Hussman Weekly Market Comment: Fed Policy - No Theory, No Evidence, No Transmission Mechanism

Undoubtedly, one of the main factors prompting a benign response to what is now virtually certain recession and virtually certain Greek default is the hope that the Fed will launch some new monetary intervention. While Wall Street appears to view the present weakness as a replay of 2010, it is strikingly clear that the evidence tells a different story, with a broad ensemble of data implying near-certainty of oncoming recession (see An Imminent Downturn ).

While we have to allow for the possibility of a knee-jerk speculative response in the event of further Fed intervention, it is also much clearer now than it was in 2010 that quantitative easing does not work, and that even its marginal effects have reached the point of diminishing returns. To a large extent, the only basis for further Fed action here is superstition in the absence of either fact or theory.

Ultimately, effective policy acts to relieve some constraint on the economy that is actually binding. Effective policy has some "transmission mechanism," where changes in the policy target can be expected to translate into decisions that improve the allocation of resources and the level of activity in the economy. Effective policy is also preferably grounded in historical evidence that supports its effectiveness, or at the very least does not contradict the action. At present, the policy menu advocated by Ben Bernanke has none of these advantages.