Once again time for Dick Morris's comical economics

This was in the New York Post yesterday. My comments are in blue.

THE FED'S FUTILE MOVE
by Dick Morris and Eileen McGann

IN an effort to promote liquidity and boost the economy, the Federal Reserve yesterday announced plans to grow the money supply by another 50 percent to 60 percent. This ignores the profound observation of Gen. George Patton: "You can't push a string."

The Fed is increasing bank reserves, which are not part of the "money supply." The Fed manipulates reserve levels to hit a desired interest rate. In its most recent statement the FOMC indicated it wanted to bring long-term rates down, thus, it will buy long-term Treasuries and that will increase reserve balances.

When the Fed expands the money supply, it doesn't pass out $100 bills on Broadway. It gives lines of credit to banks and other financial intermediaries to generate some money and also buys up Treasury bills in circulation to pump out more cash.

Yes, it buys securities (in this case, long-term Treasuries as per my comment above) because it wants to bring down long-term interest rates. Maybe it SHOULD be handing out $100 bills. It would be far more effective in stimulating aggregate demand, which is what's needed now.

But the money supply has already expanded by 271 percent in the past five months. Why does the Fed expect what hasn't worked to suddenly start working?

Again, bank reserves have expanded. The commonly referred to measure of money supply--M2--has increased about 8-percent in that time period. And currency in circulation hasn't increased at all.

Right now, there is about $800 billion plus currency in circulation sitting in wallets, purses and cash registers around the country. Another $800 billion is sitting in a vault at the Federal Reserve Board, for a total monetary supply of about $1.6 trillion.

The currency is mostly sitting in vaults not in people's wallets. If it wasn't, then the next time you went to the bank to cash a check the teller would say she had no cash--it was all in your friend Dick's wallet!

The $800 billion "sitting in the Federal Reserve Board's vault" (?? Unreal!!) are actually electronic "credits" on accounting spreadsheets.

In a vault? Yes. When Congress voted the TARP program to bail out banks, the banks actually took only a small part of the money. The rest they used to offset losses on their balance sheets while letting the Fed hold onto the money.

In a vault? NO!! (As per my comment above.)

The Gov't gave the banks capital thinking that it would get them to lend. He seems to be suggesting that the banks should be lending their capital, which is not what they do. The problem is that in a weak economy asset prices go down, causing capital ratios to fall, causing banks to need more capital to stay solvent, etc. It's a vicious circle that could have been avoided by removing mark to market accounting rules for banks (but leaving it in place for non-banks), and forcing the Fed lend to banks without limit and without posting collateral if needed to preclude bank runs.

Why didn't the banks want the money? Because they're not about to make loans in this economy. They're more than happy to let the cash sit at the Fed earning them interest. (The Fed decided to start paying interest last November).

Yes, lending is pro-cyclical. Duh!! He finally understands something, yet he constantly argues AGAINST gov't supporting demand in order to jumpstart growth, which would do much more to get credit flowing again.

So now the Fed will, in essence, be creating another trillion of money supply to sit in the vault alongside the $800 billion already there. The new money will remain idle for the same reason the old money has because banks won't make loans in this environment.

The size of the Fed's program might have a nominal value of $1 trillion, but reserves (again, he keeps saying "money supply" when he is referring to reserves) are not likely to grow by that much because the Treasury is selling securities each week and over time most of the added reserves will be swapped for Treasuries. By definition, if the gov't is expected to run a deficit of $1.75 trillion this year, that amount of securities will eventually be sold, or something close to it. So $1.75 trillion of reserves will go away and the public will end up holding $1.75 trillion more in Treasuries, which are an asset and a part of household wealth.

And what of the money that is going out the door to buy Treasury bills? Those selling Treasuries won't run out and spend the money on flat-screen TVs. With higher taxes coming up next year and the economy in the tank, they won't spend it or lend it they'll probably just turn around and buy more T-bills.

The Fed's strategy of lowering interest rates will help some people and some companies. It will put cash in their pockets and some of that cash is likely to be spent on, who knows, flat screen TV's?.

Think of a parking garage filled with cars. The cars' owners leave them in the garage, because it's a bad day with rain and snow and conditions aren't suitable for driving. Similarly, banks and consumers leave their money in the vault at the Fed or in their bank accounts or under the mattress.

When conditions improve, though, all those metaphorical cars will suddenly be taken out for a drive. All at once. And a traffic jam of monumental proportion will ensue.

One problem with that analogy: The GOVERNMENT owns the cars and it can put some or all of them disappear if it sees the roads getting too crowded, thus alleviating any tendency toward a "monumental traffic jam."

When everybody starts spending the money they're now leaving in vaults and mattresses, way too much money will be chasing way too few goods and services. Double-digit inflation will return to America.

There's probably just two things that we will end up having "way too few" of and those are homes (housing starts WAY too low) and oil (OPEC cutting production WAY back). Other than that, we have WAY too much idle industrial capacity, unsold vehicles, workers out of work, citizens without health care and education, poverty, homelessness, etc. The list goes on and on. We also have WAY, WAY, too many people who think like Dick Morris.

Yesterday's Fed action won't help but it will put more money out there that the Fed will have to mop up once the economy, on its own, revives.

Yes, they'll "mop it up," just as he says, which is a total contradiction of his entire piece!