Thoughts on Fed interventions

Lest anyone think that I've uncritically accepted some assertions made by a certain person somewhere on the net, let me offer a few of my own thoughts on the matter.

Let's start with the Federal Reserve and its mandate, which is to basically manage the economy.  How does it do this?  The Fed has control over the money supply and uses that power to expand and contract it as they deem fit.  For many years, until recently that is, the Fed simply bought and sold short term bonds.  This had the effect of increasing and decreasing the money base, which acted as a stimulant and depressive for the economy through the interest rates therefrom.  However, in the last 14 or so years, the Fed's open market operations have been insufficient in doing this function as interest rates continue to fall further and further towards zero, yet the economy seems to fail to respond.  In fact, the interest rate are at zero now and have been for several years, yet the economy isn't really responding.  What's the Fed to do?  You can't go lower than zero, or if you tried, that wouldn't look good, would it?

You may remember Operation Twist, which was in the news when Gold hit its all time high of about 1900 an ounce.  I think that was a broad movement towards regulating the economy by expanding open market operation even further than before.  We were told that the Fed would purchase long term bonds as a part of this new expanded policy.  This by itself is new and aggressive, as the Fed's policy up to that point was restricted to the near term end of the yield curve.  The yield curve is the interest rates that reflect their duration--- the shortest duration are the overnight rates, which the Fed controls through its open market ops.  The longest duration are the 30 year bonds and then there are all those durations in between.  These various durations have different rates which is referred to as the yield curve.  Well, the new policy of Operation Twist was to monkey around with the yield curve in a  more aggressive fashion.

But what's to stop the Fed from doing even more than that, if they see fit?  In principle, if they can move beyond overnight rates and into longer term maturities, why not go into any market and control it through open market functions?  Nothing stops them, as a matter of fact, by law they are required to do this.

The question therefore, is should the Fed have this much power?  I think not.  But our leaders in all their wisdom have conferred this power to them and there it is.

Those in Congress and the Presidency can interfere in the free market and the Fed does the rest.  We don't have a free market anymore, regardless of what we are being told.  Without a free market, we really can't say that capitalism is failing because capitalism isn't being practiced.

This is a type of price rigging.  For if you do this, you effect the purchasing power of the dollar itself.  If the dollar is massively overvalued, prices are going to be lower than otherwise would be the case.  Since import prices would rise in the case of a weak dollar.  Now if a weak dollar is not desired, the Fed can deal with that too by making the dollar much stronger than what the market says it should be.  That is, what the market would say if it were a truly free market.

What would bring the show to a close is if enough countries in world decided to band against the dollar and end the dollar's reserve currency status.  We could see that eventually.  There's no reason why other countries have to be forced into playing this game.

We saw price controls in the seventies.  This is a much more sophisticated version of the same.  Price fixing doesn't work and won't work this time either.  You may be able to fool the public in the US, but you won't fool other people in the world who don't have to listen to your propaganda.