The Fed’s ‘Great Unwind’: It Had to Start Somewhere

BY Paul Solman  December 20, 2013 at 4:31 PM EDT

Merle Hazard performs “The Great Unwind.”

This is not our typical post; it’s an economics music video. If you saw what the Fed did this week — or even if you didn’t and want to know what the big deal is — it will be well worth your while, we promise, to watch at least the first minute of “The Great Unwind,” above.

When we began our coverage of the Fed this week, asking Nobel laureate Bob Shiller what he would do if he were chair of the Fed and talking with former Fed economist Catherine Mann about the nuances of quantitative easing, we weren’t sure how the Fed’s Open Market Committee would vote on continuing or beginning to taper the monetary stimulus.

Mann has expertly explained how higher interest rates send dollars abroad, how banks redeposit the Fed’s trillions back at the Fed and whether the Fed and the Treasury are in cahoots.

But at the end of the week, we here at Making Sense were reminded of the recent classic from our econo-crooner Merle Hazard (aka money manager Jon Shayne) and wanted to know, is this the beginning of “The Great Unwind” Merle warned about this summer?

And so, we’re revisiting the intersection of Wall Street and Nashville’s Music Row, where we can hear a reprise of the song and an update from Merle himself.

Jon Shayne: About eight months ago, in March, I heard Warren Buffett on CNBC worrying about what will happen when the Federal Reserve starts to unwind its support for the financial markets.

“In the end, there are an awful lot of people (wanting) to get out of a lot of assets if they think the Fed is going to tighten a lot,” Buffett said. We have “never had the degree of disgorgement that might be called for down the line,” he said, “and who knows how it’ll play out. But it’ll be noticeable….”

When I heard Buffett say this, I thought, “Wow! That would be a great topic for a country song!”

So I wrote “The Great Unwind.” I rounded up some Nashville cats and background singers, and dusted off my cowboy hat. With help from the PBS affiliate in Nashville, I made a music video that Paul Solman debuted on this page. Paul got some big-name economists like Ken Rogoff, Simon Johnson and Art Laffer to weigh in on it.

In August, when the song came out, the Fed was still buying $85 billion per month of U.S. Treasury debt and mortgage-backed securities. But it was clear then, and clear now, that the Fed will need to stop buying these assets some day. Eventually, as Buffett warned, the Fed will also need to do something to sop up all the money it has created to buy these bonds, or else there will be inflation.

Buffett and I were early, as value investors tend to be, but this week, the Fed took the first step. It announced that it is reducing the pace of asset purchases from $85 billion per month to $75 billion.

Now, $75 billion is still a lot of new money entering the system. It’s not exactly a full unwinding, but it is a slow-down in the rate of the increase. However, “The Great Unwind” had to start somewhere.


This entry is cross-posted on the Rundown — NewsHour’s blog of news and insight.