It’s one of the most hackneyed of movie clichés: The hero is chasing an armed bad guy on foot and they are periodically trading shots. Both the pursuer and the pursued are remarkably bad shots, firing wildly without effect, apart from the occasional upper arm flesh wound. At some point during the pursuit, the villain runs out of bullets, and just in case subtlety is lost on the audience, the now desperate villain throws his gun in the general direction of his pursuer and runs for his life. Mayhem ensues, and the now-unarmed heavy is usually captured alive.
Recently that cliché has made the leap into discussions of monetary policy and it has since been repeated ad nauseum. While I’m more than willing to acknowledge that coming up with fresh approaches to describing economic activity is not an easy task, the use of the bullet metaphor is threatening to displace the phrase “green shoots” as the most hackneyed cliché of the post-Lehman era. A simple Google search will reveal that dozens of commentators are now speculating that Ben Bernanke and his fellow Federal Reserve governors have run out of ammunition in their battle to rescue the American economy. The problem is, they seem to be missing out on a key concept. Few believe in their heart of hearts that Helicopter Ben is really a bad guy (well, apart from Ron Paul, Jim Bunning and a few card-carrying members of the Austrian School of Economics), in fact most (myself included) believe that Chairman Ben has performed heroically in the months since the subprime crisis threatened to topple Western Civilization. And that’s where the ammunition metaphor falls short. People should remember that the heroes almost never run out of bullets.
Mr. Bernanke drove that point home during the recent Jackson Hole gathering of central bankers when he made it clear that the Fed would pursue “unconventional measures” if the economic outlook were to “significantly” worsen. Since then, speculation regarding the nature of those measures has run rampant, but with the ability to print an unlimited supply of dollars, even the most skeptical observers have to admit that the Fed has an ordnance factory capable of producing whatever caliber is needed for the task at hand.
For instance, there is nothing to prevent the Fed from declaring that the ongoing crisis has compelled them to open new lending facilities focused on stimulating specific underperforming economic sectors. If it so chose, the Fed could also expand M3 by buying treasuries from holders outside the banking sector, like insurance companies, pension funds and members of the public. Such activity could even be coupled with purchases of bundles of securitized consumer loans, credit card receivables and even corporate securities. And in case you were wondering, Chairman Bernanke wouldn’t have to stop there. Some academics, most notably former Fed Vice-Chairman Alan Blinder, have suggested that credit availability could be improved by lowering the rate paid on bank reserves held at the Fed to a negative 0.25 percent. Talk about holding a gun to the banker’s heads!
Mr. Bernanke acknowledged during his remarks at Jackson Hole that such activities could backfire by exacerbating the crisis rather than ameliorating ongoing economic distress, but if deflationary pressures were to continue to intensify, investors shouldn’t be surprised to see him undertake novel policy initiatives. Market reaction could be counter-intuitive under such circumstances, since weaker economic indicators may convince edgy market participants that those “unconventional measures” may be undertaken sooner rather than later. Traders should stay locked and loaded.
Now, I realize that I wrote earlier of my weariness of the “out of bullets” cliché and I’ve since proceeded to make a slew of references utilizing the guns and ammo theme. Having indulged me by reading this far, please forgive me for pointing out in closing that some voices are urging the central bank to briefly enact those measures immediately in order to push rates temporarily lower before allowing a rise back to current levels. They maintain that the Fed’s stated intention to keep rates at low levels for an “extended period” may actually be restraining purchase decisions, and they argue that such a rise could motivate gun-shy home buyers and corporate managers to finally pull the trigger before the long-predicted rise in rates gathers steam. While it’s unlikely that such a magic bullet exists, supporters of the idea argue that it’s the shot in the arm that the economy so sorely needs.
I know, I know, I know. What can I say?
Just shoot me.
Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.