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The Fed’s ‘Perfect Day’ Mentality is Flawed

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When I was in college, I had a day when money was in short supply, so I came up with a plan that ensured I could do what I had to do that day without going over budget. 

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The only problem was that everything had to go perfectly. I had planned to get to the gas station after some errands and figured I had enough gas to get there unless something unexpected happened. Of course, something unexpected happened -- I got caught in a construction zone and the extra time it took to wait caused me to run out of gas. 

Our economy is in the exact same position: we are ok, as long as our planning for a perfect day happens as perfectly as we plan it.

Two things happened this weekend that were noteworthy. First, Mr. Bernanke spoke in Jackson Hole, Wyo., one year after announcing QE2, stating that the Fed was not doing anything right now but would jump in if needed. My belief is that the Fed is out of bullets and whistling past the graveyard in an effort to not spook consumer confidence, which is already the lowest since President Carter.

The second thing was Hurricane Irene. While thankfully not as devastating as forecast, it still shows how fragile our economy can be. If Hurricane Irene had hit as a major hurricane, a federal bailout might have been in order since most states have depleted their rainy day funds. If Hurricane Irene had hit the gulf oil rigs, it could have created the kind of oil shock that people like Kansas City Fed President Tom Hoenig have been warning us about.

Hoenig, the longest-reigning Fed member, will be stepping down this year after 20 years as head of the Kansas City Fed and 38 years in the Federal Reserve, in what is one more example of age limits only limiting great resources. With a record of dissenting from the Fed’s policy decisions, Hoenig is a voice of sanity. He has been warning that a systemic shock can’t be dealt with effectively by the Fed with interest rates this low. For instance, oil prices spiking and creating inflation could bring on a recession and force the Fed to raise rates while a recession is starting. Hoenig has stated we need some kind of shock absorber and right now we are running on metal.

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If we were on a boat and we had a new captain and the first mate, who had been a proven sailor for almost four decades, warned that we faced running aground and wrecking, what should that captain do? I would think the captain at least investigate to see if this proven sailor was right and not just ignore advice he doesn’t want to hear. In our case, I feel as though Captain Bernanke has just said, “Full steam ahead.”

We have a political process that is broken. We have a Fed that is throwing things on the wall hoping something sticks, and that doesn't often make for a happy ending.

I am bullish on America; however, I believe that a “perfect day” plan is not wise and will more than likely come back to haunt us.

John Layfield, formerly known as JBL, was the longest reigning WWE Champion in Smackdown television history, retiring after 17 years of pro wrestling. John, a former collegiate All-American and pro football player, is a lifelong entrepreneur who has worked as an investment banker, is series 7 and 24 qualified, and is currently an active private investor. His Internet radio show can be heard at www.JohnLayfieldShow.com.

 

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