Fed is easy target for scrutiny

By DAVID MOON, Moon Capital Management, LLC
August 4, 2013

Former University of Tennessee Athletics Director Doug Dickey once told me that any time TVA stumbled in the public relations area, it took a little pressure off of him; the press spent their time and energy focusing on the other 800-pound gorilla in town.

Large institutions are easy targets. They do so many different things and have so many employees that someone is always doing something silly or stupid, even if the organization is generally, or even exceptionally, well-run.

Coach Dickey should have wished for the Federal Reserve Board to be located in Knoxville.

A client recently asked me why I despise Federal Reserve Board chairman Ben Bernanke. “You sound as if you think he is the spawn of the devil.”

I have been tough on Dr. Bernanke, but I don’t believe he is the Prince of Darkness.

The Federal Reserve is so big (and growing with every dollar it creates) and tries to do so many things that it, like most large institutions, is always doing something silly or stupid.

I have made no secret of my disagreement with the Federal Reserve Board’s quantitative easing policy. The Fed is creating trillions of dollars in order to purchase marketable securities. This is market manipulation, which would be illegal if you or I did it.

A similar Fed action in 2008 was designed to provide liquidity for a failing commercial paper market. I supported that Fed action, despite its similarity to quantitative easing.

The bigger problem, however, is that neither the current nor 2008 actions fall within the Federal Reserve Board’s stated dual mandate.

The Federal Reserve is responsible for regulating the banking system and its payment systems. The Fed’s active monetary policy involvement, by altering interest rates and changing the banking reserve requirements, is intended to accomplish two primary goals: price stability and maximum employment.

Anything less than 5 percent unemployment is usually considered full employment. Price stability is a core inflation rate equal to or below the Fed’s two percent target rate.

How has the Fed done in achieving this dual mandate?

According to Orcam Financial Group’s Cullen Roche, since core inflation was first tracked in 1957, the Federal Reserve has simultaneously achieved both its price stability and full employment mandates in only two full calendar years.

Last Wednesday, the Federal Open Market Committee announced that because of an elevated unemployment rate, it would continue purchasing $85 billion of bonds each month.

The vote was 11 to 1.

After the May meeting, when Chairman Bernanke said that the bond buying would end in mid 2014, other Fed officials immediately began backtracking.

Bernanke is the most powerful among presumably equal Fed Governors. The referential power of the position is now in greater focus since his second term as Chairman ends in January. The two names most frequently mentioned as successors are Harvard University President Emeritus, Lawrence Summers and current Vice Chairman of the Federal Reserve System Board of Governors, Janet Yellen.

Like Bernanke, Summers and Yellen have spent almost their entire professional careers working for academic or government institutions. It will be interesting to find out if their approach to monetary policy is also similar.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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