Ben Bernanke is great at taking credit for a lot of things that the Fed didn't actually achieve, while refusing responsibility for the worst results of Fed policy blunders. Here are a few examples of which Fed apologists should take note.
The idea that the short term liquidity facilities were successful is a well cultivated myth. Not only were they not successful, they directly caused the stock market crash in 2008. The Fed withdrew the funds for those programs, which I called alphabet soup programs, from Primary Dealer trading accounts. The dealers could no longer adequately perform their functions as market makers. Without sufficient trading capital, they had no choice but to withdraw their bids. The Fed instituted the Primary Dealer Credit Facility when it recognized its mistake, but it was too late, and was little more than a temporary band-aid over a financial market hemorrhage.
Things didn't actually turn around until the Fed went back to using traditional tools, and that is the first round of quantitative easing. That's when the market, the economy and the financial system began to get back on their feet. Everything the Fed did before that made the situation worse by diverting dealer capital away from its most important function - making markets. Make no mistake about it. The Fed caused the crash by diverting its support functions from the traditional established conduit to run an end around that essentially shut that conduit down.
The idea that the Fed's current round of Treasury purchases will necessarily reduce long term interest rates is also hogwash. The market has proven that since QE2 started. The Fed can neither control nor influence long term interest rates. In fact because everyone, including the banks, the foreign central banks and especially the Primary Dealers, were all loaded on the long side when the Fed announced QE2, there was only one way long term rates could go. Up. And that's what they've done.
The idea that QE has done anything to increase employment is also false. While the unemployment rate has been jiggered by arbitrarily dropping some unemployed people from being counted in the labor force, the trend of total employment remains weak. There's no evidence to link QE with an increase in employment. It certainly did nothing along those lines in 2008-09 in the first round of QE, and it's doing nothing this time.
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The idea that QE hasn't been the impetus behind commodity inflation is completely out of touch with reality. When the Fed pumps the cash into Primary Dealer trading accounts (thereby adding to the System Open Market Account), the dealers use some of it to speculate on inflation by buying commodities futures. The weather, poor harvests and demand in emerging markets may contribute to the trend at the margin, but without the Fed flooding the markets with newly created dollars day in and day out, these trends could not manifest as they have. Copper is a bellwether of the trend and its price rise can't be blamed on droughts or floods. These rising commodity prices are manifestations of monetary inflation and crack up boom hoarding.
The Fed is in the midst of another one of its long history of massive policy blunders. The process moves slowly, so that when watching it day to day it is difficult for those who aren't paying attention to the details of cause and effect to understand.The Fed uses this to its advantage to spin the story to its benefit and to rewrite the history. The Fed's propaganda obscures the connection between its actions and their deleterious effects, while highlighting what it believes to be the benefits of the policy. It may take another six months to a year to see the results of the current blunder, when again we'll hear the anvil chorus of, "No one saw this coming. It's not the Fed's fault. Things would have been worse, were it not for the Fed."
But the truth is that the real connections are there for everyone to see. You need only be looking at the correct data. Pay attention to that data and you will be prepared for the day when the Fed is forced yet again to recognize its error and change course. You will not want to be long anything when that day arrives.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
