The Fed Revisits Its Experimentation Lab - TheStreet

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I'm sorry but I must again comment on the


. I realize that I have talked about this a lot, but our monetary statesmen, especially Alan Greenspan, have caused so much damage to so many people both in the stock market bubble and, potentially, in the housing bubble that the fact they are threatening to do it again simply must be discussed. First, though, I'd like to preface this latest development with some general comments.

The problems sown by the Fed sometimes have long gestation periods. It often turns out to be the case that one can talk about these problems seemingly ad nauseam without them mattering until they matter, and then they are the only things that matter. I can remember being laughed at for screaming about Greenspan and the Fed during the bubble. Of course now, the damage is pretty apparent for all to see.

In my opinion, the unwinding of the stock market bubble -- and the economic damage created in that process -- has not yet run its course. Meanwhile, I think we're in for some problems in the housing market. Let's also not forget Ben Bernanke's remark about how the Fed could crank up the printing press, a frightening prospect for those of us who own dollars, which is almost everyone.

Acing a Fiddle Audition

: However, what most concerns me, and what should concern everybody, are comments that passed on


Wednesday by Vince Reinhart, who is secretary to the Federal Open Market Committee and director of the Federal Reserve Board's Division of Monetary Affairs. (So, obviously, this is someone who has clout inside that institution.) In remarks that ran along the same lines as Bernanke's, and just as disturbing, he said, "

If asset prices don't adjust sufficiently

to stimulate spending, then open-market purchases of long-term Treasurys in sizable quantities can move premiums lower." (The emphasis is mine.)

There are several points to be made about this quote. First of all, it's clear that the Fed is targeting the stock market to try to stimulate spending. In saner times, the stock market was always a reflection of what happened in the real economy. Now, it's apparent that the Fed is trying to use the stock market to stimulate demand.

This, of course, happened in the bubble. That the stock market


the economy was an unhealthy consequence of the bubble. Now the Fed is intent on re-creating that unhealthy environment, though I don't think it will be successful.

Indefatigable Incompetence

: In any case, Reinhart's comments also raise the question of who decides the meaning of "sufficiently." Regrettably, the answer is: the same people who didn't know anything about the bubble and who have made all these other errors. Then, there is the question of why the Fed thinks


little maneuver will be any more successful than any of its other unsuccessful maneuvers, like the 0-for-12 run it's had with rate cuts.

The Fed might recall Operation Twist, a 1961 variation on this theme, in which the central bank simultaneously lifted short-term money rates and suppressed bond yields in a bid to induce foreigners to hold more dollars. It was one palliative among many intended to defeat the inflation that presently engulfed the world. That fiasco wound up requiring the draconian measures instituted by former Fed chair Paul Volcker to break the back of runaway inflation.

Also, I'd like to know, who told the Fed that this was its job? Who told the Fed that deflation was unacceptable and that the stock market should be used to try to force demand to a place it deemed to be correct? Basically, the Fed is standing up and saying, we don't like what's going on, and we're going to change it, and the consequences be damned -- even as we see all the problems related to their prior experiments.

Arm's Length on Elucidation

: Then, showing how disingenuous the Fed can be with its comments, Reinhart went on to say, "No doubt, there are ongoing impediments to satisfactory growth in the United States, but policymakers have

reason to believe

that the current stretch of subpar growth will be modest in both magnitude and duration." Notice he didn't discuss what the ongoing impediments were, which are, of course, the bubble that came before. I would just like to know what supports his belief that this current stretch will be modest. Certainly, it can't be the Fed's success with the rate cuts thus far.

Moving from the misguided to the nonsensical, Reinhart went on to make this statement: "Of course, such promises to put a ceiling on parts of the yield curve would be reinforced with a credible promise to keep the short rate along a path consistent with long rates." I guess he means to keep the yield curve positively sloped. But once you start talking about longer-term rates, it's impossible to say that you're going to keep them anywhere.

Markets rule the long rates, even if the Fed can control the short rates. And, the mere attempt by the Fed to try to put rates where they don't belong will ultimately backfire on them, in the form of a weaker dollar, higher inflation, and eventually, higher rates, even if asset prices are collapsing.

Behind the Mantle of Mantra

: Lastly, this knucklehead hides behind the same lame excuses that the Fed trotted out in the past, namely, productivity growth arguments, "which support consumption and ultimately induce firms to hire and spend." I recommend that people reread that last sentence and see if it describes what's been occurring in the past several years since the bubble burst. Again, I'm sorry to start harping on the Fed, but through its latest efforts at experimentation, it is set to exacerbate earlier problems of its own making. There will be long-lived consequences to these experiments, even if they take time to emerge.

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William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to