Two Fed myths that need debunking...and an editor who needs an education

Two Fed myths that need debunking

The above is an article in Fortune today. It discusses what the writer (editor at large), considers are two Fed myths.

1) The Fed controls interest rates
2) The Fed will run out of money for bailouts

This article is full of half truths and observations which completely fail to enlighted the reader as to what really is happening.

His main points are that the Fed controls only short-term rates and not long-term rates. In essence this is true, but the fact is the short-term rates often determines the long-term rate UNLESS the market becomes concerned with fundamentals underlying loans (as we are seeing now). The real issue is whether the Fed sets "artificially" low rates which cause market distortions (it does) and whether the Fed should be in the business at all of
"guessing" what the real rate should be. Isn't this a capitalist market? Won't banks ultimately determine what the best rates are best on risk/reward analysis?

On the second question, he comments that the Fed is able to "print" money at will, therefore can't run out of money. He doesn't mention, however, the consequences or repercussions of that action. The Fed in reality has NOT been printing money during this crisis, contrary to popular opinion. It has merely been providing "liquidity" in the form of short-term loans tied to dicey collateral. It has not monetized these loans or losses as of yet. If they had, you would have seen a collapse of the bond markets and US dollar as investors ran for the hills. When the Fed starts monetizing (as this writer alludes to it being able to do) faith in the US dollar will collapse. In essence, the Fed does has a limited amount of funds and it is running low. To print would in essence signal the beginnings of a Banana Republic regime and foreign countries would force the rates on borrowing to skyrocket. This is a checkmate scenario for the Fed.