This page has been archived and commenting is disabled.
Bob Eisenbeis: QE 2 and Policy
Great comment by Bob
Eisenbeis, Chief Monetary Economist of Cumberland Advisors. He was the Executive Vice President and Director of
Research at
the Federal Reserve Bank of Atlanta. Bob is presently a member of the
U.S. Shadow Financial Regulatory Committee and the Financial Economist
Roundtable. His bio is found at
www.cumber.com. He may be reached at
Bob.Eisenbeis@cumber.com. -- Chris
Market
uncertainty is accompanying the wind-down of the second round of the
Fed’s quantitative easing policy. This concern is hard to understand,
as we will explain, and it is likely due to a fundamental
misunderstanding of the process.
The
Federal Reserve embarked upon its program of quantitative easing
because of the so-called zero-bound problem. The FOMC had cut its
Federal
Funds target to near zero (between 0 and .25%) and simply couldn’t
lower nominal interest rates below zero to further stimulate the
economy. So it started to engage in asset purchases to inject liquidity
into the system. Estimates are that every $100 billion
in asset purchases would have the same impact as lowering rates by
between 3 and 7 basis points. Over the course of QE 1, which spanned
from November 25th, 2008 to about March of 2010, the Fed purchased about
$1.75 trillion of assets. This translates into
additional easing of from 52.5 to 122.5 basis points.
At
its most recent meeting the FOMC reaffirmed that it will finish its
second round of $600 billion in additional stimulus, known as QE 2, at
the
end of June. This has provided an additional estimated 18 to 56 basis
points of easing, theoretically bringing the total stimulus for the two
programs to between 70.5 and 178.5 basis points.
People
are acting as if stopping the program is an end to monetary ease. But
this is far from the case. Think of it this way: much of the current
reaction seems to liken the Fed’s programs to pumping air into a leaky
tire, where the Fed would need to keep pumping to maintain a constant
tire pressure. But if this were true, then the Fed’s balance sheet
would remain constant in size as liquidity leaked
from the system. The better analogy is to liken the stimulus programs
to blowing up a balloon. The injections of funds keep pumping up the
balloon, which has gotten bigger and bigger. In the process, the Fed’s
balance sheet has grown from $2.2 trillion
in December of 2008 to $2.9 trillion presently. This leaves about $1.2
trillion in assets unaccounted for, based upon the amount of assets
purchased during QE 1 and QE 2. Where did those funds go? Did the
balloon spring a leak? The answer lies in the fact
that while the asset purchases were being made, other emergency lending
programs were simultaneously being wound down naturally as demand
receded. About $450 billion is due to the wind-down of the Term Auction
Facility, another $225 billion is due to the
wind-down of outstanding discount window credit and other loans, about
$300 billion is due to the run-off of the Commercial Paper Funding
Facility, and the remainder is due to the decline in central bank
liquidity swaps.
What
this means is that far less liquidity and stimulus has been injected
into the system by the two QE programs than is commonly believed or that
the basis point estimates would suggest. The net addition is more like
$600 to $700 billion, or roughly about 18 to 56 basis points. Of
course, there was also a term structure implication, because the
programs that were phased out involved mainly short-term
credit, whereas QE 1 and QE 2 involved purchases of long-term assets, a
kind of “operation twist” if you will. The important point, however,
is that the net additional stimulus remains in the system, even if the
Fed stops its asset purchases. The Fed is
not backing off of its desire to stimulate the economy, all it is doing
is backing off of its policy of steadily adding to that stimulus. The
air is not, on net, leaking from the tire, it is still in the balloon.
That stimulus is still working and the key
question is how effective it has been and will be.
Bob Eisenbeis, Chief Monetary Economist
»
- advertisements -
the author stataes the stimulis is working, I would ask for who
So "stimulus" (debt on the backs of my kids) is actually "liquidity" which is really "air" that is put into a "balloon" and not a "leaky tire" and that "balloon" is full of liquidity (wait...air) that is going to "stimulate" the economy?
And if we did nothing and let the bad players fail we might have free markets, the rule of law, and water and money instead of hot air balloons?
It's a leaky balloon but the author can't hear the hiss of escaping air.
So, on net, the Fed's added ~$600B but there's an additional $975B from the run-off of other ST programs. It's just a coincidence Im sure, but that gross add to the Fed's Treasury holdings is roughly equal to the deficit over the last 12 months.
Another idiot "economist" that justifies his existence on saying the FED is fighting the good fight, being somewhat "vigilant" and "responsible" in running monetary policy. He must be looking for a job.
Fact is the FED is buying Treasury securities in order to fund the massive debt demands of the NWO lead by the criminal banking cartel as certain mercantile CBs have ceased participating enabling our ponzi economy.
Comon Whalen - you are much more of a critical thinker than to cut and paste this simplistic tripe.
No he's not.
Throughout QE2 there were ~$15-30B per month in purchases "associated with principal payments from agency debt and agency MBS" PLUS the additional $80B or so per month that made up the $600B program. Now they're down to only rolling over the payments WITHOUT the additional $80B per month. The fed has been buying ~80% of treasury issuances lately, so now that they'll be buying less than 1/4 as much per month who will buy the rest?
Here are the totals per month since Aug '10 (QE2/debt payment rollover):
July forward $0/~$25B
June $50B/$12B
May $80B/$13B
April $80B/$17B
March $80B/$22B
Feb $80B/$17B
Jan $80B/$32B
Dec'10 $75B/$30B
Nov'10 $75B/$30B
Oct'10 $0/$32B
Sept'10 $0/$27B
Aug'10 $0/$18B
rims with tires don't spark like that
Jeeeez, why do I feel like the ONLY pumping of air coming from this "article" is the smoke this idiot is trying his best to blow up my ass? I'm tired of all the jibber jabber, bullshit, crystalized balls, propaganda, misdirection, shell games, dysfuntion, fraud, lying, cheating, theft, politics, green shoots, MSM, a president that is incompetent/malfeasant to say the least to lead this country, a legislative branch stuffing their pockets with Big Pharm, Oil, and Union bribes, a judiciary system that is dumber in the head than a hog is in the ass, and then WE have the shylock theives from the Walled Street Bansters. I say it's time to spill some fucking blood.
There are so many solutions to so many problems that if implemented would make all of our lives, in the aggregate, a relative paradise compared to where we are and have been for several decades.
Yours is certainly a worthy one and the ONLY one that will produce something significant in the way of results.
If Lord Blankfein, Jamie Dimon, Joe Cassano, Bob Rubin, Bill Clinton, George Bush, Chris Cox, Larry Fink, Schwartzman, James Johnson, Franklin Raines, Alan Greenspan, Tim Geithner, Hank Paulson, Bernie Madoff, Larry Summers, Al Sharpton, Charlie Rangel, Phil Graham, Ken Lewis, Dick Fuld, Ace Greenberg, just to name a few were to appear in sequential fashion with a 3/4 inch aperture in their foreheads, the resulting fallout would be a wonder to behold.
But as several others have pointed out, we do not have plan, method, preparation, will, or expertise to pull this off successfully. As those among us who do are not sufficiently motivated to sacrifice their own lives for us. Nor we for them.
It reminds me of the movies I've seen about the Concentration camps in WWII wherein there are 5 guards with machine guns keeping an eye on 200 prisoners. There is no way those guards could prevent being ripped into shreds if 200 men, women, and children suddenly decided to advance upon them at an opportune time. But who among the 200 would be willing to be the frontal force to take the bullets and allow the others to destroy their guards and try to escape?
This is the essential dilemna of mankind: The absence of true Heros who are able and willing to give up their lives for total strangers even though everyone including themselves are sure to perish.
So, $600 billion is about 18 basis points and $700 billion is 56 basis points? WTF? Are these logrithmic basis points? How does this make sense?
Never happen dude, this is America the land of the sheep - home of the passive.
John Trudell , I'm crazy ?
http://www.youtube.com/watch?v=ctUecTdPEO0&feature=related
.
" about the fight, you can't win." near the end
...Everybody stand back...!
financially engineered, rolling, leveraged sovereign take downs,
the meaning of 1913.
you'll know that the policy has worked when the sovereign is
on its knees selling for pennies every natural resource including
the children. there, fixed it
There is enough liquidity in system now to cause hyperinflation and
down the road it probably will. The Fed is hoping for it only to cause
a desired amount of inflation, but we have seen before that the Fed
has a very difficult time controlling inflation once it gets started.
Only with much higher interest rates and years of painful policies is
inflation brought under control. This time the inflation will come,
not coupled with an expanding economy, but instead, with a contracting
economy in a severe double dip recession. Raising interest rates in
this economy will be beyond painful. It would be devastating, sending
the economy into a deep recession. No interest rate increase would
result in unfettered hyperinflation which would destroy the currency
and rob people of their savings. The Fed is playing with fire pumping
massive amounts of liquidity into the economy without really knowing
what terrible side effects will occur.
As I understand it, the "liquidity" currently in the system is [for the most part] propping up asset values unrealistically via organized share buying, and holding of "contaminated" assets at false par values.
Correct me if I'm wrong, but once those assets are recognized at actual values by the average schmuck, and/or the PTB cease or fail to maintain them, don't they collapse rather hastily to a realistic mean somewhere south of jack s**t? And with that, the stock market in general, retirement vehicles, homes, etc? Doesn't the "liquidity" just evaporate?
It seems it's "liquidity" on the way into the system, but there it solidifies like financial epoxy. Any atempt to remove any substantial amount of it would be like trying to remove sand from the interior of a steep cone of it which has the outside hardened with sugar water. Poke a hole in the bottom and the contents inside run out until it re-establishes angle-of-repose...
The government money replaced the "connected people's" money so they could get out. The taxpayers are now the owners of all that worthless shit.
I would like to point out that there have been no corrections.
If the liquidity is not enough to inflate the balloon sufficiently would that be construed as a "liquidity crisis."
Does this smell like June 2007?
Yeaaa!! more fake economy, central bank engineered stimulus!!!
(Maybe this is just accurate info but Whalen's posts here are watering down my admiration. Like him better when he is correctly blistering the banking system.)
Speaking of toxic shit blowing up in your face, now Los Alamos is under threat from wildfire?
REALLY?
Who is writing this uncreative melodrama?
since i am clearly on "deathwatch 2000" i only wish to say "i find this article worthy of response in spite of certain death." take it as it is. "what did the Federal Government purchase?" is my reply. If you say "General Motors and AIG" that would seem to me "large components are what we can in actuality call an economy" and not this baloney blabbed about on the tele. How this can be "computed" into some form of econometric dialogue is simply beyond me--but if i am the government and i can both create and recreate an entire tranportation industry and qualify it as an insurable risk "i feel empowered." what should the rest feel? "feelings, nothing more than...feelings!"? stick with the natural gas space..."it's only just begun" and see how elections matter as of course they always do. if there is a sudden emergence of a third party in actuality "look out for reality" in the form of Uncle Sam vis a vis real estate. we all know the only way to return liquitidy in the form of "a borrowing authority for the folks" looks like--and it revovles around the simplicity of price. This is what we DO know.
Maybe I have had one tee marny maytinis.
But I can't understand your post.
It seems important, so could you provide Cliff's notes version?
"The air is not, on net, leaking from the tire, it is still in the balloon."
Where does one apply to have this quote entered into the history books?
Yes, an incoherent mish-mash of metaphors that appropriately exposes the absurdity of the FED's stimulus frenzy.
Too bad the Author seems to wish to discount or ignore the reality of the TENS Of TRILLIONS Of Dollars in FED & Treasury Bailouts, Backstops, Buyouts, Derivatives Payoffs, Toxic Asset Purchasing, Retirement Account Raiding, Naked Money/Credit Creation, -or ask whether any of it was worth the cost to Everyone Else in the Country to save Liars and Frauds from losing their asses in the game as happens when the game is played by Anyone that loses who is not Politically Connected.
I have a lot of respect for Mr. Whalen; but, this bit of hot air is a laughable attempt at distraction form the true magnitude of the Interventions.
The fact is that Captialism is supposed to be about taking your losses as You do You gains -and there are a whole lot of People getting paid as if they won who are truely EPIC fucking Losers by the Jackasses at the FED and in the Government with what are arguably counterfeit and/or misappropriated/stolen funds.
Those People, BOTH the Insolvent Financial Wizards and the Bought Political Puppets; deserve to have the net, the tire, and the balloon shoved right up their asses along with their losses.
Fucking up the system with Fascism and Inflation in an attempt to cover up the fact that You fucked up the system with Corruption and Fraud is a historically tried and proven way to end up hanging out at the lamp-post on a street corner when Everyone else that can has gone home for the night.
Quotes in History Books indeed...
the comparison to a balloon says it all.
What you call "stimulating the economy" I call theft through watering down the currency.