A parcela de culpa do Fed

Rodrigo Constantino

Sei que uns 90% dos manifestantes brasileiros sequer devem saber o que é Federal Reserve, mas cabe perguntar: até que ponto o banco central americano liderado por Ben Bernanke tem parcela de culpa no que está acontecendo?

Alguns podem achar que eu enlouqueci, mas peço calma. Vou explicar a teoria de forma bem sucinta e leiga. Após a crise de 2008, o Fed inundou o mundo com dólares, no afã de evitar uma recessão que poderia se transformar em depressão. Mas dinheiro não tem carimbo. O governo não controla seu destino final.

Ao tentar inflar o piscinão do mercado americano, essa liquidez abundante acaba transbordando para outros mercados, para outras piscininhas mundo afora. Esses mercados são tão menores que basta um punhado desses dólares para fazer a festa. Ou seja, a ação do Fed para estimular o enorme PIB americano pode produzir bolhas na América Latina. Uma borboleta que bate as asas num continente pode produzir um furacão em outro. Imagina um elefante enorme balançando suas gigantescas orelhas!

Outra metáfora: o Fed é o dono do ponche na festa, e anunciou que iria servir rodadas de bebida grátis ilimitadas. Quando o relógio marca duas da madrugada, e os presentes estão se fartando de liquidez etílica desde às oito horas, parece natural que comecem a chamar urubu de "meu louro". As mocreias se transformam em lindas modelos. O critério de julgamento desaparece.

É por isso que o Haiti consegue emitir títulos de dívida do governo com prazo de dez anos pagando cerca de 7% ao ano em dólares (quem seria louco para comprá-los em condições normais?). É por isso também que empresários que possuem uma bonita apresentação de Powerpoint e um X no nome da empresa conseguem levantar dezenas de bilhões no mercado (com uma incrível ajuda do BNDES, é verdade). 

Com a farta liquidez induzida pelo Fed (e pelo BCE, BOJ etc), o preço das commodities tende a subir. Isso ajuda a explicar o poder todo que um lunático bufão como Hugo Chávez acumulou, com seus petrodólares jorrando pelos poços da incompetente PDVSA. A revolução bolivariana pode não saber, mas tinha em Bernanke um grande aliado!

São as tais consequências não-intencionais dos governos e bancos centrais. Vejam o gráfico abaixo. É o índice do dólar contra uma cesta de moedas do resto do mundo. Quando ele está se valorizando, é porque a liquidez está sendo enxugada ou os agentes do mercado estão receosos de que chegou a hora do ajuste, e correm para o piscinão maior. Quando isso ocorre, a farra dos que brincavam nas piscininhas fica em xeque. A água secou!

A "Primavera Árabe" começou no final de 2010. Será coincidência? Vejam o que aconteceu com o dólar índex meses antes. Ele foi para a Lua, de forma bastante rápida. E agora estamos vendo algo similar, não na mesma magnitude ou velocidade, mas na mesma direção. O dólar tem se valorizado contra as outras moedas, pois os investidores temem que as rodadas de bebida "grátis" estejam chegando ao fim, uma vez que a economia americana dá sinais de melhora. 

Isso não quer dizer, em hipótese alguma, que o nosso destino está fora de nosso controle. O impacto do "tsunami monetário" vai variar caso a caso, dependendo dos pilares da economia. O Eixo do Pacífico, com Peru, México, Colômbia e Chile, passa por um cenário bem mais favorável. O falido Mercosul, com cores avermelhadas e inspirado pelo "desenvolvimentismo" bolivariano, enfrenta condições bem mais adversas. 

Afinal, eram as mais feias da festa, verdadeiras "barangas", mas o entorpecimento estimulado pelo Fed fez com que muitos enxergassem apenas beleza. Sabe aquele poste, que jamais havia vencido uma eleição, que tinha no histórico de gestão apenas a falência de uma loja de produtos a R$ 1,99, que ostentava no currículo o passado de guerrilheira comunista com viés autoritário, e que se cercou de gente medíocre na economia? Pois é, ela virou símbolo de gestora eficiente e faxineira da ética. Pode?

Pode, quando o povo está imerso na ignorância e curtindo a festa bancada pela fartura de dólares no mundo. A festa acabou. O verão terminou. É chegado o inverno. Quem nadava nu vai expor tal nudez quando a maré baixar de vez. A maquiagem derreteu, a sobriedade vem voltando, deixando aquele gosto de ressaca nos bêbados. Não existe almoço grátis - nem ponche ou cerveja. 

Você realmente pensou que um país poderia passar imune a uma década de desgoverno petista? Doce ilusão. Só foi possível adiar o encontro com a realidade, em boa parte, graças à ajuda do Fed e do senhor Bernanke. Agora é hora de esfregar os olhos e olhar bem para o lado: você não dormiu com uma top model, mas sim com um tremendo jaburu. Acorda, Brasil.

Time to vote!

Importante paper escrito por um desiludido Bill Gross (PIMCO) sobre a repressão financeira atual praticada pelo Fed e a irrelevância da eleição americana, uma vez que nenhum dos dois candidatos pretende mudar os rumos do país neste sentido (tendo a discordar, pois vejo Obama como uma ameaça muito maior que Romney).

All of the money being created and freed up is elevating asset prices, but those prices are not causing corporations to invest in future production.

Ben Bernanke: Currency Manipulator

By MARY ANASTASIA O'GRADY. WSJ

The dollar is our currency, but it's your problem.

—U.S. Treasury Secretary
John Connally, 1971

In the final televised presidential debate, Mitt Romney promised that if he is elected on Nov. 6 he will "label China a currency manipulator" on "day one" of his presidency. He also pledged to pay more attention to trade with Latin America, noting that the region's "economy is almost as big as the economy of China."

To be consistent, Mr. Romney should call out the Federal Reserve on day two for engaging in its own currency manipulation by way of "quantitative easing," which undermines the value of the dollar relative to Latin American currencies. After all, no one can expect a healthy trade relationship with the region if the Fed is goading U.S. trading partners into competitive currency devaluations.

But that's not the main reason why a new U.S. president should want to rein in the Fed. The greater worry is the one that International Monetary Fund Managing Director Christine Lagarde warned about at the IMF's October meeting in Tokyo. Easy money from the central banks of developed countries, she said, creates the risk of "asset price bubbles" in emerging economies.

If history is any guide, such bubbles are likely to lead to financial crises that in turn lead to setbacks in development. Aside from the damage that does to middle-income countries like Brazil, emerging-market financial crises also undermine U.S. economic and geopolitical objectives.

From September 2008 through the end of 2011, Mr. Bernanke's Fed created $1.8 trillion in new money. But Fed policy makers were only warming up. In September they announced that they will engage in a third round of quantitative easing—that is, more money creation, ostensibly to spur growth and thus bring down unemployment—at a rate of $40 billion per month with no deadline.

With so many dollars sloshing around in U.S. banks and with a fed-funds rate set near zero, investors have found it hard to earn a decent return. The scavenger hunt for yield has sent dollars rushing into emerging markets where, as they are converted into local currency, they put upward pressure on the exchange rate.

Brazil has experienced this in spades. Brazilian Finance Minister Guido Mantega has complained bitterly about it because in his mind the higher relative value of the realmakes Brazil worse off.

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Bloomberg

U.S. Federal Reserve Chairman Ben Bernanke

In Mr. Bernanke's remarks at the IMF meeting in Tokyo, he suggested that emerging economies ought to simply let their currencies appreciate rather than "resist appreciation" through "currency management." To do otherwise, he noted, can mean "susceptibility to importing inflation," which means making Brazilians poorer.

Mr. Bernanke has a point. The closed, heavily regulated Brazilian economy is held back by too much government, not a strong real.

Indeed, the quest for a weak currency to boost exports is counterproductive if the goal is development. As former Salvadoran Finance Minister Manuel Hinds wrote earlier this month for the Atlantic magazine's new online publication, Quartz, the Brazilian boom in industrial production, which stirred "the idea that [Brazil] would become the engine of the world," came from "the inflow of dollars that Mr. Mantega hates so much."

But Mr. Bernanke's dismissive posture toward emerging economies missed the larger point. As Mr. Hinds also pointed out, "the exceptional prosperity would last only as long as the dollars kept on coming." And there's the rub. The boom is an artificially high valuation of the Brazilian economy, produced only because Mr. Bernanke has made the world awash in dollars.

The sustainability issue is troubling. As Bank of England Governor Mervyn King noted in a speech last week: "When the factors leading to a downturn are long-lasting, only continual injections of [monetary] stimulus will suffice to sustain the level of real activity. Obviously, this cannot continue indefinitely."

In a perfect world, the end of the dollar flows—or a downturn in soaring commodity prices when investor expectations begin to shift—would simply mean an economic slowdown. But booms are almost always accompanied by credit expansions, and Brazil's is no different. Since 2004, bank credit has grown to 167% of gross domestic product from 97%.

What happens when a leveraged economy, living on accommodative monetary policy, suddenly finds the spigot turned off? Ask Americans who were on the receiving end of Fed tightening in 2007.

In Tokyo, Mr. Bernanke spoke to the world the way former U.S. Treasury Secretary John Connally spoke to the G-10 in Rome in 1971 after the U.S. abandoned the Bretton Woods agreement that had tied the dollar to gold: Get over it. We do what we want.

That attitude wasn't constructive for Americans or the rest of the world. If some future U.S. president intends to restore American prestige in economic leadership, restoring Fed credibility as a responsible manager of the world's reserve currency is a necessary first step.

Beware the ‘central bank put’ bubble

By Mohamed El-Erian, Financial Times

The Federal Reserve remains the best friend of many investors. It is among several key western central banks that are supporting asset prices not as an end in itself but as a means to promote growth and jobs.

In the midst of the global financial crisis, the Fed aggressively injected emergency liquidity and intervened to fix disrupted and malfunctioning markets. In the process, it rescued investors from what would have been irrecoverable losses.

Essentially, the Fed is inserting a sizeable policy wedge between market values and underlying fundamentals. And investors in virtually every market segment – including bonds, commodities, equities, foreign exchange and volatility – have benefited handsomely. In the process, many asset prices have been taken close to what would normally be regarded as bubble territory, with some already there.On several other occasions, the Fed acted to counter the disruptive “left tail” of deflation and recession. Market valuations responded favourably as the institution successfully offset both internal and external risks.

Now the Fed is attempting to meet a more ambitious objective: to deliver better economic outcomes, defined as more robust growth, lower unemployment, and stable low inflation. And last week’s release of the minutes of the last policy meeting leaves little doubt: the Fed intends to keep its foot on the policy accelerator well into an economic recovery.

Central bank action, both real and perceived, rules the investment day, and will continue to do so for now. This is also the case in Europe.

Judging from last week’s policy announcements, the European Central Bank will not hesitate to buy unlimited government securities provided the targeted countries apply for help and deliver on the policy front. It is committed to countering unwarranted risk premia related to currency convertibility risk and financial market fragmentation. Even though it is yet to be made operational, this has already translated into a major boost to investors in most European assets; and it will continue to do so if governments also come through.

Yet with the recent surge in markets, investors would be well advised to remember some basic truths as they continue to position their portfolios (and scale their risk exposures) on the basis of unusual central bank activity:

• The assets likely to be impacted the most and longest are those under the immediate influence of central bank measures – namely the securities they buy directly.

• The more investors venture beyond these assets (and the larger and more illiquid their risk positions), the greater their conviction that unconventional central bank policies will eventually succeed in engineering more robust economic and financial fundamentals.

• It is hard to pin such conviction on detailed analytics or historical experience.Central banks are neck deep in extreme policy experimentation mode, and getting inadequate support from other government entities.

• The longer this persists, the higher the risk that policy benefits will be offset by collateral damage and unintended consequences; and the greater the political heat on central banks.

• If the critical hand-off to fundamentals does not materialise, the reaction of markets will not be pleasant. Positioning on the basis of the “central banks’ put” is a particularly crowded trade. Also, it involves some investors being overconfident in the powerful omnipresence of these institutions, some believing in immaculate economic recoveries, and some feeling they can wait for markets to peak decisively and then exit smoothly.

The summary takeaways for investors are quite straightforward, and important for both generating returns and managing risk.

Investors should definitely pay attention to western central banks and respect the market influence of unconventional policies. But they should do so while keeping a wary eye on how far, and for how long, valuations can be divorced from fundamentals.

Risk exposures should evolve accordingly. Differentiation, both within and between asset classes, should increasingly underpin portfolio construction – with emphasis on companies and countries with both strong balance sheets and positive cash flow. And this need not crowd out exposures to other parts of the world, particularly emerging economies (such as Brazil, Indonesia and Mexico) where central banks are less active but markets are better supported by solid economic and financial fundamentals.

Finally, investors should take with a pinch of salt the operational feasibility of maintaining a maximum “risk-on” position until the markets turn, then making a quick exit. It is an idea that risks sounding better in theory than it works in practice.

Mohamed El-Erian is chief executive and co-chief investment officer of Pimco

O debate do século

Rodrigo Constantino

Paulinho era um neokeynesiano fanático, defensor incondicional de mais estímulos monetários e fiscais para recuperar a demanda agregada e produzir crescimento econômico e emprego. Já Frederico tinha visão diferente. Ele acreditava que injetar mais do veneno que causara os males iria apenas aumentar o tamanho da crise posterior. Eis o debate que eles travaram em sala de aula:

Paulinho: O banco central tem que manter as taxas de juros nulas até perder de vista, e injetar dezenas de bilhões no mercado para estimular a economia. ‘Compradores de imóveis em potencial se sentirão estimulados pelo prospecto de uma inflação moderadamente mais alta que facilitará o pagamento de suas dívidas; as corporações se sentirão encorajadas pelo prospecto de mais vendas no futuro; as ações subirão, elevando a riqueza, e o dólar vai cair, tornando as exportações americanas mais competitivas’.

Frederico: Como você pode chamar de riqueza a elevação artificial e nominal do preço dos ativos? Isso é transferência de riqueza, dos mais pobres para os mais ricos, que possuem maior quantidade desses bens. No mais, esta política serve apenas para manter as distorções do mercado e evitar ajustes necessários para liquidar os excessos produzidos pela bolha anterior. Não foi você que em 2002 defendeu exatamente o mesmo remédio para curar a recessão causada pelo estouro da bolha do Nasdaq?

Paulinho: Não me lembro bem... Mesmo assim, agora é diferente! Falta demanda agregada, e só o Fed tem bala na agulha para estimular essa demanda por meio do efeito riqueza...

Frederico: Isso foi justamente o argumento que você usou naquela época, eu me lembro bem. Mas o resultado não foi crescimento sustentável, e sim uma bolha imobiliária que estamos tendo que digerir agora. Você não teme a criação de novas bolhas? Desde quando riqueza se cria com impressão de papel moeda? Olha a República de Weimar, o Zimbábue...

Paulinho: Você é um conservador paranóico com a inflação e com bolhas. O importante é observar a inflação corrente e...

Frederico: A inflação corrente é a última que sente os impactos dos estímulos, que antes inflam o preço dos ativos, dando a falsa impressão de maior riqueza. Foi isso que aconteceu entre 2002 e 2007, e sabemos o resultado depois. É como tentar curar a ressaca de um bêbado oferecendo mais bebida ainda para ele. Claro que ele pode postergar a sensação de euforia, mas que médico em sã consciência diria que isso é saudável? O coitado vai acabar com uma cirrose hepática...

Paulinho: Não seja tão negativo. As autoridades precisam colocar a roda para girar, e com mais consumo, haverá mais produção, e com o tempo o endividamento será diluído.

Frederico: Como no Japão, que tem mais de 200% de dívida pública sobre o PIB?

Paulinho: Por que falar de Japão agora? Esquece isso...

Frederico: Creio que você coloca a carroça na frente dos bois, e pensa que o rabo é que balança o cachorro. Para aumentar a produção, os investidores precisam de maior confiança no futuro, e de poupança, claro. Nenhuma dessas coisas melhora com essa intervenção estatal. Pelo contrário. Isso gera mais insegurança, pois eles sabem que não existe almoço grátis. Os investidores acabam virando especuladores de curto prazo e correm para commodities, como o ouro, em busca de proteção. A “relíquia bárbara” já triplicou de preço desde o começo do primeiro afrouxamento monetário.

Paulinho: Quem liga para o preço do ouro? Vivemos na era das moedas fiduciárias sem lastro.

Frederico: Talvez por isso os ciclos econômicos tenham se intensificado e a concentração de riqueza, aumentado. E você ainda se diz defensor dos mais pobres, eleitor empolgado de Obama? Essa política agrada a turma de Wall Street mais que a qualquer outro grupo. Olha o Goldman Sachs (ou seria Government Sachs) aplaudindo efusivamente as loucuras do Bernanke...

Paulinho: Que dia bonito de sol hoje, não?

Frederico: Sabe o que mais me impressiona? É que vocês realmente parecem cigarras preocupadas apenas com o curto prazo, e nunca levam em conta os efeitos perversos desses estímulos no longo prazo. Vão acabar implodindo totalmente o sistema monetário, com a completa perda de confiança no dólar...

Paulinho: No longo prazo estaremos todos mortos. Relaxa e goza. Viu a alta do S&P 500 essa semana?

Já vi este filme antes

Rodrigo Constantino, para o Instituto Liberal

O Fed anunciou nesta quinta-feira sua terceira rodada agressiva de expansão monetária, o QE3. O banco central americano vai comprar US$ 40 bilhões por mês adicionais em ativos hipotecários, além de prolongar as taxas de juros nulas até 2015. Se o emprego não reagir a contento, o Fed poderá comprar montantes ilimitados desses ativos. Os mercados financeiros celebraram.

Mark Twain dizia que a história pode não se repetir, mas com freqüência ela rima. Já Marx pensava que a história se repete, a primeira vez como tragédia, depois como farsa. Nós já vimos essa história antes. Mas, para quem tem somente um martelo, tudo se parece com pregos. Bernanke só conhece um instrumento, e parece disposto a usá-lo no limite da irresponsabilidade.

Quando foi que ficamos loucos a ponto de acreditar que basta criar montes de dinheiro do nada para colocar a economia em rota de crescimento sustentável? Perguntem aos alemães, que viveram na República de Weimar, se isso é possível. Perguntem aos miseráveis no Zimbábue de Mugabe. Perguntem a nós brasileiros! Aprendemos com a história que poucos aprendem com a história.

Bernanke fez o QE1, o QE2, a Operação Twist, e agora o QE3. A economia segue patinando, o desemprego continua elevado, e o preço das commodities sobe. Quando o Long Term Capital quebrou em 1998, o Fed liderou uma operação de resgate que demandou pouco mais de US$ 3 bilhões. Era o começo do moral hazard que causa estragos até hoje. A diferença é que, desta vez, falamos em bilhões como se fossem troco de feira.

Qual será o tamanho do próximo pacote? Qual o limite que o Fed topa chegar? Até a completa perda de confiança no dólar como reserva de valor? Bernanke diz estar confiante de sua estratégia de saída para seus estímulos. Bom, ele também garantia lá atrás que o subprime não viraria crise sistêmica, e depois que suas medidas resolveriam o problema. Alguém ainda acredita nele?  

Draghi se junta a Bernanke na roda do QE

The Federal Reserve: From Central Bank to Central Planner

By JOHN H. COCHRANE

Momentous changes are under way in what central banks are and what they do. We are used to thinking that central banks' main task is to guide the economy by setting interest rates. Central banks' main tools used to be "open-market" operations, i.e. purchasing short-term Treasury debt, and short-term lending to banks.

Since the 2008 financial crisis, however, the Federal Reserve has intervened in a wide variety of markets, including commercial paper, mortgages and long-term Treasury debt. At the height of the crisis, the Fed lent directly to teetering nonbank institutions, such as insurance giant AIG, and participated in several shotgun marriages, most notably between Bank of America and Merrill Lynch.

These "nontraditional" interventions are not going away anytime soon. Many Fed officials, including Fed Chairman Ben Bernanke, see "credit constraints" and "segmented markets" throughout the economy, which the Fed's standard tools don't address. Moreover, interest rates near zero have rendered those tools nearly powerless, so the Fed will naturally search for bigger guns. In his speech Friday in Jackson Hole, Wyo., Mr. Bernanke made it clear that "we should not rule out the further use of such [nontraditional] policies if economic conditions warrant."

Enlarge Image

Corbis

But the Fed has crossed a bright line. Open-market operations do not have direct fiscal consequences, or directly allocate credit. That was the price of the Fed's independence, allowing it to do one thing—conduct monetary policy—without short-term political pressure. But an agency that allocates credit to specific markets and institutions, or buys assets that expose taxpayers to risks, cannot stay independent of elected, and accountable, officials.

In addition, the Fed is now a gargantuan financial regulator. Its inspectors examine too-big-to-fail banks, come up with creative "stress tests" for them to pass, and haggle over thousands of pages of regulation. When we think of the Fed 10 years from now, on current trends, we're likely to think of it as financial czar first, with monetary policy the boring backwater.

A revealing example of where we are going emerged last spring, admirably documented on the Fed's website. Using its bank-regulation authority, the Fed declared that the banks that had robo-signed foreclosure documents were guilty of "unsafe and unsound processes and practices"—though robo-signing has nothing to do with the banks taking too much risk.

The Fed then commanded that the banks provide $25 billion in "mortgage relief," a simple transfer from bank shareholders to mortgage borrowers—though none of these borrowers was a victim of robo-signing.

The Fed even commanded that the banks give money to "nonprofit housing counseling organizations, approved by the U.S. Department of Housing and Urban Development." Why? Many at the Fed see mortgage write-downs as an effective tool to stimulate the economy. The Fed simply used its regulatory power to help meet that policy goal.

Even if you think it's a good idea (I don't), a forced transfer from shareholders to borrowers in pursuit of economic policy is the province of the executive branch and Congress, subject to reproof from angry voters if it's a bad idea.

The Fed said candidly that it was acting "in conjunction" with the state attorneys general and the Justice Department. So much for an apolitical, independent Fed.

True, $25 billion is couch change in today's Washington. But you can see where we are going: Hey, nice bank you've got there. It would be a shame if the Consumer Financial Protection Bureau decided your credit cards were "abusive," or if tomorrow's "stress test" didn't look so good for you. You know, we've really hoped you would lend more to support construction in the depressed parts of your home state.

Conversely, when the time comes to raise interest rates, how can the Fed not consider that doing so will hurt the profits of the too-big-to-fail banks now under its protection?

This is not a criticism of personalities. It is the inevitable result of investing vast discretionary power in a single institution, expecting it to guide the economy, determine the price level, regulate banks and direct the financial system. Of course it will use its regulatory power to advance policy goals. Of course, propping up the financial system will affect monetary policy. If we don't like this sort of outcome, we have to break up the Fed into smaller agencies with narrowly defined mandates.

The European Central Bank's political power is, paradoxically, even greater. The ECB was set up to do less—price stability is its only mandate, and it is not a financial regulator. But the ECB holds the key to the euro-zone's central fiscal-policy question. It has bought the debts of Greece, Italy, Spain and Portugal, and it is lending hundreds of billions of euros to banks, which in turn buy more of those sovereign debts.

Eventually, the ECB will have to suck up this volcano of euros, by selling back the bonds it has accumulated. If it can't—if the bonds have defaulted, or if selling them will drive up interest rates more than the ECB wishes to accept—then the ECB will need massive funds from German taxpayers to prevent a large euro inflation. It might ask for a gift of German bonds it can sell, as "recapitalization," or it might ask for a bond swap of salable German bonds for unsalable southern bonds. Either way, German taxes end up soaking up excess euros.

Our views of central banks have changed every generation or so for centuries. The idea that central banks are centrally responsible for inflation and macroeconomic stability only dates from Milton Friedman's work in the 1960s. It's happening again, and it would be better to think clearly about what we want central banks to do ahead of time.

Mr. Cochrane is a professor of finance at the University of Chicago Booth School of Business, a senior fellow at the Hoover Institution, and an adjunct scholar at the Cato Institute.

Bernanke should show some humility

By Bob Corker, Financial Times

You don’t have to watch the morning financial news or read the newspapers for long before realising that the day’s market activities will once again be driven by a “will they or won’t they” debate over the US Federal Reserve. Almost every day begins and ends with extensive debate on the same questions: what will the Fed do next? Will there be another round of quantitative easing?

This week is yet another example, with global equity and bond markets now not debating macroeconomic fundamentals but instead placing bets on whatBen Bernanke will or won’t say in Jackson Hole on Friday. We are getting to the point where this question, and Mr Bernanke’s Fed itself, are becoming unhealthy distractions from improving our free market system and engaging in fundamental policy debates.

Close Fed-watching by the markets is to be expected on days around policy announcements by the Federal Open Market Committee. And it is a sign of a healthy market when there are movements in bond prices in response to new pieces of economic data, such as unemployment figures or gross domestic product. There is of course nothing unusual about investors adjusting their expectations of interest rates as new information becomes available. But we are faced with a troubling dynamic where bad economic news is good for stocks because it means more cheap money is on the way and good economic news is bad for stocks because it means less money will be printed.

A big part of the problem is that the US Congress has given the Fed an overly broad “dual mandate” of price stability and full employment. In 1978 Congress congratulated itself for “ending unemployment” via its passage of the Humphrey-Hawkins Act, which added full employment to the Federal Reserve’s existing mandate. This approach has not only proved unsound. It undermines the free market system, allows Congress to use the central bank as a scapegoat while avoiding tough policy decisions, and creates Fed addicts in our financial markets.

We are one of the only developed countries in the world that has such a mandate. The European Central Bank, the Bank of England and the Bundesbank, to name but a few examples, all have single mandates.

Over the past 30 years a lot of thought has been given to the question of what role a central bank should play in a developed economy. Since the financial crisis, the focus has returned to the proper role of monetary policy and the notion that central banks should provide utility services such as money clearing and transfers, serve as an emergency lender of last resort at a penalty rate in times of crisis, and maintain a money supply that provides for stable prices while guarding against inflation. The maintenance of full employment in an economy as a completely separate task from price stability is much too complex for the blunt tools of monetary policy. Even members of the Fed have begun to embrace the notion that what the Fed does best is maintain price stability, with James Bullard, the St Louis Fed president, recently saying “it’s OK to go to the single mandate” and that the Fed should focus on “providing stable prices to get the best employment outcomes” possible.

I hope that in the coming years Congress will make the necessary changes to our central bank’s charter. But the blame does not rest solely with Congress. It would be helpful to have a Fed chairman who acted with a greater sense of humility about what monetary policy can achieve. Mr Bernanke’s comfort with managing long-term interest rates and his unwillingness to stand up and say that there are limits to what monetary policy can accomplish is disturbing, to say the least. We need to do better.

Ultimately, Congress should fix the Fed’s flawed dual mandate. In the meantime, though, we should set the following test for the next nominee to be the Fed chairman: do you see limits to monetary policy and will you stop punishing savers?

We need a Federal Reserve that will help, not hinder, our country’s vital transformation to an economy comprised of savers, and not wholly reliant on over-leveraged consumers. We need a Fed that sees the risks of year after year of zero interest rates wherein investors must hunt for yield in asset classes to which they are not suited. We need a Fed that does not empower runaway spending by the federal government. And most importantly, we must demand a Fed that serves as a utility institution in our economy, not an enabler of some perverse financial system addiction.

The writer is a Republican US senator from Tennessee and member of the Senate banking committee

The Dangers of an Interventionist Fed

By JOHN B. TAYLOR, WSJ

America has now had nearly a century of decision-making experience under the Federal Reserve Act, first passed in 1913. Thanks to careful empirical research by Milton Friedman, Anna Schwartz and Allan Meltzer, we have plenty of evidence that rules-based monetary policies work and unpredictable discretionary policies don't. Now is the time to act on that evidence.

The Fed's mistake of slowing money growth at the onset of the Great Depression is well-known. And from the mid-1960s through the '70s, the Fed intervened with discretionary go-stop changes in money growth that led to frequent recessions, high unemployment, low economic growth, and high inflation.

In contrast, through much of the 1980s and '90s and into the past decade the Fed ran a more predictable, rules-based policy with a clear price-stability goal. This eventually led to lower unemployment, lower interest rates, longer expansions, and stronger economic growth.

Unfortunately the Fed has returned to its discretionary, unpredictable ways, and the results are not good. Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom. It then overshot the needed increase in interest rates, which worsened the bust. Now, with inflation and the economy picking up, the Fed is again veering into "too low for too long" territory. Policy indicators suggest the need for higher interest rates, while the Fed signals a zero rate through 2014.

It is difficult to overstate the extraordinary nature of the recent interventions, even if you ignore actions during the 2008 panic, including the Bear Stearns and AIG bailouts, and consider only the subsequent two rounds of "quantitative easing" (QE1 and QE2)—the large-scale purchases of mortgage-backed securities and longer-term Treasurys.

The Fed's discretion is now virtually unlimited. To pay for mortgages and other large-scale securities purchases, all it has to do is credit banks with electronic deposits—called reserve balances or bank money. The result is the explosion of bank money (as shown in the nearby chart), which now dwarfs the Fed's emergency response to the 9/11 attacks.

Before the 2008 panic, reserve balances were about $10 billion. By the end of 2011 they were about $1,600 billion. If the Fed had stopped with the emergency responses of the 2008 panic, instead of embarking on QE1 and QE2, reserve balances would now be normal.

This large expansion of bank money creates risks. If it is not undone, then the bank money will eventually pour out into the economy, causing inflation. If it is undone too quickly, banks may find it hard to adjust and pull back on loans.

The very existence of quantitative easing as a policy tool creates unpredictability, as traders speculate whether and when the Fed will intervene again. That the Fed can, if it chooses, intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans—creates more uncertainty and raises questions about why an independent agency of government should have such power.

The combination of the prolonged zero interest rate and the bloated supply of bank money is potentially lethal. The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself—i.e., the Fed determines the interest rate by declaring what it will pay on bank deposits at the Fed without regard for the supply and demand for money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended consequences throughout the economy.

For all these reasons, the Federal Reserve should move to a less interventionist and more rules-based policy of the kind that has worked in the past. With due deliberation, it should make plans to raise the interest rate and develop a credible strategy to reduce its outsized portfolio of Treasurys and mortgage-backed securities.

History shows that reform of the Federal Reserve Act is also needed to incentivize rules-based policy and prevent a return to excessive discretion. The Sound Dollar Act of 2012, a subject of hearings at the Joint Economic Committee this week, has a number of useful provisions. It removes the confusing dual mandate of "maximum employment" and "stable prices," which was put into the Federal Reserve Act during the interventionist wave of the 1970s. Instead it gives the Federal Reserve a single goal of "long-run price stability."

The term "long-run" clarifies that the goal does not require the Fed to overreact to the short-run ups and downs in inflation. The single goal wouldn't stop the Fed from providing liquidity when money markets freeze up, or serving as lender of last resort to banks during a panic, or reducing the interest rate in a recession.

Some worry that a focus on the goal of price stability would lead to more unemployment. History shows the opposite.

One reason the Fed kept its interest rate too low for too long in 2003-05 was concern that raising the interest rate would increase unemployment in the short run. However, an unintended effect was the great recession and very high unemployment. A single mandate would help the Fed avoid such mistakes. Since 2008, the Fed has explicitly cited the dual mandate to justify its extraordinary interventions, including quantitative easing. Removing the dual mandate will remove that excuse.

A single goal of long-run price stability should be supplemented with a requirement that the Fed establish and report its strategy for setting the interest rate or the money supply to achieve that goal. If the Fed deviates from its strategy, it should provide a written explanation and testify in Congress. To further limit discretion, restraints on the composition of the Federal Reserve's portfolio are also appropriate, as called for in the Sound Dollar Act.

Giving all Federal Reserve district bank presidents—not only the New York Fed president—voting rights at every Federal Open Market Committee meeting, as does the Sound Dollar Act, would ensure that the entire Federal Reserve system is involved in designing and implementing the strategy. It would offset any tendency for decisions to favor certain sectors or groups in the economy.

Such reforms would lead to a more predictable policy centered on maintaining the purchasing power of the dollar. They would provide an appropriate degree of oversight by the political authorities without interfering in the Fed's day-to-day operations.

Mr. Taylor is a professor of economics at Stanford and a senior fellow at the Hoover Institution. This op-ed is adapted from his testimony this week before the Joint Economic Committee, which drew on his book "First Principles: Five Keys to Restoring America's Prosperity." (W.W. Norton, 2012).

Bernanke: vilão ou herói?

Rodrigo Constantino

Uma matéria grande em defesa do chairman do Federal Reserve, Ben Bernanke, na The Atlantic, argumenta que ele é detestado pela esquerda e pela direita, mas salvou a economia americana. Gosto sempre de ler o contraditório, em nome da honestidade intelectual. Mas não concordo de forma alguma com a conclusão do autor! Acho que é muita pretensão pensar que um "maestro" pode controlar tantas variáveis dessa forma.

O autor considera que Bernanke é mais conservador do que muitos pensam quando se trata do risco inflacionário, e que vem trabalhando desde 2008 em uma estratégia de saída para suas medidas heterodoxas e hiperativas. O júri ainda não deu seu veredicto final. O tempo dirá quem está certo. O autor acredita que Bernanke é um herói e assim será reconhecido na frente. Eu arrisco dizer que, tal como aconteceu com Alan Greenspan, Bernanke será alvo de ainda mais ataques no futuro.

No meu primeiro livro, "Prisioneiros da Liberdade", de 2004 (escrito, portanto, 4 anos ANTES de estourar a bolha imobiliária), há um artigo sobre Greenspan, lamentando o fato de que este antigo defensor do padrão ouro havia sucumbido às pressões inflacionistas do governo. Eis como concluí meu artigo, chamado "Amnésia política":

"E pensar que este homem hoje senta na presidência do próprio Fed, injetando como ninguém liquidez nos mercados, tentando artificialmente manter o boom econômico, evitar a correção natural dos investimentos ruins realizados, usando o governo para 'consertar' os problemas da economia criados pelo próprio governo. O mundo perde muito com o fato de Greenspan ou ter esquecido o que disse em 1966 ou ter sucumbido às pressões políticas. Ele mesmo tem consciência de que é impossível alterar as leis econômicas através de mecanismos artificiais do governo. Mas a amnésia que o jogo político causa até mesmo nas cabeças mais lúcidas é incrível."

Basta trocar Greenspan por Bernanke, com a exceção de que este jamais defendeu o padrão ouro, e fica aqui registrada a minha opinião sobre o assunto. Bernanke irá falhar também. Infelizmente, não se cura um envenenamento com mais veneno. Produzir inflação nunca será a receita certa para crises. Fosse assim, não haveria mais miséria no mundo!

They just don't get it at the Fed

Rodrigo Constantino

Em discurso hoje realizado em Connecticut, a governor do Federal Reserve Sarah Raskin defendeu a política extremamente acomodatícia do banco central americano para estimular a economia. No trecho abaixo, ela demonstra como funciona a "lógica" de um típico governor do Fed:

"This extended period of depressed levels of economic activity and low interest rates will continue to have important implications for household income flows. In particular, critics of the Federal Reserve's accommodative monetary policy are correct that the low level of interest rates represents a strain on households who rely on income from interest-bearing assets; indeed, the flow of interest income that households earn on their savings has declined about one-fourth since the recession began. However, I would also emphasize that many households are benefiting from the low level of interest rates, and some critics of the Federal Reserve's accommodative monetary policy seem to minimize this point. Purchases of motor vehicles and other household durables can be financed more cheaply, and in many cases, households have been able to refinance their mortgages into lower-rate loans, freeing up income for other uses."

Ou seja, ela reconhece que ALGUMAS pessoas claramente perdem com esta política inflacionária, mas argumenta que OUTRAS pessoas, por outro lado, ganham. E depois acusa os críticos do Fed de minimizarem este outro lado. Não! Nós, críticos do "afrouxamento monetário" do Fed, não ignoramos este efeito positivo. Nós apontamos justamente que a política inflacionária é uma deliberada medida de TRANSFERÊNCIA DE RIQUEZA. Disfarçada e legalizada, ao contrário da um falsificador de moeda. Mas ainda assim, pura transferência de riqueza.

Sendo mais específico ainda, e como fica evidente no próprio exemplo usado por Riskin, os poupadores prudentes são obrigados a transferir riqueza para os gastadores alavancados. Apelando para a fábula de La Fontaine, o inverno chegou, mas agora as formigas são forçadas a sustentar as cigarras. Você não quis participar da farra de crédito fácil? Você poupou dinheiro em vez de se alavancar para trocar de casa e carro? Problema é seu! Quem mandou ser otário? Agora terá que obter retorno nulo nominal, e negativo real (após a inflação), para deixar de ser besta!

Afinal, a cigarra endividada precisa rolar as dívidas e agora ficou mais barato trocar de carro ou se refinanciar no imóvel. É o recado aberto que a governor do Fed dá, sem vergonha na cara. Alguns ganham, mas outros perdem. Logo, não critiquem tanto o Fed. Ele está "apenas" transferindo renda. Dos poupadores para os gastadores. E, como keynesianos só focam em demanda agregada, colocando a carroça na frente dos burros, é essa gastança que faz a economia girar, e os produtores investirem. Assim reza a lenda, ao menos. O rabo balança o cachorro.

Mais crédito fácil e mais inflação vão fazer os gastadores gastarem mais, e isso é que gera empregos e riqueza. Os poupadores não devem reclamar do retorno negativo por sua prudência. A eutanásia dos poupadores é necessária para salvar os devedores! Viva o Fed, há quase um século destruindo o valor de compra da moeda americana. E produzindo bolhas locais e mundo afora.

Libertem a moeda!

Engole essa, Bernanke! Ron Paul vai direto ao ponto neste discurso feito hoje. Ouro e prata não deveriam ser vistos como um ATIVO pelo governo, e portanto taxados por ganho de capital. É hora de repelir o Legal Tender do Fiat Money e permitir que cada cidadão tenha, como MOEDA, ouro e prata em bancos, assim como referência em contratos privados. Hayek, Nobel de Economia, tem um livro sobre a desestatização da moeda que vale a pena ser lido. Segue uma pequena resenha que fiz.

PS: Se Ron Paul deixasse sua visão ingênua de política externa de lado, ele seria "o cara" mesmo!

For the Fed, There's No Easy Exit

By GEORGE MELLOAN, WSJ

The crash of Zero Mostel's quasi-Ponzi scheme in 1968's "The Producers" left his partner Gene Wilder muttering, "No way out. No way out." Federal Reserve Chairman Ben Bernanke is in a somewhat similar position. Keynesian monetary "stimulus" has failed to revive the housing market, the federal deficit remains at a three-year flood tide, and the recovery is moving at ant-like speed. Americans enjoyed "The Producers." They're not enjoying this.

Presidential candidate Ron Paul's call to scuttle the Fed and return to a gold standard is getting surprising resonance with Republicans, judging from his strong showing in the Maine and Minnesota caucuses. Despite a rising chorus of complaints from seniors, pension funds and frugal savers about scanty returns on investments, the Fed has committed itself to nearly three more years of zero interest rates.

Mr. Bernanke defends that commitment on grounds that low interest rates will continue to make mortgages cheap and help the housing industry recover. But the housing market can't clear until the inventory of distressed housing is worked off. And that process is being inhibited by federal policies to forestall mortgage foreclosures, including a $25 billion shakedown of five big banks as a penalty for alleged foreclosure abuses.

There is no end in sight to the pressure on the Fed's balance sheet. The Fed has acquired over a half trillion dollars (net) of Treasury securities over the last 12 months. Its holdings are up to $1.665 trillion and it is financing some 40% of the deficit—which is now running at a $1.3 trillion annual rate and heading for another collision with the debt ceiling, possibly late this year.

The Fed still holds $836 billion of suspect mortgage-backed securities on its books, bought mainly to bail out Fannie Mae, Freddie Mac and AIG. The Fed lists them at par (the remaining principal value of the underlying mortgages). But sales from the AIG tranche over the last year have shown their market worth to be somewhere around 50 cents on the dollar.

The Fed nonetheless booked a surplus of $79.9 billion for 2011, mainly from the interest on its government securities. But by law that goes back to the Treasury. So in effect the Fed earns expenses and little else on its holdings, meanwhile taking a big risk. It is subject to a huge capital loss on its portfolio if interest rates rise and the market price of Treasurys goes down. That gives it one more incentive to hold interest rates as low as possible, despite the rising public clamor for higher returns on investment.

But as the U.S. economy continues its feeble recovery, banks are getting greater demand for more-lucrative industrial and commercial loans, which pay a much higher return than the quarter of a percent the Fed pays banks on its borrowings from the $1.5 trillion in reserves they hold in excess of their legal requirements. It uses those borrowings to buy government debt. The Fed could use its considerable muscle with the banks to hold on to those reserves, but denying lending to the private sector hardly furthers its professed goal of stimulating the economy.

Nonetheless, the Fed is indeed using its muscle to conscript banks into helping it shoulder the federal deficit. The "Volcker Rule" drafted by the Fed and other agencies that regulate banks is a product of the Dodd-Frank Act intended to prevent depository institutions from trading for their own account. But guess what? There's no restriction on trading in Treasurys. Thus the draft regulation joins Basel II regulations, which gives Treasurys a zero-risk rating in the risk-based capital requirements for banks, in tilting bank lending away from the private sector and toward supporting the federal government.

Former FDIC director Sheila Bair has called the Fed's Volcker Rule draft a 300-page "Rube Goldberg contraption," and even Paul Volcker has criticized it. A recent Journal article reported that foreign central bankers are furious that the U.S. Treasury escapes a ban that will apply to trading in their securities.

Bankers are up in arms as well, none of which helps Mr. Bernanke's relationship with the constituency he once represented before the Fed decided to become the handmaiden of the White House and Congress. But he has bigger troubles than that. The Treasury will keep rolling out tons of low-interest debt and someone has to buy it. Mr. Bernanke has been lucky that Japan and China continue to buy Treasurys and that European debt has been in bad odor, thus sending investors to U.S. bonds as a haven of last resort.

But how long can that last? Chinese and Japanese demand is slipping and there are at least some signs of light in Europe. All of the available signals point to the likelihood that the Fed will have to turn to more vigorous creation of new money (inflation) at some point—or face the possibility of rising market rates on government securities that sharply raise the Treasury's borrowing costs and devalue the Fed's enormous balance sheet.

No way out. No way out.

Mr. Melloan, a former columnist and deputy editor of the Journal editorial page, is the author of "The Great Money Binge: Spending Our Way to Socialism" (Simon & Schuster, 2009).

Why We Can't Believe the Fed

By BENN STEIL, WSJ

The bank's predictions of its own behavior are only as good as its predictions of the economy. It has a poor track record.

The Federal Reserve's interest rate-setting Open Market Committee recently broke new ground in Chairman Ben Bernanke's transparency campaign by proffering predictions of its own behavior over the next three years. This is a huge innovation for the Fed, which has never predicted economic data it directly controls.

The idea was first to anchor market expectations that short-term rates will stay at historic lows, thereby encouraging investors and companies to move more aggressively into longer-term, riskier assets with higher expected returns—which the Fed hopes will fuel economic growth. But the Fed also set for itself a formal, long-run inflation target of 2%.

Consumer Price Index (CPI) inflation is currently running at 2.9%; so-called core inflation, excluding energy and food prices, at 2.3%. The 2% target was meant to reassure the market that the Fed's expectation of continued low rates does not imply a reduced commitment to price stability.

If the Fed has a good handle on where the economy is heading over the next several years, then its pledges of extended low rates and a 2% inflation target imply little risk of its needing to change course and jar the markets. But how good is the Fed's actual track record on predicting the economy?

The Fed studied its own staff's forecasting performance over the period 1986 to 2006. It found that the average root mean squared error—or the deviation from the actual result—for the staff's next-year gross domestic product (GDP) forecasts was 1.34, compared with 1.29 by what the Fed describes as a "large group" of private forecasters. That is, the Fed's predicting performance was worse than that of market-watchers outside the Fed. For next-year CPI forecasts, the error term was 1.03 for Fed staff, and only 0.93 for private forecasters. The Fed's conclusion? In its own words, its "historical forecast errors are large in economic terms."

How about the Fed's longer-term predictions? The Fed started publishing the Board of Governors' and Reserve Banks' three-year forecasts in October 2007. At that time, the GDP growth forecasts among this group of 17 ranged from 2.2% to 2.7%. Actual 2010 GDP growth was 3%, outside the Fed's range.

The Fed forecasters told us that unemployment in 2010 would be in a range between 4.6% and 5%. In fact, it averaged about twice that, or 9.6%. The forecasters further predicted that both Personal Consumption Expenditures inflation (PCE, similar to CPI) and core PCE inflation would be in a range from 1.5% and 2%. The former came in at 1.3% and the latter at 1%, again outside the Fed's range. The Fed's scorecard on its 2007 three-year forecasts: 0 for 4.

In short, the Fed's premise that it can speak with authority about the future is flawed. During the two decades to 2006, its own experts were worse than outside ones in predicting one-year economic data. Since the start of the crisis in 2007, its three-year predictions have been worthless.

This means Mr. Bernanke's new transparency campaign actually injects significant new risks into the business of Fed-watching. Earlier Open Market Committee statements carried a warning that "future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information." The Fed is now saying something entirely different: that it is confident that incoming information will not materially change the Fed's current expectations—which justifies keeping policy constant over the next three years.

Yet since history flatly contradicts the notion that the Fed can safely pledge interest rates three years out, there is a significant likelihood that the credibility of the Fed's new inflation target will crumble, as it keeps interest rates down despite rising prices, or that its effort to persuade the market that rates will stay near zero will end in shambles.

Lurking uncomfortably in the background is the fact that six of the 17 Fed officials whom the Fed asked for predictions actually think that interest rates will need to rise by 2013, and three of those six believe the rise should actually come this year. Philadelphia Federal Reserve Bank President Charles Plosser drew attention to the growing split in the committee on Jan. 30 by insisting that the Open Market Committee rate statement was "not a commitment" and was "contingent on the evolution of the economy"—which is precisely the old Fed mantra.

There is a sense that what Mr. Bernanke is calling transparency is in fact an ill-conceived effort to bind dissidents on the committee closer to his own views. I suspect the result of the effort will be very different: to increase the level of distrust in the markets surrounding official Fed targets and expectations.

Mr. Steil is director of international economics at the Council on Foreign Relations and a co-winner of the 2010 Hayek Book Prize.

The Zero Decade

Editorial do WSJ

The two most powerful men in Washington have a big disagreement. No, not President Obama and Speaker John Boehner. We mean Mr. Obama and Federal Reserve Chairman Ben Bernanke, who can't seem to agree on the health of the U.S. economy.

On Tuesday night, the President proclaimed that the "state of our Union is getting stronger," employers are hiring faster than they can find skilled workers, and manufacturing is booming. Less than a day later, Mr. Bernanke and his Open Market Committee (FOMC) downgraded their already modest growth outlook and said the recovery is so vulnerable that the Fed must keep interest rates at near-zero for another three years.

The contradiction may not be as profound as it seems. Mr. Obama is running for re-election and this time he needs to sell audacity more than hope, while the Fed is still trying to reflate the housing market that it seems to believe is the main driver of economic growth. The Fed is straining to deliver the asset-price "stimulus" that Mr. Obama can't any longer get out of Congress.

That's the best way to understand the FOMC's remarkable announcements on Wednesday, followed by Mr. Bernanke's quarterly press conference. The central bank had already promised to keep short-term rates near-zero through most of 2013, but now it feels the need to assure investors it will keep them there through the end of 2014. That would be six years in total, more than half of what may eventually become known as the Fed's Zero Decade.

Mull that one over: The Fed is declaring that it needs to run the same super-easy monetary policy when the economy is growing by 2% or 3% as it did amid the worst of the financial panic. And keep doing it past the horizon. The unavoidable implication is that the Fed doesn't think the economy will grow any faster until what would be halfway through Mr. Obama's second term. The other implication is that the Fed has no idea what to do other than to push even harder on the monetary accelerator. Maybe this time, it hopes, the economy's clutch will engage.

This not-so-quiet desperation was clear in a second Fed release that hasn't received as much attention as it deserves. In a statement redefining how it interprets its policy mandate from Congress, the FOMC said it has "reached broad agreement" on new operating principles.

The Fed's dual mandates are stable prices and full employment, and the Fed said sometimes the two are complementary. But from now on when they're in conflict, the Fed essentially said, it will put inflation aside and instead focus principally on cutting joblessness.

It's no coincidence that such a restatement of principles is coming now, when the Fed is looking to justify its extraordinary monetary interventions. If there were any doubt about this intention, Mr. Bernanke put it to rest in his press conference when he said more "quantitative easing" is likely if growth doesn't accelerate soon.

One problem with all of this was pointed out yesterday by Kevin Warsh, who as a Fed governor sat on the FOMC until early last year. Speaking at Stanford, Mr. Warsh said that "exceptionally accommodative monetary policy" has its uses in a crisis or recession. But the Fed's "recent policy activism—measures that go beyond a central bank's capacity or traditional remit—threatens to forestall recovery and harms long-term growth."

That's a useful warning for markets to hear. Consider that Mr. Bernanke's transparent goal is to drive down long-term interest rates to reduce mortgage rates to reflate the housing bubble. But intervening so directly to keep rates artificially low has made the bond market useless as a price signal or indicator of risk across the larger economy.

The Fed is thus pushing investors of all kinds further out on the risk curve, with consequences no one can foresee—least of all the Fed, as we are now learning from the just-released FOMC transcripts from 2006.

Recall that during the last decade the Fed assured everyone there was nothing to worry about as it kept rates too low for too long, only to create a housing bubble it never did recognize. Recall, too, how its second round of bond-buying (QE2) in 2010-2011 was supposed to lift stock prices but in addition sent commodity prices soaring. Consumer confidence plunged as Americans felt the strain of higher prices for food and energy, and the economy has done notably better since QE2 ended.

Where will the risk-taking excesses show up this time? Who knows, and perhaps the Fed will retreat before the worst happens. But it was fascinating to see last week that investors were willing to buy $15 billion in 10-year Treasury inflation-protected securities, or Tips, despite a negative real yield. That's right, investors were willing to accept negative current returns in exchange for security against a future inflation breakout.

We mean no counsel of doom because the good news is that the U.S. private economy is performing remarkably well considering all of the burdens government has put on it. Imagine what it could do if our politicians promised not to stick it with new taxes, and the Federal Reserve returned to a normal policy that focused on long-term growth rather than reflating bubbles.