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The Federal Reserve’s True Agenda and how to deal with it

By : Ziad K. Abdelnour| 15 November 2010
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Following up on my blog of July 15, 2010 entitled “Why Reshaping the Federal Reserve is today an Absolute Must”  I thought I’d share these thoughts with you, demonstrating the Federal Reserve’s true agenda in the economy today, and why reshaping the Fed is again needed more than ever at this juncture of our country’s economic history.

In fact, contrary to popular belief, I frankly believe that the Fed has spent the last two decades creating the illusory “wealth effect” in people’s minds; knowing very well that what they do has no direct effect on the economy. If you can drive the market up 50 percent, people feel richer…and happier.

The Fed basically wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive. So, we’re being forced to choose between two overpriced assets. Plain and simple.

Our boys at the Fed are trying to make cash so ugly that they will force us to take it out and basically speculate. And in that, their actions have been obviously very successful with the hedge funds who are out there speculating like idiots….and the dumber ordinary individuals are beginning to get so fed up with having no return on their cash that they’re beginning to do a little bit more purchasing of equities. Precisely what the Fed wants.

They want to have the stocks go up, to make you feel a bit richer, happier and smarter so that you’ll spend a little more and give a short-term kick to the economy. But, it’s a pretty circular argument. For every dollar of wealth effect you get here, as stocks go from overpriced to worse, you will give back in a year or two. And you’ll give it back like it— like it happened in— in ’08 at the very worse time.

All of the kicker that Greenspan had engineered for the ’02, ’03, ’04 recovery and so on was all given back with interest. The market overcorrected through fair value. The housing market that was a huge driver of economic strength actually masked structural unemployment with all those extra, unnecessary houses being built. All of that was given back similarly at the same time. It couldn’t have been worse.

Bottom Line:

It is clear to everyone by now that the Fed is blowing bubbles and encouraging moral hazard and that’s very problematic though they are in a very strong position to move against bubbles. Asset class bubbles are the most dangerous things to investors. They’re also the most dangerous to the economy as we have seen in Japan, in 1929 and now today. You’ve got to stop them.

The Fed has enormous power to move markets. And it unfortunately is not. It could have headed off the great tech bubble. It could have headed off the housing bubble. It could have interfered with the quantity and quality of the sub-prime event. It chose not to do any of the above.

In fact, Greenspan led the charge to deregulate everything for which we have paid an enormous price. So, he could have stopped bubbles, and he should have but never did …. and Bernanke is no better.

The Fed should have never allowed the situation to get into this shape. Digging out from a great bubble that has broken is so much harder than preventing it in the first place.

I am afraid unless we’re lucky, we will have yet another crisis without being able to lower the rates ’cause they’ll still be low, without being able to issue too much moral hazard promises from the Fed because people will begin to find it pretty hollow. Cycle after cycle, the Fed is unfortunately flagging the same intention. Don’t worry, guys. Speculate. We’ll help you if something goes wrong. And each time something does go wrong, it gets more and more painful.

On the same note, the Fed’s actions are taking money away from retirees. They’re the guys, and near retirees, who want to part their money on something safe as they near retirement. And they’re offered minus after-inflation adjustment. There’s no return at all. And where does that money go? It goes to relate the banks so that they’re well capitalized again. Even though they were the people who exacerbated our problems.

Notwithstanding the fact that under these conditions that low rates is actually hurting the economy. It’s taking more money away from people who would have spent it —retirees — than are being spent by passing it on to financial enterprises and being distributed as bonuses to people who are rich and, therefore, save more.

I really don’t know where Greenspan and Bernanke are coming from, or how smart or rather stupid they really are, but their actions are all real bad ideas at any time and particularly bad ideas now.

Trust is essential for a stable economy; Trust is currently at an all-time low;

Launching criminal prosecutions and real investigations is one of the main prerequisites for an economic recovery.

Your feedback as always is greatly appreciated.

Thanks much for your consideration.

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