Stop the Bleeding with More Blood

Posted: Aug 25, 2012 12:01 AM

As the world breathlessly awaits Ben Bernanke’s Jackson Hole pronouncements, my mind wanders to just what Ben could say that hasn’t been said before. 

When all is said and done there are only three tools in the toolbox that Ben can draw from, maybe.

Since the assumption is that the Federal Reserve’s power brokers have chosen to disregard the most recent economic improvements in retail, housing, and even employment (simply viewed as artificial seasonal adjustments), it only stands to reason that, once again, it’s time to stop the bleeding. 

So, as in the past will Bernanke announce or as they say, jawbone, that interest rates will remain at artificially low levels (0% to 0.25%) for as long as he is Federal Reserve Chairman? 

A different twist on the same announcement conceivably has an extended hand toward Mitt Romney. 

Perhaps he will announce that interest paid on reserves needs to be reduced or done away with altogether in the not too distant future. 

This statement would give some sugar to the traders without actually ticking off his banker colleagues, except for the fact that the “not too distant future” is different in everyone’s mind. 

In addition, the financial markets are betting that Ben could announce a more aggressive purchase program of bonds, including mortgage backed, treasuries, and maybe even municipals. 

Thus, if Bernanke’s announcement scenario plays out as in the past it will be one of, or maybe all, of the three tactics just discussed. 

Initially, it will certainly delight but the enjoyment will only last for as long as it takes the markets to realize that it’s the same strategies, the same tactics, and the same results.  I earlier said “maybe” because now that the historically unthought-of zero interest rate policy has evolved into an unprecedented negative interest rate policy, it is possible that all sorts of other actions may be thrust on the table. 

Most of us have always thought of the Federal Reserve’s tools as being very limited. 

But what if the independent Jekyll Island Group believed that they were the last bastion standing between civilization and financial chaos?  Could the Fed now limit interest rates on all bonds of every sort?  Could they restrict the amount of withdrawals from money markets?  Could they request bank holidays, market closures, and seizures of gold?  Might they change the measurement of money?  Would they fund one small sector of society at the total expense and demise of the overwhelming majority? 

It all sounds outlandish, totally irregular, and maybe even unprecedented.  However, keep in mind that everything I’ve just mentioned has either been done or discussed before.  Therefore, I await the Jackson Hole announcement with great anticipation, realizing not that certain things are improbable, but that nothing is impossible.