Nested Nest Eggs--but no Golden Goose?

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SUBJECTS: POLITICS ECONOMY FEDERAL RESERVE

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Nested Nest Eggs--but no Golden Goose?
By Dan Spillane, The Liberty Whistle
(SEATTLE) 02/25/05 - Attempts to explain US economic imbalances related to interest rates and Federal Reserve policy have led to the recent admission of a financial “conundrum” by Alan Greenspan. This has, understandably, given the impression that the Federal Reserve isn’t really in control of what is going on.

So how much evidence is there that the Fed has lost control? Some point blame at Asian Central Bank actions, while others cite tremendous demand for debt instruments by pension funds—yes, these days every fund wants to buy debt at any price. Still others point to the overall size of mortgage portfolio debt relative to US Treasury debt--and to the odd fact that in managing large sums of mortgage debt, US Treasury debt no longer simply leads mortgage debt. That is, the US Treasury seemingly both leads, and follows mortgages--at the same time. In short, debt may have become a derivative of itself, in a way that is at least as cloudy as a Fannie Mae balance sheet.

While this is happening, all kinds of normally opposing economic cycles are running amok—the unlikely financial bedfellows of debt, steel, oil, and home prices have in tandem assumed the kind of hyperbolic ascent not seen since 2000.

So a “conundrum” indeed--but perhaps that is an understatement. To wit, if it is true that a plethora of large and mysterious forces are affecting US financial markets, there is now little doubt that the Federal Reserve has effectively “chickened out” or is “playing a game of chicken”--given its choice of words and ineffective actions. Moreover, if pension fund bond buying—home of a big nest egg—is also leading to further (nested) nest egg buying of pricey homes and pricey stocks, what was described as a “conundrum” may be far worse than the proverbial "all eggs in one basket." Indeed, what may hatch through several eggshells is something looking nothing whatsoever like a golden goose.