Obvious eludes the Fed

The Fed spoke, and everyone listened.

But if anyone expected good news, they walked away disappointed. In a shocking announcement, the Federal Reserve lowered its economic growth forecast. Wow, didn’t see that coming.

A few columns ago, I joked that Fed Chair Ben Bernanke was acting like a politician. With each passing day, it seems less of a joke. To summarize the Fed’s message: This year sucks, but next year will be better.

The Fed’s consensus growth forecast was lowered from 3.2 percent to 2.8 percent. Note that in January, the Fed expected 3.9 percent growth. In April, it lowered its outlook to 3.3 percent. Perhaps the strategy is to lower the forecast in small increments in the hope that no one will notice.

But cheer up. The expectation is for improved growth as we approach 2012 – for what that’s worth. Someone should tell Ben that the election isn’t until next year, so he shouldn’t count on any artificial stimulus to juice the economy in this second half.

The cause of the latest downgrade: temporary events. Not transitory, but temporary.

Somebody has been hitting their thesaurus. Japan has become a useful scapegoat. Supply chain disruptions were cited, particularly as they relate to the auto industry. I didn’t realize that our somewhat anemic auto sector could have such an impact on overall economic growth.

The turmoil in the Middle East was also mentioned. Notwithstanding the price of oil, if Middle East turmoil could materially affect our economy, we wouldn’t have grown a lick in the last 40 years.

Nowadays, speculators have more to do with gyrating oil prices than OPEC, and sometimes governments. In a politically motivated tactical move, the U.S. and 27 other countries agreed to release 60 million barrels from strategic reverses. The desired response occurred immediately: Oil prices almost dropped below $90. As welcome as this may be, it isn’t the purpose of the SPR, and its impact will be fleeting.

The true solution isn’t to mainline oil into the system. It’s to prohibit parasitical speculators from profiting at the cost of society. The world needs to identify specific commodities as strategic and simply ban speculation of them.

The fact that there’s no chance of that happening makes you wonder where politicians’ priorities lie. Well, not really, just follow the money.

Anyway, back to the Fed. The scariest part of its latest revelations is illustrated by this statement:

“We don’t have a precise read on why this slower pace of growth is persisting,” Bernanke said. “Maybe some of the headwinds that had been concerning us – like weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues – some of these headwinds may be strong or more persistent than we had thought.”

Really, Ben? Why are you struggling to grasp the obvious? You’re a world-renowned economist and the head of the most powerful Central Bank in the world. You have degrees from Harvard and MIT, and taught at Stanford and Princeton.

Oh, I just answered my own question. You haven’t lived in the real world since you were a child.

How out of touch are these people that they can’t connect the dots? If these guys were playing “Wheel of Fortune,” they couldn’t guess the puzzle if they were given 25 of the 26 letter of the alphabet.

Has the Fed drunk the Kool-Aid? Do they actually believe that as the stock market goes, so goes the economy? QE2 may have pumped up stock prices, but it did bupkis to correct the myriad underlying problems that are inflicting the majority of pain on Main Street.

I’m not even suggesting that the Fed has any better options. It doesn’t. As frightening a prospect as it may be, the ball is in Washington’s court.

And they should forget about trying to prop things up in the present. Rather, they should focus on creating a foundation for the future. Lord help us.

Housing is what it is. The domicile debacle has resulted in behavioral changes that will prolong the agony. Homeownership is no longer a priority. And the urge to trade up to ever bigger homes may never burn again.

It will be years before all the foreclosures and excess inventory are flushed from the system. That doesn’t mean there won’t be “green shoots” scattered throughout the country. But generally, don’t be shocked if prices remain depressed for many more years.

And it won’t be pleasant, considering that most Americans have historically derived most of their wealth from their home. Ben: That’s why propping up the stock market hasn’t appreciably affected consumer spending, except for luxury goods.

Yes, the rich have gotten richer, again. They’ve been made whole, while average Americans are left to dig out of the hole on their own.

The Fed’s only option is to keep interest rates low and wait for Congress and the White House to do their jobs. And they’d better act quickly, because there are at least two more “temporary” events looming. China’s economy is about to hiccup and Greece is poised to leave many European banks in ruins.

Author, professor, entrepreneur, and radio and TV commentator Tony Paradiso can be reached at tparadiso@tds.net.