Where The Fed Has Led Us

Yesterday's Wall Street Journal's lead editorial on the Opinion page consisted of a number of economists' ruminations on what the Fed should do next.

First, let me note how refreshing it is to see real economists polled, rather, as often is the case, see the co-anchors on CNBC ask everybody who troops onto their set whether we'll see a double dip economy, or not?

The likes of John B. Taylor, of the famous Taylor Rule for monetary policy, Richard Fisher (Dallas Fed President), Frederic Mishkin ((former Fed Governor), Ron McKinnon, Vincent Reinhart and Alan Meltzer are an impressive group from which to read comments on the topic.

But what struck me more than any single comment from these accredited economic sages is simply the horrifying situation in which Helicopter Ben and his predecessor, Alan Greenspan, have placed the US economy.

As an adult, I lived through the Volcker years. As a very aware teen, I recall William Martin's and Arthur Burns' inept accommodations to LBJ and Nixon, then G. William Miller's hamhanded attempts at running the Fed, mercifully for only a little more than a year.

After Volcker's superb, calm reign in the wake of his bungling predecessors, you'd think we'd permanently learned some lessons about monetary policy, wouldn't you?

But, no, we haven't.

So we are now in the bizarre situation of nearly repeating the 1930s: low rates and a flat economy.

Isn't anyone besides these economist worried about the repeat of the last few years, in which banks funded lousy investments due to the absurdly low cost of capital? Didn't we learn anything from Greenspan's pumping the housing sector with ultra-low rates?

And what about the ridiculously large Fed balance sheet at a time when we're funding our government debt overseas? How's that not fungible? The Fed doesn't create money out of thin air, you know. Right now, it's monetizing bad loans like crazy. The net result is our government, whether through the Fed or Treasury, is issuing fully-valued debt overseas to buy over-valued instruments domestically.

Borrow to buy high.....sound smart to you? Me neither.

Looking beyond the trees of individual economists' advice on whither next for Ben & Co., it's scary to see that forest.

A sluggish, slowly, if at all, recovering economy, too-low rates, too large Fed balance sheet, huge Federal debt, spending and deficits, with a politically-intimidated private sector scared by encroaching regulatory and legislative actions and uncertainty.

Whatever the Fed does next probably won't be sufficient, on its own, to lead us back to healthier interest rate levels in a vibrant, growing, low-inflation economy.