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Tuesday, March 22, 2011 1:04 PM


Fed Gov. Richard Fisher Sees Signs of "Speculative Excess", Warns of "Intoxication on Ambrosia of Cheap Capital"


Fed governor Richard Fisher votes on the FOMC panel on a rotating basis. He has dissented with Ben Bernanke 5 times previously. In a speech today he warned against "speculative excess".

Please consider Fed’s Fisher Says No More Stimulus Needed in U.S. After June

Federal Reserve Bank of Dallas President Richard W. Fisher said that no additional monetary stimulus will be necessary after the central bank completes its asset purchase program in June.

“No further accommodation is needed after June,” including by tapering the central bank’s purchases, the regional bank chief, who votes on monetary policy this year, said in a speech today in Frankfurt. “Doing so would only prolong the injustice that we have inflicted” on savers through inflation, he said.

The comments by Fisher, who since last year has questioned the Fed’s $600 billion of Treasury purchases, are the first by a policy maker since the central bank’s March 15 meeting in Washington. Officials at the gathering kept the purchase plan in place, while saying the U.S. economy is on “firmer footing.” Fisher said he would have voted against the central bank’s purchase program if he’d had the ability last year.

“I would have voted against QE2, had I had the vote,” the 62-year-old bank president said at the Frankfurt Finance Summit 2011. “We’ve done a bit too much.”

Fisher said he is “beginning to see signs of speculative excess” in the U.S., evidenced in the “fresh flow of money” into the stock market, a surge in so-called covenant-lite loans and the re-leveraging by private equity firms.

Fisher reiterated his view that Congress must undertake fiscal reforms to create prosperity in the U.S.

The Fed’s preferred price gauge, which excludes food and fuel, rose 0.8 percent in January from a year earlier, matching December’s year-over-year gain, the lowest in five decades of record-keeping.

“There’s lots of liquidity sloshing around the U.S. financial system,” Fisher said. “We are seeing signs of all the intoxication that typically takes place when we have the ambrosia of cheap and readily available capital.”

The last time Fisher was a voting member of the FOMC in 2008, he dissented five times in favor of tighter policy. He has led the Dallas Fed since 2005 and is one of four regional bank presidents who rotated into voting slots this year.
Bernanke Openly Embraces "Speculative Excess"

It is crystal clear Bernanke has purposely embraced speculative excess and will not back off on a date once set. Bernanke has not stopped a single emergency measure ahead of his announced time. Thus, the Fed will continue buying US treasuries until June come hell or high water.

Fed actions have been good for the stock market by fostering a psychology of speculation. However, those actions have been harmful for the average person on fixed income and the average Joe on the street who gets nothing in interest on CDs and savings accounts.

Moreover, once speculation end, crashes occur. There has been no recovery, only an illusion of one. Unemployment is down but it's a mirage based on millions of people dropping out of the labor force.

The real measure of a recovery is employment and this is what it looks like.


Nonfarm Payroll Employment - Seasonally Adjusted Total

The above chart shows the 1.5% drop between February 2001 and February 2011. Note that nonfarm employment is below where it was 11 years ago dating back to February 2000.

For additional grim details about jobs including a comparison to the Great Depression, please see Current Decade of Job Losses vs. Great Depression; How Did Quasi-Public Jobs Fare? Who is Whining?

Another regularly dissenting governor is Thomas Hoenig, who will step down shortly.

MarketWatch Interview
With Kansas City Fed’s Thomas Hoenig

Inquiring minds are reading a Q&A with Kansas City Fed’s Thomas Hoenig
Q: On commodity prices, a lot of people point to Fed policy as the cause.

A: I don’t know why not. It has got to be a factor. It is not the whole thing – you have droughts and temporary movements. But it is a contributing factor. There are drought issues, and supply issues and demand issues like the Chinese diet. But also monetary policy is accommodating demand, I think, worldwide.

Q: Is QE2 working?

A: I would say it is having effects but at what price later on? My view is it is not just about intended consequences, it is about unintended consequences.

Q: How about tapering off QE2?

A: I certainly would. I am for tapering them off. If you can do it in the right way without disrupting the markets, then yes, by June or sooner. But that precondition is a pretty tough precondition – doing it in the right way, not disrupting markets.
Bernanke hides behind a "dual mandate" of price stability and jobs as the reason for QE II. However, he has failed miserably.

We have neither price stability, nor job creation. Instead we have excessive speculation that at least two Fed Governors can see.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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