Here’s a comment from a banking industry analyst:
““The government can’t force banks to give out loans at lower rates any more than they can force Macy’s to sell me sheets for a dollar,” said Karen Shaw Petrou, managing partner at consulting firm Federal Financial Analytics.”
Yes. Unfortunately, what the government can do – and used to do but isn’t doing anymore – is lend money directly; say, via the government sponsored entity of Fannie Mae. There are other mechanisms as well.
The point here is that the Fed is doing nothing useful. It’s printing money that the banks are pocketing. It’s doing nothing in the short term that will help anybody (other than Jamie Dimon) and runs the very real risk of botching the long term – that is, driving inflation well beyond its target.
El-Erian of PIMCO has similar comments, though from the perspective of the stock and bond markets.
The Fed has one lever: interest rates. With one lever you can do one thing (in this case, change interest rates). The Fed cannot – though it continues to try, and Congress and the President continue to pressure it to do so – drive economic growth (or drive job growth). It’s just not possible. With the gas pedal on your car you can do one thing. You cannot use the gas pedal to turn a corner (or even to slow down…gravity and friction and another pedal, the brake pedal, do that). The Fed’s pedal is no different.
More than anything, though, this is a story about how large systems cannot be controlled. They are unpredictable. The simplest, and most honest, analysis of this situation is: The Fed either knew or did not know that banks would pocket the profits. If the Fed did know, then it’s blatant and disgusting cronyism. If the Fed did not know, then it’s a testament to the complexity of the system and the Fed’s lack of any control and understanding of the system. In the first case – shut it down. In the second – shut it down.