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fiscal policy vs monetary policy

  • Featured Story

    The Insidious Truth About Federal Reserve Policy

    By Shah Gilani, Chief Investment Strategist, Money Morning • @ShahGilani_TW - September 15, 2011

    To continue reading, please click here...

Article Index

  • The Insidious Truth About Federal Reserve Policy
  • Helicopter Ben is at It Again: Four Ways to Protect Yourself From the Fed’s Next Flyover

The Insidious Truth About Federal Reserve Policy

By Shah Gilani, Chief Investment Strategist, Money Morning • @ShahGilani_TW - September 15, 2011

So far, U.S. Federal Reserve policy has done nothing to help the economy. To the contrary, it's actually been quite destructive.

Yet Federal Reserve Chairman Ben S. Bernanke and his cohorts will likely expand upon their ineffective policies next week by announcing a new "Operation Twist."

That begs the question: Why?

If ultra-low rates and quantitative easing haven't put a dent in unemployment or spurred economic growth, then why expand on those programs?

The answer: Because the Fed doesn't work for the American public - it works for Wall Street .

That's right. It's not the economy the Fed has on life support - it's the banks.

America's banks are facing huge litigation costs. Worse, they've grown entirely dependent on the Fed's easy-money policy.

So the Fed is going to bail them out - again.

And we're going to be the ones who pay for it.

Federal Reserve Policy Follies

To really understand what's at play here, let's start by taking a closer look at the Fed's misguided policies.

There are two reasons why Federal Reserve policy hasn't worked: First, the Fed's artificially low interest rates are handicapping the economy. And second, Bernanke is telegraphing Fed policy decisions to the markets, giving speculators an edge over investors.

By keeping overnight lending rates between 0.00% and 0.25%, banks can borrow at next to nothing and buy risk-free U.S. T reasury securities that yield a lot more than their financing costs. The result is a "positive interest rate spread," which is the basis for banks' revenues and profits.

Additionally, banks can borrow more money by using their Treasury securities as collateral for overnight and "term" loans. Then they use the cash they borrow to buy more Treasuries. They do this over and over again to leverage themselves.

Essentially, banks have become giant hedge funds that finance their "trading books" with virtually free money, courtesy of the Fed's zero-interest-rate policy.



To continue reading, please click here...

Helicopter Ben is at It Again: Four Ways to Protect Yourself From the Fed’s Next Flyover

By , Money Morning - August 3, 2011

The circus known as the debt-ceiling debate may have left town - at least for the time being - but there's still one sad clown left standing squarely in the center of the ring.

I'm talking about U.S. Federal Reserve Chairman Ben S. Bernanke - otherwise known as "Helicopter Ben."

Bernanke got the nickname "Helicopter Ben" from a speech in 2002, in which he announced that deflation was a real worry (this was just when house prices were taking off) and that one possible solution would be to fly around the country dropping $100 bills from helicopters.

Strange as it sounds, that might actually have been a better approach than the one he ended up taking.

Attack From the Sky

Small towns in the Midwest and the working poor of such downtrodden urban environments as Cleveland and Detroit could certainly use a visit from the kindly flying Santa Claus. At least those Americans would have put the money to good use.

But so far, Bernanke's helicopter has only hovered over Wall Street, and his generosity has had a negative effect on the U.S. economy as a result.

His first two rounds of quantitative easing had three major consequences:

  • Higher inflation.
  • Higher unemployment.
  • And higher borrowing costs for average Americans.
In fact, the only thing Bernanke's policies have managed to suppress is economic growth.

U.S. gross domestic product (GDP) increased by just 1.3% in the second quarter - an indication that an already wobbly economic recovery could tip completely over in the second half of the year.

But if you think that means we'll get a reprieve from Helicopter Ben's razor-sharp rotors, you're wrong. To the contrary, he's gearing up for another flyover - a third round of Treasury purchases (QE3).

To continue reading, please click here...

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