Wednesday, August 12, 2009

The Fed's Been Busy

When Ben Bernanke isn't busy giving interviews to 60 Minutes to shore up his image just in time for his reappointment, or inventing new liquidity schemes to prop up the global economy, or negotiating against Cerberus in the Extended Stay Bankruptcy owing to the Fed's kindly acquisition of a bunch of crappy Bear Stearns assets that JP Morgan didn't want, it occasionally still meets to set interest rate policy. Today happens to be one of those days. So while we wait for the Fed's statement on interest rate policy, shall we take a moment to review how much the Fed's role has changed in the past two years?

Back in the old days (i.e. pre-mid 2007), the Fed was tasked with implementing monetary policy to help ease the economy through the ups and downs of the business cycle by setting a target for the fed funds rate. The Fed could buy or sell treasuries outright when necessary, but mostly would stick to mundane daily repo operations to help guide the fed funds rate to its target. Since mid-2007, when it began to dawn on Mr. Bernanke that maybe, just maybe, the subprime meltdown was not contained, he began what amounted to an unprecedented change in the Fed's directive. He introduced a series of new liquidity mechanisms aiming to provide cheap financing to our beleaguered banking institutions that could no longer find suckers to finance their risky investments at affordable rates. He facilitated the bailout of Bear Stearns by JP Morgan by offering a $30 billion loan, where the Fed bears the risk of $29 billion in losses, if they arise (see Extended Stay Bankrupcy above if you still believe that the Fed won't take any losses.) He opened up the discount window to the few dealers chosen to survive post-Lehman Apocalypse until the market recovered a bit. He engineered several bailouts of AIG, an insurance company over whom it had no jurisdiction, where the Fed now bears the risk of billions in losses unless, by some miracle it turns out that AIG really was solvent and can break itself into a million little pieces and has enough left over to pay back the Fed. He began a program of quantitative easing, where the Fed has agreed to massive outright purchases of Treasuries and Agencies in order to keep interest rates low so that the fragile recovery (or whatever it is) isn't stunted. Did I cover everything? Feel free to chime in if I've forgotten a few monumental changes.

So does anyone even care anymore about the Fed's boring announcements on interest rate policy? Does it even matter that rates are zero, in the face of all of the other interventions mentioned above? Certainly, if the Fed buys into the "green shoots" theory of our economic recovery, then perhaps the announcement today will hint at an end to quantitative easing and the nearing of the end of its zero interest rate policy. But why would it take the risk of squashing the nascent recovery? Better to sit tight and let the market breathe and enjoy the uptick. After all, fewer midnight frantic phone calls from bankers equals a happier wife.

1 comment:

Mr Wrightwood said...

They're going to be even busier if they ever try to unwind their inventory!