Talk About the Elephant in the Room at the Fed Over the Weekend
Over the weekend, the Wall Street Journal featured an article about the elephant in the room at the Fed: it's elephantine balance sheet.
(A great photo from Wikileaks entry for "Elephant in the Room" HERE.)
Yet again, we read calls for trimming that $4.5 trillion of assets held on the Fed's balance sheet. That astounding number grew from a paltry(?) $1 trillion before the 2007-2009 financial crisis, as the Fed bought any and all assets it deemed might threaten to collapse the financial system it oversees. Whether the move was wise, or how much it helped, has been debated since. The assets, however, remain on the Fed's books almost a decade later.
But the real elephant in the room may not be that gargantuan collection mortgage-backed securities and treasuries to which the article refers. That elephant was captured in the article's opening paragraph:
While the buying up of enormous gobs of financial assets was surely spurred by the events of 2007-2009, the idea that the Fed was on the sidelines of the financial markets seems a bit distorted, to say the least. To understand why, all one has to do is remember former Fed Chairman Alan Greenspan's observation and comments about the existence "irrational exuberance" in the stock market circa 1997, and the subsequent (albeit it temporary) collapse of stock prices. After that, Greenspan did all he could to bolster stock prices. While we don't know if he "got religion" due to his own cognizance, whether then President Clinton took him to the woodshed for a whuppin', or whether it dawned on him that his ambition to remain Fed head in the next administration would be dashed to pieces if markets tanked on his watch matters not. The fact is, from that point on, his various machinations to sustain prices continued until "The Maestro" - as he was known on Wall Street and in the media - finally left his exalted throne.
His efforts to sustain market momentum, and ultimately economic advancement even had a name: the Greenspan Put. He didn't always succeed, of course. The stock market hit the skids from 2000-2002. But boy did he make it clear it wasn't because of anything coming from the magic wand of The Maestro. Indeed, for years, Wall Street relied on this "put" to protect the markets. The "put" included lowering interest rates, turning a blind eye to expanding bubbles, keeping regulatory oversight at bay even in the face of actions that seemed to require more scrutiny, etc. (symbolized best by the notorious Bernie Madoff's gigantic Ponzi Scheme). Rather than keeping the central bank on the sidelines, it would seem more reasonable to conclude "Greenspan Put" put the Fed in the role of protector of the markets and the economy that far exceeded previous efforts. As a result Wall Street's pooh-bahs continued to reap the benefits of not only irrational exuberance, but eventually more so from the unfettered and ultimately perverse financial engineering that forcefully and disastrously tanked stock prices and just about every other item in the financial markets.
They had Greenspan's Fed to thank for the bounty they enjoyed before the crisis, but it didn't end there. So successful were The Maestro's efforts that when Ben Bernanke took over right before the crisis, he assured any and all who would listen that all was well in the markets and the economy was booming. He even famously reassured us that the sub-prime mortgage bubble was a mere blip in an expanding financial universe, that right before it ignited and brought down the economy and just about the entire world's financial system.
All of this was nonsense, of course. Nevertheless, when it all hit the fan, those who prospered from a system gone mad remained flush. A few endured official criticism, but most escaped unharmed, still rich, and ready to rock and roll again once the crisis ended. These include individuals and institutions who clearly not only stretched the limits of legality, but engaged in outright thievery - never mind the whole-sale trashing of any sense of morality that glared at us as more and more facts emerged.
If the author of that article had said "return to the central bank's pre-crisis role," it might make some sense. But to add, "on the sidelines of the financial markets"? Really?
But more important than dickering over this author's use of language, we might question the whole idea of a central bank - in cahoots with other central banks around the world - continuing to influence our markets and our economy to the extent they do. Such questions becomes compelling what one considers two factors:
1) the original idea of central bank being a "lender of last resorts" to help soften the effects of financial crises caused by a lack of liquidity compared to the role they now play in constantly attempting to pull levers to both control markets and accelerate or decelerate the economy.
2) the continuing pattern of a few (the so-called 1%) exploiting the system created and sustained with the Fed's cooperation and reaping the riches created by that system, in the face of the slow, steady draining of wealth from the other 99%.
If Trump's election hasn't convinced you that this pattern continues unabated, I'm not sure what will. And if you hadn't realized the role the Fed plays in sustaining this pattern, it's time you did.
(A great photo from Wikileaks entry for "Elephant in the Room" HERE.)
Yet again, we read calls for trimming that $4.5 trillion of assets held on the Fed's balance sheet. That astounding number grew from a paltry(?) $1 trillion before the 2007-2009 financial crisis, as the Fed bought any and all assets it deemed might threaten to collapse the financial system it oversees. Whether the move was wise, or how much it helped, has been debated since. The assets, however, remain on the Fed's books almost a decade later.
But the real elephant in the room may not be that gargantuan collection mortgage-backed securities and treasuries to which the article refers. That elephant was captured in the article's opening paragraph:
Federal Reserve officials grappling with the legacy of expansive stimulus would find it difficult to return to the central bank’s precrisis role on the sidelines of financial markets, analysts and central-bank watchers say.Did you spot this elephant? It's contained in the phrase "the central bank's precrisis role on the sidelines of financial markets." Who's kidding who here?
While the buying up of enormous gobs of financial assets was surely spurred by the events of 2007-2009, the idea that the Fed was on the sidelines of the financial markets seems a bit distorted, to say the least. To understand why, all one has to do is remember former Fed Chairman Alan Greenspan's observation and comments about the existence "irrational exuberance" in the stock market circa 1997, and the subsequent (albeit it temporary) collapse of stock prices. After that, Greenspan did all he could to bolster stock prices. While we don't know if he "got religion" due to his own cognizance, whether then President Clinton took him to the woodshed for a whuppin', or whether it dawned on him that his ambition to remain Fed head in the next administration would be dashed to pieces if markets tanked on his watch matters not. The fact is, from that point on, his various machinations to sustain prices continued until "The Maestro" - as he was known on Wall Street and in the media - finally left his exalted throne.
His efforts to sustain market momentum, and ultimately economic advancement even had a name: the Greenspan Put. He didn't always succeed, of course. The stock market hit the skids from 2000-2002. But boy did he make it clear it wasn't because of anything coming from the magic wand of The Maestro. Indeed, for years, Wall Street relied on this "put" to protect the markets. The "put" included lowering interest rates, turning a blind eye to expanding bubbles, keeping regulatory oversight at bay even in the face of actions that seemed to require more scrutiny, etc. (symbolized best by the notorious Bernie Madoff's gigantic Ponzi Scheme). Rather than keeping the central bank on the sidelines, it would seem more reasonable to conclude "Greenspan Put" put the Fed in the role of protector of the markets and the economy that far exceeded previous efforts. As a result Wall Street's pooh-bahs continued to reap the benefits of not only irrational exuberance, but eventually more so from the unfettered and ultimately perverse financial engineering that forcefully and disastrously tanked stock prices and just about every other item in the financial markets.
They had Greenspan's Fed to thank for the bounty they enjoyed before the crisis, but it didn't end there. So successful were The Maestro's efforts that when Ben Bernanke took over right before the crisis, he assured any and all who would listen that all was well in the markets and the economy was booming. He even famously reassured us that the sub-prime mortgage bubble was a mere blip in an expanding financial universe, that right before it ignited and brought down the economy and just about the entire world's financial system.
All of this was nonsense, of course. Nevertheless, when it all hit the fan, those who prospered from a system gone mad remained flush. A few endured official criticism, but most escaped unharmed, still rich, and ready to rock and roll again once the crisis ended. These include individuals and institutions who clearly not only stretched the limits of legality, but engaged in outright thievery - never mind the whole-sale trashing of any sense of morality that glared at us as more and more facts emerged.
If the author of that article had said "return to the central bank's pre-crisis role," it might make some sense. But to add, "on the sidelines of the financial markets"? Really?
But more important than dickering over this author's use of language, we might question the whole idea of a central bank - in cahoots with other central banks around the world - continuing to influence our markets and our economy to the extent they do. Such questions becomes compelling what one considers two factors:
1) the original idea of central bank being a "lender of last resorts" to help soften the effects of financial crises caused by a lack of liquidity compared to the role they now play in constantly attempting to pull levers to both control markets and accelerate or decelerate the economy.
2) the continuing pattern of a few (the so-called 1%) exploiting the system created and sustained with the Fed's cooperation and reaping the riches created by that system, in the face of the slow, steady draining of wealth from the other 99%.
If Trump's election hasn't convinced you that this pattern continues unabated, I'm not sure what will. And if you hadn't realized the role the Fed plays in sustaining this pattern, it's time you did.
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