Do These Guys Even Talk?

The EU is an example of the difficulty of  effective financial reform when core problems remain unaddressed. Reconstructing asset/liability mismatches can be tricky when the "assets" are the liabilities. The US situation is messy but not the same. The political players shows an incredible lack of maturity on the subject. The banks are effectively pushing back exemptions and restrictions on "skin in the game" while relying on Fan/Fred to take the paper. At the same time, no less than 5 proposals are on the table right now to shut down the mortgage giants. The budget process, or more directly the lack there of, is the input that has moved the Fed away from QE.

Despite floating reasons that are more palatable than true, QE is a process of pressuring negative real rates when the zero bound is hit. It is an inefficient process that throws off several types of shrapnel deemed positive (asset class inflation) in the short term. The ridiculous reliance on Stop-Gap Funding has bolstered the restraint camp at the Fed. A budget that is passed and on the table can be evaluated by the Fed. A political football being kicked around government shutdown and the debt limit cannot include the Fed. Certain prominent bond market participants see this loss of a consistent buyer as the primary threat to prices. Expectations management on the inflation front is the other tricky tweak. For all the bashing, the Fed's dilemma is now the result of their own "success"  at monetary pornography.

Finally, the Chinese are going to take another swing at a bond contract. Shelved since 1995 after an influx of insider trading and problems, the product is a necessary addition. The contract can help inflation fighting in a more efficient manner than credit quotas and reserve requirements. They are late to the party. The global paradox grows. The West continues to lurch toward central planning as distrust of free markets and men remains high. The East, from regulation to revolution (to wealth), yields to the force of the Invisible Hand. The US needs to penance our sins and move on, or we will find ourselves on the wrong side of history.

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