Money Games

After much anticipation and hoopla, Fed Chairman Bernanke made his post FOMC meeting utterances on Wednesday.  In short: No QE3, for now.  More Operation Twist.

Markets didn’t know what to make of it.  Initially they rose on the announcement.  The Dow jumped over 100 points.  After that, however, it slid down 100 points before climbing back up…ending the day about 13 points off where it started.

Then, yesterday, at opening bell, the DOW barfed all over itself…and never recovered.  By the time the closing bell rang, the DOW had dumped 250 points.

Jim Cramer said it was the fault of commodities.  “Today was a day when lots of investors freaked out that there might not be enough end demand for everything that’s fashioned from commodities, not just the commodities themselves,” said Cramer.

Perhaps Cramer is right…and maybe he is wrong.  Here at the Economic Prism we don’t pretend to know what moves the stock market.  But we think the disappointment of no QE3 may have soured the moods of traders.

Operation twist, no doubt, involves significant market intervention.  While it doesn’t actually expand the money supply, like quantitative easing, it twists and contorts credit markets like a blacksmith twists and forges a wrought iron gate.  What we mean is through Operation Twist the Fed intends to heat up and hammer out credit markets nearer to his heart’s desire.

California Stagnation

In practice, the Fed accepts one check from the Treasury and writes another check back to the Treasury.  From what we gather, as part this latest extension of Operation Twist, the Fed will swap $267 billion of shorter-term treasuries for longer-term treasuries by the end of 2012.

The objective of the twist is to lower long term interest rates to encourage more borrowing and spending.  Of course, the whole endeavor is to jump start the economy – to boost it up – until it finds its own traction.  More spending, according to the Fed, means more growth and more jobs.

Obviously, the Fed’s plan sounds well and good.  But, so far, over the last four years of easing and twisting, the economy has nothing to show for the Fed’s efforts…except for adding about $6 trillion to the national debt.  The unemployment rate is at 8.2 percent and, last month, the economy added just 69,000 – the fewest in a year.

Moreover, here in the Golden State, unemployment’s at 10.8 percent and it won’t be coming down anytime soon…

According to the just released UCLA Anderson Forecast, California will not see unemployment drop into the single digits until 2013, and won’t drop to 8.3 percent until 2014.  What’s more, here in Los Angeles County, the unemployment rate is not expected to fall below 8 percent until late 2015 or early 2016.

“The basic theme is California is about six months behind the U.S. and LA is probably another three months behind California,” said David Shulman, a UCLA economist and co-author of the Anderson Forecast.

Clearly, the road to recovery is going to be a long slow slog…with the Fed’s help or not.

Money Games

Quite frankly, despite what the Fed says, they really can’t do anything to help the economy.  That’s been the obvious experience over the last four years.  But what they can do is they can bailout all the big banks and big corporations with their funny money.

In a more honest world, the government would have let the overextended banks and bankrupt corporations fail.  The financial managers and executives would have been responsible for their mistakes.  The punishment for their imprudence would have been brutal but they would have learned many valuable lessons.  For one thing, the banks would have learned to not create toxic assets and sell them to each other.

The average worker is also handicapped by the Fed’s money games.  Rather than learning the skills and knowledge that the economy really demands they continue to serve positions and industries that are propped up by the government.  They become dependent on government stimulus.

When the housing boom was ballooning upward and outward, thanks to Greenspan’s cheap credit, construction jobs were plentiful.  But now that the gas has been sucked out of the market there are too many workers with too little demand.

“We have a large number of workers here in California who are working in construction and manufacturing, and their jobs aren’t coming back,” said UCLA senior economist Dr. Jerry Nickelsburg.  “So while they’re skilled and they want to work, they don’t have the skills that are being demanded.”

Who knows…maybe the Fed’s twist extension will bring on the next building boom and jobs will become plentiful?

More than likely, after the initial dust up of no QE3 clears, the Fed’s money games will just goose the stock market for a month or two.

Sincerely,

MN Gordon
for Economic Prism

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