Thursday, June 21, 2012

The Fed: Policy, Credibility, Collusion, and Absolution Deficiencies

Yesterday, the Federal Reserve System chairman announced that he is 'open to more QE' to drive/keep long term interest rates down. Long term interest rates have been really low for the past 4 years or so and the economy has not improved too much.

The current Fed's policies suffer from four major deficiencies: policy, credibility, collusion, and absolution. All these deficiencies are deliberate and are aimed at preserving the Fed's current role of the fourth power of the government.


Interest rates are one of the most important signaling mechanism of any financially open economy. When the economy is expected to grow the interest rates tend to be high and when the economy is in recession the interest rates tend to be relatively low.


When the Fed, in a totally deliberate manner, wants and promotes low interest rates then it is basically saying that it expects low economic growth for a very long time. Bernanke is a liar when he is saying that low interest rates will spur growth since the current economic conditions are almost identical to the ones we have experiencing since 2008.

What the current economic crisis shows -unequivocally- is that it has strong psychological undertones related to the complete lack of trust in the banking and financial systems. No matter how low the interest rates are people will not engage in financial transactions with institutions they do not trust. The Fed's credibility is close to the long term interest rates.


The current interest rate policy followed by the Fed favors only financial and banking institutions. Why should we believe that the Fed is trying to help the economy when the Fed seems to be primarily interested in protecting the financial system and not protecting rational economic choices?

If we take rational decisions and save money the Fed is telling us that we are fools. We should be spending the money and we should do this as quickly as possibly, 'to spur economic growth'. Our interests, as savers, conflict with the Fed's chairman interests.

The Fed should increase interest rates to promote economic optimism and prove that it values rational economic choices. Due to its massive borrowing needs, the government is another massive beneficiary of the Fed's drive to lower long term interest rates but nobody seems to care about savers.


Almost everybody in the current leadership economic circles is willing to sacrifice rational economic behaviors in favor of the 'spend more than you have' doctrines. One of the proofs lie in the fact that the US Treasury owes most of its debt to the Fed. How will the Fed pay its debt to the US Treasury if not by printing money?

Policy, credibility, collusion, and absolution deficiencies undermine the strength of the US economy and support the very existence of an institution -the Fed- that should be brought under much more public control than it is now.

I am amazed that people get worked up and angry by the individual mandate of the new health care law but do not flinch an eye at the sight of the Fed destroying the fragile beauty and strength of the banal interest rate.

What can we do to protect ourselves from the Fed's rapacious appetite to economically destroy all those of us who are savers?

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