The Big Easy

The Fed has been attacked from almost every quarter following their announcement of QEII. The biggest complaint appears to be how much inflation they are building into the system. This might be true, at some point down the road. But the question today is much more one of trying to keep the ship afloat.

Let me give an example. Over the past few weeks the Swedish Central Bank (Riksbank) has withdrawn about SEK300 billion (~US$45 billion)of "crisis" loans from the market. Short term interest rates and mortgages shot up instantly in response. Sweden is actually one of the more healthy nations in Europe. If the ECB were to close the "back door" to countries such as Ireland, Portugal, Spain and Greece-imagine the chaos.

Greece, Portugal and Ireland (their combined GDP account for just over half that of Spain’s) took 61% of all loans provided by the ECB last month, up from 51% the previous month!

OK. I know QE and the Central Bank Repo Facility aren't exactly the same thing, but they are certainly close enough to be mentioned in the same breath. The Fed is trying to maintain liquidity and manage interest rates to keep them low.

Yes the market has backed up in protest of the announcement of QEII. Small wonder. Every acolyte to Milton Friedman or the Austrian School was screaming that the Fed's intervention was ideologically wrong. They are all focused on a narrowly defined monetary base and believe markets should determine equilibrium interest rates. Just who is this market? Whose interest are they protecting? Have you ever met an investor who put (any) national interest ahead of their desire for profit?

They rant and rave about the price instability inherent in the Fed's policy crossing inflationary bridges of the future while forgetting the problems of today. Yes, they are all worried that when inflation starts the Fed will be unable to contain it. Yes they point out that the Fed is too worried on deflation as they accused it in 2003, and yes they are quick to point out that as late as 2006 the Fed was still relatively unconcerned that a housing bubble was forming. And lastly, for good measure, they also like to slap the Fed for overreacting to the fears of oil-based inflation in mid-2008.

Well you can't have it both ways unless of course the underlying message is that these Monetarists are just ranting against the Fed because Prof. Bernanke isn't one of 'theirs'. Bernanke is actually concerned about the economy today; about unemployment; and about the state of the housing market. He keeps mentioning that he is doing what he can to try and keep the ship afloat, while asking for help from the fiscal side.

As if the ridiculous state of affairs currenly obtaining in Washington is demonstrating any sense of urgency or even understanding. The recent mid-term elections set the stage for a Congress that will do little to address the growing deficit, crumbling infrastructure, widening rich-poor divide or the need to come to grips with 21st century industries before we become a third world nation.

Yes, QEII is part of the Big Easy. As is QE in the UK, and the ECB's "Back Door". And if we didn't have all the Fed Bailouts, the UK Bailouts, and the EU bailouts, despite all the ideological noise, we would have had the Great Depression.

Bernanke might be the lesser of two evils-he isn't a saint-but he is at least keeping the engine going while the erstwhile captains screw around.