fed Markets

Fed Critics Show No Class In Crisis

"It is heartbreaking to see all that threatened right now."

“I think everyone is suffering here but I think those who are least able to bear it are the ones who are losing their jobs”, Jerome Powell said, during a somewhat surreal video press conference that found the Fed chair reading into a camera, newsman style, before taking questions from reporters via webcam.

“It is heartbreaking to see all that threatened right now”, Powell continued.

He was mercilessly ridiculed on social media for, among other things, committing to keeping rates low for the duration of the crisis, discussing the structure of the Fed’s various liquidity facilities (specifically, the Treasury backstop), and attempting to strike an empathetic tone towards the 26 million Americans who have lost their jobs during the last five weeks.


The seven-minute clip above gives you the flavor of the entire proceedings.

Over the course of the virtual press conference, Powell didn’t say much that was particularly contentious. Nothing he said was surprising.

What he did do, though, is state the facts. In the current circumstances, those facts are inconvenient and uncomfortable for some. For others, they are an excuse to feign incredulity and otherwise wax hysterical about “moral hazard”, price discovery, the deficit and, of course, the Fed’s role in harming a nation of would-be savers (and we’ll just forget that Americans aren’t exactly known for being a frugal bunch).

I myself indulged in a bit of humor at Powell’s expense, but only in regard to the somewhat strange spectacle of the Fed chair speaking into a camera lens about a modern day depression with no one else in the room due to quarantine protocol. It was an objectively odd moment.

But others took the opportunity to entertain their fans with the usual cynicism and derision. I’ll only cite examples from commentators who wittingly put themselves “out there”, so to speak, when it comes to the debate.

Powell admitted that the Fed is now into areas where there’s more risk (e.g., buying corporate bonds) and that, the Fed chair said, is ok.

But not for John Hussman, it’s not. “[If the Fed] goes forward and buys uncollateralized corporate debt, in violation of 13(3) and CARES 4003(c)(3)(B), and the public loses money, the Fed would be [spending money not lending money]”, he said, in a shrill series of tweets that included an allusion to putting the entire Fed board in prison. “What color and size jumpsuits do FOMC members want?”, he asked.

Earlier this month, Jeff Gundlach suggested something similar, although he didn’t openly call for anyone to be put in a “jumpsuit’. “The Federal Reserve is presently acting in blatant non-compliance with the Federal Reserve Act of 1913”, Gundlach proclaimed, on April 14. “An institution violating the rules of its own charter is de facto admitting that said institution has failed and is fundamentally broken”. (Narrator: The Fed is not doing anything illegal.)

And then there was former Dallas Fed adviser and author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America”, Danielle DiMartino Booth, who never misses an opportunity to cast aspersions.

Flagging Powell’s remark that “Treasury stands in front of our losses”, Booth was kind enough to offer a “translation”. “Taxpayers will be responsible for recapitalizing any facility that incurs losses”, she said. “Feel better?”

Below, for reference, is a visual that shows the Fed’s various facilities and the Treasury backstop which allows the Fed to lever up. In the simplest possible terms, the orange buffer will absorb first losses.

Booth is correct in her “translation”, of course. But what she doesn’t mention is that some of these facilities will probably turn a profit for taxpayers barring a total meltdown. As Bloomberg reminds you, “similar programs during the global financial crisis of 2007-09 turned a profit”.

I’m not suggesting that each and every one of these facilities will morph into some manner of profit machine for Treasury, I’m simply providing you with a realistic assessment, stripped of the hyperbole.

While I’ve been keen to differentiate between the companion facility for the Paycheck Protection Program and the rest of these emergency facilities (PPP loans are guaranteed by the SBA, and, as detailed here, there’s something absurd about banks funding what amount to grants with the Fed), the fact is, it is far too early for anyone to suggest that these will turn into loss-making vehicles at the expense of the American taxpayer. It is, in my judgement anyway, irresponsible for high-profile individuals to suggest as much on social media.

Booth is a Bloomberg Opinion contributor and an incorrigible Fed critic. She also suggested on Wednesday that perhaps rates shouldn’t be kept low after all. “LONGER FOR…EVER”, she tweeted, in all-caps. “Powell just committed to keep rates at the floor until he’s ‘confident’ the economy has recovered”.

That is correct. Powell committed to keeping rates at the floor until the Fed is confident there’s no longer a depression going on and that measures adopted to avert a viral apocalypse are no longer a threat to the economy. For some, that’s an unreasonable position. I’d be inclined to call it entirely rational. But readers can make up their own minds.

Meanwhile, Peter Schiff is worried about hyperinflation during the single, largest demand shock since the Great Depression.

“Ironically, as the Fed is pursuing the most inflationary monetary policy in its history, Powell was just asked what the Fed will do to prevent a deflationary spiral?”, Peter mused, to the delight of a fan base which has been consuming his maddeningly repetitive content for as long as I can remember.

“The question is will the Fed be able to admit its mistakes and reverse policy in time to prevent hyperinflation?”, Schiff wondered.

I sincerely hope I don’t need to explain just how ridiculous that really is. Oil prices went negative last week. Core inflation printed below zero for the first time in a decade last month. We are currently witnessing a deflationary supernova the likes of which modern human beings have never seen. For the past month, consumption has effectively been forbidden by government decree. In the past five weeks alone, America has lost more jobs than were created over the preceding 11 years.

And yet, through it all, Schiff is still trotting out his best hyperinflation zingers.

Apparently, the only things in Peter’s inflation basket are rent and wholesale, choice beef, which hit a record high on Tuesday.

None of the above is to suggest there’s no truth in what this trio of habitually abrasive Fed critics had to say on Wednesday while Powell was busy awkwardly leading a Skype call with a dozen reporters. Additionally, I didn’t set out to pick on this particular trio. There are any number of other notable names I could have chosen.

Rather, the point is to state the obvious: This type of attention-seeking behavior from the same handful of people is entertaining during normal times, and to the extent you can somehow cut through the layers of hyperbole to get at the kernels of truth, they do serve a purpose. But during a modern day depression, there is no benefit to the public from the shrill parroting of disingenuous narratives.

Finally, let me reiterate that when it comes to pointing out the fact that the Fed’s policies have exacerbated inequality, thereby making situations like the current debacle worse by leaving middle- and lower-income Americans even more vulnerable, no one has been more vocal than me.

In fact, it was just this week when I again reminded the world that it is not a coincidence that some measures of inequality increased at the onset of the Fed’s response to the GFC. Here’s an example:

The rapid ascent of the red line is in no small part due to the fact that the Fed (and other central banks) have spent the last decade writing policy prescriptions which have inflated the value of the assets concentrated in the hands of the wealthy.

But here’s the thing, folks. Just because Jerome Powell’s net worth happens to be obscene, doesn’t necessary mean he’s any less concerned about everyday Americans than your favorite Fed critic with a sarcastic wit and a Twitter account.

And even if you insist on saying Powell doesn’t care about everyday people, can we not grant him a license to feign empathy during a depression?


20 comments on “Fed Critics Show No Class In Crisis

  1. The virus would seem to have distorted our perception and created the illusion that everything was sunshine and flowers before the Covid 19 World Tour began. The claims that the economy was “strong” pre-pandemic have become axiomatic, but rate cuts, repo facilities and “balance sheet adjustments” along with a trillion dollar deficit to sustain 2 % growth might suggest otherwise. Guess we don’t need to discuss the pros and cons of a standing Repo Facility anymore. The virus has obscured as it has exacerbated our economic ills.

    What is particularly concerning is/was the Fed’s near total inability to reduce the balance sheet accumulated during the GR and how much Angst over-shooting 25 basis points unleashed in December 2018. However will the Fed come to terms with the 10T that seems likely to wind up on the books when the dust settles? The horizon for ZIRP would seem barely discernible if not receding beyond perception for foreseeable future — 7 years at 0% to arrive ever so briefly at that sky high 2.5% seems like an airy dream given the scale of economic devastation and levels of public debt relative to GDP (a ratio that is yet to account for the GDP contraction).

    Today may not be the day to talk about “moral hazard” and “free riding” problems, but if the Fed continues to rush to the rescue how is that not like handing a book of matches –or perhaps a flamethrower– to a pyromaniac? And given the interminable “Quest for Yield” ZIRP will engender how is building with dry kindling not encouraged.

    And of course there will never be another exogenous shock every again because we cannot afford one –just like we really couldn’t afford this one.

    • I’m sure you know this, but the system allows various companies and individuals to take excessive risks… to the level these become systemic risks that if we allow inefficient market forces (emotions / lack of liquidity) to punish them on the downside, the cost to the broader economy is so bad that it’s in society’s interests to backstop the damage. This is a problem with the system of free market capitalism. The Fed was created to deal with this problem and its only doing its job RESPONDING to the problem, which has evolved as the market evolved to have/allow more risk (growth of structured products, ETFs…) that usually come out with large shocks to the economy.

      Hate to say this, but the only solution is regulation. Too bad regulation will always be a step behind market forces (more on this later). However, with right regulations the system can and IS BEING improved to prevent excessive risk taking to prevent this growing job scope of the Fed. After the ’08 financial crisis, banks have become much less risky, this is a fact. After this ’20 Covid crisis, I wouldn’t be surprised if you see more regulation in areas of stock buybacks (don’t use leverage to give back equity), ETF industry (ETFs have varying levels of risks, they should be rated just like credit and corresponding restrictions applied on money managers), and this is already happening but transparency and regulation on OTC derivatives.

      How fast can our government achieve this? I don’t know. With its partisan interests and SPACs getting bigger and pumping more money into free-market friendly agendas (dangerous feedback loop on this), this can take a very long time. Crisis like 08 and Covid are true opportunities for society to make real progress in areas of regulation. The Fed is only buying time for the system to improve, but until then it has the moral obligation in the broader society’s interest to do everything it can – go NIRP, backstop (any) markets during liquidity crisis by straight up purchases or repo/swap facilities – to prevent a total economic collapse. It should also be noted that the Fed is fast and efficient in implementing its monetary policies. Meanwhile regulation-making by Congress and regulation-enforcing by SEC are both hampered by inefficiencies in our legislative and judicial systems. This is why regulation is always step behind market forces and the flip side of that which is the Fed balance sheet.

      One key positive is that global governments seem capable of turning to fiscal policies to boost the economy (putting aside partisan differences) in times of crisis. If the unintended consequence of Fed protecting the markets is a hyperinflation across financial asset classes making only wall street / the wealthy richer, these fiscal policies should have more direct impact on Main Street.

      With reference to the idea of jailing the Fed, I obviously don’t think that any members of the Fed should be jailed, but to extend that I also completely disagree with ex post facto laws when it comes to financial market regulations. Don’t punish people for just being part of the system.

      • The Nürnberg defense!

      • I would agree that a new regulatory regime is and will emerge from this crisis. I disagree with the idea that the Fed has been a reactive “first responder” to a crisis not partly of their own making (and whether there were better policy alternatives for them is a matter of some debate –I am not sure they could have managed much better the decade previous given the constraints within which it was and is operating particularly having to fill the governing vacuum that Congress and the Executive have created by a breakdown in governing consensus . The Fed has become increasingly activist both in terms of encouraging investors into assuming greater risk at a lower risk premium and “implicitly” serving as an insurance company under the guise of an “assurance” institution. The days of parsing Greenspan-speak (and it was indeed fun and Greenspan is still in my mind the paragon of “Fed-Speak” whom only Draghi has come close to emulating) should be over –there is no “strategic ambiguity” or any benefit to keeping the markets guessing –because the Fed’s actions in ’08 and now leave no one guessing –the Fed is not just a Central Bank providing stability it has become an activist insurance company. And like all insurance companies it needs to start charging premiums and writing policies –with explicit guidance about just what they will and won’t cover and if they don’t cover it then the government regulates it so that it cannot grow too large to not be quarantined. Despite all that there will always be a Long Term Capital Management somewhere, but greater transparency would help. There is simply no room for error any longer (consider how many more tools Greenspan and Bernanke had in the toolbox when LTCM, 9/11 and the GR hit) even it it takes a lot of the fun out of it.

  2. Som e pertinent comments above and from RStanz. Powell is doing the best he can.

    Of course, I do wish I has been wise enough to follow Peter Schiff’s advice back in 2009. Wasn’t he out there with Rick Santelli screaming about “the debasement of the currency”?

  3. Out of curiosity, is there a good time for plain English and if so is now that time?

    • Also I don’t mean to sound like a troll, particularly given the back and forth from the last time. I really enjoy your work but get curious about your opinions particularly when you write pieces which lean more editorial.

  4. It is much easier to be a critic than write a play, a movie script or run a restaurant. Some of the critics have been so wrong about the markets it is not funny. As far as inlation goes- if the Fed could somehow have that problem they would probably drop to their collective knees and give thanks to the almighty. Right now we are staring down the barrel of a major deflation. If this is handled poorly there is no doubt in my view that we risk a major depression. If we are lucky and things are handled better we can come out the other side in a reasonable (12-18 months) time frame and reduce the suffering.

    • Consumption is generally easier than production, but that not to say that noting difference in performance between, say, G. William Miller and Paul Volcker is not useful. I am not sure if you watched the entire presser but one takeaway for me was how strongly Chairman Powell underscored “uncertainty” –and the use of that word repeatedly should prick up anyone’s word since the distinction between “risk,” which can be measured and managed, and “uncertainty,” which cannot, is axiomatic within insurance and finance industries. In other words, assessment is ongoing as the building is still smoldering. My personal takeaway is that the Fed really needs more information to assess meaningfully the situation –and as you say Chairman Powell, who may lack for empathy for the person who may not find his payday lender particularly forgiving, certainly has a good deal of sympathy for her and is genuinely doing the best he can.

  5. Rangeman

    Depending on critics is totally wrong.They always bet two sides and make the fact twist for the sake of the interests they stand for.Think about lehman brothers and you will find the response of market is slow(at least in critic)They can’t discover what the market is and keep playing the game until everything failed.Sometimes a few of critics knew the truth,but chose to cheat.Because the market can’t stand the other voice to present it achieving his plan.So these critics do diffrent thing from what they say.When we consider the true situation,we should do what they do instead do what they say.

  6. The last time through was a bump in the road. They learned from it, only problem was they thought it wouldn’t happen again. This time we hit a major pothole andshould be glad this old jelopy is still running. Time for systemic change is down the road. How it happens is political and better not to be dealt with during a full on Depression .
    Thank You Chairman Powell for being a warrior.

  7. I don’t know if relying on the taxpayers to repay these trillions is really possible. I think this is when we need to start the presses and print truck loads of magic money out of thin air. (More of the same.)

    • The debts we are creating now cannot ever be repaid. Our collective greed as a country, combined with our common hatred of taxes, will never allow it. Instead we have to set up the conditions to manage the collective debt. There is still no free lunch, never will be. Losing our favorite bar is nothing like the sacrifices we will be facing later this year and next year.

  8. H: Thanks for your views on John Hussman’s response to Fed actions. I’ve followed his blog for years because I put about 3% of my retirement kitty with him. His logic regarding valuation is flawless. Sadly, logic alone is not a reliable quality for making money because he has been wrong and over-hedged for too long, thus the Hussman Growth Fund reliably dwindled – until recently – losing about 50% since the GFC.

    Oddly, Mr Hussman now ventures into legal opinion about Fed policies, raising questions I’ve seen no one else raise. I know he is a math maven, but I was unaware of his law bonafides. Hussman is a very active philanthropist, so it is surprising and troubling to see him railing against programs that seem crucial for these dire times.

  9. I like Jerome, I hear he plays a mean electric guitar, not sure Powell and the Fed have an alternative to tossing the kitchen sink at the crisis, they are doing all the Fed can do, I wish we could say the same about our useless politicians and elected officials

  10. You can not like what the Fed is doing, while acknowledging they have no choice. Lesser of two evils and all that.

  11. “wax hysterical about “moral hazard”, price discovery, the deficit and, of course, the Fed’s role in harming a nation of would-be savers” -> Do you even read what you write? As if the above are relics or irrelevant when Covid is here.

    • They are relics, Peter. They’ve been relics for 10 years now. Maybe you noticed. The difference is, now there’s a better justification. And yes, I do “read what I write”. And so, apparently, do you.

    • Even clocks are right twice a day. Peter? Not so much.

  12. I like that your theme is a call to heal wounds that are caused by the extreme political mental sickness in our country. How this sickness shows up in any number of subjects including health care, economic theory and many other endeavors is more a cause of concern than the actual political sickness. It is important to turn back to our core values when confronted with irrational behaviors, by core I intend to mean kindness, compassion and openness to community spirit.

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