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Townhall
Finance...
Fed
Hooey
by Larry
Kudlow
March 10, 2012
I didn’t
want to let the latest cockamamie Fed idea for “sterilized” bond buying
pass
without a comment. A Wall Street Journal story explained that somehow
the Fed
will buy more long-term bonds, print new money, and then borrow the
money back
so it doesn’t cause inflation. It’s all a lot of hooey. Typical Fed
tinkering.
They can’t seem to help themselves. The dollar has already fallen about
1
percent since this story broke. Gold has jumped.
If you buy
into the Fed’s argument, it will inject cash in return for new bond
purchases.
Then it’s going to take the cash out by selling Treasury bills to the
very same
dealers who bought the bonds. These are called reverse repos. Or, the
Fed will
somehow force the banks to put the original new cash into bank accounts
called
“term deposits.”
So we’ve
got bond buys, reverse repos, and term deposits. And it’s all supposed
to net
out to no QE3, no pump-priming, no more money-creating. It’s too clever
by ten.
And the Fed
is catering to the easy-money crowd on Wall Street that wants the
central bank
to keep driving the stock market higher and higher.
Hooey.
The key
role of the Fed should be to maintain the current and future value of
the
dollar, a.k.a. King Dollar. In fact, the best thing the Fed could do is
appreciate the dollar by about 20 percent. That would drive down energy
prices,
including gasoline, and boost real consumer incomes.
This
strong-dollar approach would be a rule-based monetary policy in direct
contrast
to the easy-money fine-tuning and tinkering which has gotten the
economy
periodically into calamitous circumstances. Actually, with 2.5 or 3
percent
economic growth, including a modest bump up in jobs, the Fed should be
normalizing
interest rates. For example, the Taylor rule would set the fed funds
rate
somewhere between 1 and 2 percent, not zero, with no furtive bond
purchases.
Bernanke
& Co. has become the all-time Keynesian manipulator. If Mitt
Romney becomes
the next president, let’s hope he opts out of this and instead turns to
a
hard-money policy: King Dollar, preferably linked to gold.
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and other articles at Townhall Finance
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