Fed Policy, Awash In Liquidity, Consequences

Definitely a "must read" at the link below (excerpt follows):

Awash In Liquidity, Part 2: The Long-Term Consequences Of Falling Interest Rates | The Economy | Minyanville's Wall Street: ".... There are going to be unintended effects that we can't yet discern, but there are some issues that we already know about. ... over the last five years, the Fed has destroyed the tools it has used for the last 100 years to carry out monetary policy. Reserves in the banking system are now 34 times the level that is "required." So, raising reserve requirements doesn't appear to be viable. Selling assets from its balance sheet (open market operations) to reduce reserves would require an undoing of about $2.6 trillion before bank reserves would become an effective tool to control bank lending or the growth of the money supply. And, the Fed as the "lender of last resort" simply doesn't make sense in a world awash in liquidity.... So, how does the Fed unwind all of this? How does it actually raise interest rates when the appropriate time comes? Today, it doesn't appear that the Fed actually knows exactly what it is going to do, nor can it model, with any precision, what the impacts will be of some new tools with which it is currently experimenting.... a zero rate policy benefits the wealthy, and hurts the middle class.The reality is that there are no real plans to reverse the bloated balance sheet. According to NY Fed chief Dudley (in a May 20 speech), the discussion inside the Fed now excludes any concept of selling assets from its portfolio. Such an admission means that the Fed has realized that it has destroyed its traditional tools, and only has those experimental ones. Prepare for volatility and unintended consequences."

see also:  first installment of this two-part series Awash in Liquidity, Part I: Why Interest Rates Are Falling

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Consequences should be considered BEFORE the fact

Consequences should be considered before the fact—before deciding to join a government-union-corporate axis to push for immigration reform that well might help the overall rate of economic growth and profits, but evoke a lack of enthusiasm from the unemployed programmers who will have to compete with the new high-skilled immigrants, or an unwelcoming attitude towards the unskilled newcomers who drive down wages. Or before handing out multimillion-dollar bonuses to bankers so recently bailed out by the taxpayer. Or before exposing valuable technology to theft by China’s state-owned enterprises in order to sell a few more feet of rope in that emerging market (source: Saving Capitalism | The Weekly Standard)

• Too many laws on the books.
• Too many giveaways and special tax breaks.
• Too many unintended consequences.

When is the last time Washington repealed laws, simplified government, really reduced the complexity and size of government, eliminated redundant programs, etc? Washington's main problem? Too much money. The NSA is just one example, Iraq is another -- if we had a smaller government budget, a smaller military, we would have never invaded Iraq as foolishly as Bush-Cheney did, the NSA would have never begun spying on US citizens for no good nor constitutional reason.  Sometimes you just have to take the credit card away from the stupid, although perhaps well-meaning in the moment, inept bureaucrats. I'd rather see Washington reallocate about 20% of the current US budget to building public infrastructure in the fifty states. Washington is too fat, too stupid, too lazy--living off the "fat of the land"--they don't know what "recession" is in Washington, they never took a cut in pay, nor suffered layoffs. Past time for reform and reallocation of priorities and resources at the federal level.

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