Well, we are almost there for the all important September 18th Federal Reserve meeting to review the benchmark Fed. rate. And as the Chairman of the Federal Reserve Board, I am forced to write this piece as I look at the madness that's been generated over this meeting.
Well, one may wonder why I picked Spoof when 'you-name-it' news sites all over the world that claim to know what markets want have dissected each word of mine and that of other board-members to recommend us what decision we should take and analyzed further its impacts on financial markets, on sub-prime issue, on liquidity and credit availability and finally on the all-important economic growth. The reasons are obvious - only Spoof offers me the freedom that I badly need to share my thoughts. I will serve my purpose; and I don't want markets to react unnecessarily before that 18th decision as well.
Since last one month or so, I have read 'n' number of articles that stated markets expect interest rates would be cut by a minimum of 25 basis points on 18th; and by year end, by close to 75 bps. Many played with the figures by 0.5% and 1.0% respectively. Many even gave interesting median estimations (with other statistical jargons that make no sense) on what economists told them. And majority of these economists came from the Investment Banking community or from Hedge Funds.
I have nothing against those articles and its recommendations and expectations. Many academicians even gave Fed. an 'F' for our mishandling of sub-prime issue. Again absolutely fine, honestly I myself do agree that we deserve that (if not an expulsion, I favor an expulsion that Fed. should be closed!). However my sole submission is that grading is based on performance of Federal Reserves over last six years - i.e. when interest rates were brought down to 1% to boost consumption and economic growth. Many scholars complete their PhDs in five years; whereas markets and academicians took more time to give us a rating on our past performance after six years! I wonder what grades they deserve for their timely judgments!
Freedom of speech is a fundamental right. However I am at a loss to interpret the loud drums that's playing in the so-called markets that blurt out the same theme again and again - 'markets expect Fed. To cut interest rates'. In Google search; you will find millions of news articles covering that - not only in our homeland, but in almost all parts of the world. Initially I laughed, then I felt angry, then a bit frustrated and now I am little perplexed at the stupid audacity of the self-proclaiming prophecy when some one says some thing like 'markets expect'. Eventually I understood that it's a lobby group that wants us to know that markets expect Fed. to bail out markets!
Sounds a bit funny - isn't it! Did Saddam expected US to bail him out? Probably no. Does Osama bin Laden expect that the US will bail him out for his adventurous actions? Probably no again. The voices against this lobby, though weak because they don't have the money power that markets command, also said that our parents told us not to play with fire - be it with Weapons of Mass Destructions or Terrorism or even with Money matters. And if we still decide to play with fire; we should not be complaining of getting our fingers burnt. So these academic voices warned that Fed. should not send a signal by proving all parental advices are wrong because markets want them to be wrong.
So I read it this way - the rich expects to get richer and Fed. to help them; the fund managers expect Fed. to help him/her so that they can show bumper trading profits with riskier instruments and leveraged position to earn huge bonus; the sub-prime lender expects Fed. to help them out as they struggle with forfeited properties with no takers in a falling market.
Does the poor (around 12% of the US population) expect to get poorer? No one talks about that because their voices seldom get heard? I guess not. Does the people who have not yet bought their American dream homes because prices have shoot up too high beyond their means should be left without the chance by maintaining prices artificially high thro' a bail out? And by sheer numbers, this group has more people than the rich, the fund-managers and the aggressive lenders, or even the struggling end home-buyer.
If prices fall now, many would be able to buy house again in future. And if prices don't fall; many will never be able to own a house in their life time.
I agree that a terminally ill cancer patient can't flex his/her muscle. However we need to make a choice today whether this 'Fiat' Fractional Banking led system has indeed driven US economy to the stage of a terminally ill patient; or we can survive with our strong will and determination as we have done many times in the past.
Many called me 'Helicopter Bernanke' because they expected me to distribiute Dollar from a helicopter so that everyone gets enough money and no one complains. Many expected the 'Greenspan Put' era to continue. Both are not feasible for ever.
Don't get me wrong. I have my empathies for the real Americans who today are struggling with their mortgages (or even lost their homes). It's indeed satirical that when we face economic slowdown; we ask the not-so-well-off section to consume more, to spend more, to dream big so that economy can grow and come out of recession. We rearward those consumptions and dreams with asset bubbles, and low supporting interest rates. The rich always have been consuming more and they can't consume any more, in all likelihood. So we have used the struggling section with the pawns of 'grow rich' scenario once in every five or so years. They also don't believe us easily now-a-days. So initially they doubt our commitments - they take time to decide to consume more, dream big. But as they wait and watch; the rich creates the asset bubbles. The poor wonders 'this time it must be for real'. And they finally join. And the bubble bursts. Interest rates tighten; and they again are shattered. And they complain - 'I was happier by consuming less and without dreams; you created environment for me to consume more and dream big. And when I have just started; you rob me by creating the totally opposite scenario.' It has some merit, and we can't and shouldn't ignore those weak voices of many.
So I am against bailing out this so-called lobby group that apparently knows what markets want. I wonder if anyone ever can know what markets want - even for a day, for an hour or for a year. By claiming that they declare that a few large investment bankers control the markets - their voices are those of the markets' voices. Which itself is a lie and failure of markets. They live in a fool's world; and expect that they can influence any with the strength of their money power. They eventually mean that they knew that this crisis was predestined; and markets whisper to the ears of the rich and super-rich.
Alternatively, even if one thinks that these guys indeed know what the market wants where in Fed., we struggle hard to find what's good and healthy for the markets for the long term and short term. And we don't deny that we do make mistakes; and if these lobby-groups are to be believed; they expect markets expectations are rational, logical and are never wrong. As common people, we know it to be otherwise. The American people also want our troops to return from Iraq; and it definitely sounds more authentic that 'market wants' statements. Does that mean we pull back our troops starting today? Or even take more controversial 'Bush-impeachment'. Majority probably favors that - does it mean we allow public to take over judiciary and impeach President Bush?
In above cases, we find nothing wrong when Federal policies and systems work against those of the citizens. Then why we expect Federal Reserves to listen and deliver what this so-called market expects thing.
There is something called an infeasible region for many problems if constraints are self-contradictory. It's a challenge for any Central banker following Fractional Reserves Banking to keep inflation and unemployment low; and growth rate moderate to high. When one adds bailing out the rich on top of that difficult problem; one surely lands in no real solution zones.
That does not mean that we have not deliberated over the issues in Federal Reserves. The best course of action which we will love to take, but can't is kill the investment bankers like J P Morgan, Morgan Stanley, Merrill Lynch, Goldmann Sachs, Lehman Brothers and that lot. They are the root of the problem and they are not like the heart or the liver of our indispensable global body. They rather are the tumors. There would be some pain as the large investment bankers, hedge funds and Private Equity players die; but their death would indeed herald a new and better financial world with stability and less inequality. If one documents the malpractices these investment bankers have adopted in last couple of decades to earn profit by playing and leveraging money alone; that would put Hitler's records as most kind and humane.
So we in federal Reserves believe deep in our hearts that we should not bail out these tumors; and prove the lessons our parents taught us to be wrongs. However we have plans to bail out the struggling end-borrower; the house owner who are finding it difficult to pay their monthly installments. And our calculations also show it makes better monetary sense. By keeping interest rate high for manipulators; we earn more (meaning we can afford lower Money Supply) and a fraction of that can be used to subsidize the retail customer - partly or even fully. One may question our profit motive; but if the investment bankers so long used our other motives to make profit by cheating their customers; why we ourselves don't adopt that model for a change for some time with these investment bankers. And once the evils are eliminated; we take on the role of traditional central banker again.
Though we would love to take that decision, you as a reader also be aware that the influence of that lobby group that can hear the whispers of the market has reached us everywhere - from The White House to the Congress to our Federal Reserves. And we may decide something else, sacrificing what we should have ideally decided for better economic health of all Americans.
I feel better that the Spoof exists - which allowed me to do some plain simple speaking baring my heart out to all the criticisms, expectations and suggestions.