Last week, JP Morgan CEO Jamie Dimon made a comment about the Federal Reserve’s plan to somehow unwind the nearly $8 trillion in bonds it began purchasing during the mortgage crisis of 2008, using money it created from thin air. Dimon said that he doesn’t understand the implications of this Fed action.
Dimon is one of the guys who is both smart and wise. He runs a company with $3 trillion in assets and knows as much about the workings of the financial system as anyone. If he doesn’t understand the potential unintended consequences of this Fed policy, no one does – including (maybe even especially) the Fed governors responsible for it.
In November 2008, the Federal Reserve began buying mortgage-backed securities, at a time when few investors would. These purchases were funded with money the Fed created by making a computer entry on the sellers’ books.
It eventually purchased $600 billion of these securities, averting a potential meltdown in the bond market.
But you know how Washington works. If $600 billion is good, maybe a few trillion would be better?
Suddenly, the Fed was using this money creation/bond buying strategy (known as quantitative easing) to micromanage the economy – not simply to avert a crisis. It was the equivalent of using powerful narcotics every time you almost get a paper cut. Eventually you become addicted.
Fifteen years later, the Federal Reserve now owns $7 trillion of bonds purchased with previously non-existent money. For perspective, it is more than 20% of our federal government debt. Creating a few trillion dollars out of thin air certainly makes investors happy, but (shock!) it also creates inflationary pressures of various types. So, the Fed now says that it is going to reverse this process and begin taking this phony Fed money out of the economy.
And if Jamie Dimon is uncertain how this will play out in the economy, so is Fed Chair Jerome Powell.
This assumes that the Fed actually follows through on its announced plan to reverse these bond purchases. Like a narcotics addict who promises to quit, it’s politically very difficult to break the addiction to “free money.”
A few weeks ago, I wrote about a friend who was misled about the range of a Hertz electric vehicle. Her experience serves as one small example of the unintended consequences of government trying to force an action for which there is not yet sufficient natural demand to support the needed infrastructure. Hertz apparently figured this out, as the company just announced it is selling 20,000 electric vehicles this year (a third of its EV fleet) and suspending its plans to buy up to 100,000 EVs over the next three years.
David Moon is president of Moon Capital Management. A version of this piece originally appeared in the USA TODAY NETWORK.