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QE? Why the FED Failed

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July 10, 2013 – Comments (9)

QE has indeed failed us three times over: economic recovery, if we can call it that, is the slowest one of all; unemployment has remained painfully high and stubborn. Helicopter Ben has been running the printing presses 24 x 7, to no avail. OK, that is not exactly how it works: all he does is add a few zeroes to a special cell in a spreadsheet.

Wha' happened? Where's the earth-shattering, economic ka-boom?

SHADES OF THE WEIMAR REPUBLIC?

The HeadFed did what Germany did in the aftermath of WWI, where the result was hyperinflation: a typical joke is that if you had a wheelbarrow full of Papiermarks, a thief would dump out the currency and take the wheelbarrow. There was great fear and loathing that the same would happen here in the US in the aftermath of the banking meltdown in 2008 from whence Helicopter Ben earned his nickname.

OK, THEN WHAT HAPPENED?

Well, actually, nothing. I mean absolutely nothing. No robust recovery, no inflation, nothing. In fact, GDP went red a couple of times, and there was actually fear of deflation. Even the Eurozone tried something different, and were no more successful. It is clear that economic theory, not to mention the textbooks, are gonna need a rewrite.

CAPITAL FORMATION

I was listening to a radio talk show (Kudlow) about this subject, when the above phrase was mentioned, but without elaboration. This piqued my curiosity, so I looked it up. Sure enough, there are two related but different economic concepts. Being a business writer, I figured he meant the recent one: savings accounts, mortgages, bonds, money market funds, and debt instruments including derivatives. I am guessing that, by taking bonds and debt out of circulation and injecting cash, ole Helicopter figured there would be so much currency sloshing around that it would encourage banks and financial institutions to lend to business, which leads to the older definition of capital formation. That is acquiring buildings, machinery, and raw goods to increase production and therefore GDP and the economy.

EXCEPT FOR ONE SLIGHT PROBLEM

All the extra cash did not circulate, but was put on ice at the central bank by various commercial banks, especially the 'too big to fail' variety. This stash of more than $1 trillion is being used as 'tier 1 capital' to strengthen their balance sheets, as required by Basel III and Frank-Dodd.

WHAT'S NEXT?

I dunno. The old rules no longer seem to apply. 'Your guess is as good as mine'. Yes, I know: Helicopter just breathed the word 'tapering' and sent bonds and Treasury paper into a tailspin, pushing up interest rates. My head hurts.  

9 Comments – Post Your Own

#1) On July 11, 2013 at 1:51 AM, somrh (79.25) wrote:

The old rules didn't really apply before either. They have the causality wrong.

Banks extend credit first and look for reserves later. The central bank has to increase reserves to meet the financial sector's need for reserves (well, I suppose they could not supply reserves and let the system collapse...)

They can buy assets all they want and all it's going to do is lower rates on assets (and whatever assets they get replaced with: corporate bonds, stocks, etc).

But the entire premise is wrong in another sense. Part of the problem is that there is already too much private debt. Develeraging is required, not more debt. Attempting to increase lending (borrowing) should not be the focus. The focus should be on how to better facilitate deleveraging.

Frankly, if they had simply written checks to the population, that would have been a far better alternative than what we got.

Alternatively (or in conjunction) we could have gotten some much needed infrastructure spending which does actuallly add real value. 

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#2) On July 11, 2013 at 2:25 AM, awallejr (76.71) wrote:

Except look at what the Fed is buying. TBills and MBSs.  So by buying Tbills you keep the Federal borrowing costs low and by buying MBSs you keep mortgages low.  End result is people can refinance and lower their monthly cost hence more free money for them to spend.  And the Fed cost well is lower too. 

Yes Tbills spiked up recently but most are going to hold until maturity or death.  Boomers aren't selling. Uncle Ben isn't "tapering" any time soon (God I hate that media term).  He simply told you the EVENTUAL exit strategy becuase he didn't want to just pass the buck to the next Chairman.

The underlying data has ALWAYS been the key.

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#3) On July 11, 2013 at 8:17 PM, MoneyWorksforMe (< 20) wrote:

I love how many people are quick to compliment Bernanke for the suppsosedly "great job"  he has done while the fed is now easing more than it has at any point over the past 4 years, and the fed funds rate is still essentially zero. Whether or not Bernanke has done or is doing a good job, is simply predicated on his ability to return to historically normal monetary policy and for the economy to be strong on its own two feet. Until we see this happen (i anticipate not before another terrible crisis) he at best deserves a grade of "incomplete."

 This enormous monetary experiment, appears doomed to fail in a spectacular way. Someone is going to slip up, and it may be seemingly innocuous, but it will be a pandora's box, and we'll all wake up to see markets cratering. It could happen tomorrow--it wouldn't surpise me at all. When fundmanetals lose relevance, makets can turn on a dime and make extreme moves in either direction. Markets are hanging on the word of every politician and this is extremely dangerous. This is what "investing" has come to. I'm starting to think the word "investing" isn't even appropriate anymore. I should probably start calling it gambling. Thanks Bernanke, for absolutely nothing. 

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#4) On July 12, 2013 at 1:39 AM, awallejr (76.71) wrote:

Ah Money of course we are on opposite sides.  I suppose you prefer to have followed Schiff's advice and let the whole system collapse.  You know what stopped the bleeding back in 2009?  It wasn't listening to the Roubinis and Megadeath Whitneys wanting to nationalize all the banks.  It was when Bernanke came out and said the Fed will do whatever it takes to backstop the banks.

Whammo, the stock market did a major reversal. Things DIDN'T collapse. Things have SLOWLY but SURELY been improving.  It could do better but the Republican House refuses to help fiscally-wise. 

What he is doing is accomplishing two things as I said in comment 2.  He is keeping Government borrowing costs low and he has helped homeowners to refinance into historically low rates hence enabling them to keep their homes and even have a few bucks to spend.

He gave an exit strategy which gave the market an excuse to correct (which we all wanted it to do anyway), then came out and said what I have been saying all along.  TIME WILL TELL.  As the data improves then the Fed can ease up on the purchasing.  But it WILL or SHOULD be done slowly because it has to.

You do realize that what the Fed is buying is all self amortizing right?  The Fed doesn't NEED to do anything.  The paper being bought self liquidates over time.

Personally I'd be more concerned about deflation.  Wages are not expanding except for the 1%.  And as the boomers retire they will be limiting their spending not growing it.

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#5) On July 12, 2013 at 8:02 AM, MoneyWorksforMe (< 20) wrote:

Awallejr. way to once again start talking to me without actually addressing any of the main points I've discussed above.

Bernanke's job isn't even close to done--in fact, his job is becoming more difficult day by day. Therefore it is simply premature to say he is "doing a great job" when the most difficult part of the job is still left! Furthermore, congratulating someone on avoiding a crisis, only by creating a potentially bigger and more costly one down the road is ridiculous, and defies any sensible logic. Apply this to any situation in life! In sum, at BEST the jury is still out on whether or not Bernanke is doing a "good" job.

If Bernanke is able to somehow miraculously exit the markets without any significant repercussions (I will be absolutely amazed), I will then have myself a nice piece of humble pie.

And to adress what you've said about deflation: I don't know how anyone could think deflation at this point in the game is a viable option. I don't see deflation in any of the goods or services I buy. I don't fear deflation or inflation, high levels of either will lead to the same result. If you haven't realized yet, any deflationary sign will be countered with more easing. Maybe this is because the U.S. is the largest debtor nation? I'm not sure how long this can continue for...as I said before I think it will be a policy blunder that sets off the dominoes. Other than that, we have China that will have a larger economy than the US in less than 7 years. The U.S. losing its role as the only superpower will put significant pressure on this insane monetary policy. As the only way it has been able to perpetuate this monetary policy is by the dollar being the world's reserve currency--but this too is changing, and changing quite rapidly...

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#6) On July 12, 2013 at 12:39 PM, awallejr (76.71) wrote:

Money, way to once again use surmise and supposition and ignoring the facts.

I guess you forgot what was going on early 2009.  We were having back to back negative 6 GDP quarters.  Millions were being laid off.  Housing was crashing.  People being thrown out of their homes.  Banks weren't even lending to each other.  Libor was skyrocketing.  GE and GS had to beg Buffett for cash just to stay in business.  There was a real possibility that people couldn't get cash from the atms. Cries for nationalizing banks were everywhere.

And then Bernanke did a press conference and told the world that he was not going to nationalize the banks and the Fed will do everything it could to backstop the banks.

The market turned on a dime after that.

With concerns of liquidity addressed, the next issue was to stop the bleeding and turn the economy forward. Enter the QEs.  And so far it has done what was expected.  Market at all time new highs.  Jobs are slowly positive as opposed to horribly negative.  Housing seems to be on a rebound.  Debt costs have been reduced dramatically.

Even your buddy Kudlow, who constantly attacked Bernanke, has now praised him.

The real problem is the FISCAL side.  Things could actually be improving more if it wasn't for the blind partisanship in Congress.

Bernanke's biggest mistake at his press conference was to give a specific example for the commencement of scaling back by say POSSIBLY IF THE DATA SUPPORTS IT on September and end mid 2014.

Everyone was taking that as a given.  Since many did their modeling using a 6 1/2 pct unemployment number as the trigger that took them into 2014/2015.  Saying September of 2013 was a game changer for them.  Hence the sell off by many.

His recent speech assuage the investment world that in essence September is not a given date.

As for his exit strategy, he set it forth as I have said, he didn't want to just pass the buck to the new chairman next year.  So he laid it out and it is what I have said it would be.  Let the paper self liquidate over time. And since he is in MBSs that can take up to 30 years, but so what, in theory the Government is perpetual.

As for deflation I guess you didn't even listen to his recent press conference where HE said he had some concerns about it.  I submit his opinion is far more important than some anonymous blogger named MoneyWorksFor Me.

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#7) On July 12, 2013 at 8:27 PM, MoneyWorksforMe (< 20) wrote:

 Whether you like it or not awallejr, this is reality:

 http://www.zerohedge.com/news/2013-07-12/inflation-too-low-are-you-kidding-us-bernanke

Go explain this one away with more government "statistics."  

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#8) On July 12, 2013 at 9:04 PM, gamemily (< 20) wrote:

Design of artificial intelligence must read
[1 paradox]Why 0.999... is not equal to 1?
Written in 2012
The current mathematic theory tells us, 1>0.9, 1>0.99, 1>0.999, ..., but at last it says 1=0.999..., a negation of itself (Proof 0.999... =1: 1/9=0.111..., 1/9x9=1, 0.111...x9=0.999..., so 1=0.999...). So it is totally a paradox, name it as 【1 paradox】. You see this is a mathematic problem at first, actually it is a philosophic problem. Then we can resolve it. Because math is a incomplete theory, only philosophy could be a complete one. The answer is that 0.999... is not equal to 1. Because of these reasons:
1. The infinite world and finite world.
We live in one world but made up of two parts: the infinite part and the finite part. But we develop our mathematic system based on the finite part, because we never entered into the infinite part. Your attention, God is in it.
0.999... is a number in the infinite world, but 1 is a number in the finite world. For example, 1 represents an apple. But then 0.999...? We don't know. That is to say, we can't use a number in the infinite world to plus a number in the finite world. For example, an apple plus an apple, we say it is 1+1=2, we get two apples, but if it is an apple plus a banana, we only can say we get two fruits. The key problem is we don't know what is 0.999..., we can get nothing. So we can't  say 9+0.999...=9.999... or 10, etc.
We can use "infinite world" and "finite world" to resolve some of zeno's paradox, too.
2. lim0.999...=1, not 0.999...=1.
3.The indeterminate principle.
Because of the indeterminate principle, 1/9 is not equal to 0.111....
For example, cut an apple into nine equal parts, then every part of it is 1/9. But if you use different measure tools to measure the volume of every part, it is indeterminate. That is to say, you may find the volume could not exactly be 0.111..., but it would be 0.123, 0.1142, or 0.11425, etc. 
Now we end a biggest mathematical crisis. But most important is this standpoint tells us, our world is only a sample from a sample space. When you realized this, and that the current probability theory is wrong, when you find the Meta-sample-space, you would be able to create a real AI-system. It will indicate that there must be one God-system in the system, which is the controller. Look our world, there must be one God, as for us, only some robots. Maybe we are in a God's game, WHO KNOWS?
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#9) On July 13, 2013 at 2:40 AM, awallejr (76.71) wrote:

Well Money apparently you can't make your own arguments.  You did that elsewhere just linking a link and saying "aha."  I was not arguing with Zerohedge, but fine I will. 

There is a reason why you don't include food/energy when discussing general inflation.  Bernanke told you why and history shows you why.  They are TRANSITORY.  One year you can have bumper crops, the next a drought.  Oil is more seasonal than anything. General rule for gasoline is it tends to peak by July 4th.

Remember 2008?  Remember when oil sold for $147 a barrel in the summer then crashed to $30 a barrel?  Zerohedge mention that?

So STL. Fed President Bullard's concern that slowing inflation could lead to deflation, or a broad decline in prices, and Japanese-style economic stagnation should be ignored because some blogger named Tyler Durden says otherwise?

How about you actually reading the FOMC's June minutes where many others worried about the low level of inflation instead of blindly replying with some nobody's link.

If you are not going to make your own arguments Money please don't waste my time.

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