Monday, January 25, 2016

Finger of Blame Will Be Pointed At The Fed

The Fed, created to provide liquidity during a crisis, was originally limited to the stimulus of the private sector through the purchase of short-term commercial paper (CP). This expanded the money supply and provided liquidity during the ill-liquidity of panics and crises. Since the private sector pays its debt or ceases to exist, the money supply contracted after the CP was retired.

This was the Fed original design. World War I and II, of coursed, changed it. Politicians, not bankers, ordered the Fed to support (buy) US government bonds instead of CP. Unlike the private sector, the public rarely repays its debts. The continuous rollover of ever-expanding debts prevents the money supply from realigning with demand after each crisis. In other words, the Fed is forced to support a system that can only reset after systemic failure.

As expected, the finger of blaming will be increasingly pointed towards the Fed, because the majority no longer understands its original purpose. The Fed was never designed to be the buyer of last resort to support government largess.

Headline: Why the Fed Is the Root of Much Market Turmoil

Not long ago, this week’s Federal Reserve meeting looked like a nonevent. Having begun to raise rates in December, the central bank was expected to stand pat while signaling more hikes later on.

Now, after several bone-jarring weeks, many investors hope the Fed ​is having second thoughts.



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