The Federal Open Market Committee (FOMC) released its latest
statement on Wednesday January 29, 2014.
Its statement was very similar to the previous one in December.
The main thing of interest coming out of the meeting was the
Fed’s rate of asset purchases (money creation). At the last meeting, it was announced that the Fed would
“taper” by $10 billion per month.
Instead of inflating at $85 billion per month, it would inflate at $75
billion per month.
With the latest statement, the FOMC announced it would taper
by another $10 billion. So
starting in February, the Fed will add “just” $65 billion per month to its
While this was widely expected, there were growing doubts
about the continuation of the taper because of the bad economic news over the
last couple of weeks. The
unemployment rate dropped, but it became evident that it was only because
people stopped looking for work.
In the last week, the stock market has been doing terrible
with news of weakening in China, as well as currency crises going on in various
countries. It seems that a lot of
fear has quickly returned, and this time it included investor fears.
This was Bernanke’s final act as Fed chairman. He will pass over the reigns to Janet
Yellen this weekend. I find the
situation quite ironic.
When Bernanke took over from Greenspan, the economy seemed
to be booming. Bernanke has a bad
reputation now as a money printer (even though most of it is done digitally and
not by actually printing money).
But when Bernanke first became Fed chairman, he actually took a tight
monetary stance. It was under
Bernanke’s watch that the Fed stopped inflating and kept the monetary base
It was these actions that triggered the whole crash, but it
was not the cause. Real estate
started to go bust and then we hit the fall of 2008 when stocks collapsed and
the whole financial system seemed to be on the edge of a cliff.
This was mostly due to the easy money and low interest rate
policies of the Fed under Greenspan.
This is what caused all of the malinvestment, including the housing
bubble. Bernanke’s action of
tightening is what exposed the malinvestment. It wasn’t until after the whole financial crisis became
evident that Bernanke started to inflate like crazy.
It seems that Bernanke may now be doing to Yellen what
Greenspan did to him. He is
setting her up for a fall. Under
his watch, the Fed has more than quadrupled the monetary base since 2008. It has caused a stock bubble and a huge
misallocation of resources. As the
rate of monetary inflation goes down, these malinvestments will be
exposed. If the Fed keeps tapering
and sticks to it, then we are likely to see a severe recession.
Bernanke started the tapering just before leaving
office. Now Yellen will have to
deal with it. This isn’t to say
that the Fed can’t reverse course.
If the economy starts to get really bad, then I don’t think it will
shock any of us if Yellen starts increasing monetary inflation back to $85
billion per month, or even more.
When things finally fall apart, I am glad that it will be
someone like Yellen who will take the blame. She is a Keynesian (or worse) and she believes that more
monetary inflation is the answer to most of our problems. When things go bad, her philosophy can take
the blame, just as it should.