The Public Policy

The Fed Is Enhancing Our Vocabulary

That's about the best thing going for it these days.

By 9.27.11

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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.

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About the Author
Frank Schell is a business consultant and former international banking executive. He serves on the Dean’s International Council of the Harris School of Public Policy Studies, University of Chicago where he is a lecturer.