STOCK MARKET WATCH -- Wednesday, 18 April 2012

[Demeter]

42. The Federal Reserve Turns Left By William Greider, The Nation

http://truth-out.org/news/item/8575-the-federal-reserve-turn-left

NO, IT'S JUST THAT THEY WENT RIGHT FOR SO LONG THAT NOW IT LOOKS LIKE THEY ARE COMING FROM THE LEFT....

...In this sorry situation, there is really only one governing institution with the courage to dissent from the conventional wisdom—the Federal Reserve. The central bank declines to participate in the happy talk about recovery or in the righteous sermons attacking the deficit. In its muted manner, the Fed keeps explaining why the house is still on fire, why more aggressive action is needed, and is gently nudging the politicians who decide fiscal policy to step up. But its message is ignored by Congress and the president and viciously attacked by right-wing Republicans who say, Butt out.

The stakes in this elite dialogue are enormous. The outcome will be more meaningful for ordinary citizens than any other issue at play in this year’s campaign. If the Fed is right and politicians refuse to act, Americans may be condemned to a bitter slog through many years of stagnation.

Japan in the 1990s is the appropriate comparison. After its financial bubble burst, Japan saw its “lost decade” stretch into fifteen years of stunted growth. Its central bank responded hesitantly, and its monetary policy proved ineffective—rendered impotent by a “liquidity trap,” a condition identified by John Maynard Keynes. The United States experienced a similar fate in the Great Depression of the 1930s. As an economics professor, Fed chair Ben Bernanke is a scholar of that period. He is determined not to let it happen again. A decade ago, he scolded Japanese authorities for failing to be more imaginative and aggressive. They needed “the courage to abandon failed paradigms and to do what needed to be done,” Bernanke advised. His model was Franklin Roosevelt, whose “specific policy actions were, I think, less important than his willingness to be aggressive and to experiment—in short, to do whatever was necessary to get the country moving again.”

Maybe the Fed chair should give the same lecture to American politicians. But Bernanke is at risk of embarrassment himself: despite the Fed’s firepower, it has been unable to restart the economy. And monetary policy is running out of gas. Five years ago, in the heat of crisis, Bernanke’s response was awesome. The Fed created trillions of dollars and flooded the system with easy money—enough to stabilize financial markets and rescue wounded banks. It brought short-term interest rates down to near zero and long-term mortgage rates to bargain-basement levels. It provided a huge backstop for the dysfunctional housing sector, buying $1.25 trillion in mortgage-backed securities, nearly one-fourth of the market....

GREIDER IS WAAAAY TOO OPTIMISTIC ABOUT THE FED RESERVE...