The already rich English language is being even more enriched by
the monetary policy of the Federal Reserve. And words still matter
— the last time I checked.
First, we had Quantitative Easing I and II, and now
potentially QE III. These denote Fed monetary interventions of an
exceptional nature, beyond the normal buying and selling of
securities to maintain interest rates within a certain target
range. No doubt some people were rightly confused over the QE
moniker, perhaps thinking that three generations of the magnificent
cruise ship Queen Elizabeth could be sighted in New York Harbor
just off the Statue of Liberty — with British and European
royalty, Hollywood, and prominent artists on board.
But in recent days, new and robust vocabulary has been
added to the American lexicon. Like Chubby Checker, who sang
various songs about the Twist in the early 1960s, the Federal
Reserve has announced its “Operation Twist” (named for
a similar monetary action in 1961). This provides for
the sale of $400 billion short term securities and the purchase of
a like amount of long term ones — all to make longer term
borrowing more attractive — and yes, to encourage the use of debt
by the American people and companies. But for those of us already
confused by the meaning of QE I, II, and III, this is yet a new
rhetorical frontier.
If there is anything that has been learned from the
financial crisis that erupted with fury in September 2008 with the
collapse of Lehman Brothers, it is that the American financial
system — the consumer, corporate and government sectors — has too
much debt. The excessiveness and danger of debt are evident when
revenues fall or real estate values decline. In that environment,
debt cannot be repaid, or there is not enough equity left to
refinance, or loan assets of banks become impaired with the drop in
collateral value, or pools of mortgage securities must be written
down with huge losses for banks — indeed, all of the
above.
Low interest rates do more than encourage consumers,
corporations, and the federal government to borrow. They also
punish savers, investors, and retirees, forcing them to incur more
immediate risk or longer term investments that earn more to
maintain a standard of living. Low interest rates make the use of
debt for people and companies more attractive. Further, they cause
risk averse folks and taxpayers who behave prudently to ultimately
bear the losses and bail out those who behave recklessly — this is
the very type of moral hazard that we have heard so much warning
about from our financial policymakers.
Some estimates are that one in four American homeowners is
underwater, meaning the debt on their house is greater than its
market value, and that the value of an average American home has
declined by 27 percent since 2006 — an immense loss in perceived
purchasing power as well.
Meanwhile, back at the Fed, the high priests of pain are
ensconced in the narcissistic and combative culture of the District
of Columbia, heavily bunkered on L Street in an elegant 1930s
building that is an example of classical revival architecture. Fed
whiz kids consult their models and analytics, attend meetings to
project their theories in PowerPoint slides, and with their
utterances appear to treat the rest of the country as a high tech
workshop for the experiments of well-trained financial
minds.
The Fed must have an active communications or creativity
department to craft such euphemistic and clever designations for
its arcane programs such as Operation Twist. While to the Fed they
are just clinical descriptors, to the American people they may be
seen as glib expressions affecting our way of life.
We need a strong and credible Fed to manage the price and
employment levels, regulate the financial system, be a steward of
interest rates and the country’s cost of capital, and be the lender
of last resort. Moreover, we need a Fed that can look the European
Central Bank and Chinese government in the eye, and be an opinion
leader on the interconnectedness of their and our monetary
policies. To its credit, the Fed has well-defined leadership and
unlike Congress, actually accomplishes things.
We should want Fed staffers to like their jobs and have a
sense of humor, even during times of stress and economic travail.
But perhaps they should first see the pain on Main Street before
making up their next witticism.
