The Piggy-Bank Got Smashed: The Collapse of Median Wealth of the American Family

The Federal Reserve just released figures on the median wealth of the American family. 

“The median family, richer than half of the nation’s families and poorer than the other half, had a net worth of $77,300 in 2010” according to the New York Times.

The 2010 is almost exactly the same as it was in the early 1990s when the latter figure is adjusted for rising prices.  The recent financial crisis has, therefore, erased “almost two decades of accumulated prosperity.”

This accumulated wealth reached a peak of around $126,400 in 2007, the Fed said.

The primary culprit for the roughly $50,000 decline? 

Well, the “crash of housing prices explained three-quarters of the loss.”

Over the past fifty years or so, homes were the piggy back of the middle classes.  Most of the income earned by the middle classes went into their homes with little else left over for any other kind of wealth accumulation.  And, the middle class saw their wealth rise over this time period.

Over the past twenty years or so, the federal government tried about as hard as it could to create a similar piggy bank for people with little or no personal wealth and little or very little income.

Now this goal of the government has all come crashing down.  To a great extent, the credit inflation begun in the early 1960s aimed at building up the housing piggy bank has unwound.

The aftermath of the federal government’s great experiment has left a confused and, in many cases, a desperate number of households.  And, this is after three years in which the United States economy has been growing.

Why can’t fiscal stimulus correct the problem as so many fundamentalist Keynesians recommend?

The answer is that the government programs aimed at keeping the price of houses rising, year-after-year-after-year could just not continue to sustain this inflation forever.  There had to be some real earnings supporting the continually rising prices.  Somewhere, sometime the “bubble” had to stop.  The cash flows supporting the increasing market values of the housing stock could not keep up…so the market values of the housing stock had to, at some time, collapse.

The continued credit inflation created by the federal government resulted in a dislocation of resources.  And, where there is a dislocation of resources, the economy must, over time, attempt to return the allocation of economic resources to a less artificial distribution. 

That is what we are going though now.  Of course, some pundits recommend more of the same.  If the credit inflation being created by the government is not “getting things going again” then the government must step up its efforts to produce more credit inflation. 

The problem with this is that constant application of credit inflation cannot continue on forever and forevermore.  The dislocations created by such a policy grow and grow and grow and the amount of credit inflation applied to the economy must also grow and grow and grow in an effort to sustain the dislocations.  The burden becomes heavier and heavier and heavier.

Eventually, the bubble bursts. 

The United States economy is now going through a re-structuring attempting to remove the dislocation of resources created by fifty years of almost steady credit inflation on the part of the federal government.  We are seeing the consequences of this policy, not only in the collapse of the median level of wealth of the American family, but also in the growing inequality in the distribution of wealth in the country.

Unfortunately, these unintended consequences just inform us that “good intentions” do not always produce the results we want.     

Spain: Is This The Start of Something Big?

“Spain on Saturday agreed to accept a bailout for its cash-starved banks as European finance ministers offered an aid package of up to $125 billion (or €100).”

Note: this is for the banks only…not for Spain, itself…

The IMF had suggested that the minimum needed to stop the drain at Spanish banks was around $46 billion.  So, for once, it seems as if the finance ministers are finally trying to get their arms around the problem and not just “kick the can down the road”. 

After what we have seen over the last three years of so, it is easy to be skeptical.

To raise the credibility of the officials in the eurozone, this effort is going to have to be followed up by something more. 

Yes, the agreement has not really been signed and sealed yet, and I am looking further down the road. 

That, however, is the only way that credibility is going to become established.  One still shudders at the lack of leadership that exists within this community.

But, next steps are going to have to be made and they are going to have to follow right on the heels of this effort to halt the decline of the Spanish banking system.

The next steps are going to have to strongly indicate that the eurozone is following up this action with a real effort to create a European Banking Union!

This will not be a simple task, by any means, but it is the next thing on the agenda.

Yes, Europe needs a new unified fiscal authority to keep the eurozone together and to stabilize the euro.  This will be an even greater task than the building the European Banking Union.

The banking system needs to be saved first and this must be done in the short run.  The fear of a run on European banks seems real and this fear must be dealt with before we get to the sovereign debt issue.  Thus, full attention must be given to the issue of a banking union for it is the short run issue of consequence right now!

A major issue that will overshadow much of the debates relating to the creation of a European Banking Union is the giving up of sovereignty over banks that now reside within national jurisdiction.  That is, each individual nation in the eurozone is going to have to give up something very dear to them in order to achieve the creation of a banking union.  This surrender involves centuries of history, pain, dislike, and, in some cases, outright hatred.

Can the officials get over this hang-up?  Can they put the past behind them in order to save the future? 

Creating a banking union, however, is just the start.  If there are national issues that must be given up in creating a “federal” banking union, these issues pale when one considers what these nations must give up to create a “federal” government that oversees and controls the spending and taxing and so forth that have formerly been completely under the control and oversight of the individual nations themselves. 

But, it seems to me that there is very little to choose from in the present situation.

Let’s consider three possible outcomes from the current state.  First, a European Banking Union is formed followed by the formation of a federal European government that oversees and controls spending for the eurozone. 

Second, the eurozone falls apart and the individual nations now making up the union go on their merry way.

Third, some nations form a banking union and a federal government and other drop out of the community.

To me, the suffering and pain that would accompany the second and third choices would be very substantial.  The second and third options are just not pretty!

But, human beings can be very self-destructive at times and make choices that are stupid and against their own best interests.

In my mind, there is no real choice.  Somehow, someway, European officials are going to have to form a European Banking Union and are then going to have to follow this up with some kind of federal government that deals with the combined fiscal issues of the eurozone.

Therefore, I am pleased to see the discussions concerning the rescue of the Spanish banks going forward.  I am hopeful that these discussions will be followed up by the formation of a European Banking Union. 

Then, the big task…a federal European government that will discharge the responsibilities of the eurozone with respect to the fiscal affairs of the community.  Of course, this federal government will also have to deal with the restructuring of economies, work-rules, pensions, and so forth.

Seeing real, credible movement on the part of European officials, I believe, will be seen positively by international investors.  If these investors react positively to the movements to create a European Banking Union and then to the further efforts to create a federal European government, I believe that financial markets will rise and this will provide the support and encouragement for the project to continue. 

If this process gets started the European officials must not let the momentum or the international investment community will lose heart and argue that the officials were not fully into the idea in the first place.  Skepticism will set in again.

I see the possibility of getting started on the European Banking Union, however, as a real opportunity.  The issues here are not as great as those connected with the formation of a federal European government.  So, this is a chance to start on issues that are smaller and are clearer. 

The important thing is to get the process jump-started and then build on the momentum.      

The Bad News Continues: German Banks Downgraded

Moody’s has been traveling around Europe over the past four weeks or so and leaving its mark about everywhere it has gone.

On June 6, Moody’s lowered the credit rating of six German banks and three Austrian banks. 

Deutsche Bank was not included in this round of downgrades for it will be examined later this month when Moody’s does a review of the “biggest global banks” with large capital market operations. 

The latest round of bank downgrades followed three downgrades in Sweden on My 24, sixteen downgrades in Spain on May 17, and twenty-six downgrades in Italy on May 14.

The news release that accompanied the June announcements stated that the German banks still had a large exposure to structured credits, a substantial exposure to peripheral countries in the eurozone, and exposure to industries that were going through hard times, like shipping and finance. 

In addition the banks still faced a great deal of exposure to possible loan charge-offs due to weak profitability. 

And, these banks had only small amounts of capital relative to total assets.

The weak profitability can be attributed to the fact that German banks…and European banks in general…are not expanding their lending.   On reason is the reality of the current recession taking place in Europe.  However, with weak capital ratios and additional regulatory pressure to re-capitalize, the banks are not in any mood to move more aggressively on the lending front. 

The whole re-capitalization issue is also caught up in the discussions about forming a European banking union that would make almost all banks in the eurozone, European, and not just a member of a particular country.  This is not a non-issue!

And, if the banks are not lending, it will be difficult to achieve faster economic growth. 

One can see why the issue of a possible bank run on continental banks is being tossed around.  And, one can see why European officials are concerned.

The problem here is that if one ignores a problem for a long, long time, the problem does not necessarily go away.  And, in many cases, the problem can get worse.

The banking situation is Europe has been ignored for a long, long time and combined with the sovereign debt crisis, which was also ignored or action was postponed for a long, long time, things got worse. 

The added problem is that when things get worse, the solution is not always the same as in situations where the problem did not get worse.  And, when the problem gets worse, it often takes a much longer time for things to get back to normal. 

Liquidity actions on the part of central banks and deficit spending on the part of national governments may resolve a “more normal” banking or “more normal” sovereign debt problem within a reasonable period of time.

When the problems become ones of solvency and bankruptcy, the “more normal” prescriptions to solve the problems may not work and the time to return to “business-as-usual” may be an extremely long time.  But, when the problems become this great, officials often deny them and try to postpone getting to the real core of the issue for as long as they can.

We have seen this situation evolve in Europe. 

Now, the solutions have become structural and the potential disruptions to the existing culture have become enormous.  Where all this will end is unknown.

But, the pressures to act are growing.  Everything seems to be culminating in the need for eurozone officials to do something.  Financial markets react to news about what officials seem to be doing.  If it looks like the officials are moving to resolve an issue…financial markets improve.  If it looks as if the officials are deadlocked due to irreconcilable differences…financial markets tank.

Economic news does not do that much to move the markets these days.  The conditions of official discussions are the primary thing that the participants in the financial markets seem to be focusing upon.

Here again is another factor that arises when action is postponed.  The news never quite seems to be positive.  The German banks have been downgraded today.  Moody’s will soon have a report out on the “biggest global banks.”  And, then there will be something else. 

I know that the nations of the European continent have issues with one another that go back centuries.  I know that it will be very difficult for many people to lay down these issues and get on to what is real.  But, all I can say to the officials in Europe is…GET OVER IT!  Get on with business. The rest of the world cannot wait for you to fight another world war…if only on the conference table.          

The Case for the Dollar: Nothing Has Changed

If one looks at a chart showing the value of the United States dollar against major currencies, one could argue that what was achieved in the presidency of Barack Obama looks very similar to what was achieved in the presidency of George W. Bush.  Both presidents created substantial amounts of credit inflation during their time in office and both presidents saw the value of the United States dollar decline against other major currencies in the world. 

The only thing that separates the two periods is the time in which there was a “flight to quality” in late 2008 and early 2009 and the value of the dollar rose.  However, as President Obama took charge the decline in the value of the dollar resumed.

The only thing that has made Mr. Obama look “good” over the past three years or so is the weakness in the value of the euro, a weakness derived by the fact that many countries in the eurozone followed an even more liberal policy of creating credit than did the United States and, as a consequence is paying the price for it.  

One can interpret the euro/dollar behavior as one in which both currencies are suffering from excessive government credit creation and one currency will seem to be stronger for a while and then the other currency will recover against it.  Right now, the dollar is showing stronger than the euro.

The point is, however, that overall, the value of the dollar is not doing real well against all the other major currencies excluding the euro.  This is a result of the fact that the economic policies of the Obama administration are little different from those that were pursued by the George W. Bush administration.  And, international investors continue to bet against the dollar…even as lots and lots of money pours into the United States from Europe because of the eurozone financial crisis. 

The international investment community shows little or no confidence that President Obama will turn the situation around in the future once the “flight” money reverses its flow.  Market forces sense weakness and move against it.  The Republicans are fighting the way they are, not because of Obama strength, but because of Obama’s weaknesses when it comes to economics.  They sensed this before the 2010 mid-term elections and politics in the United States has not been the same since.

There have only been two times since the dollar was floated on August 15, 1971 that the United States has really earned a “strong” dollar.  These two periods were connected with Paul Volcker, then Chairman of the Board of Governors of the Federal Reserve System in the early-to-middle 1980s, and with Robert Rubin, then Secretary of the United States Treasury in the last half of the 1990s. 

The rest of the time since 1961, the Federal government has focused on fostering credit inflation, using federal deficits to try and stimulate economic growth and keep unemployment at low levels.  What the government has actually accomplished over this time period, what we are experiencing now, is tepid economic growth, high levels of unemployment, and even higher levels of under-employment.

International investors recognize this and that is why the value of the dollar was floated back in 1971 and why the value of the dollar has declined ever since (with the exception of the two periods mentioned above).  Currently, the value of the dollar has declined by almost one-third of the value it traded at in the early 1970s.

I continue to believe that the value of the United States dollar will continue to decline against other major currencies.  Nothing has really changed…in aggregate.  Obama has created massive amounts of debt during his presidency.  George W. Bush created massive amounts of debt during his presidency.  And, unfortunately, I don’t really see much change coming along in the future. 

Therefore, I believe that the value of the United States dollar will continue to decline…along with the relative economic position of the United States in the world.    

A European Banking Union

Wolfgang Münchau, writer for the Financial Times, has written a very clear article about the possibility of a European banking union.  What is most interesting in the piece is his reflection on what a banking union might mean for he eurozone.

The basic point is that given the banking problems that now exist in each country of the eurozone and in the whole of Europe, almost everyone is moving to the conclusion that a banking union of some form is needed.  Even German chancellor Angela Merkel has seemed to move in this direction in recent days.  Some, like ECB President Mario Draghi, are getting rather aggressive about such a move.

The need is certainly there, highlighted by yesterday’s announcement that Portugal  will inject €6.6 into three of the country’s largest banks. The Portuguese government claimed that the need came about due to the very severe new capital requirements of the European Banking Authority.  

Let’s concentrate on a few of the points that Münchau makes in his article.  First, almost all banks within the eurozone should be a member of the banking union…and, this includes Spain’s Bankia and the Landesbanken of Germany.  That is, the bar for membership, Münchau argues, should be very low.  The banks themselves would become members of the banking union and not of the individual states making up the banking union.

After this, the banking union needs a treasure chest… Münchau suggests a total of €1 trillion…to help banks recapitalize.  The suggestion here is that part of the funds would initially come from member governments but eventually the full €1 trillion would be raised by a eurozone bond or something similar.  This fund would make the banks solvent, although a large number of the banks would, in essence, be nationalized.

A second fund would need to provide deposit insurance.  The essence of this idea would be to stem bank runs or the possibility of bank runs.  The deposit insurance would be based upon bank membership in the banking union and not upon whether or not the country remains within the eurozone. 

The basic model of the deposit insurance fund is that of the United States and the Federal Deposit Insurance Corporation, the FDIC.  This would mean that where ever the deposit insurance fund is located it must have the power and backing to be able to close banks down, much in the way that the FDIC does.

This means, however, that the deposit insurance fund would have a supervisory function, one that would have the ability to examine banks on a regular basis and one that would have the ability to limit bank functions and operations as is needed.  No more “mickey mouse” stress tests, but real examinations that had a sting to them and that would be enforced.

Where to locate this regulatory authority of examination and closure is a problem.  It would not have to be “independent” as is the FDIC in the United States but could be connected in some way to the ECB.    

But, Münchau continues, this starts to widen the circle.  The author states very clearly that to give the deposit insurance fund the power and the authority to close a bank, regardless of what country the bank claims as its home, means that the political union of the member states must be sufficiently strong to back up the banking agency in its efforts.  National interests cannot interfere with the deposit insurance fund because this would immediately destroy the credibility of the banking union. 

“Without a commitment to further political union, deposit insurance is either ineffective or ruinous.”

People in the eurozone have begun to talk about the possibility of bank runs and systemic bank failures.  Here I refer you to a recent article in the Economist magazine, “The Fear Factor: Preventing a Big European Bank Run”.

There has been a change in attitude with respect to European banking problems...focus has shifted from the bank problems being one of illiquidity to being one of solvency.  “Unlike six months ago, officials now realize there is no alternative to a banking union.” (This from Münchau.)

Notice, that the solvency question has arisen due to the concern for the banking system…not in terms of sovereign debt.  So, the thought process has still not moved as far as it needs to go!

However, a “proper” banking union is going to require a political union.  And, the political union is going to require a fiscal union. 

If Europe moves on down the road in creating a European banking union, then, this argument goes, Europe will move on down the road in creating a central European fiscal and governing union. 

The question is, therefore, will European officials move on the creation of the European banking union?

To do this, some Europeans are going to have to step up and become leaders.  Up to this point, the lack of leadership has been the most deficient resource on the European continent. Will someone please step up!  

The European Banking System

The banking system in Europe, particularly in Spain, is getting a lot of attention these days.  The specific case that has been in the news is that of Bankia, the fourth largest bank in Spain.

Bankia is a special situation in that it was a consolidation of seven Spanish savings banks in December 2010.  It is obvious now that those involved in the consolidation basically put the banks together without recognizing the serious condition of the loan portfolios of the combining savings banks. 

The fact that the “hole” in Bankia’s balance sheet is so bad just highlights the incompetency of the Spanish banking authorities or their naivety given the serious state of the housing market crisis that Spain was undergoing at the time. 

Here again, one wonders what role the European interpretation of the financial crisis played on this restructuring of the seven savings banks into one.  If one assumes that the asset problems of the banks were connected with the liquidity of the loans, then, I guess, one does not feel that the value of the assets need to be written down.  If one were to assume that the asset problems were ones of insolvency, then the authorities should have responded in a different way. 

Europe, unfortunately…and incompetently…assumed that the problems faced by the banks were liquidity problems and not insolvency problems…and they just “kicked the can further down the road.”

“Can kicking” time seems to be over.

Now, however, the fear factor seems to be spreading beyond Spain to the rest of the European continent.  “A fierce debate is now taking place as to the best way to avert a run that, if it started, might be difficult to contain and could lead to massive capital flight from the Eurozone’s peripheral countries…”

Proposals for a banking union that includes integrated financial supervision and deposit insurance have been flying around Europe last week.

These proposals have been accompanied by increased calls for a “full economic and monetary union.”  But, again, this comes at a time when Greece may elect a government that rejects the agreed upon bailout provisions and at a time when Spain may also require a huge financial bailout to save not only its banking system but also its sovereign debt.  The rest of Europe may not readily accept either of these outcomes.

The difficulties faced by officials in Europe (I will not use the term “leaders” because I see none) are highlighted when put into contrast with the banking situation in the United States.  Although in the United States, Ben Bernanke and others at the Federal Reserve talked about the “liquidity” problems of the financial system, they were faced right away with solvency issues. 

The most prominent of these was, of course, the case of Lehman Brothers Holdings Inc., which filed for bankruptcy on September 15, 2008.  However, the Federal Reserve System and the Federal Deposit Insurance Corporation were faced with many, many more bank failures and bank consolidations soon after.  All told, since September 30, 2008, the number of institutions in the commercial banking system of the United States has dropped by 884 banks!  This is not an insignificant number.

In my opinion, the Federal Reserve ran its Quantitative Easing 2, at least in part, to help keep troubled commercial banks open and allow the FDIC to work with the banks in the worst shape to close or to find someone to acquire them in the smoothest and least disruptive manner possible.  In this the American regulators have been tremendously successful. 

Commercial banks have not really been giving out loans over this time period and hence help to underwrite the economic recovery.  But, the consolidation of the banking system has proceeded without much fanfare and this is not all bad!  At a bare minimum, this approach has provided some downside protection in the tepid economic recovery now taking place, protecting against any major disruptions from a cumulative closing of many banks within a short period of time.

The European situation seems to be going the other way.  Officials not only treated the banking situation as one big liquidity problem it added to the problem by forcing the European banks to take on more and more of the sovereign debt of the teetering peripheral countries of Europe.  Since the debt of the troubled European nations were assumed by European officials to be “riskless” the “troubled” banks could acquire the debt of the “troubled” European nations without suffering any decline in their existing credit rating.  

Thus, suspicious credit was added on top of suspicious credit at these banks.

And, the regulators went about their merry way without raising any kind of question or doubt about the solvency of these banks!  How blind can one be?

Then stress tests were administered…twice…by these same regulators in order to reassure depositors and investors of the soundness of the banks.  The stress tests were a “bad joke”.

As a result, “Since national regulators have lost the confidence of markets, they are having to bring in outsiders to assess how much capital their banks need.”  But, this could be a disaster if they are realistic and truly trustworthy.

Now, the authorities have to scramble.  The European Union not only does not have the fiscal authority to oversee the fiscal affairs of the member countries and the EU as a whole, it does not have a unified banking authority to oversee and regulate the banking activities that go on within the EU. 

It looks as if the anxiety in Europe is rising.  Mario Draghi, in the words of the New York Times, has issued a challenge: “A Terse Warning for Euro States: Do Something Now” The Times article goes on to say “The note of frustration and urgency in Mr. Draghi’s voice was a sharp contrast to six months ago…”

It is time that someone listened!

Federal Reserve Can Do Little At This Time

By historical standards the rate of growth of both measures of the money stock, M1 and M2, are quite high.  Still the reasons for these high growth rates are related to people moving assets around their balance sheets rather than the stimulus injected into the banking system by the monetary authorities.  Money stock growth is not occurring because loan growth is increasing.

In May, 2012, the year-over-year rate of growth of the M1 money stock was just about 16 percent within the 16 to 18 percent range the year-over-year growth rate this measure of the money stock has grown in the first five months of this year.

The M2 measure of the money stock grew at a 9.5 percent rate of year-over-year increase, a rate consistent with its behavior since the end of last year.

These measures are growing as rapidly as they are, not due to the monetary stimulus of the Fed working its way through the lending of the banking system, but because people continue to shift assets in their balance sheets away from short-term interest bearing assets to transactions balances that pay little or no interest.

This shift in funds, as I have argued for over the past two years or so, should not be interpreted as a sign that people are buying things.  On the contrary, people are still moving their funds from short-term interest bearing assets to transactions balance for two reasons.  First, many people are without jobs or without full-time jobs or who face housing problems need to keep their money in a form that can provide for daily needs.  Second, with interest rates so low people are not earning enough in the short-term interest paying assets to justify them to keeping their funds there.

In the first case, the currency component of the money stock is still increasing at historically high rates, 8.5 percent, year-over-year in May, and this I continue to interpret in a pessimistic way.  People need to hold cash when times are tough. 

In addition, the demand deposit component of the M1 money stock is increasing at a 36 percent annual rate in May, an extraordinarily high year-over-year rate of growth.  Where are these funds coming from? 

Well, small time deposit accounts are down over 17 percent, year-over-year, retail money funds are down 3.5 percent, year-over-year, and institutional money funds are down slightly more than 8 percent, year-over-year.  People are taking funds out of short-term interest bearing accounts and putting these funds into demand deposits.

The increase in demand deposits is not being generated by the commercial banks lending out money to support consumer or business spending!

We can see the effect of this on bank reserves.  Total bank reserves have actually declined year-over-year by slightly less than 2 percent.  However, required reserves have risen by 31.5 percent over the same time period.  The increase in required reserves is a result of the shift in other bank accounts that have lower reserve requirements to demand deposit accounts that have a much higher reserve requirement. 

The interesting consequence of this is that excess reserves in the banking system have actually declined over the past year.  They have not declined by much, but the have declined sufficiently to cover the amount of reserves the banks’ need to cover the increase in required reserves to back up the rise in demand deposits.

This decline in the excess reserves in the commercial banking system is matched by a similar decline in the reserve balances commercial banks keep at Federal Reserve banks. 

Overall, in comparing where the Federal Reserve was last year with where it is at the present time there are two things that stand out in terms of the actions of the central bank. 

First, the Fed supported the substantial increase in the demand for currency in the economy.  In this matter, the Fed supplies currency to the public “on demand”.  That is, the Fed exercises no control over the amount of currency that is in the economy.

Second, there were substantial actions on the part of the Fed over the past year to combat what was going on in the rest of the world.  Three major line items on the Fed’s balance sheet relate to this: central bank liquidity swaps; dealing in assets denominated in foreign currencies; and reverse repurchase agreements with “foreign official and international accounts.” 

This second area that stands out is not surprising given all the problems that have been faced in Europe and elsewhere.  The Federal Reserve has provided help when and where it can.

Otherwise, the other activity that the Federal Reserve has engaged in over the past year can fundamentally be called “operating transactions.”  That is, the Fed acts to offset seasonal or special transactions to maintain relatively steady reserve balances.  For example, when cash flows out of the banking system in the Thanksgiving/Christmas time period, the Fed usually injects reserves to cover the outflow.  After the first of the year when cash flows back into the banks the Fed will reverse their previous injection.

These actions are call “operating transactions” because they help to stabilize the movement of funds in and out of the banking system that are just routinely operational.  And, these operations still have to be maintained even in the face of all the excess reserves that now exist within the banking system.

Bottom line: very little has changed in the banking system in recent months and, hence, the Federal Reserve has been relatively quiet.  There still remains a contingent of individuals in the financial markets that are calling for the Fed to engage in a third effort at quantitative easing.  My guess, however, is that QE3 will not be forthcoming, even in the face of the lower revised numbers for GDP in the first quarter of this year.

There are three reasons for this.  First, further quantitative easing will have little or no effect in stimulating faster economic growth.  There are just two many structural problems in the economy for the United States to achieve faster economic growth at this time.  What would the banking system do with more than $1.5 trillion in excess reserves?

Second, the handling of the insolvency problems within the United States banking system is going very smoothly. (See my post on “The Condition of the Banking System”.) Right now, there is nothing else the Federal Reserve can do to help this process go any better.  Thus, the Fed needs to leave well enough alone.

And, third…this is an election year.  The Fed has been criticized in the past for attempting to ease monetary policy to support a sitting President.  It does not want to look political in its actions.  

The Federal Reserve does not have unlimited capabilities.  The officials at the Fed need to know when to act, but they also need to accept the fact that there are times when they can do little or nothing to help a situation.  In these latter cases they need to back off.

To me, now is a time when the Fed need to stay quiet, continue to execute its routine “operating” duties, but still stay alert.  There is very little benefit that the Fed can achieve now through further actions, but there are potential costs of attempting to be too active.