The New Powerlessness: Even Better Than the New Normal


"What, if anything, will the Fed do," Mike Larson asks at DailyMarkets.com, "if the economy craps out again?" The long answer is that there's not a lot the Fed can do with the next quantitative easing campaign that it hasn't already done with the first. The short answer is who cares:

But again, my answer is that whether the Fed goes hog wild printing money or not, it won't matter much to the real economy. It'll probably boost gold prices. It'll likely hammer the dollar. And it could temporarily boost stocks, even in the face of lousy fundamentals.

But all the kings horses, all the kings men, and even a further ballooning of the Fed's balance sheet—currently around $2.3 trillion vs. $900 billion before the credit crisis burst onto the scene—won't matter to most Americans.

Private companies aren't firing workers and hoarding cash because interest rates are too high. They're doing so because there's too much factory and labor capacity.

Consumers aren't cutting back on spending because loans are too expensive. They're doing so because they just went on the wildest debt-fueled spending binge in U.S. history, and they're trying to repair their balance sheets.

Look, we've had twin bubbles in stocks and housing over the past decade and a half. They both popped. The fallout will be with us for a long, long time.

Nicely said.

It's poignant that the Fed really has been doing everything right by Chairman Ben Bernanke's lights. In May, when talk of recovery was still bringing rubes into the tent, the Fed's balance sheet peaked at $2.333 trillion. Bernanke actually managed to reduce it slightly in the following weeks. But now he's gone off that diet.

As always, 'twas beautiful land what killed the beast. Foreclosures and sob stories are still piling up, and the real estate market is plunging so fast it's now clear the whole country is built on an Indian burial ground. In an effort to stop real estate from going where it wants to go, the Fed is rapidly buying up mortgage-backed securities. Soon the Fed will reach its current commitment to buy $1.25 trillion in debt from the former GSEs Fannie Mae and Freddie Mac.

Here's a metaphor I haven't seen used in the context of the Great Credit Unwind: Bernanke is now entering the second of two hot dog-eating competitions, but in this round buns and condiments are included. Much as I'd like to say this is going to be the hot dog-eating competition where somebody actually explodes, I think Bernanke will pull it off. The world hasn't lost its taste for American debt, and America hasn't lost its taste for running it up. Yes, yes, it can't go on forever, but for the Fed's purposes it only needs to go on until they can claim the Great Repression is over and have somebody believe them.