Criticizing the Federal Reserve is a time-honored American tradition. But sometimes the perception that the Feds don’t know what they’re doing is no longer a perception. Instead, it can become a hard reality. Conspiracy theory could become conspiracy fact. And it could happen at any time.
The Federal Open Market Committee (FOMC) of the Federal Reserve meets eight times a year, approximately once every six weeks. Several weeks after each meeting, the Fed issues a statement and minutes documenting monetary matters and policy decisions discussed and agreed to at the last meeting. This, of course, is official business for the public record. Unbeknownst to the public and media, however, are private meetings that are held offline for which no records are kept. The private sessions usually take place prior to official FOMC meetings so that key members of the FOMC can freely voice their opinions and bounce ideas off one another. It’s basically a dry run for the consensus that will be reached the next day at the formal FOMC meeting, but with one significant difference. Instead of carefully nuanced public statements, which are characteristic of the Federal Reserve, the inner thoughts and feelings of a select group of Fed insiders are expressed clandestinely in language, which is never supposed to see the light of day.
Attending these private sessions are a handful of the most influential Federal Reserve members, a kitchen cabinet of insiders, if you will. Unlike FOMC meetings, which are intended ultimately for public consumption, these meetings are closed to everyone except a chosen few. The sessions are held in a small conference room of the Federal Reserve Board Building, which is meticulously checked beforehand by seasoned security professionals to make sure the room is clear of any monitoring devices or bugs. These meetings have no particular structure nor does any one individual chair the meeting. It’s basically a free-for-all where anyone can speak his or her mind without fear of the outside world learning what had been discussed. At least, that had always been the case — until now.
It appears one of the insiders has gone rogue and has decided to wear a wire to the meeting. Apparently, his civic conscience got the better of him. He is unafraid of being detected because no pain-in-the-ass security officer is about to frisk a Federal Reserve member, nor would there be any reason to do so.
Let’s listen to part of the conversation caught on tape.
“Another meeting; another charade. How long can we punt this thing down the road? We are running out of excuses not to raise interest rates. It’s been over six years since we pushed the federal funds rate to near-zero. It was supposed to be a temporary measure. Within a year or so, the economy was supposed to rebound enough so that we could gradually return to a normal range of interest rates without fear of the lapsing back into a recession.”
“Those days are long gone. What worked in the past doesn’t work anymore. Our predecessors were asleep at the wheel and let the housing bubble get way out of hand. They knew full well that the housing market was over-heated and didn’t have the nerve to take away the punch bowl until it was too late. Why piss off our friends on Wall Street when everybody there was making money hand-over-fist peddling worthless mortgage-backed securities with bullshit AAA ratings to unsuspecting investors? Why piss off borrowers who could get interest-only mortgages with next-to-nothing down and without having to prove they were creditworthy or even had a job? To be a killjoy and stop the insanity would be poor form. It would also be a sure way of getting kicked off the Board and banned from a nice cushy job in the banking industry down the road.”
“So we wound up bailing out greedy bankers instead and then we bought up all their toxic Collaterized Debt Obligations at a premium. You would think they would show a little restraint…but no. They couldn’t wait to award themselves huge bonuses and strut around with shit-eating grins across their faces. No wonder Main Street Americans hate their guts and hate us, in turn, for doing the bankers’ bidding at every turn.”
“If zero interest rates weren’t enough to fill their coffers, we started those insane Quantitative Easing programs, which is printing money out of thin air by any other name. We were pushing on a noodle. It got us and the economy mired in a quagmire. It also raised expectations that such bat-shit-crazy easing would continue in perpetuity. And those expectations have turned into outright demands that we continue more of the same.”
“Yeah. And where did all those low interest rates and QE schemes get us. They got us nowhere. In fact, they made matters worse because we boxed ourselves in. We pushed the stock market to the moon and made rich people richer. We pressed Joe Six-Pack to take on more risk in order to get a decent return on his investments. We punished savers, particular seniors, like my mom and pop, by driving interest rates to nearly zero on the hard-earned money they have in their bank accounts.”
“And to what end? The economy is languishing, stuck in a lingering malaise. Real wages are flat or declining for most Americans, as their expenses continue to rise. People have dropped out the work force in droves; most have given up on ever finding a job again. Those who have jobs have seen their wages decrease because they are being forced to work fewer hours.”
“And we have the unmitigated balls to pretend everything is unicorns and rainbows. We have the gall to say we to intend to raise interest rates before the end of the year. Who the hell are we kidding? We know if we raise rates, it could crash the market in a heartbeat. If it doesn’t crash the market, it will certainly crash the economy. Then we will have to deal with the backlash and have to back down by lowering interest rates to zero once again, losing all credibility in the process.”
“We thought we could smooth the economic cycles, which have occurred from time immemorial. We thought we could eliminate downturns in the economy by cleverly manipulating monetary policy. We thought wrong. We found out the hard way that economic downturns are necessary to purge out excesses in our financial system. We fooled with Mother Nature and got burnt. Now we don’t know whether to shit or go blind.”
“With the media hanging on every single syllable that the Fed utters, we can’t even talk intelligently about the bind we’re in. Can you believe, we couldn’t purge the word “patient” from our FOMC reports without spooking the market? Hell, if we can’t even hint about raising rates without creating havoc in the markets, how will the market react if and when we actually raise rates? And, even if the market accepts that we will gradually raise rates, how will a weak economy react to such tightening? My guess is that it will not react well. The economy is too fragile for it to react otherwise. We are overdue for a recession and the next one will hit us real hard.”
“We’re so screwed. What the hell were we thinking?”
“We weren’t. That’s the problem. It sounded good at the time and we went with it. I can kick myself in the butt for being an imbecile.”
“That’s why we have to stay the course. Just keep moving the goalposts and keep interest rates where they are. An economic malaise is better than another Great Recession or, worse, a Depression. A rising or flat stock market is better than a collapsing market. When in doubt…punt. Or, should I say, keep punting. There will always be a reason for keeping interest rates right where they are now. Why tempt fate when you don’t have to.”
“But how will we ever normalize interest rates again? We are stuck at zero and we’ve been stuck there for a long time. If the economy falters and we enter a recession, we have nowhere to go. We can’t lower interest rates because they are already at zero.”
“You’re wrong. We can drive interest rates negative. Just like some of our European partners have already done. Why not?”
“I guess you’re right. That will get people off the dime. Why would they keep their money on the sidelines in their bank accounts and have to pay the banks interest for the privilege of holding their money? That should finally get the economy going because people will choose to spend their money and buy stuff instead of paying the banks to hold it. They sure aren’t going to put their money in the mattress.”
“Something tells me that Americans will not take kindly to negative interest rates. No way will that fly. At least, not in America. I think I prefer keeping rates at zero instead. In other words, I like keeping things exactly the way they are. Besides, doing nothing is the path of least resistance.”
“Didn’t we have the exact same conversation a few weeks ago and arrive at the same conclusion?”
“Yes we did. But practice makes perfect.”
“So, when the FOMC convenes tomorrow, we all know the drill.”
The wired participant left the room along with his colleagues. He listened to the recording later in the privacy of his home.
After careful consideration, he decided to destroy the tape because doing so would be the better part of valor. Besides, most people who pay attention to the Fed probably wouldn’t be surprised that this is what the Fed actually thinks. No one wants to hear that unelected, largely unaccountable Federal Reserve members have painted themselves into a monetary corner and are absolutely clueless as to how get themselves out of it.
But there is one thing he resolved to do as a result of his close call with reality. He would take the off ramp. He decided to leave the Fed and take a high-paying job in the private sector while he still had the chance. Perhaps, there was even enough time to cash in on the lecture circuit right after he leaves the Fed. After all, an economist is nothing if not prudent in how he handles his personal finances. Why rock the boat? He had been part of the problem far too long. No one would give him any credit for exposing the Fed.
Some things are better left unsaid.