A Dash of Economic Fine Tuning and Mystery Monetary Policy

I don't know where you folks stand, but I think that I have had about all the government fine- tuning of the economy that I can stand. What exactly is the Fed's definition of fine tuning the economy anyway? All these years I have been under the impression that fine-tuning usually involved changes performed in minor increments meant to dial in to a precise target . Rarely have I seen fine-tuning operations performed with a sledge hammer or dynamite, I guess that is unless the fine tuning is courtesy of the Fed and the Treasury Department.

The Feds latest round of monetary fine tuning started a year and a half ago with the Fed Funds target rate at 5.25%. The Fed, in order to push the rate down further added liquidity. Recently, enough liquidity was added to move the rate to zero. Pushing the rate to zero is accomplished by the fed creating money in the form of reserves and adding these reserves to the banking system. By supplying excess reserves, (more reserves than the banks will bid for) the cost of these funds, or the "target rate", starts to fall. Once you have reached a point where no bank will bid for additional reserves you have hit bottom, I mean zero. After reaching a zero Fed funds rate, your guidepost has effectively disappeared, and will continue to read zero no matter how many new dollars you create . At this point, without a target rate to guide you , your monetary policy is now called "Quantitative easing". Quantitative easing is simply providing as much liquidity as the Fed wants until they hit what ever their new target is, which only Bernanke knows. Thus we have arrived at the Bernanke Standard, which I will refer to from here on out simply as the BS.

The Fed has lost it's way, and is now making up monetary policy on the fly. Without any guide posts, how will the Fed and markets know when it has reached its monetary destination? Better yet, how does the Fed even know it is on the road to it's destination? Are the dramatic swings in the value of the dollar brought about by the Fed's new monetary policy and the uneasiness it creates really it's desired outcome? Are the markets really crying out for more uncertainty? When Sir Ben has determined we are exactly ( remember this is fine tuning) where we need to be on the BS continuum how will he know? How will we know?

The combination of "Monetary policy by Mystery" along with the incoming administration's "We're not sure what we are going to do, but it's going to be big fiscal policy" serves to maximize the very uncertainty that bloodies the market on a daily basis. Who is going to step forward and risk capital when so much doubt and confusion has been created by our political leaders?

The President Elect's current guiding principal, articulated by Rohm Emmanuel "You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before", is not a message of hope for the American people. It is just touting that now is a great time for politicians to fleece their cowering constituents once again.

The President Elect shouldn't be waiting in the wings for the right page on the calendar to be turned. He should be front and center, reassuring the markets that soon the dollar will be stabilized and prudent fiscal policies, including tax cuts for corporations and individuals to reinvigorate the productive elements of the economy, will play a major role in the new policy mix.

Mr. President Elect, we're waiting to see some of the leadership you promised!