Share This Page

Markets challenge central banks

| Saturday, Aug. 31, 2013, 9:00 p.m.

The Federal Reserve's initiatives to stimulate the economy — including its low interest rate policy, monthly bond purchases and support for government bailouts — may have stretched market manipulation almost to the breaking point.

Combined, these have led the Fed to create some $3 trillion in synthetic dollars in an “experiment” of unprecedented size and scope. The apparent success in averting a collapse of the financial system, recession and depression created a degree of hubris.

It inspired the Fed, as the international reserve currency's central bank, to take its philosophy to other key troubled economies like those of Japan, the United Kingdom and the European Union, despite German resistance.

As the low-interest program continued, it was reinforced by “forward guidance,” through which central banks committed to interest rate repression for years to come. After some five years, these programs are being evaluated by the Fed and by the markets. The results look bad. Rising interest rates indicate markets possibly are challenging central banks.

In two respects, the Fed's policies have been an undoubted success. First, Wall Street was saved. But it has not been reformed. Too-big-to-fail banks have grown even larger and are engaged still in massive operations imposing inherent risks on depositors and taxpayers.

Secondly, time was bought, albeit at a vast cost to future generations. Politicians have failed, however, to cut big government and restructure their economies.

The Fed's programs appear to have failed or succeeded marginally at best, pumping financial markets with speculation.

Two Fed economists — Vasco Curdia of the San Francisco Fed and Andrea Ferrero of the New York Fed recently authored a report: “How Stimulatory Are Large-Scale Asset Purchases?” They estimated that by 2012, the Fed's bond purchases had added only 0.13 percentage points to the United States' real Gross Domestic Product. Furthermore, they concluded, without forward guidance, the contribution to the GDP would have been a paltry 0.04 percent.

The Fed's St. Louis branch says the Fed's low-interest rate program has cost fixed-income investors roughly $700 billion over the past five years. Following increased taxes and Obama-Care, that may be one key reason why the Fed's $85 billion in monthly Treasury bond purchases failed to inspire consumers to spend.

But when Fed Chairman Ben Bernanke hinted at the possibility of a tapering of the bond buying program, markets went into a tailspin. The question is not if the Fed should end bond purchases, but when.

For 99 years, the Fed has had undisputed control of short-term lending rates. But in London's vast offshore free market in greenbacks, the rate banks charge each other — a benchmark for other loans — has started to rise. Does the rise in the rate, combined with a pending change in Fed governors, indicate the beginning of a free-market challenge to central bank interest rate repression? If so, it could have dire consequences for currencies and the debt of spendthrift and developing nations.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at johnbrowne70@yahoo.com.

TribLIVE commenting policy

You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.

We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.

While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.

We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers

We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.

We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.

We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.

We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.