6 years of free money?

As the Federal Reserve's zero-interest-rate policy continues, doubts begin to grow.

By Anthony Mirhaydari Jan 4, 2013 3:03PM

Money copyright John Lund, Blend Images, JupiterimagesIn late 2008, something happened that many thought was impossible: Borrowed money became essentially free. It was then that Federal Reserve started its zero-interest rate policy, slashing short-term borrowing costs to near 0% in an effort to stem the financial panic and recession.


Of course, they didn't stop there. In the years that followed, the Fed piled on with four "quantitative easing" efforts focused on pushing down long-term rates as well. 

The results: Adjusting for inflation, the big banks and the government can now borrow money at negative interest rates. That's better than free. And that's because the monetary base has swelled from around $800 billion in 2008 to nearly $3 trillion now.


The benefits of all this are questionable. 

The unemployment rate is stalled near 8%. Employment-to-population ratio has fallen to early 1980s levels. Middle-class wages are still flat-lining. And, as hawkish members of the Fed are starting to point out, the downside risks are growing fast -- causing Wall Street to question its "free money 4'eva" mindset. Here's why.


The quiet enthusiasm was shattered on Thursday after the December Federal Reserve meeting minutes were released and, to the bulls' great surprise, suggested that a growing number of Fed policymakers are beginning to doubt the efficacy of repeated doses of quantitative easing and an extended period of ZIRP.



The minutes said that a "number of participants" on the Fed committee expressed concern the $85 billion-a-month open-ended money printing stimulus under QE3 (mortgage purchases) and QE4 (Treasury purchases) -- and the resultant expansion of the Fed's balance sheet as the monetary base swells like a cancer -- could result in higher inflation expectations and gum up future policy implementation.


Concern was also noted about the fact the Fed's zero-interest rate policy, now entering its sixth calendar year (shown above), could lead to "imprudent risk-taking" and "financial imbalances."


More simply, as the Bank for International Settlements noted in its recent quarterly report, the Fed and other central banks could be blowing up a third asset price bubble of the last 12 years -- this time, in corporate bonds.


All of this suggests the market's cheap money addition may not be a sure a thing as many believed.


The result was a dramatic pullback in stocks and precious metals during the cash session, with the selling accelerating afterhours in gold and silver. While the price action looks weak, the technicals in the precious metals are already oversold.


So for now, I recommend avoiding gold and silver. But I also wouldn't recommend short positions either. The takeaway is that, as we move closer to the debt ceiling fight over the next few weeks and what's set to be a disappointing Q4 earnings season, an increasingly reluctant Fed is just another catalyst to work against the market's newfound enthusiasm.


Indeed, today Richmond Fed President Jeffrey Lacker said that current Fed policies will "test the limits of credibility" and that additional monetary stimulus would not boost growth.


I'm going to use the complacency and false enthusiasm that has settled on Wall Street to add leveraged exposure to the CBOE Volatility Index ($VIX), which has been crushed on a historic scale over the last few days, by adding the VelocityShares Daily 2x VIX Short-Term ETN (TVIX) to my Edge Letter Sample Portfolio


Disclosure: Anthony has recommended TVIX to his clients.

I found this positions with the help of technical screens developed with Fidelity's Wealth Lab Pro back-testing tools, which you can find here. (Fidelity sponsors the Investor Pro section on MSN Money.)


Be sure to check out his new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.   


Jan 4, 2013 3:26PM

This policy has been only a windfall for the large banks, many of whom got us into the mortgage crisis.   Those banks who get free money are not lending it so it is not being used to "prime the pump" of the economy.

For as long as I can remember,  the very people that goof things up get paid.


Jan 4, 2013 4:31PM
Plus, the zero-interest policy effectively steals money from people trying to live off their savings!  Governmental thievery!
Jan 4, 2013 3:30PM
The federal reserve is very much like the Wizard of OZ; a bunch of smoke and mirrors and a loud mouth.
Jan 4, 2013 3:38PM

"...a growing number of Fed policymakers are beginning to doubt the efficacy of repeated doses of quantitative easing and an extended period of ZIRP."


Well, DUH! How can devaluating a currency help a country in the long run -- especially if it's the world reserve currency?!  These idiots have no business controlling the U.S. dollar.

Isn't this exactly what Ron Paul has been saying for years and I thought he was a cook.
Jan 4, 2013 3:36PM

The big banks get their money for less than nothing and charge healthy interest rates to any sucker stupid enough to take out a loan. The banks see all of that interest, the borrower sees nothing. The monetary base has swelled for the big banks and shrank for the average American.


Eventually the free money bubble is going to burst and anybody in debt is going to look back on the subprime mortgage years as a golden era is simple criminal rapaciousness by our shyster politicians and banksters.

Jan 4, 2013 3:57PM
It is time to put the federal reserve out of business,,,they are the main reason this country is going to hell.
Jan 4, 2013 4:48PM
Shocking, is the greatest country in the world has the biggest idiots.  Hard to believe is that the college educated powers are dumber than dumb, and their in charge of our very way of financial prosperity.
Jan 4, 2013 4:45PM
you do not have to have a seat at the fed to understand that you can not continuously create  money out of thin air and not expect inflation to follow at some point
Jan 4, 2013 4:08PM
How exactly does the Fed think they'll unwind this reserve currency abuse?  If you have an answer tell them, because they sure don't know.
Jan 4, 2013 5:40PM
Ron Paul was our only hope.  Don't worry about the banks, worry about the welfare state we've become.  With 47 % of the American people on some sort of Federal funding we have big problems
Jan 4, 2013 3:44PM
Sounds like stagflation will be here before you know it "dyno mite"
Jan 4, 2013 4:36PM
There's a friggin' double standard in this country!  The big wheels may be able to borrow for free (what's called here "free money") but I'm still getting charged 16% to borrow money on my credit cards!  When are the regular folks gonna wake up & begin to ask for some of the goodies that the ruling class is getting?  :-(
Jan 4, 2013 4:39PM
Don't ever invest in AIG, C, BAC, GS, or JPM. They started this mess and it sucks.

Well now we know when the economic collapse is going to happen.


It's 2013 folks that is when the Federal Reserve is going to let the US house of cards fall taking with it the rest of the world's economies.


It's been a nice try to save the world economy but the fat lady she is a singing


So SELL SELL SELL everything folks and buy gold and hoard food, gas and ammo



The released minutes said: "Several [officials] thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet."

Analyst Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, said the revelation was "somewhat surprising".

The Federal Reserve announced immediately following December's FOMC meeting that it would be keeping US interest rates near zero until the country's unemployment rate had fallen to 6.5%. It currently stands at 7.7%.


It's called legal theft which only those "CONNECTED" can get away with. Not really complicated.
Jan 4, 2013 5:01PM
LET THE HYPER INFLATION BEGIN!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Jan 4, 2013 5:38PM

awwww look at this! it appears that the obamafication of the nation has just begun,(well actually continuing from 2008) the democrapic voters just took a look at their paychecks and are upset that the they're smaller!!! wow! that was quicker than I thought!!!


oh I'm sorry did you idiot low-information aka idiot voters finally get the picture? that "everybody's" taxes are going up, and you thought only the mega rich will be taxed to death, aka "punished" by your grand high exalted mystic marxist ruler and colossal mega-fraud obama, well I just have one thing to say:


hahahah!!! ah! hahahahahaha!!!! oh I'm doing cartwheels here in my house and typing at the same time I'm so giddy!! like I told you idiots, the mid class is getting hammered by new taxes not just the rich, the people makin' 30K and up are going to get the worst of it, not the rich and that's what's so funny!!! or ironic depending on where you are hehe


 and for you idiots that voted for that black bastard again, hahahaha!!! hahahaha!!! oh the thousands of dollars you could've had for yourself are now going to pay off God knows what pork, or some scumbag corrupt union bosses, once again: hahahah!!!! ah!!! ahahahahahahahahahahaha!!! oops!! just orgasmed from all this excitement, excuse me while I change my pants, when I bust, I really make a mess, pardon me....

Jan 4, 2013 5:27PM

How many of us who KNEW the Federal Easing Program would be bad lost their jobs over it? Don't you think it's time we investigated and went after the Kool Aid addicts who bought into it and are now wealthy off a bad program?


Close the banks. End the Federal Reserve. Get RID of Wall Street.  

Jan 4, 2013 7:19PM
You have to have money saved if you want to be prepared for emergencies. The banks pay you next to nothing. When you borrow the sky is the limit. The spread is unforgivable. In the meantime jobs give out no raises but expect more. The cost of everything goes up but the taxes we pay on everything also goes up. If things continue as they have for the last ten years expect a revolution.
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