Financial Times columnist John Authers conflates two recently notorious military metaphors in his reaction to the Federal Reserve's big announcement Wednesday that it would buy around a trillion dollars worth of U.S. Treasuries and agency-issued mortgage-backed securities. His headline is: "Fed's Shock and Awe." His lead sentence is: "The Federal Reserve is on a war footing and it is using the Powell doctrine -- only go to war as a last resort, and do so with overwhelming force."
There's no question that the Fed shook up financial markets around the world yesterday. But let's be clear: The Powell Doctrine was successfully employed in the first Gulf War, while "shock and awe" didn't end up working out quite so nicely after the invasion of Iraq -- in part because it was not accompanied by overwhelming force, at least as judged by the long run.
Why should we be careful with our metaphors? Because the Fed's move brings with its own potential for an endless quagmire, unless it is matched by equally forceful moves from the Obama administration to resolve the financial crisis. As Yves Smith points out today, citing Brad Setser, there is already evidence that foreign appetite for U.S. Treasuries is beginning to slack off. Now that the Fed is printing money as fast it can, the potential for a weakening dollar and further disenchantment with U.S. government-issued debt is a high possibility. The U.S. government is going to have to sell a lot of Treasuries to fund its ongoing budget deficits. Who is going to buy them?
The problem with shock and awe is that it fades fast, and then it doesn't work so well the next time you try it. Meanwhile, the banks limp on, waiting for Powell to show his face.
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