At the Republican convention a couple of weeks ago, we watched Clint Eastwood interviewing an open chair allegedly occupied by President Obama. That image flashed through my mind today as I watched Fed Chairman Ben Bernanke at his press conference, after pledging ongoing waves of freshly printed money.
Instead of Clint Eastwood and Barrack Obama, I pictured the chair next to Bernanke occupied by the figurative body of generations unborn. As Bernanke rattled on with his rationale for printing massive amounts of new money, I pictured the unseen figure gagged and struggling but unable to speak or be heard. In time and in overwhelming frustration, tears flowed as our unborn surrogate reflected on the dismal prospect of massive debt burdens that will be our legacy for generations to come.
Very few honest adults would consciously spend assets willed to their grandchildren to cover debts they themselves created by profligate spending, imprudent housing decisions or untimely investments. In fact, our legal system would punish them severely if they did. Most of us would condemn such an action if we were asked to be judge and jury. The majority of us, however, seem to have no moral hesitancy when the Federal Reserve Board acts in our stead to take money from future generations to paper over our financial misdeeds.
In addition to this weighty anchor that we are attaching to our heirs, we are collectively silent as we permit the Fed to exercise its rescue efforts by taking money directly from those dependent upon fixed income returns–disproportionately, the elderly retired. While small in comparison to the financial damage done to the elderly retired and generations unborn, my concerns extend also to those (myself included) who have spent decades studying the interrelation of economic and market factors and their effects on securities prices. By unleashing an unprecedented torrent of new money, the Fed has gravely distorted historically normal relationships. Analysts will suffer the consequences of that action indefinitely. The Fed has permanently altered the historical record.
One would expect that these massive ongoing Fed rescue actions would be offensive to believers in free market economics. Nowhere is the principle of free market economics more staunchly defended than on Wall Street. Ironically, when (as now) Wall Street’s ox is in danger of being gored by deteriorating fundamentals, most of its outspoken strategists have apparently swallowed their principles and have spoken out in support of continued Fed largesse.
While central bank efforts to boost asset prices have been significantly successful since 2009, such efforts have been singularly unsuccessful through major bear markets both in the past decade and in decades long past. Their success rises and falls with investor confidence, a frequently fragile condition. We cannot know how long such confidence will last in the current instance.
Whatever the near term economic and market outcome, I suspect that the invisible future generations’ surrogate sitting in the empty chair next to Bernanke is rooting strongly for a free market future rather than one controlled by central planners.