The Fed lives rent-free in the heads of critics and supporters

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This column has made this fundamental point in various ways over the years, but the simple way to put it is that nothing brings out the stupid like money. Nothing. Few of those who think about it or think about it understand that no one buys or sells with money, or lends or borrows with money.

Money flows are always and everywhere an exchange of products and services for other products and services (buying and selling), or an exchange of products and services now with a view to obtaining more products and services in the future. (loan and loan). Money is just a deal on value, a piece of paper with recognized value between producers of goods and services that facilitates the actual exchange of goods and services.

This is why buying and selling increases during times of economic boom, as does lending and borrowing. The movement of money signals once again the movement of real goods and services, or the future production of them. Money is not an incentive as so many people naively assume; rather, it is a consequence of production. If you are productive, the money will find you. Always.

All of this and more came to my mind while reading a recent Financial Times report on the wealth management branches of JP Morgan, Bank of America BAC, and Morgan Stanley MS. The trio’s loans in the 2nd quarter of 2021 are up 17.5% compared to 2020. You think?

Except some will stop for a minute and internalize something like But wait. In March 2020, the Fed went to zero around the middle of the month to stimulate the economy. Didn’t loans increase with the fall to zero? Fed supporters would say yes.

For them, the Fed is the instigator. A central bank run by mediocre minds like Bernanke, Yellen and Powell can literally choose to revive the economy in troubled times by decreeing cheap credit. According to the Fed cheerleaders, the central bank is heroically guiding us to avoid recession.

Except he can’t do anything like that. Thank god it can’t. An economy is people, and people rely on their mistakes to improve. Recessions are a sign that they are correcting what was wrong. It’s a reminder that even if the Fed could actually avoid a recession as venerable economists, politicians and pundits believe, the US economy would be so wiped out by the action that it wouldn’t value savings. In other words, the surest sign that the Fed’s economic clout is purely mythical is the fact that the US economy is the most dynamic in the world.

After that, such a childish hagiography of those who have no common sense ignores that money and credit are what follows production. They are the consequence of production. See above. And since the Fed is not a producer of anything (it’s actually a penniless arm of a penniless Congress if anyone could bother to stop and think) that could be called a good or a service, the idea that its monetary machinations could increase or decrease credit gives new meaning to the absurd.

Fed supporters wear their ignorance back and forth, and elsewhere too. What is unfortunate is that the criticisms of the Federal government do not exactly rise up in the debate.

Critics say the Fed is the root cause of the impossibility of having too much credit that would be the source of inflation. Critics say the markets are populated with extremely dumb producers borrowing at low Fed-induced rates on how to use dollars to hunt too little commodity. Ah yes, producers far from campus and from the editorial staff are going into debt so as not to get what they need to develop or innovate. And lenders eagerly lend at low rates to these same blind borrowers regardless of their ability to be repaid. Don’t worry, this is getting more and more ridiculous.

If the Fed’s critics are to be believed, the central bank is calling rates low just to get financial institutions to follow suit with easy money. Except that no lender would easily part with what is redeemable for near zero or easy priced goods and services, especially when the economy is weak. See loans in the second quarter of the 2020s compared to the most recent.

If the self-proclaimed free market critics of the Fed are to be believed, the artificial prices made artificial by the government do not apply to the central bank of Congress. While rent control is free traders’ favorite example (with good reason) of why artificial prices lead to scarcity, the logic goes out the window with central banks. Central bankers can literally force those who are able to lend to do so blindly, close to zero, once the Fed goes to zero. Yes, Fed critics believe the Fed can force creditors to self-destruct at the command of central banks.

Not really. With pessimism at its highest last year due to political panic over a virus that emerged during lockdowns, credit availability has plummeted. For obvious reasons. When the production stops relatively, the exchange also logically. And when production relatively comes to a halt, there are fewer resources to lend alongside a reduced willingness of those who have the resources to lend them. In other words, the imposition of command and control tends to make just about any borrower subprime. Find?

If the Fed could actually increase credit, there would be very little credit to increase.

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