The Times of London ran a piece, titled, Fed Throws Out the Rulebook, which pointed out the unprecedented nature of the actions by the Federal Reserve Board:
The Federal Reserve yesterday threw away the monetary policy rule book it has been using for 50 years in its most dramatic effort yet to stem the global economic crisis.
In a single stroke, the US central bank in effect eliminated the cost of borrowing money between banks overnight. It promised that US rates would stay at or near zero for the foreseeable future. And, acknowledging that it now has no more room to cut rates, it announced new, unprecedented measures to stimulate the economy, namely pouring cash into almost every crevice of the financial system and massively expanding its own balance sheet.
The two-day meeting of the Fed’s open market committee which ended yesterday must have been one of the most extraordinary in the central bank’s 95-year history. For more than a year the Fed has been deploying all kinds of weapons — traditional monetary policy implements as well as hastily-manufactured new ones — to prevent the US economy from collapsing into a deep and enduring depression.
But, indicating the gravity of the crisis and the failure of all those previous efforts to turn things around, Ben Bernanke, the Fed chairman, and his colleagues, today threw every remaining tool in their toolbox at the financial markets.
There were three key elements to the Fed’s move — each of them dramatic in its own right.
First, it cut rates once again from the existing one per cent to something close to nothing. But, instead of announcing a target rate for the overnight interest rate — as it has done for the last decade — the Fed said it would aim to keep the rate in a range — between zero and a quarter percentage point. This unusual move reflects the fact that the federal funds rate — a market interest rate that the Fed can move only indirectly — has been volatile recently because of continuing strains in the interbank lending market.
Second, in its statement accompanying the move, it noted that the US economy had deteriorated on almost all fronts in the last few weeks, and it said that those “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”
The Fed rarely commits itself to future policy decisions but those words are tantamount to saying that rates will remain at or near zero for a long time.
Third, Mr Bernanke has launched the US on an uncharted path of what economists call “quantitative easing”, emergency measures to stimulate an economy in the clutches of deflationary collapse. …
Well Mr. Bernanke certainly has confidence in his convictions, which brought to mind a fairly shop-worn quote from a pop-psychology classic:
“Often the difference between a successful man and a failure is not one’s better abilities or ideas, but the courage that one has to bet on his ideas, to take a calculated risk — and to act.”
By Maxwell Maltz
The quote can be viewed here:
Psycho-Cybernetics (Google Books)
By Maxwell Maltz
Published by Simon and Schuster, 1989
288 pages, Pg. 117
The quote can be purchased here:
By Maxwell Maltz
Pocket (August 15, 1989)
Maxwell Maltz was a plastic surgeon who observed that patients who came in to his office feeling depressed about their appearance, did not, in fact, become happy after their plastic surgery, even if to an objective eye their appearance was much improved or even beautiful or handsome. In other words, their personal insecurities were not cured by curing the presumptive cause of the insecurities.
From this observation, Dr. Maltz became a famous author and speaker, and his classic self-help book went on to sell over 30 million copies. Dr. Maltz explained his choice of title this way: Psycho-Cybernetics — The word cybernetics comes from a Greek term that means ‘a helmsman who steers his ship to port.’ Psycho-Cybernetics is a term I coined which means, “Steering your mind to a productive, useful goal …. so you can reach the greatest port in the world … peace of mind. With it, you’re somebody. Without it, you’re nothing.”’
In fact, many of his thoughts about the mind/body connection and the relationship between thought and action have been further popularized by motivational and personal development speakers. From Zig Ziglar to Tony Robbins, there is a little bit of Maxwell Maltz in all their work.
When we look at the quote, though, we note its problematic nature.
It is almost certainly true that most of the great successes have come from people willing to act on their convictions. How could it be otherwise? Only those willing to act outside the mainstream can differentiate themselves from the mainstream.
Yet if exceptional success is found disproportionately in those willing to act outside the norm, isn’t exceptional failure also likely to be found among those willing to think and act independent of social convention?
In other words, believing in oneself enough to act on one’s convictions is a route to being exceptional, but much as we would like to believe that the man who acts independently is destined for success, we don’t actually have much data to back that up.
We can praise Ben Bernanke for acting boldly but, really, the open question is not is he bold or timid but, rather, is he correct?
We fear he may have too much faith in the economists’ machinations. If the Federal Reserve just pulls the right monetary levers, if the fiscal package is just the right size, if policy is good, then all will be well. Perhaps. We certainly hope so.
We think, though, that there are realities that can be suspended for just so long. So if we built too many houses because we wanted to put people in a house who couldn’t afford it, we can try to reinflate the bubble with low-interest rates and easy money, but we suspect that is just setting us up for terrible inflation and the Federal Reserve will then have to move to deflate the bubble they just pumped up.
Much as an alcoholic or drug addict often needs to hit bottom, as long as people think that the worst is yet to come, they just won’t buy houses. If they think their money may be inflated away, they may feel they need to save more.
Are the actions the Fed is taking really bold after all? In the end, they may be the easy route because they enable the Fed and the government at large to say, “We are going to save you,” when maybe the really bold path would be to say that there are limits to the effectiveness of monetary and fiscal policy and everyone better batter down the hatches for tough times ahead.
Despite Dr. Maltz’s prescription, we may, in fact, need better “abilities and ideas” — not primarily bold attitudes.
Perishable Thoughts is a regular section of the Perishable Pundit. If you have a favorite quote that you would like to share with the industry, please send it on. You can do so right here.