Nobel-ist Eugene Fama with Rick Santelli on CNBC today. There are plenty of chuckly moments but buried in the sniping was an important and - in our opinion - grossly uncovered point. As the "esteemed" Prof. says, " Short rates have fallen, despite the Fed's massive actions and a IOER rate that is intentionally "set higher than the market rate."
As our earlier Death Star posts indicated, this is a "floor" discussion that centers on shadow banking and the GSEs absence of Fed accounts. Dr. Fama is content to say don't worry about issuing short "debt" to buy long debt because its a wash but he is dismissive of the reality that a plethora of short market rates converge into or even through the IOER "floor." The FAFRRRF (Death Star) is a "shim" to support that spongy level. (Just raising the IOER far too scary I guess)
But what if delusional market participants - full disclosure I'm a card carrying charter member - are on to something when we opine that the CB cannot set both the quantity and the price (IOER) of its "good." More directly, if attempted, how would they luckily pick the proper (neutral, natural equilibrium to sound smart) rate. As we showed at the time, during the Taper/Convexity Vortex rate move, short money rates made consistent new lows. More dangerously, if policy were to gain traction, then the short/long swap would alter the shape of the curve rapidly and dramatically in the worst way - the advancing Bear Flattener.
I'm just a Dog watching TV, I see but cannot comprehend. Color me skeptical when Prize winning college professors tell me everything will be just fine. I was involved in a mess with some other Medal Winners called Long Term Capital.