This page has been archived and commenting is disabled.

The Fed's New Round of Quantitative Easing Is Like Trying to Patch Leaking Pipes by Pumping in More Water

George Washington's picture





 

Washington’s
Blog

Bernanke announced additional quantitative easing yesterday,
primarily in the form of buying treasuries to monetize the U.S. debt.

Jeff Harding points out that those worried about deflation within the Fed won out over the scared-of-inflation camp:

The
Fed Open Market Committee voted today to roll its holdings of maturing
Fannie and Freddie debt into longer term Treasurys. This represents a
significant change in Fed policy and it appears that the
anti-deflationist wing of the Fed, led by James Bullard, president of
the St. Louis Fed, won over the anti-inflationists led by Thomas
Hoenig, president of the Kansas City Fed.

 

As I reported last week,
there is a significant movement in the Fed, led by James Bullard, to
increase its Open Market Operations purchases of Treasurys in order to
prevent deflation. They see that money supply is decreasing and that
zero interest rate policy (ZIRP) has been ineffective. In a
groundbreaking paper just published by Bullard, he advocates the
purchase of Treasury debt which is, in effect, a monetization of U.S.
debt. They believe that such purchases, called "quantitative easing" is
the only effective tool the Fed presently has to increase money supply.

 

This reveals that the Fed is very worried about deflation.

 

***

 

Presently
(as of August 4) the Fed holds a total of $2.054 trillion of debt.
Commencing last year and continuing through April of this year, the Fed
bought $1.25 trillion of GSE debt (MBS of the government sponsored
entities, Fannie Mae and Freddie Mac) and the balance consists of
Treasury paper. They intend to keep their holdings at this level.
According to a subsequent release
today by the NY Fed, which carries out the Fed's Open Market
Operations, Treasury paper purchases will be "in the 2- to 10-year
sectors of the nominal Treasury curve, although purchases will occur
across the nominal Treasury and TIPS yield curves."

 

***

 

While
the initial impact of this new policy on the economy will be modest, it
sets a precedent for the Fed to substantially increase its attempts to
inflate the money supply as the economy declines.

Given that the Fed has until recently taken extraordinary measures to avoid inflation, this may be a major shift.

Tyler Durden notes:

BofA's
Jeffrey Rosenberg provides the breakdown of the total amount of
securities that roll off (MBS, Agency and USTs) over the next 12
months: the total is $340 billion, including the $230 billion (and
possibly more) in MBS. Alas, this means that on a straight line monthly
basis (and the finally outcome will likely be far more jagged), there
will be on average just under $30 billion a month in incremental 2-10
Year Treasury Purchases. As Joseph Abate said earlier, this is not
nearly enough to be considered a new stimulus, and at best seeks to
retain the status quo. What is notable is that BofA believes today's
action should have been priced into the market.

So is another round of quantitative easing the right prescription for the economy?

It depends on whether or not you think debts and deficits matter.

As I wrote last month:

"Deficit
hawks" like top economic historian Niall Ferguson says that America's
debt will drive it into a debt crisis, and that any more quantitative
easing will lead our creditors to pull the plug. See this, this and this. Indeed, PhD economist Michael Hudson says (starting around 4:00 into video):

If
the problem that is grinding the economy to a halt is oo much debt, and
if no one in the government - in either party - is looking at solving
the debt problem, then ... we're going to go into a depression as far
as the eye can see.

Yet the U.S. hasn't reined in its profligate spending. While modern economic theory shows that debts do matter (and see this), the U.S. is spending on guns and butter.

As PhD economist Dean Baker points out, the IMF is cracking down on the once-proud America like a naughty third world developing country. (As I've repeatedly noted,
the IMF performed a complete audit of the whole US financial system
during Bush's last term in office - something which they have only
previously done to broke third world nations.)

Indeed, economics professor and former Senior Economist for the President’s Council of Economic Advisers Laurence Kotlikoff wrote yesterday:

Let’s get real. The U.S. is bankrupt.

 

***

 

Last month, the International Monetary Fund released its annual review of U.S. economic policy.... The IMF has effectively pronounced the U.S. bankrupt.

 

***

 

Based on the CBO’s data, I calculate a fiscal gap of $202 trillion, which is more than 15 times the official debt.

 

***

 

This is what happens when you run a massive Ponzi scheme for six decades straight....

 

***

 

Bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.

On the other hand, as I also pointed out last month, the government isn't even stimulating in an effective way:

"Deficit doves" - i.e. Keynesians like Paul Krugman - say that unless we spend much more
on stimulus, we'll slide into a depression. And yet the government
isn't spending money on the types of stimulus that will have the most
bang for the buck: like giving money to the states, extending unemployment benefits or buying more food stamps - let alone rebuilding America's manufacturing base. See this, this and this.

(Yes, Congress has just thrown twenty billion dollars at jobs and the states, but it is a tiny drop in the bucket compared to the many tens of trillions of dollars in handouts to the giant banks.)

Keynes implemented his policies in an era of much less debt than we have
today. We're now bankrupt, with debt levels so high that they are dragging down the economy.

Even
if Keynesian stimulus could help in our climate of all-pervading debt,
Washington has already shot America's wad in propping up the big banks
and other oligarchs.

More important still, Keynes implemented
his New Deal stimulus at the same time that Glass-Steagall and many
other measures were implemented to plug the holes in a corrupt
financial system. The gaming of the financial system was decreased
somewhat, the amount of funny business which the powers-that-be could
engage in was reined in to some extent.

As such, the economy had a chance to recover (even with the massive
stimulus of World War II, unless some basic level of trust had been
restored in the economy, the economy would not have recovered).

Today, however, Bernanke, Summers, Dodd, Frank and the rest of the boys haven't fixed any of the major structural defects in the economy.
So even if Keynesianism were the answer, it cannot work without the
implementation of structural reforms to the financial system.

A
little extra water in the plumbing can't fix pipes that have been
corroded and are thoroughly rotten. The government hasn't even tried to
replace the leaking sections of pipe in our economy.

Quantitative easing can't patch a financial system with giant holes in it.

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 08/11/2010 - 18:32 | Link to Comment RockyRacoon
RockyRacoon's picture

The Fed is like an economic military.  We have bases all over creation just like we intervene in economies all over the world.  Does saving every other country thru dollar swaps save us in the long run?  Or is the whole dreaded mess just as absurd as military intervention, costing us our collective wealth.

Wed, 08/11/2010 - 17:32 | Link to Comment metastar
metastar's picture

On a long enough timeline [in the not too distant future] the survival rate for the dollar drops to zero. ZeroFed.

Wed, 08/11/2010 - 16:35 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

President Barack Obama’s plan to let lapse the Bush-era tax cuts for the highest-income Americans would have little effect on 76 percent of those taxpayers, a study says.

Under the Democrats’ plan to end a tax break for those earning more than $200,000 per individual or $250,000 per couple, the 3.8 million filers who fall in the $200,000 to $500,000 income range would pay $2 billion more in 2011 taxes, or an average of $532, according to a July 30 letter from the nonpartisan congressional Joint Committee on Taxation.

The July 30 study conducted for the House Ways and Means Committee shows that those earning between $200,000 and $500,000 would account for 5 percent of the planned $38 billion tax increase; the biggest burden would fall on the 608,000 taxpayers who make between $500,000 and $1 million and the 315,000 who earn more than $1 million. The first group would pay $6 billion more, or an average of $9,868, and the second group would owe $30 billion more, or $95,238 on average, the analysis said.

For those under $500,000, the tax increase is “relatively low,” said Roberton Williams, an economist with the Urban Institute who studied the joint tax committee report. “It’s less than 1 percent.”

Yep, that's what all the fuss is about.  How do you like the super-wealthy enlisting you to protest tax rates that benefit them far more than than do you?

Republican, tea partier, liberal, or Democrat: don't be a sucker - recognize that it is plutocratic elite vs the rest of us, and alot of this will make much more sense.  If it serves them GOOD, if not BAD. Forget everythign else. Greed you would not recognize as human lives in the callous hearts of those people who have all but institutionalized their plutocracy.  The politicians, by and large, serve them after they are elected, with periodic messy trips back to the electorate to explain their bizarre actions.  Political diviseness benefits them greatly - it distracts and draws energy from the real conflict that should occur.

Wed, 08/11/2010 - 16:57 | Link to Comment BarrySoetoro
BarrySoetoro's picture

That's right...let's go down the class warfare road, because it has always worked out so well in the past.  Did you actually type this post, or did you just do a copy-paste from your morning talking point update from Pelosi?

The bottom line is that you believe you are ENTITLED to other people's money...just by virtue of the fact that they have more of it than you do.  Newsflash for you, Ned.  In the grand scheme of the planet, the poorest slob in this country is probably in the top 5% of wealthiest people on the planet...so, as a member of the "super wealthy" club, what say you?  I'm glad we've got the Urban Institute on the case, reassurring me that I'll be just fine with a little bit less money.  Fuck Him...and Fuck the class warfare / entitlement mentality that has infected this country like a bad case of the clap.

Wed, 08/11/2010 - 16:06 | Link to Comment bigkahuna
bigkahuna's picture

The wheels could come off at any time. China could put us in the dirt by itself. It is embarrassing.

Wed, 08/11/2010 - 15:56 | Link to Comment tom
tom's picture

"Keynes implemented his policies in an era of much less debt than we have today. We're now bankrupt, with debt levels so high that they are dragging down the economy.


Even if Keynesian stimulus could help in our climate of all-pervading debt, Washington has already shot America's wad in propping up the big banks and other oligarchs.

More important still, Keynes implemented his New Deal stimulus at the same time that Glass-Steagall and many other measures were implemented to plug the holes in a corrupt financial system. The gaming of the financial system was decreased somewhat, the amount of funny business which the powers-that-be could engage in was reined in to some extent."

 

You should read more of and about Keynes before you post this kind of stuff, you got it all mungo bungoed.

Keynes began his career in the post-war era when the UK owed massive war debts to the US, which he argued were crippling the UK economy. His first big "hit" was a pamphlet slamming the attempt to impose war reparation debts on Germany, which he argued, in 1919, would lead to further conflict. Keynes was extremely wary of foreign debt, which is evident throughout his career, though he didn't mention it in his most popular book The General Theory as the theory at its center didn't even take into account the foreign sector.

Keynes never implemented anything. He co-authored Lloyd George's 1929 Liberal party platform proposing large-scale public works. Public works was not Keynes' own idea; he was just one of many prominent people at that time who supported it. The Liberals won 59 seats, Labour 288, Conservatives 260. But almost half the Liberals were classical liberals opposed to George's public works platform. Nonetheless it was a gain for the Liberals and Keynes was appointed to a couple advisory committees.

Then came the '29 crash and the onset of the Great Depression. Large-scale public works grew more popular including in the US, where a guy by the name of Franklin Roosevelt, who came up with the plan before he'd ever heard of Keynes, implemented the New Deal.

Later, Roosevelt met Keynes who started offering advice to him, and American disciples of Keynes, especially Alvin Hansen, became very influential in forming US policy.

Here's something I write with more detail: Don’t (always) blame Keynes

http://keynesianfailure.wordpress.com/

Wed, 08/11/2010 - 15:26 | Link to Comment Übermensch
Übermensch's picture

Folks we are living through hyperinflation as Bernanke speaks.

Wed, 08/11/2010 - 15:25 | Link to Comment kevinearick
kevinearick's picture

damned if they do (1);

damned if they don't (0).

That'll happen when they throw out the steering wheel and all the gears.

Wed, 08/11/2010 - 15:19 | Link to Comment Grand Supercycle
Grand Supercycle's picture

DOW/SP500 daily charts are now bearish.

So the downtrend I first mentioned in early May this year, can now resume.

http://stockmarket618.wordpress.com

Wed, 08/11/2010 - 14:53 | Link to Comment dcb
dcb's picture

bond vigilantes always strike after you have put our money in treasuries. they will hit us markets when dollr is strong.

this is a bounce thing. buy alternative currencies when dollar very strong, sell when weak. I'd imagine it will be a crisis in slow motion. note from my understanding china has been selling into strength.  now the people buying are us citizens. that's when you can strike.

But I wonder if Japan will be the next attacked before us. they pick one country at a time.

when you see falling stocks, bonds, and dollar the end is near.

Wed, 08/11/2010 - 14:46 | Link to Comment SteveNYC
SteveNYC's picture

The problem is the leaks in said "pipes" happen to drop into a big Scrooge McDuck like coin vat in certain buildings occupied by JPM and GS in Manhattan. None of it will ever find you or I.

Wed, 08/11/2010 - 14:42 | Link to Comment Astute Investor
Astute Investor's picture

(Yes, Congress has just thrown twenty billion dollars at jobs and the states, but it is a tiny drop in the bucket compared to the many tens of trillions of dollars in handouts to the giant banks.)

Ben Bernanke believes that banks are "special" because, in his words, they provide unique intermediation services that help overcome informational problems in financial markets.  This statement is obviously bogus, but provides insight into Bernanke's madness.

Being categorized as "special" is all you need to know and provides the rationale for why the tens of trillions of dollars that went to the banks.

 

Wed, 08/11/2010 - 17:33 | Link to Comment Wallace Hartley
Wallace Hartley's picture

Not sure if the the banks are "special", but their upper management sure is...f-ing retards.  Getting huge bonuses based on money that was given to them by us taxpayers.  Makes me sick to my stomach.

Wed, 08/11/2010 - 19:54 | Link to Comment Shameful
Shameful's picture

Hold on there! How can you call them retarded?  They managed to make insane bets, lose and get paid on them anyway.  They have access to infinite money and backed up with the power of infinite moral hazard.  They drive sports cars and tool around with high price hookers.  Where is the retard part?  Seems to me like they won, and we suckers who get stuck with the bill lost.

Wed, 08/11/2010 - 15:17 | Link to Comment DevelopMental
DevelopMental's picture

they provide unique intermediation services that help (Bernanke) overcome informational problems in financial markets.

Invert, always invert...

Wed, 08/11/2010 - 14:29 | Link to Comment ATG
ATG's picture

Re Today, however, Bernanke, Summers, Dodd, Frank and the rest of the boys haven't fixed any of the major structural defects in the economy.

 

Add Blankfein, Gramm, Greenspan, Geithner, Paulson, Roemer and most Big Corp Shadow Banks to the list...

Wed, 08/11/2010 - 14:24 | Link to Comment hidingfromhelis
hidingfromhelis's picture

...and the DXY is up 1.9% with this.  Makes perfect sense. <sarc off>

One pill makes you larger And one pill makes you small, And the ones that mother gives you Don't do anything at all.

http://www.youtube.com/watch?v=OegvynJ1plk

Wed, 08/11/2010 - 14:07 | Link to Comment Ned Zeppelin
Ned Zeppelin's picture

The latest Fed move seems in the category of "futile gestures."  Wonder how many billable hours were spent trying to figure out this move.

Wed, 08/11/2010 - 14:01 | Link to Comment MarketTruth
MarketTruth's picture

(Humor) So like BP, will the Fed try a 'Junk Shot' to seal the leaking pipe?

Oh wait, they already have by buying $1,250,000,000,000 of Fredd/Fann paper... and the pipe is still leaking.

Wed, 08/11/2010 - 14:32 | Link to Comment WaterWings
WaterWings's picture

GW is asking for it using such keywords in the headline. Troll swarm in 3...2...1...

Wed, 08/11/2010 - 14:21 | Link to Comment ATG
ATG's picture

Bingo

Wed, 08/11/2010 - 13:53 | Link to Comment TooBearish
TooBearish's picture

dude its a fukking baby step wake me up when they take the balance sheet to 6 trillion

Wed, 08/11/2010 - 14:24 | Link to Comment ATG
ATG's picture

A gambling man might be lured by zero cash carry into leveraging Treasuries 20 to 1.

Oh wait...

Do NOT follow this link or you will be banned from the site!