For years we have argued that the main reasons for rising social anger, populist sentiment, and general disillusion with the US economy boils down to one thing: the Federal Reserve, which as we have argued since 2009, has approached the crisis aftermath in a wrong way, generated unprecedented wealth inequality through its monetary policy favoring a tiny fraction of the population – those invested in risk assets – and instead of reflating another debt bubble, should have allowed the system to undergo a debt purge and start afresh.
For this we have been branded perpetual conspiracy theorists and permabears.
Moments ago, none other than the WSJ’s Fed “whisperer”, Jon Hilsenrath admitted these allegations have been correct in an article titled “Years of Fed Missteps Fueled Disillusion With the Economy and Washington“, and which as the WSJ notes “helps explain one of the US’s most unpredictable, populist political years.”
In other words, it is the Fed’s policies that have led to the current failed economic regime (as noted again yesterday by Citi’s Matt King and today by former Fed governor Kevin Warsh), and which are responsible for the rise of such candidates as Donald Trump. Which, incidentally, is also something we have predicted over the years would happen. As such we are delighted that one of the most popular establishment Fed watchers now agrees with our assessment.
This is what Hilsenrath writes:
In the 1990s, a period known in economics as the “Great Moderation,” it seemed the Fed could do no wrong. Policy makers and voters saw it as a machine, with buttons officials could push to heat or cool the economy as needed.
Now, after more than a decade of economic disappointment, the central bank confronts hardened public skepticism and growing self-doubt about its own understanding of how the U.S. economy works, a development that helps explain one of the most unpredictable and populist political seasons in modern history.
Some highlights from the piece focus on the Fed’s own admissions:
“There are a lot of things that we thought we knew that haven’t turned out quite as we expected,” said Eric Rosengren, president of the Federal Reserve Bank of Boston. “The economy and financial markets are not as stable as we previously assumed.”
… The rise of Trump:
For anyone seeking to explain one of the most unpredictable political seasons in modern history, with the rise of Donald Trump and Bernie Sanders, a prime suspect is public dismay in institutions guiding the economy and government. The Fed in particular is a case study in how the conventional wisdom of the late 1990s on a wide range of economic issues, including trade, technology and central banking, has since slowly unraveled.
Here, unwittingly, Hilsenrath admits that by perpetuating the status quo policies, Yellen is explicitly furthering Hillary’s presidential campaign.
Meanwhile, revulsion against the Fed is rising:
Once admired globally for their command of the economic system, central bankers now are blamed by the left and right for bailouts during the financial crisis and for failing to foresee and manage forces suffocating the global economy in its aftermath.
Populist protest movements called “Fed Up,” “End the Fed” and “Occupy Wall Street” lashed out at the bank’s policies, and in the case of End the Fed, its very existence. Lawmakers of both parties want to subject it to more scrutiny or curb its powers.
Confidence in the Fed – and all other US institutions – has collapsed, for good reason:
“I certainly myself couldn’t have imagined six, seven years ago that we would be employing the policies we are now,” Fed Chairwoman Janet Yellen said to a packed ballroom in New York earlier this year. She lamented the government has leaned so heavily on the Fed to stimulate the economy while tax and spending policies were stymied by disagreements between Congress and the White House.
Confidence in the central bank’s leadership has dropped. An April Gallup poll found 38% of Americans had a great deal or fair amount of confidence in Ms. Yellen, while 35% had little or none. In the early 2000s, confidence in Chairman Alan Greenspan often exceeded 70%.
Even the Fed now admits it no longer knows what it is doing, with the main culprit being the massive debt overhang:
“What was missing to me was the in-depth understanding of how much risk and leverage had grown in the financial system and basically how lacking in resilience the financial system as a whole was to this kind of shock,” Mr. Williams said in a recent interview.
And then there is the question of what happens if the Fed loses control, something one of its staffers earlier this week said would require another $4 trillion or more in QE:
Still looming is potentially the biggest reversal of all in the modern conventions of central banking. If another recession hits, it isn’t clear the Fed has the tools available to mend the economy, a subject Ms. Yellen could address in Jackson Hole.
Traditionally the Fed cuts interest rates in a downturn. With its benchmark short-term rate near zero, it can’t be pushed much lower. If recession hits, the Fed will likely resort to unpopular tools used after the financial crisis, including Treasury-bond purchases and more promises to keep short-term rates low far into the future.
“We should be extremely worried,” Mr. Summers said. “We are essentially on a fairly dangerous battlefield with very little ammunition.”
* * *
But why put this “stunning” admission out now, one day before Jackson Hole, and why confirm that the Fed is losing control in its “fight for the economy”, and is responsible for the current sad state of affairs? Simple: this is the grand pivot to push for “fiscal stimulus.” The irony: “fiscal stimulus” is merely a phrase for issue more debt, at least a trillion dollars more, according to a Reuters analysis.
And all that debt will ultimately need to be purchased, or monetized, by someone. Someone like the Fed.
In other words, all this Hilsenrath mea culpa, which most certainly was greenlighted by the Fed, seeks to achieve is to give the Fed ammunition to ultimately double down on the same policies that even it admits have not worked, where following the brief infatuation with a rate hike, it will once again resort to monetizing, what else, more debt.
The real conclusion? As Matt King pointed out yesterday, when he correctly predicted that all central banks will do, is “double up”…
… is that “the distortions will get even bigger.”