21/05/2010 – The Federal Reserve Does NOT Control the Market

In reality — the Fed has no such power. This is the revelation
of Elliott Wave International’s newest complimentary resource
from Club EWI: the 35-page eBook titled “Understanding
the Fed.” Including excerpts from the
selected works of EWI President Robert Prechter — including
his 2002 book “Conquer the
Crash” and several past “Elliott Wave Theorist” publications
— this riveting report exposes once and for all the most dangerous
myths about the Federal Reserve.

Chapter 3 (of the 8-chapter anthology) attends to the “Potent Directors
Fallacy” — i.e., the false notion that the central bank is in control of
the U.S.’s money, market, and economy — and offers this “Conquer the
Crash” insight:

“For recent examples of the failure of the idea of efficacious economic
directors, just look around. Since Japan’s boom ended, its regulators have been
using every presumed macroeconomic ‘tool’ to get the Land of the Sinking Sun
rising again, as yet to no avail. The World Bank, the IMF, local central banks,
and government officials were ‘wisely managing’ South East Asia’s boom until
it collapsed spectacularly in 1997. In America, the Federal Reserve has lowered
its discount rate from 6% to 1.25%, an unprecedented amount in such a short time… What
will it do if the economy resumes its contraction; lower rates to zero?“

Note: The underlined sentence above was written in 2002. Today,
that forecast has come to fruition after the Fed’s rate-slashing
campaign since September 2008 has brought rates to the zero level.

Chapter 3 then goes on to explain WHY the Fed’s monetary policy
failed to lift the hot-air balloon of the economy out of the
violent credit and housing downdraft. Here, the eBook writes:

“The Fed’s ultimate goal is to influence public borrowing from banks.
During economic contractions, banks become fearful. At such times, low Fed-influenced
rates cannot overcome creditors’ disinclination to lend and/or
customers’ unwillingness or inability to borrow. Thus,
regardless of assertions to the contrary, the Fed’s purported ‘control’ of borrowing,
lending, and interest rates ultimately depends upon an accommodating market psychology
and cannot be set by decree.”

Once again, flash ahead to today and the disintegration of optimism
and shift toward conservation can be seen in the following data
from February 2010:

• Year-over-year bank credit was (negative) – 6.8% vs. 10%
  in 2007
• Loan availability to small businesses plunged to the lowest
  level since interest rate crisis of 1980, thus drying up a
  major means of debt repayment.
• The number of banks tightening their lending standards has
  soared, while consumer credit and tax revenue is plunging.
• And, residential and commercial mortgages are plunging, as
  more and more home/business owners are walking away from their
  leases.

In Bob Prechter’s own words: Once you can assimilate the truths
contained in this eBook, “you will have knowledge of
the banking system that one person in 10,000 has.”

Do you want to really understand the Fed? Then keep reading this
free eBook, “Understanding
the Fed”, as soon as you become a free
member of Club EWI.