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"The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases ... Is To Drive Up Wall Street"
The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.
But as U.S. News and World Reported noted last month:
By
now, you've probably heard that the Fed is purchasing $600 billion in
treasuries in hopes that it will push interest rates even lower, spur
lending, and help jump-start the economy. Two years ago, the Fed set the
federal funds rate (the interest rate at which banks lend to each
other) to virtually zero, and this second round of quantitative
easing--commonly referred to as QE2--is one of the few tools it has left
to help boost economic growth. In spite of all this, a funny thing has
happened. Treasury yields have actually risen since the Fed's
announcement.
The following charts from Doug Short update this trend:
Of
course, rather than admit that the Fed is failing at driving down
rates, rising rates are now being heralded as a sign of success. As the
New York Times reported Monday:
The trouble
is [rates] they have risen since it was formally announced in November,
leaving many in the markets puzzled about the value of the Fed’s
bond-buying program.
***
But the biggest reason for
the rise in interest rates was probably that the economy was, at last,
growing faster. And that’s good news.
“Rates have risen
for the reasons we were hoping for: investors are more optimistic about
the recovery,” said Mr. Sack. “It is a good sign.”
Last
November, after it started to become apparent that rates were moving in
the wrong direction, Bernanke pulled a bait-and-switch, defending
quantitative easing on other grounds:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose
and long-term interest rates fell when investors began to anticipate
the most recent action. Easier financial conditions will promote
economic growth. For example, lower mortgage rates will make housing
more affordable and allow more homeowners to refinance. Lower corporate
bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
Increased spending will lead to higher incomes and profits that, in a
virtuous circle, will further support economic expansion.
As former chief Merrill Lynch economist David Rosenberg writes today:
So
the Fed Chairman seems non-plussed that Treasury yields have shot up
and that the mortgage rates and car loan rates have done likewise, even
though he said this back in early November in his op-ed piece in the
Washington Post, regarding the need for lower long-term yields:
“For
example, lower mortgage rates will make housing more affordable and
allow more homeowners to refinance. Lower corporate bond rates will
encourage investment.”
But the Fed Chairman is at least getting
what he wants in the equity market. Recall what he said back then —
“higher stock prices will boost consumer wealth and help increase
confidence, which can also spur spending. Increased spending will lead
to higher incomes and profits that, in a virtuous circle, will further
support economic expansion.”
So now the Fed has added a third mandate to its charter:
1. Full employment
2. Low and stable inflation
3. Higher equity valuation
The
real question we should be asking is why Ben didn’t add this third
policy objective back in 2007 and save us from a whole lot of pain over
the next 18 months?
And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.
Indeed, leading economic consulting firm Trim Tabs (25% of the top 50 hedge funds in the world use TrimTabs' research for market timing) wrote on Wednesday:
The
Federal Reserve’s quantitative easing programs have helped stock
market participants, financial institutions, and large companies but
have done little to address the structural problems of the economy,
according to TrimTabs Investment Research.“Quantitative easing
is supposed to produce stronger economic growth and lower unemployment,”
said Madeline Schnapp, Director of Macroeconomic Research at TrimTabs.
“While QE1 and QE2 have worked wonders on the stock market, their impact on GDP and jobs has been anemic at best.”
Similarly, Ambrose Evans-Pritchard wrote today:
The
Fed no longer even denies that the purpose of its latest blast of
bond purchases, or QE2, is to drive up Wall Street, perhaps because
it has so signally failed to achieve its other purpose of driving
down borrowing costs.
Unfortunately, a rising stock market doesn't help the average American as much as you might assume.
For example, Robert Shiller noted in 2001:
We
have examined the wealth effect with a cross-sectional time-series
data sets that are more comprehensive than any applied to the wealth
effect before and with a number of different econometric
specifications. The statistical results are variable depending on
econometric specification, and so any conclusion must be tentative. Nevertheless,
the evidence of a stock market wealth effect is weak; the common
presumption that there is strong evidence for the wealth effect is not
supported in our results. However, we do find strong evidence
that variations in housing market wealth have important effects upon
consumption. This evidence arises consistently using panels of U.S.
states and individual countries and is robust to differences in model
specification. The housing market appears to be more important than the
stock market in influencing consumption in developed countries.
I pointed out in March:
Even Alan Greenspan recently called
the recovery "extremely unbalanced," driven largely by high earners
benefiting from recovering stock markets and large corporations.***
As economics professor and former Secretary of Labor Robert Reich writes today in an outstanding piece:
Some
cheerleaders say rising stock prices make consumers feel wealthier
and therefore readier to spend. But to the extent most Americans have
any assets at all their net worth is mostly in their homes, and those
homes are still worth less than they were in 2007. The "wealth effect"
is relevant mainly to the richest 10 percent of Americans, most of
whose net worth is in stocks and bonds.
I noted in May:
As of 2007, the bottom 50% of the U.S. population owned only one-half of one percent of all stocks, bonds and mutual funds in the U.S. On the other hand, the top 1% owned owned 50.9%.
***
(Of course, the divergence between the wealthiest and the rest has only increased since 2007.)
And last month Professor G. William Domhoff updated his "Who Rules America" study, showing that the richest 10% own 98.5% of all financial securities, and that:
The
top 10% have 80% to 90% of stocks, bonds, trust funds, and business
equity, and over 75% of non-home real estate. Since financial wealth is
what counts as far as the control of income-producing assets, we can
say that just 10% of the people own the United States of America.
The bottom line is that quantitative easing is not really helping the
average American very much ... and is certainly not worth trillions of dollars.
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Just to make sure I've understood you correctly: do you propose to drastically extend the mandate of the Federal Reserve, so that it can "pay off people's mortgages"?
Note that the purpose of most of these Fed-bashing articles is the exact opposite of that.
More Critical Thinking Wanted..huh? Well, you could sure use some, though I rather suspect it would be like pouring matter into a black hole, so, you're probably going to have to pay for it. As such, I reccommend you take what money you have a go long and hard munis. Some Spanish, Portuguese and Italian bonds as well.
Your contention that TARP turned a profit could probably be proven wrong with transparent information, but it doesn’t matter as TARP was a just minor Band-Aid while the real financial bailout was organized. The GSE’s and FHA have transferred the majority of the mortgage market train wreck from the Banksters to the Federal Government, with a token $1-odd trillion parked on the private Fed balance sheet. This represents the greatest theft in the history of the WORLD. Not to mention that post-theft the private Fed’s QE is driving up all but short rates while our currency is debased and the stock market is pumped. And to add insult to injury wealth continues to be transferred from individual savers to the same Banksters via ZIRP.
So go peddle your bullshit someplace else Sparky. You’re either too palpably stupid or evil to gain any traction here.
The other (much more widely recognized) economic take on that is ZIRP punishes rent-seekers who are only sitting on their money passively, while rewarding actual risk-takers who invest in the economy.
FYI, it's not the banks who were sitting on a trillion dollars of savings - it's companies and the top 5% of earners. They sat on that money because they saw a profound lack of demand, they had overcapacity and were under-utilized and because they saw looming deflation.
Forcing those monies from rent-seeking hoarders of money into actual main-street investments is what the Fed's bond buying intended to achieve - and it achieved that so far.
If you listened to ZH propaganda and bought gold at the top, too bad for you. Do something more productive than speculating on (and hoping for?) the end of modern civilization ...
No comment on my obvious conclusion that the wreckage from a national real estate crash was transferred to the public balance sheet via the GSE’s and FHA? I guess that doesn’t fit neatly into your simplistic faith that it is quite logical to allow the private Fed to print as much U.S. currency it wants to in order to target higher stock prices.
You know so little about ZH that you label its readers as “right wingers.” If you bothered to absorb an education here you would know the pervasive view is that all of Washington is controlled by the TBTF financial institutions. The Government of the United States is intentionally supporting policies that are not in the best interest of its own citizenry.
If printing money, propping up insolvent banks and pumping stocks was a win-win policy why is Japan still steaming towards a cliff? Why don’t all countries pursue these policies? What you are seeing is a debasement of our fiat currency and the creation of inflation. Have you checked the prices of energy, food, copper, cotton etc.? Do you know what is happening to the Chinese cost of goods as wages soar?
Finally, the U.S. is now a service based economy. The net effect of a weak currency is going to be very negative, not positive. Stagflation will be the end result of the monetary crimes being committed by the private Federal Reserve Bank, and supported by numb-nuts.
There are many, many contributors to ZH that are more eloquent that I am. Unfortunately they won't find someone as lost as you worthy of a education. But should you ever want an education you can find it in the history of this site.
Your arguments are valid ones - although I disagree with some of them. My critique was of the statements in the article, which created a hyperbole and exaggerated the 'cost' of QE.
This bit:
The effects of a weaker exchange rate depends on the amount of trade done with international partners and whether there's a surplus or a deficit towards them, not on the type of economy.
Switzerland is a service based economy too (in fact more so than the US) still it is hit by the strong CHF very, very hard.
Your MBS argument would only be valid if all of it were totally worthless. Is it your claim that the value of all that real-estate is close to zero?
Regarding Japan, it never fought deflation hard enough: it tried to extend the money suppy (and drastically so) but that did not help the real economy. The QE efforts by the Fed do have the sign of having an effect on the real economy. Whether it's a net plus or a net minus remains to be seen.
The farce of our situation is that Japan gives us advice: "Don't write off bad loans too quickly." This from a country with Debt to GDP of 200% that thinks the world won't laugh when they make pretend they will bail out the PIIGS.
Your claim that my mortgage scam observation, (and MBS is a small part of it) "is only valid if all of it were totally worthless" reminds me of the recent Arizona's shooter's logic: Mortgage loses are only real if the recovery is zero. Mortgage recoveries are not zero. Therefore mortgage loses aren't real.
I am happy for you if you have made your fortune and moved it outside the U.S. in assets that will benefit from the general debasement of fiat currencies. It is not a zero sum game by definition because there is a nearly infinite supply of paper money.
But I do mourn for honest, optimistic, patriotic working class who are just realizing they have been fucked beyond recovery by insolvent banks and the Government they control...
2 Peter 2:3
The other (much more widely recognized) economic take on that is ZIRP punishes rent-seekers who are only sitting on their money passively, while rewarding actual risk-takers who invest in the economy.
I see. So all the savers out there and retirees are evil "rent-seekers" who should be forced into highly speculative instruments because the FED says so. I guess you will never retire or ever need a stable income source to live on during your golden years. Nice way to gloss over a theft of epic proportions being perpetrated against the elderly who have worked and saved for their entire lives to build up a country which has at a whim decided to steal their retirement. When the mobs of angry retirees comes looking for justice because they have been wiped out, I hope they find you.
Check the data yourself and you'll see that the overwhelming majority of 'savers' and other bond holders were not retirees but companies and rich individuals, to the tune of $1 trillion each.
If you are of the opinion that beyond general monetary easing (the reduction of interest rates, which has been the mandate of the Fed for a century), the Fed should also have the power to implement selective policy action and involve itself in selective rewarding of certain categories of investors, such as 'retirees'? Should the Fed also protect "the poor" perhaps?
How far are you willing to go in terms of wealth redistribution from those who work today to those who 'earned' money in the 'golden' years when the various bubbles were being blown? Are today's retirees not (partly) to blame for the system that brought the economy here? Should they be completely and artificially isolated from all monetary effects of a bust economy?
I dunno 2012 is a comin
YOU dare to talk about not being taken seriously?
What's that saying about the pot and the kettle again?
What I found funny is that none of the replies nor anyone of the nearly two dozen junks actually had the wits to counter my rather simple to check assertion. Insults, accusations, sure - but actual logical counter-arguments - only the cricket chirp.
Which tells volumes about the intellectual honesty of right-wingers :-)
"The ultimate cost of buying $600b worth of government bonds is not equal to the first leg - it is equal to the purchase price minus the sell price"
Just who will buy back these bonds? When will they buy them back?
Whoever bought hundreds of trillions worth of bonds in the past 50+ years of US government bonds?
The US is a net debtor, so dilluting its own bonds is not an issue - it is indebted in its own currency. Do you think there will be much political outcry in the US if down the line the Chinese lose dearly on their bond positions? Why do you think China bailed out the PIIGs in Europe? China does not want the bond markets to collapse because China as a creditor has a lot more to lose than the debtors.
The US as a debtor indebted in its own currency has China by their guts and QE2, in case you have not noticed, was also a warning shot towards China: "dude, if you do not devalue the yuan, we will devalue it for you". There is nothing that China can do against that.
"George Washington" claiming the following "bottom line":
Fails at bottom line arithmetics, on an epic proportion.
It presumes two fallacies: one, that the sell price will be zero dollars, and secondly, that the Fed "spent" this much existing money that is missing from elsewhere.
No, the Fed did not 'spend' existing money - it simply "printed" money and bought treasuries for that, and has now on its balance sheet not freshly printed (and unused) dollars but a bunch of treasury bonds.
The final cost of that operation will equal to the nominal loss on the bond buy/sell operation once it's fully drained, minus whatever benefits it brought to the country as a whole.
Claiming that trillions have been spent is simply disingenious.
You could fairly argue that tens of billions will be lost on the transaction - which is still a ton of money that could have been spent better - but going on a hyperbole with claims of trillions of dollars only discredits the argument, and massively so.
The other obvious thing you and the author of the article is missing is that the Fed does not have to sell those bonds.
Why not? Because they are government bonds for God's sake. They have a principal amount, interest paid (coupon) and a due date. The Fed will get back its 'freshly printed dollars' in regular bond rollover.
Unlike stocks, bonds are self-sterilizing.
(You could validly question the viability of the exit strategy if only long mortgage based securities with 30 years of runtime were involved or so, but QE2 does not primarily involve them, the average maturity is a couple of years, giving the Fed an 'automatic' exit strategy.)
So what the Fed does here is that it absorbes a fair chunk of bonds and forces other parties into other instruments - such as into actual real-world investments in the real economy ...
(Which was a real issue - US companies were sitting on $1 trillion of government bonds which was driving deflation ...)
None of these thoughts and dynamics are outlined in this Fed-bashing article. It's as one-sided, unfair and disingenuous as it gets.