Friday, May 7, 2010

ZIRP Should Be Zapped

David Stockman, "Fed Policy Stealing From Our Future"


We are now well into the second year of green shoots, but in word and deed the Fed remains entombed in the zero interest rate policy (ZIRP)...[which] is incredibly destructive because it gives precisely the wrong signal to key economic constituencies, including speculators, savers, and politicians....

The risk/reward equation for rank speculation on the yield curve has become downright mouthwatering. Based on the Fed’s promise of no policy surprises, daredevils throughout the financial markets have put on massive carry trades, believing -- perhaps correctly -- that they will have plenty of forewarning when it's time to get out of risk assets. Meanwhile, funded by the Fed’s cornucopia of essentially zero-cost repo, these risk assets are earning handsome spreads and/or valuation gains, thereby minting profits while the speculators wait.

These massive trading gains being reported by Wall Street banks, however, do not represent economic profits from capital deployed in value-added service to the household and business sectors; that is, they are not comparable to returns from underwriting new equity issues for corporations or providing asset management services to households. Rather, they amount to pure rents extracted from valueless, hyperactive trading inside the Fed’s artificially steepened yield curve.

To be sure, the dead-weight economic cost of this pointless churning of the secondary markets in securities and derivatives may not be fatal. But at the end of the day, it does represent a massive, unjustifiable income transfer from the struggling multitudes to the fortunate few, and a demented social policy that forces investors to incur great risks to obtain any return at all on their savings.

Complete article viewable at

No comments: