The essay could have been great, too, if CHS had not made the mistake accepting the Fed's stated policy goals as the Fed's actual goals. In a section entitled "Here is what each program was intended to do," he documents what the Fed "intended" to accomplish with things like ZIRP and QE. He then goes on to detail how none of the "intended" goals can be met through the Fed policies. He then closes with the following questions:
Do the Fed's honchos really think there is another end-game here other than the collapse of their latest ZIRP-QE2-driven asset bubbles? Could they really be so blind, so stupid, so misinformed, so ignorant of reality and history, as to believe their policies will actually work?
Are they so detached from reality that they fail to see their policies are backfiring, further impoverishing most of the citizenry as they set up the inevitable collapse of the banks they have tried so hard to save?
Are they really simpletons, or are they just taking orders from the Financial Elites who have the most to lose when the whole sagging sandcastle finally collapses into the waves?Let's focus on the second question: "Could they really be so blind, so stupid, so misinformed, so ignorant of reality and history, as to believe their policies will actually work?"
The answer to this question depends on what the Fed actually hopes to accomplish, and I don't think we can give the Fed (or anybody currently in power) the benefit of the doubt and accept its stated intentions as its true intentions.
I've come to the conclusion that the Fed's true goal is a "soft-landing" into deflation. Of course, the landing will only be soft for the financial institutions and the top 5% of wealth holders. You see, the Fed is not trying to save the economy but the banks and their valued customers, the major capital holders. Everybody else is expendable.
The funny thing is that CHS had a truly great post last week called "Trade of the Decade: The Power Elite's Grand Strategy," in which he correctly calls that the power elite want deflation and will make sure they get it. So, I'm not sure why CHS does not take things one step further and view the Fed as part of the power elite instead of merely a lackey of the power elite.
Once you recognize that the Fed is part of the power elite (an important part, in fact), their true intentions become clear.
Today, David Rosenberg, one of my favorite analysts, makes a similar mistake by spotting the Fed good but misguided intentions for the announced QE2:
What the Fed is clearly trying to do is reflate asset values in order to generate a more positive wealth effect on personal spending and pull the cost of debt and equity capital down in order to re-ignite business "animal spirits" and hence corporate investment and hiring. In a balance sheet or deleveraging cycle, success is not always guaranteed even by the most aggressive of monetary policies.
No. This is what you think the Fed must be trying to do because nothing else makes sense, IF the Fed is actually following its "mandate" and trying to achieve maximum employment and price stability. Unfortunately, that is not what the Fed wants.
What we're witnessing here is an example of the "anchoring and adjustment" effect. Our view of the Fed has been "anchored" to our understanding of its statutory dual mandate, and we "adjust" our understanding of what the Fed is doing (or trying to do) around this anchor. As a result, when we see a big mismatch between what the Fed is accomplishing and what we believe the Fed is trying to accomplish, we accuse them of either being stupid, misguided, or lackeys. It never occurs to us that we may have set our anchor in the wrong place.