I noticed this article on CNBC.com reporting on an interview with former Fed Chairman Alan Greenspan on Squawk Box, Friday, June 7, 2013.
It appears that Chairman Greenspan believes that the open-ended QE itself, bloating the Fed’s balance sheet, is causing market volatility.
The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve—that everybody agrees is excessive—the better. There is a general presumption that we can wait indefinitely and make judgments on when we’re going to move. I’m not sure the market will allow us to do that…. Gradual [exit] is adequate, but we’ve got to get moving.
The most important positive force in the economy at the moment is the fact that equity premiums are so high, which means the downside on stock prices is quite limited. If we can get stock prices to rise, which they will if this thing stabilizes, then you get a lot of asset-growth effect on the economy.
I think the issue is not only a question of when we taper down, but when do we turn. Bond prices have got to fall. Long-term rates have got to rise. The problem, which is going to confront us, is we haven’t a clue as to how rapidly that’s going to happen. And we must be prepared for a much more rapid rise than is now contemplated in the general economic outlook.
I happen to think his logic is backward. It isn’t QE or the size of the Fed’s balance sheet that is causing volatility; it’s the uncertainty emanating from the FOMC members that is causing the volatility. Every time there is even a whisper of “tapering” or terminating the QE program by even FOMC members that do not vote on policy this year, the markets take a dive. The Fed has a stated goal, a goal that is nowhere on the horizon, yet we hear all this hawkish chatter based on nothing material, as if that goal means nothing. And it really does appear to everyone else that it indeed means nothing. There are no sign posts that don’t change, there is no credible definition of how much is enough or how we know enough is enough, and it creates uncertainty among investors that the Fed will prematurely tighten and abort the recovery causing massive losses. That is just how tight monetary policy is STILL. HINT: Markets get it that the Fed is at least as incompetent as it was in 2008; and nothing reinforces that idea more than nebulous commitments that can be easily reneged.
The absolute worst thing to do would be to hit the brakes or give any indication the Fed will hit the brakes before its goal is in sight. Talking about it with no precisely explainable rationale is completely counterproductive, removing progress that could be gained if the hawks kept their opinions to themselves and gave the markets and the economy space to heal. It results in a much larger balance sheet than would otherwise be required. There is nothing like taking three steps forward and two steps back, but that is exactly what these people are doing.
If this weren’t such a serious matter, the urge to enter malicious obedience mode would be entirely overwhelming, and I would be tempted to challenge these bozos to follow their way-off-base urges to remove QE and see what happens. They need some very public embarrassment; and I would love to hear the echoes of “I told you so” all around the MM blogosphere. Of course I would prefer for MM’ers to not win the argument that way; but I constantly wonder how much more of this condition of stasis at the level of awful we can manage. It certainly cannot go on like this forever. Perhaps the only way out is for it to get much worse at the hands of the hardcore inflation targeters before it gets better.
PS: The hawkish stuff is nothing but a raw abuse of power by unelected technocrats. Given that 2% inflation is the target and they insist on playing little head games about tightening when inflation is 50% below target and headed down, it just means they want you and everyone else to know how much power they have over our lives, and can be as arbitrary and capricious as they wish with no accountability. It’s power they should not have. We need to legislatively can the discretionary aspect of monetary policy, and adopt rules and consequences for breaking them.