Market Talk

We weren’t the only ones who seized on the comments yesterday from Brian Sack of the New York Fed. Gluskin Sheff’s David Rosenberg also realized just how telling they were.

The line in the speech that set us off was this: “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” Perry Mason couldn’t have teased out a more incriminating statement. Rosenberg thought so, too. From his comments today:

I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.

Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission. Then again, this is what the Fed has been all about since the LTCM bailout of 1998. We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success. There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means, is irresponsible at best, dangerous at worst.

We may have gotten an insight today into the Fed’s real thought process when it come to quantitative easing, the so-called QE2 everybody’s expecting. Brian Sack, the head of the New York Fed’s markets group, was speaking today about the benefits to the economy that could come should the Fed decide to launch into a big bond-buying program.

There has been fierce debate on the subject, even within (or, more precisely, especially within) the Fed itself. But most people still think this is a fait accompli, that the Fed, in not so many words, will be cranking up the printing press. What will they accomplish by this? Well, you can imagine that interest rates will stay low, if not move lower. How’s that an accomplishment when rates are already at historic lows? Well, it isn’t, but it also isn’t really the point.

From Mike Derby’s write-up of Sack’s speech:

While asset buying is an “imperfect policy tool,” Sack said “balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.”

“…by keeping asset prices higher than they otherwise would be.” Bingo! John’s the one that noticed that in the speech and jumped all over it. Because what’s he actually saying there, in typical Fed jargon, is that the central bank is looking to keep asset prices artificially high. That one of the goals of QE2 is to keep asset prices artificially high.

In less polite circles, that’s called market manipulation, and it often leads to perdition.

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