Economy imperiled as QE bag of tricks fails

Question: What do you call it when you are screwed if you do and screwed if you don’t?
Answer: Federal Reserve policy.
The policymaking Open Market Committee yesterday released the minutiae of its last meeting, and it is now clearer than ever that Fed members don’t have a clue about what to do.
No, let me change that. They don’t even have a clue about where to find a clue about what to do.
A more important question is this: Should the Fed continue to print gobs and gobs of greenbacks so that it can further rig the bond market in a maniacally wrongheaded effort to keep interest rates artificially low and Wall Street happy?

In case you like titles for things, this money-printing experiment is called quantitative easing. And it is Fed Chairman Ben Bernanke’s pet project, so you know how hard it will be to kill this dog.
Those extra trillions of dollars are used to buy government bonds and mortgage-backed securities. With the government acting as a shill buyer at the bond auctions, rates have stayed exceptionally low for years.
This has benefited some Americans — mostly the rich — and has been detrimental to the majority of us who happen to be living in a rich man’s world.
But interest rates have been rising lately and doing so without Fed permission. Some would have you believe that the increase in borrowing costs is a reaction to talk that the Fed will slow down — or even stop — the $85 billion a month bond-buying program.
Sorry. Rates started rising in early May, and Bernanke didn’t start opening his yap about slowing QE until later, when he realized the bond market wasn’t stepping up.
It isn’t a question of whether this so-called “tapering” of the bond purchases will happen. It’s only a question of when.
And it is becoming a more urgent question since legitimate buyers of government bonds have been in short supply lately. In fact, Treasury Department surveys show that foreign governments, which hold US bonds as a security blanket, have actually been sellers of Washington’s debt of late.
So interest rates have been rising. And the stock market, which doesn’t like rising interest rates for a number of reasons, has been falling.
In fact, interest rates are up around 1.2 percentage points on 10-year bonds since early May. And the Dow Jones industrial average is off 760 points since it peaked in early August.
I’ve been warning readers all along that trouble was brewing for stocks, which are still up 14 percent this year.
And the pace is quickening. The Dow has lost 440 points since last Wednesday, a day before I wrote “the stock market is obviously headed for difficult times.”
Stocks and bonds fell again yesterday after the Fed released a summary of the discussion that took place at its July 30-31 meeting.
I’d like to summarize what the Fed members were saying at that meeting, but I can describe it better.
Picture Thanksgiving dinner with 12 adults trying to give their opinion about any important topic — all at once. What kind of consensus could possibly be reached?
Some governors, in the minutes, seemed worried that the trigger for tapering should be a different unemployment rate than one already stated. Others were worried that inflation was too low.
Still more governors thought the economy would improve later this year, a hope that’s been bandied about for years. Others said the stock market’s gains weren’t making Americans feel rich enough to spend money and help the economy.
Ugh! Can’t you all just shut up for a minute?
If you are looking to draw a conclusion from all the jabbering, an online headline from someone who sped-read the statement will do: “Fed members split on tapering.”
The financial markets didn’t know what to make of it all either. The Dow was down before the Fed announcement; fell some more; recovered all the losses and went into positive territory and then ended the day with a 105-point loss.
The much more important bond market just kept declining, which automatically caused rates to rise some more.
I’ve made you read a whole lot to get to this point, but here’s all that really matters: The Fed has trapped itself.
When it ultimately decides to taper QE or stop the bond purchases altogether, rates will rise. Substitute buyers will have to show up to purchase all the bonds that the Fed won’t be purchasing.
And those subs will want higher yields on the bonds for their effort.
What if the Fed doesn’t taper?
Then market forces will take over, just like they have since May. Interest rates will rise, perhaps a lot more, on their own as investors worldwide will worry that the Fed has lost control of the US currency.
But it’s even more unpredictable than that.
Nothing will really be permanent until President Obama decides who will take over when Bernanke leaves in January.
And that next guy — or, less likely, gal — won’t have much room to maneuver.