The Fed's "WAR OF THE WOR(L)DS"

Like many in the investo-blogosphere I eagerly devoured David Merkel's "FOMC Statement, Redacted Version" today. I am very grateful that someone has taken the time to do this on a regular basis as it saves a lot of time compared to reading the 2 statements side by side. Maybe its just me being "fed up with fed-speak" (sounds like a good WSJ article name if it hasn't already been used!), but it seems that our thesaurus-loving friends at the fed are really trying to engage in more of an "anxiety-easing" policy than a QE policy at the moment. Now that interest rates tools are sayonara the fed has really stepped up its newest weapon against all things deflationary before QE becomes the proverbial kitchen sink: a war of words.

Yes of course Greenspan made this method famous and Ben Bernanke, being the astute pupil that he is, certainly paid attention to Greenie in English class all those years. But until this most recent statement, I didn't really get the vibe from the Bernanke-led fed that they were trying to "game the system" by fooling us with vagueries and empty statements. I thought he was a straight-shooter a la Mr. Bush?

Here are selected excerpts from this meeting's statement and my interpretations of those statements given their change in language vs. last meeting.

They write:
The Committee anticipates that a gradual recovery in economic activity will begin later this year, but the downside risks to that outlook are significant.

I read:
We sure hope the market turns around by the end of this year, but we don't think it will

They write:
The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets.

I read:
So last time you were evaluating it. This time you're ready. God the suspense is killing me! Either you are already doing it, but want to maintain the illusion that the tool is still available OR you don't want to commit until we have shed another 5% in GDP growth.

They write:
the Committee expects that inflation pressures will remain subdued in coming quarters.

I read:
Look we've made progress! The first derivative of deflation has slowed. I already have next meetings statement prepared: "Inflation pressures have normalized and will gradually revert back to long term historical averages"

Let's stop the madness of Greenspan! Let's work off some debt/leverage for another year and gradually restore confidence in the banking sector. Confidence that they are making loans that they will eventually get paid on... I don't see how lowering long term rates in the near term is going to spur a sustainable increase in loan activity unless lending standards are relaxed (which they won't be). Who is on the sidelines right now waiting to buy a new house based solely on the level of 30 yr fixed rates? Aren't these just the refi- people?

My 2 cents.

Short-termism Redux:
Sunk Costs, Escalation Bias and Satisficing Markets

It has become more clear to me since the market crash in October that those in Washington who are making decisions on our behalf are suffering from chronic escalation bias; the premise that once aid has been distributed to an ailing financial institution and the proverbial "intervention" line has been crossed, the government (read: treasury) must see their investment through to the end or risk its collective reputation. This logic flies in the face of what every business student in America - and throughout the world- is taught in corporate finance 101: sunk costs should play no role in future decision-making. I can even vaguely recall a picture in my corporate finance books illustrating a sunk cost: I think it was a crudely drawn diagram of a truck leaving a gas station. Sounds pretty basic.

Alas, the human mind likes to play tricks on even the "brightest" minds of our time. And so we see billions of dollars being sprayed around sporadically every couple of weeks (days?)aimed at flare-ups while a forest fire rages in the background. Analogies aside, i'm obviously making reference to a few of the "chosen" banks that the government has decided to save (and save again). And yet, how did it get to this point? How did this hodge-podge of bailouts, guarantees, and emergency loans come about? Did the Government really think that "one more bailout" would finally stem the tide of asset erosion-- the self-reinforcing downward spiral of deleveraging? We don't know the thought process of those in charge - everything that they say in public is propaganda, and for their sake it has to be. Heaven forbid Bernanke say the d-word at a fund-raising dinner, only to have the Nikkei drop 10% before he can finish his sentence.

It was a perfect storm of satisficing decision-making coupled with the desire to preserve one's own reputation amid a relentless media. The result: our regulators, elected-officials and their ilk can no longer make rational, prudent, pragmatic decisions in the best interests of their constituents: American citizens. It's time for new leadership.

Tuesday at noon we will welcome a new President. It's the first step to curing the psychological "hangover" (hat tip: dubya) that has been plaguing our decision-makers for the better part of two years. Our new leaders- and by extension, we -must be vigilant however; consensus will be easily found, but it should not be sought. There are some hard decisions that will need to be made and some people will get hurt. But for now let's bask in the promise of a renewed hope for our country. Congratulations America, now let's get to work.

references:
http://www.informationarbitrage.com/2008/11/the-plague-of-short-termism.html
http://en.wikipedia.org/wiki/Sunk_cost