Fed Hooey

I didn’t want to let the latest cockamamie Fed idea for “sterilized” bond buying pass without a comment. A Wall Street Journal story explained that somehow the Fed will buy more long-term bonds, print new money, and then borrow the money back so it doesn’t cause inflation. It’s all a lot of hooey. Typical Fed tinkering. They can’t seem to help themselves. The dollar has already fallen about 1 percent since this story broke. Gold has jumped.

If you buy into the Fed’s argument, it will inject cash in return for new bond purchases. Then it’s going to take the cash out by selling Treasury bills to the very same dealers who bought the bonds. These are called reverse repos. Or, the Fed will somehow force the banks to put the original new cash into bank accounts called “term deposits.”

So we’ve got bond buys, reverse repos, and term deposits. And it’s all supposed to net out to no QE3, no pump-priming, no more money-creating. It’s too clever by ten.

And the Fed is catering to the easy-money crowd on Wall Street that wants the central bank to keep driving the stock market higher and higher.

Hooey.

The key role of the Fed should be to maintain the current and future value of the dollar, a.k.a. King Dollar. In fact, the best thing the Fed could do is appreciate the dollar by about 20 percent. That would drive down energy prices, including gasoline, and boost real consumer incomes.

This strong-dollar approach would be a rule-based monetary policy in direct contrast to the easy-money fine-tuning and tinkering which has gotten the economy periodically into calamitous circumstances. Actually, with 2.5 or 3 percent economic growth, including a modest bump up in jobs, the Fed should be normalizing interest rates. For example, the Taylor rule would set the fed funds rate somewhere between 1 and 2 percent, not zero, with no furtive bond purchases.

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Bernanke & Co. has become the all-time Keynesian manipulator. If Mitt Romney becomes the next president, let’s hope he opts out of this and instead turns to a hard-money policy: King Dollar, preferably linked to gold.