Page 1 of 2 Ben's big ZIRP! moment
By Julian Delasantellis
In between the DC Comics graphic novel series that started in 1940 (then they
were just called comic books) and the current oh-so-earnest series of
full-length motion pictures, the Batman superhero character lived on in the
American ABC television network, with a series that ran from 1966 to 1968.
With the character's genesis in the comics, and with the show being broadcast
in the relatively new format of color television, the producers added a new
graphic feature not seen previously or since on American TV. With every
depiction of kinetic violence, such as a punch being thrown and connecting or a
thrown out a window, the screen would light up with a brightly colored graphic,
sometimes contained in a exploding text box, that, by means of an onomatopoeic
such as "Pow!" or "Crash!" illustrated and emphasized the action being shown.
This was, of course, the full flower of the era of many young American's
dalliance with psychotropic drugs such as LSD. Commentators at the time noted
that perhaps the series was aiming for the demographic of stoned viewers (but
just how desirable would that group be to advertisers?); from what we now know
of that era, it's just as likely that, in their experience with the program,
both the script writers and the viewers were high.
With the Federal Reserve's latest action on Tuesday, a Batman-type graphic
would have been useful in illustrating the event. As the news crossed traders
and economic commentators' display screens, the picture should have included a
brightly colored exploding "ZIRP!", economic jargon for "zero interest rate
policy", to symbolize just how unexplored and unprecedented is the road the Fed
has chosen to now traverse.
It's the last stop on the line for chairman Ben Bernanke's rate-setting Federal
Reserve Board Open Markets Committee. For the 10th time since September 2007,
it has engineered a cut in its Federal Funds Target rate, from 1% to a range of
0.0% to 0.25%, along with a concomitant 75 basis point cut in the rate the Fed
charges member banks for overnight loans, the Discount Rate, to 0.5%.
The cuts are a profound illustration of the failure of Bernanke's term at the
Federal Reserve, both before his elevation to Fed chairman in February 2006,
and since. While a Federal Reserve governor from 2002 to 2005, he was a willing
and eager acolyte to the hubris of his master, then Fed chairman Alan Greenspan
- a sodden fantasy that what we now realize was the final, blow-off phase of a
worldwide debt bubble was just another example of the 1990 victory of
capitalism over socialism making all earthly things wise and wonderful.
Since he started cutting rates 15 months ago, Bernanke has pointedly eschewed
Greenspan's standard operating procedure of slow and steady 25 basis point cuts
at a time in favor of regular big, aggressive 50 to 75 point cuts.
As I noted last February (see
Bernanke Hits the Joy Button, Asia Times Online, February 1, 2008),
this was always a gamble (one Bernanke has now convincingly lost), that the
economy would recover prior to him running out of room to lower rates. Bernanke
had probably not wanted to lower rates to 1%, as he was forced to do in late
October, for that was the Federal Funds rate that Greenspan established from
mid-2003 to mid-2004, and is now considered to be a key factor in the real
estate and debt bubble's final, crazy years of expansion. But after hitting 1%
in October, the ongoing and rapidly intensifying weakness in the US, and now
the global economy, has finally pushed the Fed to ZIRP, the lowest rates ever,
the lowest rates that could ever possibly be.
If you're looking for a place where never was heard a discouraging word, don't
read the Fed's post-meeting statement on current economic conditions:
the Committee's last meeting, labor market conditions have deteriorated, and
the available data indicate that consumer spending, business investment, and
industrial production have declined. Financial markets remain quite strained
and credit conditions tight. Overall, the outlook for economic activity has
In one sense, Tuesday's Fed move was just a
reflection of reality. The Federal Funds Target Rate is just that, a target
that the Fed's Open Markets Committee sets as a sort of rheostat of economic
activity. The rate is raised, as it was from 2004-06, if economic growth is
considered too strong, and lowered if growth falters.
The operational mechanism of this process involves the New York Fed buying or
selling Treasury securities in the electronic market among large banks for the
required cash reserves to cover their loan portfolios. Even with the 1% target
that has prevailed since October 29, the rate has, in fact, traded well below
that mark for most of the past seven weeks. The weakening economy has so
decimated loan demand among big banks that the Fed couldn't raise the rate,
even if it wanted to.
As in any big gamble that is risked and lost, now the Fed, and the economy in
general, must face the consequences of its recklessness. In the case of the
adoption of ZIRP, gone now is the potential utilization of the significant
psychological benefits of Fed rate moves. Frequently, on being hit with a piece
of bad news such as a dire economic report (as the next unemployment report
will almost certainly be on January 9), the negative stock market reaction will
be tempered by the news, or even the possibility, that a Fed rate move has or
could come in to act as a positive counter to the negative news. That option is
now gone; with Daddy tapped out, the next time Junior gets in a jam, he will
have to face the consequences by himself.
But wait! Just as Bernanke goes all in and loses with his last card, he tells
the table that he has more aces up his sleeve that he still can play.
The general intention of moving interest rates up or down is to influence the
quantity and turnover rate of the money circulating in the economy - higher
interest rates are meant to discourage borrowing and the lending the banks do
to fund the loans; lower rates encourage borrowing in precisely the opposite
fashion. However, all the rate cuts the Fed has recently engineered have not
acted to spur the loan activity needed to keep the economy from contracting,
for it has all been countered, and then even bettered, by the frightful
inexorability of deleveraging.
Well, Bernanke says. Why don't we just eliminate the middleman, the banks? If
the banks won't put the moolah in the public's hands, we'll do it ourselves!
From Tuesday's statement:
The focus of the Committee's policy going
forward will be to support the functioning of financial markets and stimulate
the economy through open market operations and other measures that sustain the
size of the Federal Reserve's balance sheet at a high level. As previously
announced, over the next few quarters the Federal Reserve will purchase large
quantities of agency debt and mortgage-backed securities to provide support to
the mortgage and housing markets, and it stands ready to expand its purchases
of agency debt and mortgage-backed securities as conditions warrant. The
Committee is also evaluating the potential benefits of purchasing longer-term
Treasury securities. Early next year, the Federal Reserve will also implement
the Term Asset-Backed Securities Loan Facility to facilitate the extension of
credit to households and small businesses. The Federal Reserve will continue to
consider ways of using its balance sheet to further support credit markets and
Earlier this month (see
A bedside guide for Henry Paulson, Asia Times Online, December 3,
2008), I noted how on November 25 the Federal Reserve joined in an US$800
billion US government moneygasm seeking to hose the markets down with the