Another Over-Educated, Nobel Prize Winning Idiot

An exchange between Nobel Prize winning economist Eugene Fama and Rick Santelli on CNBC caught my eye yesterday morning. 

It was a fairly remarkable exchange which showed just how much ivory tower academics can be detached from the real world.  I think that PhDs at the Fed and the predominance of (Marxist) academics in this administration are ruining this country.  We need more 'real world' businessmen in key positions throughout government and the Federal Reserve.  These academics apparently don't know anything!

Rick Santelli was talking to the professor about the continuation of the $85 billion bond purchase program (QE) and about how and when to end it. 

Fama  says "it's basically a neutral event... It's No Big Deal!"

"Let me interrupt you," Santelli interrupted at one point. "If it's no big deal, then why don't all central banks just do this to the nth degree and make it a constant day to day week to week event where they purchase what's issued, keep interest low, and just target a low rate forever. Why won't that work then?"  The professor scoffed condescendingly at the question saying "there is so much confusion in the question." 

Confusion?  Maybe, but Rick's analogy could be extended even further: why bother to tax at all?  Why not just let the Federal Reserve buy all of the debt issued by the Government all of the time (to the nth degree as Rick mentioned)?  There is no need to tax citizens at all! 

If it wasn't such a big deal, why the prolonged Federal Reserve debate, with plenty of hand wringing, about just the beginning of the end of the QE program??  Prognosticating about what the Fed will do in it's massive monetary experiment is the singular obsession of the professional investor community--a very unhealthy thing in itself.

Remember when the Federal Reserve even hinted in May that it might slow it's bond buying sometime in the future?  The 10 year treasury bond yield rocketed from 1.6% to 2.9% in about a month along with mortgage rates.  Imagine if they had actually slowed the buying of bonds, or heavens forbid, actually sold some of the bonds that it's been accumulating!!?? 

It's abundantly obvious that the Fed has, at the very least, succeeded in massively distorting bond prices by their intervention in the market.  When I say distorted, I mean bond prices are too high and interest rates too low. 

And there are problems with nascent asset bubbles.  Cheap money is finding it's way into the stock market and reinforcing a bubble there.  Companies are using cheap borrowed money to buy back their own shares.  Stock market margin debt is at record levels and so are stocks.  Bond yields are so low that the Fed is making the stock market the "only game in town." Housing is suddenly inflating at 12% per annum (from a low level).  Medical costs are inflating enormously.  Farm land prices are soaring in the Midwest.  

Does this sound like "no big deal?"   

All of these market interventions will be reversed at some point and will create more problems, including bursting bubbles.  We're living through the aftermath of one burst bubble already---created courtesy of the Federal Reserve and the Government. We've all learned of the damage from burst bubbles and we're headed in that direction again. 

Like I said, PhDs, LLDs and Nobel Prize winners are ruining this country.