Best Santelli Rant in a while..
- Thread starter Tsing Tao
- Start date
So, like I promised, here's how I view this...
To me, your statement above is actually very telling. IMHO, the job of a Fed chairman (as well as a trader and/or risk manager, for that matter) is precisely about "making a guess based on a hypothesis supported by a theory", since, obviously, the future is completely unknown. In fact, even the present is largely obscured by a sort of "fog of war".
So suppose as a Fed chairman you're facing a bunch of outcomes, including the low probability (2 - 5%) outcome that you define as "utter ruin" (Great Depression, Japanification, secession, whatever). In fact, the consequences of the ruinous outcome are so dire that, even with a low probability, it makes the "expected value" of your future unacceptably negative. Also imagine that the set of available tools is limited and you don't have the ability, at short notice, to negotiate for a broader remit. What do you do? IMO, you do what you can, even if there are significant costs involved. In my mind, this is a situation similar to what a risk manager (or a good trader) faces if they find that they're in a trade that can totally destroy them. A good risk manager in this situation hedges, even if the hedge isn't perfect and/or costs too much. In my opinion, the logic above is legitimate justification for the initial rounds of QE. My disagreement with the need for QE3 stems from my subjective view that the probability of the "ruinous" outcome by the end of 2012 was very close to 0. To be fair, my view was supported by the pricing of various instruments in the mkt.
I realize that there are many parts of the above that are, to some extent, subjective. You may disagree with this or that specific element of the argument. However, to me, the logic is the important bit and, I believe, it is sound. Moreover, there's some historical precedent to support it.
And to add my final point, which, again, takes us full circle. That is why I have said all the things earlier about Rick Santelli. Based on what I have heard him say, he just doesn't think like a risk taker and/or trader. He sees his central scenario realized in the future with complete certainty. For a trader, that is the surest way to utter failure.
So you're Bernanke, and you see QE1 doesn't work. You try QE2, that doesn't work. You try Twist. Nope, no luck there. Now you're into well into QE that you've essentially promised to continue until the economy improves, still no real luck. At what point do you go "Ya know, maybe I'm thinking about this the wrong way."
Unless, of course, there is an ulterior motive. Like bailing out banks, shoring up their balance sheets, creating inflation, etc.
It certainly isn't about improving the labor market, since Bernanke knows the Fed has no real control over employment.
What do you mean "it doesn't work"? The simple fact that you haven't blown up means that "it worked".
As to ulterior motives, sure, it's possible (although not sure the ones you list are "ulterior"). But, like you said, it's also possible that aliens land and buy up all your debt with gold bars.
As to the Fed having no control over employment, that's not obvious to me. The Fed has no direct control over employment, for sure, but there's a wealth of evidence to suggest that there is a relationship between employment and interest rates. Again, if you care to read Milton Friedman on monetary policy, he argues this quite eloquently and with a great sense of balance.