Posted on 08/10/2010 6:42:47 PM PDT by CutePuppy
That noise you hear, that's the sound of helicopters in the distance.
While they may be in the distance, they are closer than they have been in quite some time, and chief pilot Ben Bernanke is leading the squadron.
We are now coming up on three months of very anemic economic growth, so limp many economists fear we are closer than we have ever been to a double dip. GDP registered a paltry 2.4% in the second quarter, a very disappointing number, especially after the economy has fallen so far despite the huge spending in the stimulus plan.
The only real economic successes we have had have been TARP, and the Fed's first round of quantitative easing, which ended in March. TARP was primarily the brainchild of former Treasury Chief Hank Paulson.
TARP turned out quite well, as almost all of the money lent to banks has been returned to the government -- some in less than a year and with a tidy profit to boot for taxpayers. Not so evil-sounding when you look at the facts, is it?
Quantitative easing, on the other hand, is the practice of non-traditional monetary easing by the Fed, and generally includes moves outside of fed funds interest-rate changes.
Quntitative easing is essentially, but not only, the increasing of the money supply through purchases by the Fed. It can be accomplished by purchasing securities as mundane as Tim Geithner's Treasuries or it can be more exotic, like purchasing mortgage-backed securities. The US still does not permit the Fed to buy corporate bonds -- like many other countries -- which would have been a good addition to FinReg.
When the Fed purchases bonds from banks or in the open market, the banks receive cash for the bonds, thereby increasing the money supply.
.....
(Excerpt) Read more at m.nypost.com ...
QE is not the best solution to the current U.S. economic problems, but Federal Reserve's monetary policy cannot and should not be expected to fix the economy overburdened by stupid, destructive, never-ever-working-as-politicians-intended regulations, mandates and Kenseyan fiscal policy of government deficit spending.
Real estate was the epicenter, the vital organ if you will, of this economic collapse, and it's where the majority of recovery efforts should be focused. Only the Fed has had an impact in this area to date. None of the half-baked, half-hearted programs conjured up by the career politicians in the administration have had an impact. Think HAMP, PPIP, etc.
TANSTAAFL - There Ain't No Such Thing As A Free Lunch!
Quantitative easing doesn't add to the national debt. The assets purchased just sit harmlessly on the Fed balance sheet until they mature or are liquidated. Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency. But inflation hardly seems a concern these days—just economic growth. Moreover, quantitative easing would fill a void in the financial markets as it did after the securitization markets died an ugly death during the 2007-2008 financial crisis. Besides, any measure that would help the economy reach escape velocity from its current unsatisfactory orbit would likely be appreciated by both U.S. creditors and the citizenry. Signs of a sea change in attitudes toward quantitative easing are growing, even in unusual quarters. ..... Alan Blinder, Princeton economist and former vice chairman of the Fed under Bill Clinton, admits to a personal preference for fiscal stimulus. Yet a recently released study by Blinder and Mark Zandi, chief economist of Moody's Analytics, concedes that aggressive financial measures taken by the government, including the Fed's quantitative easing, were far more effective than fiscal policy in ending the Great Recession, including the Obama administration's $800 billion American Restoration and Recovery Act, passed in early 2009. Now Blinder is worried by the "sag" he's seen in the economic numbers. He thinks the Fed may be forced to resume its quantitative easing in the next couple of months if the weakness in the economy continues. How much will they purchase? Maybe $2 trillion or more of securities, doubling its balance sheet from the current $2.3 trillion in the process. That's the magnitude of an estimate that a former Fed official now on Wall Street proffered to Blinder. Most startling, however, is the recent conversion of James Bullard, president of the St. Louis Fed and a member of the Fed's policy-setting Open Market Committee. Long an inflation hawk, he's now calling for the Fed to be prepared to crank up the monetary printing presses and, in Jim Cramer lingo, "buy, buy, buy." He worries that America is falling into the deflationary trap that has gripped Japan for much of last 15 years. .....
This approach has come to be known in financial circles as "quantitative easing," though the tactic rarely has been employed. The Bank of Japan tried it with mixed success early in this decade, and it became a centerpiece of both U.K. and U.S. monetary policies during the 2008-2009 financial meltdown. Indeed, the Fed from early 2009 to the program's conclusion on March 31, 2010, bought some $1.3 trillion of Treasury bonds, Fannie Mae and Freddie Mac mortgage-backed securities and agency debt with dollars essentially created out of nothing. .....
Basically, the Fed will use the surplus it's getting from the interest on its $1.3T QE1 portfolio of MBS (at about 4%-5% interest rate, instead of lending money to the banks at 0.25%-0.5%) to buy new Treasury bonds. This is better than simply sending these funds to Treasury and, in theory, should unburden banks' balance sheets and higher reserve requirements and help the banks lend money to businesses because right now they are paying more in interest for attracting capital than they can borrow from the Fed.
It's not the best solution to the U.S. economic problems, but Federal Reserve's monetary policy cannot and should not be expected to fix the economy overburdened by stupid, destructive, never-ever-working-as-politicians-intended Kenseyan fiscal policy of government deficit spending.
And the theoretical multiplier effect that deficit spending is supposed to deliver — excess economic growth for every dollar the government spends — doesn't seem to be working. No kidding!
TANSTAAFL - There Ain't No Such Thing As A Free Lunch!
There is no instrument of monetary policy that can save us from this correction. They will only make the crisis worse, far worse.
Economies are too important to trust to governments. That goes double for private corporations like the Fed.
All of the talking heads, economists, et al this AM on CNBC said the Fed would not buy back MBS, that it was just too soon to do so and if they did it would signal a much bleaker picture than the markets are seeing.
They all agreed the Fed would simply change its language in its statement to reflect the slowing economy and to lay the foundation for future buying should the economy worsen.
So the question I have is this.
What did the Feds see that all those talking heads economists from Wall Street didn’t?
Agreed. Not until or unless the U.S. gets her fiscal "house" (and Senate) in order... Government's fiscal policies are the problem, so that's where the solutions must reside.
Articles just provide the evidence to the harm and ineffectiveness of attempted fiscal "solutions" and the evidence of some help of monetary policies in rescuing the U.S. (and the rest of the world) from financial disaster resulting from destructive fiscal and regulatory practices.
If you put it this way ( ;-) ), the answer is obvious - the Fed sees a bleaker picture, as Bernanke has recently testified ("unusually uncertain outlook").
You are right about the talking heads and "predictions":
Fed Won't Signal More Easing: Ex-Governor Meyer - CNBC, 2010 August 10
"Nobody will favor QE2 (a second wave of quantitative easing), absolutely nobody," Meyer said of the FOMC members. "They are miles away from it."
Fed Can't Do Much More to Boost Economy: El-Erian - CNBC, 2010 August 10
Surely, someone is taking notes on this disaster as to what NOT to do!
Some say TPTB are trying to inflate their way out. But just look at velocity.
The ‘deflationistas’ vs the ‘inflationistas’.
Who will win?
(Will the excess capital screw us all when it ends up in commodities? Oil $140?)
I just wonder though...
With so many Wall Street insiders saying the Fed would never do what they just did, how much of an impact will it have not only on the markets but on the economy.
WIll the masses run and jump back behind the sofa again, holding up more and more money, refusing to invest, spend and hire people?
Seems to me that the Fed is seeing something the Wall Street crew isn’t.
Which is actually a scary idea.
[Seems to me that the Fed is seeing something the Wall Street crew isn’t.]
Like maybe just how much A$$Paper they’ve got in their MBS portfolio?
That's the multi-$T question. Bernanke stopped QE1 in March, precisely for that reason - he doesn't want to inflate unnecessarily, but now he feels the need to stave off deflation, and to keep an economic recovery from keeling off (he helped engineer the financial / banking recovery, sine qua non economic recovery would be impossible). And there are many who agree with him; author makes a decent case for them:
Deflation is upon us. If, instead of using the government's calculation of the Consumer Price Index, which is heavily weighted toward rent rates, we use the price of assets, in particular the precipitous drop in home prices, then the Fed would have been pulling QE2 out of its berth some months ago. Former Fed Chief Alan Greenspan expressed this same concern last week on the Sunday morning talk show circuit. A harsh reality of this dysfunctional economy is that loans, the economy's lifeblood, are still not getting made in any meaningful measure. The economy will not, and cannot, function in a self-sustaining way until capital flows freely from bank to business, bank to merchant, and most important, from bank to homeowner. ... Second, it would be a bit of a U-turn for the Fed, which stopped its first round of quantitative easing (QE1) in March, quite prematurely, in my opinion. It was my thought that the real risk was, and still is, deflation.
The real problem is the spending and regulatory policies of the current administration and Congress, and uncertainty ("second, third, fourth etc. shoe dropping") of the laws that are still in the pipeline. It's the Obama factor / Zero effect in this dysfunctional economy. That's not something that the Fed or monetary policy can fix.
The Uncertainty Principle — II [Dodd-Frank] Only 30 times more complicated than Sarbanes-Oxley - WSJ Editorial (free), 2010 July 16
Government and the Uncertainty Trap - It's not a lack of liquidity that's holding back our economy. Investors and business leaders are waiting to learn more about future taxes and regulations - WSJ Opinion (free), 2010 August 07, by Thomas F. Siems
That's why consumers are not spending (savings rate grew rapidly from 2 years ago) and profitable companies are sitting on piles of cash, investing it anywhere else in the world (mostly in Asia), except expanding or hiring in the U.S. And who can blame them when the Obama's prescribed "medicine" is demonizing them and hitting them with higher taxes, higher expenses (ObamaCare etc.) and uncertainty in regulatory environment?
Maybe the Fed and WS are in sync, actually. CNBC's "bull-sessions" notwithstanding, I've seen a lot of push in serious financial press (FT, WSJ, Barrons etc.) for the Fed's QE2, even from the "unusual suspects" (see post #2). I guess the central idea is to keep the economy on the heat pad before the November elections, to see how much damage might be undone on the fiscal front after that.
Weakness in the headline numbers for, say, inflation and second-quarter GDP growth is signaling trouble ahead for the economy. Even more menacing, however, are developments deeper in the financial plumbing of the U.S. Barron's editor and columnist Randall W. Forsyth has recently highlighted the worrisome drop in two-year government notes, to a yield of near 0.5%. Occupying the netherworld between the zero-bound fed-funds rate and the 3%-yielding 10-year notes, the two-year rate in Forsyth's view is exerting a relentless gravitational pull downward on longer-term bond prices. A broad pancaking of government yields would, of course, be Exhibit A in any U.S. descent into acute, Japanese-style malaise. ..... Signs of a sea change in attitudes toward quantitative easing are growing, even in unusual quarters. Last month, the European Central Bank quietly invited Vincent Reinhart, a powerful figure in the Greenspan Fed as director of the Division of Monetary Affairs from 2001 to 2007, to conduct a seminar on quantitative easing for its top staffers. That was momentous, given the institution's history as a bastion of monetary conservatism and rectitude. "I don't know what ECB's plans are, but it should be pointed out that they have all the instrumentalities already in place to launch an aggressive program of quantitative easing," Reinhart tells Barron's. .....
And the WS had the positive answer today - just before the Fed announcement implying mild QE became widely available, broad market started to shoot up, recovering most early losses. So I don't see a diversion in real life, as much as I expect it in the commentary and "predictions" or attempts to affect the Fed with the outside "open" arguments.
The global response to the Fed’s QE is a stock market selloff.
Deflation. Falling asset prices.
Higher market volatility usually follows the Fed policy decisions for the next 2-3 days, one way or the other. Hedge funds position themselves for volatility in advance of announcement, then spin it to benefit their book. Some will say that the Fed is doing the right thing fighting deflation and providing more liquidity for the banks to make loans ("BUY"), other side will say that "unexpected" QE2 / QE-lite shows that the Fed sees more serious trouble / double-dip / recession for the economy ("SELL")...
It's summer time; the heat is on, the volume is low, and the "market" has been starving for some volatility. Throw in erratic liquidity on stock exchanges and HFTs or possible PPT intervention and... I think it's best to ignore the short-term "market signals" and explanations by the "experts" on the news in the few days following all Fed policy announcements. People will speculate about the sizeIt's an excuse / opportunity for a few trades that don't say much of anything more than the decision itself.
Deflation. Falling asset prices.
Yep, could be toxic - vicious circle, self-fulfilling prophecy psychology change. Bill Gross of Pimco and some other active bond managers are positioning their portfolios for deflation. That's more important to understand than the direction of the stock market in next few days of volatility.
"The deflation should be comparatively benign, but it's still worrisome given the fact that unemployment currently stands at 9.5% and we see a one-in-three chance that the deflation will be accompanied by a recessionary double dip," Zandi of Moody's tells Barron's. Once an economy succumbs to deflation, it's often hellishly difficult for a nation to escape the trap. Companies and consumers alike tend to defer their spending on the assumption that prices for goods and services figure only to get cheaper in the future. Real interest rates spiral higher, making debt burdens all the more onerous. Forced collateral liquidations result, driving asset prices ever lower. ..... Deflation is anything but an errant concern, despite the U.S.'s long post-World War II history of the opposite — endemic inflation. Prices during the first three years of the Great Depression fell some 10% a year. Commodity prices during that period fared even worse. And Moody's econometric models are signaling that the U.S. might slip into deflation, albeit temporarily, by late this year or in early 2011.
Bernanke is trying to avoid another "Japan," which had "lost two decades" to deflation already. But the Fed's monetary policy has never been a panacea against the destructive Keynesian "spend it and forget it" Congress and administration's fiscal and regulatory policies.
Bernanke is copying Japan, not avoiding it. So is Congress.
Debt is deflationary. To escape deflation you have to lower your outstanding debt.
The traditional, ethical way to do this is to “Liquidate, liquidate, liquidate.”
Of course, the MBA kiddies think that they can outsmart the System by printing enough money to devalue the currency.
Won’t work. The only that works is if you have a criminal mindset and are counterfeiting Dollars...because otherwise there is debt being created to introduce each new Dollar into circulation, and that new debt is just as deflationary as any other.
At some point, you accumulate so much debt that the deflationary drag from all of your debt overwhelms any short-term potential inflationary gains from spending, anyway.
Debt sticks around, it accumulates...whereas spending is very short-term, temporary.
The net effect is that the “print money now” MBA kiddies will simply end up copying Japan’s precise response to deflation in Tokyo from 1989 to date.
Instead of outsmarting the System, they will be mired in its deflationary trap.
We are not exactly in the period that can be described as the "ethical age".
Debt sticks around, it accumulates...whereas spending is very short-term, temporary.
Yep. Friends come and go, enemies accumulate.
If only government did what it tells people to do with their personal finances - get rid of unnecessary debt. If they used new, long-term low-interest debt to "refinance" old, high interest debt, instead of piling up more debt, it would be a different story.
Unless and until Congress (with the help of supportive or pliant President) stop deficit spending (at best, thinking they can inflate the economy; at worst, not thinking beyond short-term money grab) there is not much that the central bank can do. Sure, it can help bring [another] recession, but it will only get the blame for it and give the Congress and President another reason to "stimulate" people into oblivion with more spending and the vicious cycle of deflationary spiral.
But there is little evidence that even Republicans currentry in Congress understand that, instead of just looking to change the spending "priorities" to their own pork. We've seen that already in the (first?) "lost decade" of the 'Naughts.
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