![\"South](\"https:\/\/i0.wp.com\/www.dougsbriefcase.com\/blog\/wp-content\/uploads\/2014\/01\/Credit-UMN.jpg\")
<\/a>South Africa\u2019s gov\u00adern\u00adment in recent years vot\u00aded to jail peo\u00adple for mak\u00ading unau\u00adtho\u00adrized and inac\u00adcu\u00adrate weath\u00ader fore\u00adcasts. Good thing for the Fed\u00ader\u00adal Reserve that their bad pre\u00addic\u00adtions don\u2019t car\u00adry con\u00adse\u00adquences. [Cred\u00adit: Uni\u00adver\u00adsi\u00adty of MN<\/span>]<\/p><\/div>The South African gov\u00adern\u00adment in recent years con\u00adsid\u00adered a bill to jail peo\u00adple who pub\u00adlished inac\u00adcu\u00adrate and unau\u00adtho\u00adrized<\/a> fore\u00adcasts of severe weather.\n Hold\u00ading peo\u00adple account\u00adable for their pre\u00addic\u00adtions seems a bit harsh in this sea\u00adson of pre\u00addic\u00adtions. But the South Africans do have a point: pre\u00addic\u00adtions have con\u00adse\u00adquences. That\u2019s as true of pre\u00addic\u00adtions about the econ\u00ado\u00admy as about the weath\u00ader, some\u00adthing that the Fed\u00ader\u00adal Reserve might do well to ponder.<\/p>\n The South African bill\u2019s pro\u00adpo\u00adnents argued that the law was nec\u00ades\u00adsary to pre\u00advent pan\u00adics<\/a> that might arise as a result of pri\u00advate fore\u00adcasts of weath\u00ader dis\u00adas\u00adters. Such fore\u00adcasts, when false, could lead to evac\u00adu\u00ada\u00adtions of vil\u00adlages and oth\u00ader cost\u00adly, dis\u00adrup\u00adtive and exces\u00adsive reac\u00adtions. So the bill would make it ille\u00adgal<\/a> to dis\u00adsem\u00adi\u00adnate \u201ca severe weath\u00ader or air pol\u00adlu\u00adtion-relat\u00aded warn\u00ading with\u00adout the nec\u00ades\u00adsary writ\u00adten per\u00admis\u00adsion from the Weath\u00ader Ser\u00advice,\u201d a gov\u00adern\u00adment enti\u00adty. Vio\u00adla\u00adtors would be sub\u00adject to fines and up to 10 years impris\u00adon\u00adment. The government\u2019s weath\u00ader ser\u00advice would remain exempt from such penal\u00adties<\/a>. It alone could fore\u00adcast bad weath\u00ader with impuni\u00adty. It holds a license to err.<\/p>\n As does our Fed\u00ader\u00adal Reserve. Diana Furcht\u00adgott-Roth<\/a> of the Man\u00adhat\u00adtan Insti\u00adtute has chron\u00adi\u00adcled the Fed\u2019s abysmal recent record of fore\u00adcast\u00ading eco\u00adnom\u00adic per\u00adfor\u00admance. She notes that:<\/p>\n The Fed\u2019s shift\u00ading and erro\u00adneous 2013 fore\u00adcasts are no anom\u00adaly, she wrote, cit\u00ading the following:<\/p>\n What is par\u00adtic\u00adu\u00adlar\u00adly strik\u00ading is not only that the Fed is con\u00adsis\u00adtent\u00adly wrong, but that it con\u00adsis\u00adtent\u00adly errs in one direc\u00adtion: it over\u00ades\u00adti\u00admates eco\u00adnom\u00adic per\u00adfor\u00admance, lead\u00ading Furcht\u00adgott-Roth to sug\u00adgest that one qual\u00adi\u00adfi\u00adca\u00adtion for Fed\u00ader\u00adal Reserve Gov\u00ader\u00adnors is that they be \u201cpro\u00adfes\u00adsion\u00adal optimists.\u201d<\/p>\n This opti\u00admism is no doubt root\u00aded in the agency\u2019s con\u00adfi\u00addence in its own eco\u00adnom\u00adic mod\u00adels. Unlike weath\u00ader\u00admen, the Fed doesn\u2019t mere\u00adly fore\u00adcast the economy\u2019s per\u00adfor\u00admance. It seeks to influ\u00adence it through the cre\u00adation of mon\u00adey. Late\u00adly, it has binged on mon\u00adey creation.<\/p>\n The Fed\u00ader\u00adal Reserve facil\u00adi\u00adtates liq\u00aduid\u00adi\u00adty<\/a>,<\/span> a fan\u00adcy way of say\u00ading that it helps keep the bank\u00ading sys\u00adtem from run\u00adning short of cash. Banks often need to bor\u00adrow at the end of the day to set\u00adtle trans\u00adac\u00adtions. The Fed sets the tar\u00adget rate<\/a> that banks pay for such overnight bor\u00adrow\u00ading, help\u00ading to grease the wheels of the finan\u00adcial sys\u00adtem. When it believes there is too much mon\u00adey in the econ\u00ado\u00admy, cre\u00adat\u00ading an infla\u00adtion risk, it rais\u00ades the tar\u00adget rate; when mon\u00adey is too tight, it cuts it. The Fed moved this rate effec\u00adtive\u00adly to zero<\/a> in Decem\u00adber 2008, some\u00adthing it had\u00adn\u2019t done since its found\u00ading in 1913. It has remained at zero per\u00adcent for the past five years. It recent\u00adly announced<\/a> that it plans to keep it there well past the time that the unem\u00adploy\u00adment rate declines below 6\u20131\/2 per\u00adcent, its pre\u00advi\u00adous endpoint.<\/p>\n But when growth remained unex\u00adpect\u00aded\u00adly tepid despite its extra\u00ador\u00addi\u00adnary zero inter\u00adest rate pol\u00adi\u00adcy, the Fed took anoth\u00ader bold step. It insti\u00adtut\u00aded sev\u00ader\u00adal rounds of quan\u00adti\u00adta\u00adtive eas\u00ading (QE<\/span>), cre\u00adat\u00ading enor\u00admous amounts of mon\u00adey and exchang\u00ading it for gov\u00adern\u00adment debt and mort\u00adgage-backed bonds. Such instru\u00adments, unlike cash, are illiq\u00aduid and there\u00adfore can\u2019t eas\u00adi\u00adly be lent by banks to busi\u00adness\u00ades and house\u00adholds. The idea behind QE<\/span> was that, by replac\u00ading banks\u2019 illiq\u00aduid assets with new\u00adly-con\u00adjured cash<\/a>,<\/span> it would induce them to lend more, stim\u00adu\u00adlat\u00ading eco\u00adnom\u00adic activ\u00adi\u00adty and spurring job creation<\/p>\n Large\u00adly as the result of QE<\/span>, the Fed now holds near\u00adly $4 tril\u00adlion<\/a> in bonds on its bal\u00adance sheet. But the mon\u00adey it cre\u00adat\u00aded to buy these bonds hasn\u2019t coursed through the econ\u00ado\u00admy the way the Fed\u2019s mod\u00adels had fore\u00adcast, as var\u00adi\u00adous econ\u00ado\u00admists<\/a> have point\u00aded out. Indeed, the veloc\u00adi\u00adty of mon\u00adey<\/a> \u2014 which mea\u00adsures the rate at which mon\u00adey is exchanged for goods and ser\u00advices through\u00adout the econ\u00ado\u00admy \u2013 is at his\u00adtoric lows.<\/p>\n The Fed is cre\u00adat\u00ading mon\u00adey, but that mon\u00adey doesn\u2019t seem to be find\u00ading its way into the broad\u00ader econ\u00ado\u00admy. This isn\u2019t what the Fed\u2019s mod\u00adels pre\u00addict\u00aded. No one is sure why its QE<\/span> pro\u00adgram hasn\u2019t worked as fore\u00adcast. One would expect that banks, flush with cash, would be eager to lend mon\u00adey to busi\u00adness\u00ades and house\u00adholds, spurring demand and stim\u00adu\u00adlat\u00ading growth. That hasn\u2019t hap\u00adpened. Small busi\u00adness\u00ades say that banks are too stingy with loans. Banks say that busi\u00adness\u00ades just don\u2019t want to bor\u00adrow. The results are, in any case, inar\u00adguable: bank loans to small busi\u00adness\u00ades declined by 27 per\u00adcent<\/a> between Sep\u00adtem\u00adber 2008 and Sep\u00adtem\u00adber 2013.<\/p>\n Larg\u00ader, pub\u00adlicly trad\u00aded cor\u00adpo\u00adra\u00adtions, by con\u00adtrast, have ready access to cred\u00adit. Such com\u00adpa\u00adnies don\u2019t have to rely exclu\u00adsive\u00adly on banks. They can issue their own bonds. In 2013, cor\u00adpo\u00adrate bond issuance sur\u00adpassed $1 tril\u00adlion<\/a> for the sec\u00adond con\u00adsec\u00adu\u00adtive year. It is only the third time in his\u00adto\u00adry that it has exceed\u00aded that thresh\u00adold. The mar\u00adket cap of pub\u00adlicly-trad\u00aded con\u00adcerns also has risen. The S&<\/span>P 500 rose by near\u00adly 27 per\u00adcent<\/a> in 2013. Large banks did espe\u00adcial\u00adly well, with S&<\/span>P finan\u00adcials post\u00ading a 33 per\u00adcent increase<\/a>. QE<\/span> is good for Wall Street, but not so much for Main Street.<\/p>\n The Fed\u2019s inter\u00adven\u00adtion into the real estate mar\u00adket has pro\u00adduced sim\u00adi\u00adlar\u00adly asym\u00admet\u00adri\u00adcal results. The agency plays a major role in gov\u00adern\u00adment efforts to boost hous\u00ading prices, buy\u00ading up near\u00adly $1.5 tril\u00adlion in mort\u00adgage-backed secu\u00adri\u00adties. That has led to some recov\u00adery in the res\u00adi\u00adden\u00adtial hous\u00ading mar\u00adket, with aver\u00adage prices ris\u00ading by 13.6 per\u00adcent<\/a> over the course of 2013. But that improve\u00adment, too, has been uneven. A recent Wall Street Jour\u00adnal <\/a>analy\u00adsis of Zil\u00adlow data found that the recov\u00adery in home prices in a num\u00adber of cities has been evi\u00addent in afflu\u00adent com\u00admu\u00adni\u00adties, but not in more mod\u00adest neigh\u00adbor\u00adhoods. Home prices in pros\u00adper\u00adous Palo Alto (CA<\/span>), for exam\u00adple, have risen 40.4 per\u00adcent (aver\u00adage price: $2,353,100) above their pre-2008 peak, but have declined by 53.8 per\u00adcent in the near\u00adby work\u00ading class city of San Pablo (aver\u00adage price: $225,300).<\/p>\n The Fed\u2019s poli\u00adcies appear to have been selec\u00adtive\u00adly ben\u00ade\u00adfi\u00adcial but broad\u00adly unpro\u00adduc\u00adtive, fuel\u00ading inequal\u00adi\u00adty amid a limp\u00ading econ\u00ado\u00admy. Big banks, large cor\u00adpo\u00adra\u00adtions, well-heeled investors and own\u00aders of lux\u00adu\u00adry homes seem to have ben\u00ade\u00adfit\u00aded dis\u00adpro\u00adpor\u00adtion\u00adate\u00adly from these poli\u00adcies. The Fed expect\u00aded some\u00adthing dif\u00adfer\u00adent: a broad\u00adly favor\u00adable effect on the econ\u00ado\u00admy. Which is one rea\u00adson why its GDP<\/span> pro\u00adjec\u00adtions have been con\u00adsis\u00adtent\u00adly cheery. And con\u00adsis\u00adtent\u00adly wrong.<\/p>\n Fed inter\u00adven\u00adtion has become Wall Street\u2019s drug of choice, help\u00ading pro\u00adpel stock prices to record lev\u00adels<\/a> while avoid\u00ading (to this point, at least) a bond mar\u00adket col\u00adlapse. Investors have so far tol\u00ader\u00adat\u00aded the agency\u2019s recent deci\u00adsion to begin grad\u00adu\u00adal\u00adly taper\u00ading its mon\u00adey cre\u00adation<\/a>,<\/span> with stock prices ris\u00ading by 3.5 per\u00adcent<\/a> over the two weeks since the announcement.<\/p>\n The real test of the Fed\u00ader\u00adal Reserve\u2019s resolve will come if the stock mar\u00adket fal\u00adters at some point. My pre\u00addic\u00adtion is that the Fed will respond to such a down\u00adturn in equi\u00adties with renewed quan\u00adti\u00adta\u00adtive eas\u00ading. The Fed\u2019s bias toward mon\u00adey cre\u00adation will effec\u00adtive\u00adly become a per\u00adma\u00adnent state of affairs, wax\u00ading and wan\u00ading in response to Wall Street\u2019s performance.<\/p>\n That\u2019s my pre\u00addic\u00adtion, any\u00adway. But please don\u2019t throw me in jail if it proves wrong.<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" The South African gov\u00adern\u00adment in recent years con\u00adsid\u00adered a bill to jail peo\u00adple who pub\u00adlished inac\u00adcu\u00adrate and unau\u00adtho\u00adrized fore\u00adcasts of severe weath\u00ader. Hold\u00ading peo\u00adple account\u00adable for their pre\u00addic\u00adtions seems a bit harsh in this sea\u00adson of pre\u00addic\u00adtions. But the South \u2026 Con\u00adtin\u00adue read\u00ading \n
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