I?m speechless at the “Maestro’s” ability to transfer blame and also at his acknowledgement that the Fed is irrelevant but still dangerous, as displayed most recently in the Wall Street Journal.
[G]lobal economic forces, which have been building for decades, appear to have gained effective control of the pricing of longer debt maturities. … Asset prices more generally are gradually being decoupled from short-term interest rates.
Arbitragable assets–equities, bonds and real estate, and the financial assets engendered by their intermediation–now swamp the resources of central banks. The market value of global long-term securities is approaching $100 trillion. Carry trade and foreign exchange markets have become huge.
[snip]
Although central banks appear to have lost control of longer term interest rates, they continue to be dominant in the markets for assets with shorter maturities, where money and near monies are created. Thus central banks retain their ability to contain pressures on the prices of goods and services, that is, on the conventional measures of inflation.
If you can?t control asset prices, you have no real effect on the economy. You can open the floodgates of liquidity and not move corporate borrowing (witness Japan in the 1990s, although some argue that the BOJ had more ability to affect money supply than it used). Also, if you can?t effect foreign exchange markets, then can you really control the creation of money and near money.
So what exactly does the Fed do?
