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Fed's Warsh on QE - Form Over Substance
Fed Governor Kevin Warsh made a splash on Friday with an Op-Ed piece in
the WSJ. The essence of this was that the Fed would have to move to
eliminate the massive monetary stimulus quickly and aggressively at
some point in the future when, “The timing is right”.
This
sounded good to me at first. I hate the QE process. I think it will
ruin us. Mr. Warsh’s comments were addressed to people like me. My
thoughts after re-reading his words:
-Mr. Warsh is a ‘close
confident’ of Mr. Bernanke according to the WSJ. Anyone who thinks that
Mr. Bernanke did not have something to do with the Op-Ed piece and the
follow on speech by Warsh is just wrong. While Warsh wrote this column,
I will bet that Bernanke reviewed it before it was delivered to the
WSJ. Fed Governors do not speak publicly unless there is a specific
reason. Everything they do is orchestrated. Including articles in the
WSJ.
-The timing of this writing is very suspect. It follows by
just days the Fed’s announcement that they will keep rates at zero for,
“the foreseeable future”. My guess is that after the last announcement
Bernanke got phone calls from foreign central banks that said, “I am
holding your paper and I do not like your actions. What you are doing
is devaluing my holdings. Change your ways or I will change my
holdings!”
-Why would any central bank willingly hold the vast
quantities of Treasury IOUs when the return adjusted for inflation is
negative? They have to account to their citizens as well. From China
and now Japan and from many other traditional holders of our debt are
coming words and actions that they have had enough. While they are not
selling Treasury paper yet, there is little evidence that they are
increasing their holdings net of Agency debt.
-Foreigners have
expressed their concerns, but more significantly the American people
are increasingly looking at the Fed's policies with disdain. People are
aware that for the first time in our history the US is monetizing the
debt. Large deficits have always been an issue. But we are in a new and
dangerous place with the deficits in 2009. In prior years, holders of
dollars purchased all of the debt. This time it is different. Now we
are just printing the money. Depending on what is included in the
calculation of QE that printing has/will reach a minimum of $1.75
trillion. Mr. Bernanke has to be aware at this point that many citizens
are actively comparing our economic policies to that of post WWI
Germany, Argentina and even comically Zimbabwe. There is nothing
comical about this. We are doing what those countries did.
-Mr.
Warsh suggests that at sometime in the future the Fed will react and
remove the stimulus. These are empty words while the Fed buys $25
billion of Federal IOU’s each week. There is no substance behind Mr.
Warsh’s comments when interest rates are negative 2% versus inflation.
The Fed's credibility is not reestablished by an Op-Ed piece. It will
be re-established by action.
-It is possible that the delay in
reversing the QE program will have a negative effect in the short term.
At this point everyone is thinking, “It is going to end soon and when
it does there will be another big leg down in the economy, I am not
going to plan an expansion based on that”.
-Do not assume that
Mr. Bernanke is unaware that the dollar is at a low for the past year.
He knows that this movement in capital is a function of the increased
distrust in his policies outside of the USA. Mr. Bernake’s only job is
to, “maintain price stability”. There is no confidence he will deliver
on this promise.
-The words by Warsh coupled with the Fed’s
unanimous vote to extend zero interest rates this week leads me to
believe that the Fed will continue the QE process until the 1st quarter
of 2010. Mr. Bernanke has said recently that the recession is over. The
emergency monetary and fiscal steps that have been undertaken over the
past year and a half have worked. The economy is now benefiting from a
significant inventory correction. The real economy has some legs. They
may be wobbly legs, but they are real. The inventory correction will be
completed by the first quarter 2010, precisely the time that the Fed
will be withdrawing its stimulus. The downturn in the 2nd quarter of
2010 will be significant as a result of these combined factors. It
would be far wiser to reverse the monetary stimulus while the economy
has legs of its own. Failure to do so will leave the Fed with no policy
options nine months from now.
-In the Journal piece Mr. Warsh stated:
“If
policymakers insist on waiting until the level of real activity has
plainly and substantially returned to normal–and the economy has
returned to self-sustaining trend growth–they will almost certainly
have waited too long.”
Mr. Warsh and Mr. Bernanke
already know they have extended the emergency steps too far. They know
that there is very little chance that the US will return to trend line
growth of 3% on a sustained basis. Too much damage has been done to
expect that to happen. It is more likely that we will have just a
quarter or two of real economic expansion before the next slowdown.
This
Op-Ed would not have appeared if that were not the case. The Fed is in
a policy dilemma at this point. They know what they are doing is wrong,
but they are afraid of the consequences of, “Doing the right thing”. So
they are doing nothing. They write letters to leading newspapers saying
they are aware of the problem, and will act in a timely manner. But
they know that the longer the emergency steps are extended the harder
the fall will be when they remove them.
»
It seems a little childish but whenever I hear the words QE, I hear the phrase:
"QE is rather like Peter Pan; the magic only works if you believe in it."
there are some good points in the article but enough detractions to keep it of modest value....
for example we are not printing money like weimar germany or zimbabwe...those countries printed money with total disregard to backing....the usa is printing massive quantities through the purchase of assets....there is a huge huge difference between the two strategies....
i agree whole heartedly that warsh in collusion with bernanke is grandstanding....they can talk themselves blue in the face but it is their actions and only their actions which count....their actions have been to kick qe down the road to fight another battle with the wrong enemy....
the necessity of maintaining vigorous levels of purchases of junk assets speaks loudly regarding the state of real estate and banking....the economy shows absolutely no signs of returning to economic levels which valued these assets originally....even a quarter or two of annualized 4% growth would fail to return us to frothy valuations....except for the massive infusion of money into the system....which means
more bubbles....
the fed has no way of removing all of the "liquidity" it has supplied....it may exercise repo agreements now and then but they will not be sufficient and of only passing
effect....withdrawal of money would take us back a year but
i would be all in favor of that...
those excess reserves sitting in the fed will come tumbling out and add more thermite to the monetary explosion in progress...
i am concerned not just about the inflationary implications but about the central planning implications....the soviet economic model failed miserably and our outcome will be no different....we have a bunch of right winged totalitarian
cia-fed apparatchiks running things into the ground in washington....it stems in part because of sino-envy....send ben a set of pajamas...
qe is like an all night drinking fest - the morning will be a bitch....
No we are not printing like Weimar.
I don't think you start this process off with the thought that you will add a zero to your currency every few months. You start with, "We will just do it this one time and we will reverse the awful effects of this as soon as we can". This is a slippery slope that I do not think we should be on at this juncture.
As you point out what has already been done will likely to be permanent. And the plan is to do more. We have gone from forth gear back to third and are still cruising along. We are a long way from stopping and reverse does not work in this bus.
BK
let me clarify the printing situation...
when i say that we are not printing like weimar
i am not talking in terms of quantity but in
terms of quality....
weimar just started adding numbers to currency willy nilly
as the charade escalated out of control....there
was absolutely nothing behind the currency as
those zeroes were added....
the usa is not doing that....it is producing
wheel barrows full of money which is backed by a
debt based asset....
so weimar had fiat money backed by nothing; in
the usa we have money backed by debt assets...this
distinction is important for folks to see and
why i cringe when people make the comparisons...
so the difference is one of kind and quality rather
than of quantity or pure printing....
not that it is better....if anything it is worse
because the implications are more difficult to
see....in other words, keeping all of that debt
alive in an economy which cannot sustain it is
lethal because the interest is not terminated
and moves inexoriably higher until it tanks the asset
, at which time the purchases revert into weimar
style printing....
'''so weimar had fiat money backed by nothing; in
the usa we have money backed by debt assets...this
distinction is important for folks to see and why i cringe when people make the comparisons.'''
That distinction is farcical.
Prior to 2009 your claim was true, that the new money was backed by a debt based asset (in other words, borrowed). But this year the Fed has been directly monetizing the debt by creating money to purchase treasuries.
It makes no practical difference if the U.S. prints dollar bills or the Fed prints dollar bills or if they don't print at all and just add entries in a ledger. (The only difference is that doing it the way we are, the U.S. owes interest to the Fed on the money the Fed created out of nothing. In other words, we picked a worse way to go because as the debt increases the interest on the debt increases and we'll have to create even more money to pay the interest.)
Now money is being created ex nihilo and backed by nothing, just like weimar, just like zimbabwe, just like Argentina.
The Fed's track record for withdrawing stimulus measures (or making rate adjustments) is very poor. I have no confidence that they will reverse course at the appropriate time.
In fact, I believe that the damage has already been done and there is no viable exit strategy. Simply extracting the liquidity that's been injected is not enough, the economy needs to reset, it needs to suffer the downturn in order to resolve gross imbalances.
I'm in the denninger camp on this one, we're boxed in with no exit that won't involve pain and adjustment. The big question is when do we want to suffer and to what degree...now or later.
In my book we've taken the wrong fork in the road.
Economists may have legs, but we do not have jobs or money. I think jobs and money are more important than legs. I guess thatists would speak plainly, but perhaps they are afraid to do so, because they would have to speak about real things, like jobs and money, instead of imaginary things like legs.
Another excellent contribution, Bruce.
END THE FED. EVERYONE should read Ron Paul's new book, it is only $13 at Amazon, buy a few copies and hand it out to friends and relatives.
I know I have.
Thank you for a very timely piece Bruce with more analysis and food for thought on this matter. I happened to see Warsh's piece just after it came out and started scratching my head and saying to myself, "okay, wtf, what kind of fedspeak is this just a day or two after the fomc meeting"
i notice some healthy disagreements brewing in this thread and I look forward to reading them. I'm actually hoping TD might move this up to the main board to catch some more action and debate.
I really liked this one from your post: "My guess is that after the last announcement Bernanke got phone calls from foreign central banks that said, “I am holding your paper and I do not like your actions. What you are doing is devaluing my holdings. Change your ways or I will change my holdings!”
Timing is everything so they say. I don't think it was the FOMC announcement but the brief level of DOW 9900 that caused a reversal only a fool holds for the last 1%. 10,000 was in the bag and of course 3rd Q performance needs to be maintained. These guys need there first bonus in a year.
Take away end of Q and you would have had no buyers late last week.
China can plan to market time all they want but at some point in next months sell-off the flight to the safety of bonds versus the ablility to pay is going to be questioned and then KABOOM.
Watching bonds rally with stocks and oil caused my head to spin until I realized it was the rehearsal for the coming reversal.
Profiting from this certain debacle doesn't assuage my fury and anger. Fortunately I'm not blinded by an Ivy League education.
You got three days get to work.
I think the author misses an important point.
The Federal Reserve began purchasing mortgages and agencies in January 2009. At the close of business on December 31 2008 the balance sheet of the Federal Reserve totaled $ 2,275,463,000,000
After purchasing huge chunks of Treasuries, agencies and mortgages that same balance sheet has contracted and stood on the most recent Wednesday at $ 2,199,875,000,000.
So while its holdings of securities has exploded the balance sheet in its entirety is smaller than it was at the beginning of the year.
One can also make a case that as long as excess reserves remain at current elevated levels that there is no problem. banks are not lending.....to anybody. Excess reserves are dead money.
In addition the velocity of money has cratered. The time to experience a little agita is when the velocity of money chart produced by the St Louis Fed begins to curl up.
To act before that would stifle the fledgling recovery.
I would pose the additional policy question: What should the central bank have done? What would you have done instead?
I suggest that history will accord these gentleman high marks for avoiding a far bigger catastrophe.
http://research.stlouisfed.org/publications/mt/page12.pdf
Given that the Fed has refused to be audited, and Geithner as its handmaid has gone on record saying it would be bad for America if it were, how are we to trust the numbers the Fed says are in its balance sheet? Does it seem even remotely possible that their balance sheet has decreased given the amount of Treasury paper they have bought over the past year?
We need a truthful audit.
$0.02
history will record these monsters as reckless
megalomaniacs who raped and pillaged a country
to maintain a broken economic model long past
its viability if we can even say it had any
viability.....
the central banks should have stood down and let
the economy take its course....which means
liquidations, bankruptcies, and other reorganizations....
..the squeal of systemic risk is as fraudulent
as santa claus....
the fed has kicked the can down the road...and
removed moral hazard for a very elite select
few people and companies.....while visiting mayhem
on everyone else due their profligate irresponsible
policies started by greedscam...
arguing that the balance sheet is smaller today
than at the beginning of the year is like arguing
about which cheap whore is more virtuous than
the rest....perhaps you would like to change time frames
but deceit precludes that option....
and you ask about the harm of massive reallocation
of capital? i am sure you are eyeing a spot
at the washington politburo if in fact you are
not already there....
one could make the case that the massive reallocation
of capital, artificially low interest rates,
and preferential treatment of banksters has
sewn the seeds of the next phase of the catastrophe
and maintained pathological management and systems
when they should have been destroyed.
one could further make the case that the opportunity
costs of maintaining broken systems deprives us of
healthier investments which would lead the way
to a new economy....instead we have a dirigiste
sclerotic junta hanging on to dear power like
a bunch of failed geriatric generals from
argentina....
Bunch of crazy reckless drunks avoid driving into rows of pedestrians, and instead careen into storefronts, sidewalk landscaping and parking meters, causing untold property losses. Mayor hails driver and passengers as "heros" for avoiding a large loss of life, and awards driver key to the city. Yep, high marks are due here. In fact, the driver should open a driving school and run the Higway Patrol too. Anyone who can fuck up that bad must know what they are doing.
Are you on crack?
80481: I think that the change in the Fed BS reflects very big central bank swaps that were entered into during the height of the crisis. They have been wound down and replaced with what I believe are the QE transactions. They include purchases of $300 b of Treasuries, 1.25T of agency mbs and $200b of unsecured debt obligations of Fannie and Freddie.
I believe that the Fed did the right thing with QE last March. We were very close to a lights out situation. The QE medicine has helped stabilize things. The Fed should be commended. They brought the medicine that saved the patient. But too much has been done. There is still significant more QE buys over the next 4-6 months scheduled. This is in front of us. It should be behind us at this point.
This is high octane gas. Once this catches fire it will be very difficult to stop. The Fed should already be mopping this up slowly. Instead they are just over halfway through. ST interest rates are near zero. The risk is that the Fed errs on this by extending these programs too long. They will once again be contributing to a bubble. This time the bubble would be the broad economy. They shoud have acted this week to slow this down and end it early.
The markets like it when the Fed does the 'right thing'. If in a week the dollar has taken another leg down, the Fed will have just lost more credibility. They can't buy that with an Op-Ed. They need to speak with action not words.
In particular Bruce I think buying 80% of the MBS market is unnecessary, and has just allowed the Administration to put off making a decision on Fannie and Freddie. Reforming (or abolishing) those two monsters is FAR more important than reforming health care.
Bernanke's purchases of agency MBS has allowed the MBS market to continue to function, which it should not be. If the agency MBS market was hurting like it should be, more business would go to the FHA, and the Admin would be forced to do something about Fannie and Freddie, probably rolling them into the FHA (or shutting them down and expanding the FHA to encompass Fannie and Freddie programs - same diff).
I would abolish the Fed, end fractional reserve banking and go back to the gold standard. I would've wiped out the shareholders, given the bondholders a serious haircut, reinstate the Glass Steagall Act and investigate the bankers for criminal misconduct and fraud prosecuting them to the fullest extent of the law.
The far bigger catastrophe is coming courtesy of these "gentlemen" you speak so highly of:
http://www.businessinsider.com/henry-blodget-marc-faber-the-future-will-...
http://eclipptv.com/viewVideo.php?video_id=7468
Agreed, the Fed should have been abolished. It still should be, it is not too late, but it soon will be.
When in history has a graph like this ever ended with a good result?
http://research.stlouisfed.org/fred2/graph/?s[1][id]=AMBNS
Faber and the companion video with Robertson interviewed on CNBS - - two guys that appear to be correct more often than not:
(this is the Robertson video that ZH had posted a few days ago)
http://www.cnbc.com/id/15840232?video=1275040574&play=1
Great interview,BUT in the final moment JR laments that the american people are not being asked to help the country in this time of trial. On the contrary, we(those still paying taxes) are being enslaved with future debt( tax burden) and those on fixed incomes( mostly former taxpayers ) will be robbed by inflation. Examining government policies of entitlements through the moral filter of "do unto others as you would have them do unto you" reveals an ethic of : you have more than others, so government will take it from you, give it to others( mostly non taxpayers) and take the credit to consolidate political power. This begs the question, when have you ever been thanked by a politician for paying your taxes?
I think the only thing you've missed in this article is the time frame when the "roadside bombs" go off. It won't be 2017-20, it will be 2011 if not sooner. There is no way that the Chinese are going to keep building dollar surpluses. They are after IMF gold, they are buying gold in London, they are bringing all of Hong Kong's gold back to Hong Kong. This doesn't sound like we've got 10 years before BOOM. It sounds like we've got 10 MONTHS. Whether it is China, Japan, the Gulf States, who knows, but SOMEONE is going to set this baby off when they feel they are at as good a place as it's going to get. Then goodbye dollar! There really is no escape, no matter what Bernanke and company do. Obama and Congress will keep borrowing, and that leaves the Fed with -0- options.
I also was wondering about the timeframe - perhaps BK could elaborate on that - 10 years from now the world will be on the verge of a "real" energy as well as major water crisis that will eclipse just about everything not to mention that the harsh reality of the underfunded entitlement programs will be bearing down on America.
Agree with Ghost on the timeline disagreement.
And there is no way we will avoid an international " incident " of some major signifigance in the next 3 years. A global depression raises tensions enormously .... I'm betting it will be Iran/Israel.
Today's Wizards at the Fed project monetary policy in anticipation of global economics WITHOUT a major confrontation scenario. That's some other bureaucrat's job.
The domestic powder will be wet when the guns go to blazing. An ending scenario that may fulfill the Nostradamus prediction of 12/21/12 when all returns to ZERO !!
Don't invest.
Blow what's left.
At this point I regard all public communications from the Federal Reserve to be carefully crafted public relations efforts. The releases seem to be most relevant for justification of market behavior, that is, more PR.
The people who matter know all this. They are all in "The Shuffle Club" and are desperately working to keep the wheels from busting off.
more like carefully crafted propaganda efforts
I appreciate the article and your writings and largely agree with your statement. A general critique: please include a link to the article in your piece.
OJ, You are right, sorry.
This a WSJ discussion of the Warsh Op-Ed:
http://online.wsj.com/article/SB125390296566041633.html
The Warsh Op-Ed
http://online.wsj.com/article/SB1000142405297020448830457443304105833413...
I agree with the premise of your article but disagree with these statements:
"The emergency monetary and fiscal steps that have been undertaken over the past year and a half have worked. *** The real economy has some legs."
Inventory correction yes, but sustainable real growth or "legs," no. The shipping fleets & railroad car loadings show that both raw and finished goods are not moving & folks are not buying what's produced. Growth nowadays is flipping paper back and forth to churn up the prices making the masses feel "wealthy" again.
The FED is really getting desperate now as the public gets more educated on their history and methods of operation. Your great article adds to the body of information & comment. All we need now is BO to involve us in a war that cannot be financed by the banking cartel as they're beginning to realize that this time they went over the cliff with the rest of us.
When all is said and done, Ben Bernanke and his co-conspirators at the Fed will probably be responsible for destroying more lives than all the despots in the history of mankind combined.
perfectly said....