Why is the Federal Reserve Freaking Out?

It appears that the Federal Reserve is putting out signals that it will be engaging in more quantitative easing (printing money) toward the end of this year:

The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc.

“We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.

Maybe I am being alarmist, but I as Ben Bernanke and the rest of the Fed have already proven themselves to be remarkably blase about the unemployment levels, so I have to assume that they are expecting to see someting major shake loose in the financial markets, and they want to restart their sh%$pile for cash program to forestall this.

It might not be an economic or financial issue that is getting them to move though, as they are currently hamstrung by the intersection of the law and Barack Obama's general unwillingness to challenge republicans on the stonewalling of even the most benign nominees.

As a result, 3 nominees for the Federal Reserve Board of Governors are cooling their heels, and with the retirement of Donald Kohn, the board membership is down to 4 members, which means that they cannot make the emergency loans that they did following the collapse of Lehman:

Here's a scary thought: Let's say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund — many of which have large exposures to Euro banks — to "break the buck," which leads to another run on money market funds.

The Fed would be powerless to help. The Fed's emergency lending authority (the famed Section 13(3)) requires that any emergency lending facility to non-banks be approved "by the affirmative vote of not less than five members" of the Fed Board of Governors. Currently, there are only four members of the Fed board: Bernanke, Warsh, Elizabeth Duke, and Dan Tarullo. Donald Kohn retired earlier this month, and the Senate has yet to vote on Obama's three nominees (Janet Yellen, Peter Diamond, and Sarah Bloom Raskin).

Indeed.

Of course, Obama could fix this by making a recess apportionment, I would suggest that he actually appoint Jamie Galbraith, because it would freak the Republicans out, but he doesn't have the guts for that, or much else.