The Fed and the ECB: Both Out of Options

The Federal Reserve Bank once and for all showed that it's abdicated its role as a central bank versus the being the monetary arm of the executive branch. As much as I abhor Fed Speak, a certain amount of opacity in language is desirable. For example, there's the customary practice of committing to low rates "for an extended period."

Wall Street takes that language and processes it, and the markets incorporate the information content into the shape of the yield curve, for example. The Fed is not committed to any specific date and retains flexibility, as it must and should. Putting a specific date on the period of low rates is an unprecedented break with central bank practice. This is another boon to Wall Street to have at it, and does nothing about the problem of all the excess liquidity on bank balance sheets and the lack of traditional lending.

I understand that inflation could surprise, but unless something unusual happens on the global economic growth front, apart from a supply shock or natural disaster, there appears to be no fundamental underpinning for an inflationary spike.

The oil price decline is a combination of growing inventories, sharply declining demand, and a reduction in speculative focus on this market. The speculation will move elsewhere, with a Fed guarantee that it won't surpise speculators with higher rates. Gold has been levitating for a long time, but let's leave that market aside.

Turning to the ECB, it has relatively few options that will provide meaningful support to a dismal outlook in Europe. The Wall Street Journal naively suggests that the Germans, French and stronger European countries will withdraw from the European currency union and create their own "strong euro."

This is extremely unrealistic and would not solve the fundamental problem of economic imbalances within the European Union. Germany is really in the driver's seat, but it too will be reluctant to detonate the charge that destroys the empire of the Brussels bureaucrats, of which many senior ones are French. A slow, economically inefficient unwinding is probably what's in store.

What about the former Eastern Europe? There is a lot of underexploited dynamism in countries like Poland, but they never really had a primary seat at the table of the European Union. If the euro disappears and the Union falters, do they turn East or West for economic growth?

There is occasional blather about the need for European countries to increase fiscal harmonization to get out of the current mess. That was never acceptable to any EU member, and the notion of giving up some degree of national sovereignty remains anathema. Forget about this option.

Finally, in Britian we have again echoes of London Calling by the Clash. Paul Simonon sang an ominous "Guns of Brixton," and that's one of the neighborhoods being torn apart by violence and thuggery. In addition to any issues with newer immigrant groups, Londoners are finally having to acknowledge that with all the economic gains in the City of London financial district, the educational and employment situation of a few generations is dire and has been ignored.

Fiscal stimulus anyone?