LONDON (Reuters) – Chairman Ben Bernanke’s Fed is beset by demons of its own design.

Terrified by memories of the 1930s and Japan’s more recent experience in 1990s and 2000s, the academics who now dominate the Federal Open Market Committee display a hyperactive compulsion to tinker with monetary policy in a bid to solve all the problems besetting the U.S. economy.

But if inflation is always and everywhere a monetary phenomenon, as Milton Friedman argued, Fed policy has a smaller role in solving real-economy problems such as a gaping trade deficit, moribund housing market, sluggish growth and joblessness.

Expectations of another substantial round of quantitative easing (QE2) have gone too far for the Fed to pull back now. The Fed must press ahead or risk a massive, disorderly correction across all asset classes (bonds, equities, commodities and currencies).

But once the trigger is pulled members of the FOMC should resist the temptation to tweak further and give the normal cyclical processes of recovery and structural reforms time to work.

HUBRIS

Never before has the Fed had so much theoretical firepower at senior level.

LONDON (Reuters) – Get your excuses in early seems to be the strategy for members of the Bank of England’s Monetary Policy Committee (MPC) fearful of an outpouring of public anger about failing to control inflation, avert a double-dip recession, or perhaps both.

Speaking in Dublin on Tuesday, MPC Member David Miles admitted: “It is a near certainty that four or five years from now the monetary policy that is set over the next year will, with the benefit of hindsight, look very likely to have been too loose or too tight. Many will then talk about the big mistake the MPC made in late 2010 and the first part of 2011.”

“If we tighten too quickly it will be a story of myopic MPC learnt nothing from events of 2008; if growth and inflation look stronger than I now think is the most likely outcome it will be MPC completely failed to see what was obvious to nearly everyone — that inflation was out of control.”

Miles echoed a pre-emptive “mea culpa” issued on Sep. 22 by Bank Chief Economist Spencer Dale who acknowledged: “It is quite likely that in hindsight, once we see how the economy evolved and which risks materialised, that the current stance of policy will be criticised for having been too tight or too loose”.

The Bank’s increasing defensiveness reflects both its intellectual embarrassment at failing to meet the inflation target (42 months out of the last 51, and counting) and growing criticism and scepticism of its strategy. It is not just the committee members but the Bank as an institution and the system of inflation targeting that is now in the firing line.

The Bank knows that within the next year attacks are likely to intensify if inflation remains above 3 percent (equal to its 2 percent target plus the expected impact of the forthcoming VAT rise) or the economy slides back into recession as a result of the government’s austerity programme (with which Bank Governor Mervyn King is closely identified).

Pre-emptive excuses are designed to head off calls for wholesale reform of the system (“new men, new measures”). It lays the groundwork for arguing that the Bank could not have done better in exceptionally difficult circumstances, and should be given another chance to prove it can make the inflation target work, once the crisis and its aftermath have passed.

LONDON (Reuters) – In Greek mythology, when Pandora opened her jar the ills of the world sprang out, leaving only hope behind. Once out, the contents could not be captured and put back. Pandora could not undo what she had wrought.

In 2008-2009, central banks billed their strategy of ultra-low interest rates and quantitative easing as extraordinary and temporary measures — justified by the exceptional severity of the banking crisis and the danger to the global trade and payments systems.

But what was once unconventional and unorthodox is rapidly becoming the new normal and likely to be maintained for an extended period.

In theory, the main central banks are still committed to reverting to pre-crisis system of inflation targets and an orthodox monetary policy centred on short-term interest rates.

But it will not be easy to exit from the extraordinary interventions of the last two years or persuade investors, policymakers and the public that central banks should revert to a more limited role focused on core consumer prices and short-term rates, leaving broader trends in debt, equity and commodities to market forces.

TECHNICAL STEP, OR REVOLUTION?

Most central bankers and economists still characterise ultra-low rates and quantitative easing (QE) as a crisis response or an extreme version of traditional monetary policies.

LONDON (Reuters) – China’s announcement of a two-month boost to reserve requirements in a bid to drain excess liquidity from the banking system shows why the Federal Reserve’s flirtation with a new round of quantitative easing is likely to be futile and counterproductive.

Even the prospect of easing is adding to inflationary pressures in emerging markets and countries such as the United Kingdom, via surging commodity prices, while doing nothing to stimulate jobs or output at home in the United States.

Keeping rates near zero in the core economies of the United States and the euro zone and injecting even more liquidity through a new round of central bank asset purchases is not stimulating additional investment in productive capacity or a new round of hiring.

It is simply encouraging a fresh round of financial engineering and de-equitisation (as companies such as Microsoft use cheap borrowing to support their stock prices) and a renewed outflow of funds from core financial markets into commodity instruments and developing economies as investors hunt for better yield. These are precisely the destabilising financial trends which set the stage for the financial crisis in 2007-2009.

OUR CURRENCY, YOUR PROBLEM — AGAIN

In a world of semi-fixed exchange rates the Fed’s increasingly loose monetary policy is being transmitted to emerging markets such as China, India and the rest of Asia, which are already in danger of overheating.

U.S. policymakers at the Fed as well as in the administration and Congress would like emerging markets to deal with their inflation problem by allowing their currencies to appreciate against the dollar — improving U.S. competitiveness and enabling American manufacturers to boost exports, while also cutting some of the pressure from cheap-priced imported products.

MOSCOW (Reuters) – Rio Tinto and BHP Billiton seem to have finally bowed to the inevitable and admitted regulatory hurdles to their proposed production joint venture (JV) are insurmountable.

Rio Chairman Jan du Plessis reportedly told the company’s board meeting earlier this week that “with regard to the (joint venture) and why it didn’t succeed …we should simply work on the basis that both parties worked well and in good faith to make this thing work and both parties agreed, simultaneously, it wasn’t possible”, according to a front-page report in the Sydney Morning Herald.

The proposed agreement has a year-end deadline for completion, which includes obtaining necessary regulatory approvals. Neither side is likely to openly call off the deal before then to avoid incurring break fees. But they may instead opt to run out the clock.

It has been clear for some time that the deal has been dead in the water. The Australian Competition and Consumer Commission (ACCC) has postponed a final ruling on whether the joint venture can go ahead five times as the companies try to convince the regulator the JV would not be anti-competitive, despite intense opposition from customers in the steel industry.

BHP has already shifted its commercial strategy towards the fertiliser market, with a bid for Potash Corp of Saskatchewan, which was perhaps an implicit admission that it had failed to convince regulators to let it pursue aggressive growth in iron ore, and was instead switching its expansion hopes to other markets where it does not already hold a dominant position.

It all marks a sharp twist in fortune since the autumn of 2008, when the ACCC gave its approval to a full merger between the two miners, and BHP appeared confident it could satisfy concerns from the European Commission with limited asset disposals. According to BHP, the proposed takeover was only aborted because the financial crisis disrupted the deal’s completion and damaged the value that could be realised from asset sales.

This time the two firms have run into a much stiffer regulatory review and appear to have been unable to convince the regulators that even a much more limited operational link-up, with separate marketing of all the iron ore produced by their Western Australian assets, would risk lessening competition unacceptably.

LONDON (Reuters) – Following passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (PL 111-203), the fierce battle to remake the derivatives markets has shifted from the halls of Congress to the obscure byways of Washington’s regulatory agencies.

An army of lobbyists, lawyers, and regulators are now thrashing out the details — large and small — that will determine whether and how Dodd-Frank affects trading on the ground.

The Commodity Futures Trading Commission (CFTC) has identified no fewer than 30 areas where new rules will be needed. In most cases, rules are being put out to consultation and must be finalised before July 2011 to meet congressionally mandated deadlines.

To make the process more transparent, and reduce the influence of special interests, the Commission is publishing details of all rulemakings and comments received on proposed rulemakings on its website. It is also taking the unprecedented step of making available names and subjects of discussion at all meetings between commissioners or staff on the one hand and lobbyists and outside agencies on the other.

It represents a conscious effort, led by CFTC Chairman Gary Gensler, to make the process as open as possible. The CFTC chairman has gone far beyond the requirements of the 1976 Government in the Sunshine Act in a bid to ensure the new law is implemented effectively and not watered down by a raft of interpretations and special exemptions.

THREE-WAY SPLIT

One of the most controversial rules centres on the seemingly arcane issue of how to define swap dealers.