Bernanke Fails Again
The Federal Reserve Bank's plan to buy longer-term government debt has been greeted by a stock market plunge, mixed employment data and negative commentary from experts whose confidence in Fed wizardry has vanished.
After yesterday's Fed Open Market Committee meeting, the central bank announced its plan for a repeat of the Kennedy-era "Operation Twist," in which then-Fed Chairman William McChesney Martin, Jr. sold shorter-duration debt while purchasing longer term debt:
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
Last week I discussed the twist strategy and its attendant uncertainty risks. The new/old strategy and many more of the supposedly smart tools Fed Chairman Bernanke has at his disposal make the effects of Fed strategy much harder to predict. They do, however, make the Fed's intentions clear. Bernanke, as I noted months ago, is trying to micromanage a reinflation of the real estate market, ignoring the mountain of evidence that real estate remains overvalued.
The failure of the twist strategy has already begun. The Dow lost 500 points today and closed down nearly 400. International stock markets have also tanked. Although new jobless claims are down slightly (an announcement related to but not caused by the Fed's new policy), there is no evidence suggesting this will reduce unemployment, which grew and remained high during the previous two episodes of quantitative easing.
This has not stopped various stooges from defending the failed Fed chief. In The Nation, William Greider accuses "right-wingers" of "attacking Ben Bernanke for "taking modest steps to bolster the economy."
Meanwhile, never-informed D.C. princeling Matt Yglesias says Republicans who recently sent a critical letter to Bernanke were "urging him not to take any steps to help the economy" – a mischaracterization that charmingly recalls David Horowitz' 2002 slander against opponents of the invasion of Iraq: "100,000 Communists March On Washington To Give Aid and Comfort to Saddam Hussein."
Beyond the religious faith implicit in these claims – it bears repeating that there is not a shred of evidence that any of Bernanke's or Treasury Secretary Geithner's actions over the last 36 months have "helped" or "bolstered" the economy – there's an added irony. I'm old enough to remember when leading liberal lights took pride in opposing the machinations of central banks and the international financial consensus. In 1999, after protesters smashed a few Starbucks windows in Seattle, Greider said the riot "woke up America and maybe the world." I don't know what's changed since then to make Greider want to stand up for a "private club for deal-making among the most powerful interests, portrayed as a public institution searching for international 'consensus.'"
You can expect more such intramural bickering as the intellectual bankruptcy of the Keynesian consensus becomes more clear. Reuters has a sampling of negative responses to the twist:
The Fed's grim outlook for the U.S. economy and data showing China's contracting factory sector drove U.S. stocks down 3 percent on Thursday on fears of a global recession.
"Investors seem to be waking up to the fact that monetary policy is pushing on a string," said Capital Economics analyst John Higgins. "The stock market and commodities are likely to continue to struggle, given the gloomy outlook for the economy that the Fed openly acknowledged on Wednesday."
Thomas Lam, OSK-DMG chief economist, put the economic impact of the Fed's "twist" operation at less than half a percentage point of added growth—slightly below a Goldman Sachs estimate.
Even the Fed does not know exactly what to expect, saying it is "difficult to estimate precisely" how much of an economic boost the program will deliver.
And here's an interesting update [pdf] on Kenneth Rogoff's 2008 study [pdf] putting the current recession into perspective.