E The Federal Reserve Financed WW2 But Cannot Finance America Now

Is the Fed happy enough with that illusion of wealth creation? We certainly hope not.

There may be a silver lining in current efforts by the Fed, in raising the Fed Funds Rate, however. Many view it as a tightening, but if it were more robust it could be looked at as growing the money supply. 

In a recent article entitled A Scary Monetary Conundrum Arises from the Great Recession, I pointed out that the Fed and market monetarists seemed to have reached a conundrum. The Fed interfered with interbank lending, and it had a slight bounce before diving. It now is all about the Fed Interbank. 

So, one wonders if raising the Fed Funds Rate would give interbank lending a bounce. The Fed has said raising the Federal Funds Rate puts a floor under the rates. It seems to be worth a try, in order to break the conundrum, make the market monetarists happy, or at least as happy as economists can be, and get the Fed to input more stimulus into the banking system. The Fed has clearly failed to do so.

Clearly, with excess reserves making interbank lending less necessary, all that is left is for the Fed to fund infrastructure, maybe buy non financial assets like Japan does, and do more QE, but there is a shortage of long bonds in the economy and short bonds at the Fed to do repo.

The Fed is letting the world economy, and the US economy down. Everyone knows it. We cannot settle for negative interest rates and a cashless society. The Fed can do better, so can the treasury, and so can the comatose, zombie-like congress who is afraid of its own shadow (sorry for the mixed metaphor. Real zombies fear nothing), when it comes to getting our economy going again.

The Fed and the government need to work together to bring prosperity, because if they keep taking down small and medium businesses during downturns,  who borrow and fail, pretty soon it won't be worth it for job creators to borrow and fail anymore.

There isn't physical world war, but there is an economic war going on against main street and small and medium business. And that war is being driven by Fed policy, even if it doesn't want to carry on that unpopular fight.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Comments

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Barry Hochhauser 4 years ago Member's comment

Fascinating, this was a side to the Fed I had no idea even existed. Heroic indeed. Shame we seem to have lost some of that heroism over time.

Gary Anderson 4 years ago Author's comment

Yes, certainly, Barry, you wonder why the Fed is so timid nowadays. The darkest interpretation is that it is a globalist conspiracy, and the US was more useful then than now. And/or it is because the banks bet on low rates now and the Fed is bank first and economy second. I hope those are not the real meaning of this failure of the Fed to work with government to get America moving. I am convinced that the Fed does bet on low rates and that is having a huge impact on the new normal.