The Fed has Built a Bomb

James Longstreet
We have turned the Free Market over to the Federal Reserve and they have replaced it with a bomb. 

Meddling academics floundering in a mutual admiration society cleverly expanding their impacts and powers over our economic system.  As they do, the free market evaluation of assets is altered. Capital is misappropriated. Decisions are made by this central planning agency that subjectively helps some and harms others.

How did this self-expansion of powers proceed unfettered? Politics. Even though the Federal Reserve is intended to be at arms length with politics, it is absurd to think that’s actually the case. Fed pumping of money is arguably the only economic impact from government policy ( or government sponsored agency) that has had a marked impact on the economy, subdued as it may be. The party in power is all for such actions. Would they dare challenge the Fed’s powers as it conducts actions that attempt to buff up the economy and promote higher stock values?  Not likely.

Now we receive yet another warning from none other that the Philadelphia Fed president, Charles Plosser.  

The way Charles Plosser sees it, the Federal Reserve is sitting on a ticking time bomb that could severely damage the economy unless the central bank reacts quickly to defuse the looming threat.

The Philadelphia Fed president, viewed as one of the bank’s leading hawks, is worried about some $2.5 trillion in “excess” reserves. That is, loanable funds available to individual or corporate borrowers through the nation’s banks.

The Fed has created these reserves through unprecedented purchases of U.S. Treasurys and mortgage-backed securities, a strategy known as “quantitative easing”.

These reserves are just sitting in the bank system, basically doing nothing. That’s because demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.

“These reserves are not inflationary right now,” Plosser said in a meeting Tuesday with reporters in Washington.

Yet if borrowing begins to surge and those reserves start to pour out of the banking system, Plosser worries, “that’s going to put pressure on inflation.” The result: the Fed could be forced to raise interest rates faster and earlier than it would like and perhaps slam the breaks on the economic recovery.”

In other words, the Fed has been pushing on a string. The attempted stimulus is building like a bomb of liquidity that won’t disappear and may be impossible to mop up.

““One thing I worry about is that if we are late, in this environment, with all these excess reserves, the consequences might be … more dramatic than in previous times,” Plosser said. That’s central-bank speak for an economic fiasco.

Nearly six years of “emergency” action by the Federal Reserve.  The “faucet” is on, but only the basement fills with water.  Out of sight, out of mind for now.

We have turned the Free Market over to the Federal Reserve and they have replaced it with a bomb. 

Meddling academics floundering in a mutual admiration society cleverly expanding their impacts and powers over our economic system.  As they do, the free market evaluation of assets is altered. Capital is misappropriated. Decisions are made by this central planning agency that subjectively helps some and harms others.

How did this self-expansion of powers proceed unfettered? Politics. Even though the Federal Reserve is intended to be at arms length with politics, it is absurd to think that’s actually the case. Fed pumping of money is arguably the only economic impact from government policy ( or government sponsored agency) that has had a marked impact on the economy, subdued as it may be. The party in power is all for such actions. Would they dare challenge the Fed’s powers as it conducts actions that attempt to buff up the economy and promote higher stock values?  Not likely.

Now we receive yet another warning from none other that the Philadelphia Fed president, Charles Plosser.  

The way Charles Plosser sees it, the Federal Reserve is sitting on a ticking time bomb that could severely damage the economy unless the central bank reacts quickly to defuse the looming threat.

The Philadelphia Fed president, viewed as one of the bank’s leading hawks, is worried about some $2.5 trillion in “excess” reserves. That is, loanable funds available to individual or corporate borrowers through the nation’s banks.

The Fed has created these reserves through unprecedented purchases of U.S. Treasurys and mortgage-backed securities, a strategy known as “quantitative easing”.

These reserves are just sitting in the bank system, basically doing nothing. That’s because demand for loans has been unusually weak amid an economic recovery that’s the slowest on record since the Great Depression.

“These reserves are not inflationary right now,” Plosser said in a meeting Tuesday with reporters in Washington.

Yet if borrowing begins to surge and those reserves start to pour out of the banking system, Plosser worries, “that’s going to put pressure on inflation.” The result: the Fed could be forced to raise interest rates faster and earlier than it would like and perhaps slam the breaks on the economic recovery.”

In other words, the Fed has been pushing on a string. The attempted stimulus is building like a bomb of liquidity that won’t disappear and may be impossible to mop up.

““One thing I worry about is that if we are late, in this environment, with all these excess reserves, the consequences might be … more dramatic than in previous times,” Plosser said. That’s central-bank speak for an economic fiasco.

Nearly six years of “emergency” action by the Federal Reserve.  The “faucet” is on, but only the basement fills with water.  Out of sight, out of mind for now.