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Friday August 6, 2010 - 17:53:12 GMT
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Fed's ZIRP: US Government's Greatest Giveaway Barely Mentioned in Press, on Fin TV

To be sure I am not arguing for Fed tightening as some economic religious zealots in the Tea Party are where all faith is in the hands of creative destruction of markets much as there is no room for modern medicine in combating illness with some religious sects – it’s god’s will.


However, I can’t help but get worked up over the constant bashing of the government’s response to the crisis from all sides of the political and economic spectrum, but especially from the financial sector where I would say conservatively 8 of 10 blame the drift toward a Japan outcome of stagnation on the ineptness of the policy response. 


Hypocrisy comes to mind as nearly to a person these creative destructionists fail to mention the largest welfare program of them all and still fully operational…and the one that is supporting the financial system (hence the hypocrisy)…the Fed’s ZIRP (zero interest rate policy effectively) or zero cost of funding for banks. 


A monkey with a Sharpie could make money with a zero cost, and near infinite supply, of funds.  This is not investing or managing risk successfully.  This is corporate welfare.  Just because it comes from the Fed directly and not the taxpayer (future government liabilities on the federal budget balance) does not mean it is not a benefit offered from every citizen of the country.   Indeed the Fed’s balance sheet (our balance sheet) is full of all sorts of assets of questionable valuations which banks post as collateral for these (near) zero cost of funds.  Heck if the Fed opened up its availability of funds at near zero cost to households in exchange for Play Stations, Wii’s, flat screen TVs, Lazy Boys, lap tops, Viking stoves and clunker automobiles, then we would see consumers get back on their feet in a hurry too…even with underwater mortgages.    Hard to even hear any commentary or reports on the still mountains of underwater assets banks still have on and off their books…who cares when they are making money.


What about TARP?  Oh it was paid back with interest we hear from most in the financial sector like it is a badge of honor.  But few discuss what would have happened without it. Or how easy ZIRP makes paying back US gvt.  And moreover few ever call it a fiscal stimulus which it was – part of the budget and an act of Congress (Bush admin did it I know and it was a success by any objective assessment…albeit there is a legitimate criticism that success is relative…more like kicked the problem down the road). TARP kept the doors open and prevented massive job losses in banking if not the collapse of the banking system.  TARP was fiscal policy at work.  Seems like a case of selective memory for many in the markets. 


To be sure I am not suggesting the WH and Congress have responded perfectly to the crisis and the fiscal stimulus – countercyclical policy is always messy, never fair and impacts with long lags.  I find it shocking that many say the fiscal stimulus was 100% ineffective…the labor market is still weak.  How about recognizing that the hole dug into the economy by all the parties that brought us the credit crisis is so deep that to expect an exit within 24 months is about as reasonable as a 3 year old finishing dinner with the dessert on the table? The Great Depression is widely seen lasting from about 1929 (stock market crashed in 1929 while it took years before the economy saw peak unemployment) until 1940.  FDR was elected in 1932 and began a policy response in earnest in 1933 after his inauguration.  With unprecedented policy activism, the Depression dragged on and was not really whipped until WW2 broke out.  FDR won four elections too even with mixed results from policies like the New Deal.  But one attitude that the American people shared across political party lines in the 1930’s and is not present today in either major party (or the Tea Party) is the need for national sacrifice…when you have wars and only a volunteer army goes (how about mandatory service – could be in non-military roles too for those not inclined to go to armed forces) and there is nothing done in the budget to pay for it, we are living in a free lunch world. 


Is it surprising then to only hear about tax hikes from the left, and tax cuts and spending cuts from the right?  This is the free lunch, no sacrifice generation. 


Lastly, we come out of the largest economic recession since the Great Depression precipitated by a financial crisis and the ensuing financial reform legislation was written (another less told factoid) by bank lobbyists working with the Democratic leadership in Congress.


All the whining about gvt and politicians reminds me of the old primate exhibit in the Bronx Zoo…I remember going into the exhibit hall as a child and seeing a sign that said the world’s most dangerous animal…underneath the sign was a full length mirror.  We elect government and it is a reflection of our citizenry.  Criticism of gvt is necessary – as is policing at times.  But let’s all stop for a minute and gaze at that mirror for the really big questions and answers.    


David Gilmore




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