Taper Week Is Next Week

It is widely believed that, at next week’s Fed meeting, Fed chairman Bernanke will announce his intention to start reducing (“tapering”) the rate at which the Fed purchases bonds.

His announcement should go like this:

“Dear Citizens, the Fed is today announcing the beginning of the end of its bond purchase program, familiarly known as “Quantitative Easing.” We are ending this program because we have come to acknowledge that it has failed to achieve its intended result, that is, a substantial increase in employment. Of course, this strategy has always failed before in other countries, but we counted on US exceptionalism to make the crucial difference that would allow it to succeed here.

This current QE program is not the first that we have tried, although it is of course, as a result of the well-known government strategy of re-inforcing failure, the largest. Over the course of these programs, we have now created an asset bubble of historic proportions and we are afraid that this bubble is about to burst, with unknown but probably rather negative consequences. Since we do not know how to deflate this asset bubble gracefully, we are simply following the time-honored basic principle of “if you find yourself in a deep hole, first of all, stop digging.”

Hopefully nothing bad will happen before the end of my term at the Fed. Good luck to all of us.”

But it won’t.

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