QE 2 Was A Disaster: Here Is Why US Fiscal "Stimulus" Was A Complete Failure As Well

Tyler Durden's picture

Two and a half years ago, Christina Romer, then still employed by the Obama administration in the position of Chair of the Council of Economic Advisers penned "The Job Impact of the American Recovery and Reinvestment Plan" - a report predicting the impact of a fiscal "stimulus" that took out $787 billion from the pocket of American Taxpayers (subsequently discovered to cost even more) and put that money...somewhere. We are not sure where, because according to a chart now made legendary for its complete failure to predict the future, it sure did not go into creating jobs. Below we present the original chart that made the January 10, 2009 presentation, and superimpose upon it the reality of the past two and a half years. It is simply stunning. And while we are here, and discussing the abysmal failure of QE2 (the impending arrival of QE3 notwithstanding), it is amusing to hear the whimpering of the likes of one Richard Koo, who is now claiming that all along the money from the Fed's monetary stimulus should have been invested in the form of a fiscal one. Well, Dick, below is the impact of your fiscal stimulus....AND it also includes the impact of $2 trillion in incremental monetary stimulus. Combined, both fiscal and monetary stimulus has now missed the worst case projection for US unemployment for 30 months running. Here is the simple truth: both monetary and fiscal stimuli are abysmal failures, when the economy is mean reverting to a state where it was hijacked from courtesy of 30 years of "great moderation" - and there is nothing that can be done to stop it. Correction: there is one thing - the Fed can destroy the dollar in its attempt to disprove simple physics. And, ultimately, it will.

From the original ARRA proposal:

And the outcome:

Nuff said.

h/t Mike

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baby_BLYTHE's picture

The Federal Reserve is the largest counterfier in the history of the world

traderjoe's picture

Actually, in our fractional reserve system, it's the banks that counterfeit most of the money. See the paper from the chicago fed entitled modern money mechanics.

"The actual process of money creation takes place primarily in banks."

Michael's picture

I spoke with Benjamen Shalom Bernanke today and he said there would absolutely be QE3 and they'll probably call it Quantitative Debt Monetization. The pigs just have to squeal loud enough for it first, and they will.

Michael's picture

What would a worldwide Bond Market collapse look like?

No really, I want to know.

Paint a picture for me.

Michael's picture

Just heard on CNBC World;

Japan needs a specific type of crude. A light sweet crude, especially after their natural disaster, and they ain't getting it from their chief supplier, Libya, due to the little thingy they have going on over there.

Now we know why Obama wants to get that Libyan oil on line as soon as possible.

Humanitarian reasons, ie: Japan. 

hbjork1's picture


THanks much for the post.

These guys i the FED aren't really very bright.  In fact, considering the import to the country I have to say they are "faking" their expertise. 


Dr. No's picture

Junkers dislike the truth

Pure Evil's picture

Sorry bout dat!

I'm just a crack junkin' monkey.

TruthInSunshine's picture

Here is the true counterfeiting, which is not only allowed, but they've made it a necessary part of the ponzi scheme which all economic activity depends on (the 1.5 trillion or so in treasuries Bernanke & Syndicate have purchased have the potential to create credit/debt *they are the same thing* on the order of approximately 15 trillion; never mind that the demand and/or ability to tap that credit just isn't there and won't be there for a long, long time, hence the reason the tailspin will get worse and the crash into the mountain side will happen. And even if the demand and/or ability to tap even, say, 25% or more of that credit did exist, it would hasten the destruction of the economy, as it no doubt indicate a new bubble has been launched, allowing broad participation and broad new indebtedness. No win situation).

The velocity of the destruction wreaked by Modern Money Mechanics, as admitted quite candidly within the very text of the instruction manual that guides the very actions of the Federal Reserve, is astounding, and there can be little doubt, when simple and accurate math is done, that we're approaching the implosion, regardless of what form it takes (pick your poison as it makes no difference in the practical result of the outcome).

QE1 and QE2, thus far, have sewn the seeds of the next major crisis, which will be an intense one, and is closer in time rather than further (see ZH's article on margin utilization, which has similar implications).

Open Market Reserve Expansion and Credit Creation

1. The FED buys $10,000 in government securities from an authorized dealer and instructs the designated bank to credit $10,000 to the dealer's account in exchange for an increase of $10,000 in the bank's federal reserve balance. With a ten percent reserve ratio, $1,000 is isolated and the other $9,000 is made available as the basis for new loans.

2. This $9,000 is loaned out to business A, who immediately deposits it back into the bank. This $9,000 is another addition to the bank's reserve balance. Ten percent, or $900, is isolated and $8100 remains as the basis for new loans.

3. The process continues until all excess reserves are loaned out. With a ten percent requirement, $10,000 can support $90,000 in expansion of bank credit and $100,000 of deposit expansion.

The above is admittedly a simplification, but it is one contained in the FED's own publication (pg 6-8) and believed by the FED to be an accurate representation of the current system. In effect the FED has the power to create money through nothing more than an electronic bookkeeping entry. Whether the initial injection stays with the same bank, as is assumed above, or whether it changes hands, is irrelevant;

“It does not really matter where this money is at any given time. The important fact is that these deposits do not disappear. They are in some deposit accounts at all times. All banks together have $10,000 of deposits and reserves that they did not have before. However, they are not required to keep $10,000 of reserves against the $10,000 of deposits. All they need to retain, under a 10 percent reserve requirement, is $1000. The remaining $9,000 is "excess reserves." This amount can be loaned or invested (pg 6). ”

It is a common perception on the part of the public that excess reserves themselves are loaned out. This could not be farther from the truth;

“Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system (page 6-7). ”

From the facts presented thus far, several things should be apparent:

• The deficiency between purchasing-power and collective retail prices is cured by the creation of bank credit

• The refusal to create new credit is enough to cripple production and consumption

• Collective growth in loans is directly related to collective growth in deposits. When loans are payed back, deposits are destroyed

Asset Destruction and Credit Contraction

1. The FED sells $10,000 of treasuries to a dealer and receives payment in the form of an electronic check drawn on Bank A's reserve account. As a result the FED's holding of securities and bank reserves both decrease by $10,000. This constitutes a decline in the money stock

2. The amount of reserves freed by the decline in the deposits is $1,000. This leaves the bank with a reserve deficiency of $9,000

3. Under a ten percent requirement, unless the bank borrows money to cover the gap, the deficiency would lead to a $90,000 reduction in deposits and $80,000 reduction in loans or investments

It has been established that a $10,000 injection of reserves into the banking system in the form of a securities purchase may result in the expansion of up to $90,000 in loans and $100,000 of deposits. However, when $10,000 of reserves is removed from the system, the credit it sustains must contract, to the extent that any excess reserves are not utilized. This is the ripple effect that results from loan defaults... As bank assets lose value or disappear, so do their equivalent representation in bank reserves. The default of $10,000 on an bad loan could cause up to $100,000 in losses.

“The central bank, by purchasing and selling government securities, can deliberately change aggregate bank reserves in order to affect deposits. There are two other ways in which the System can affect bank reserves and potential deposit volume directly; first, through loans to depository institutions, and second, through changes in reserve requirement percentages. A change in the required reserve ratio, of course, does not alter the dollar volume of reserves directly but does change the amount of deposits that a given amount of reserves can support. Any change in reserves, regardless of its origin, has the same potential to affect deposits (pg 15-16). ”

The system of fractional reserve banking administered by the Federal Reserve and its member banks is essential a “ponzi” scheme of the largest magnitude. Initial investors are paid with money from later investors and in fact all of this “money” has its origins in nothing more than electronic entries in a quasi- governmental agencies' hard drive. The Federal Reserve is not a federal entity, it is not subject to oversight by the government, members are appointed to twenty year terms by the president and confirmed by the senate. The regional boards are elected by regional banks. They are not subject to any audit; private or public. Our entire economic system is mortgaged to the banking sector, immediate reforms are needed to take the power of credit creation away from private interests and place it back into the hands of the US government as prescribed by the constitution. Failure to act and bring this issue to the forefront will only further burden future generations with unnecessary debt created as a result of an unnecessary system.


Modern Money Mechanics: How To Make and Destroy Money
nmewn's picture

Good post, I remember this from a long time ago.

It is true, there is nothing new under the sun, just variations of what has come before...some people run "legal" ponzis...some don't.

hbjork1's picture

I also saw this some time ago.  This time I am keeping it for reference.

boiltherich's picture

Ummmm, you can't seperate the banks from the Fed.  Money is created when it is borrowed/lent and destroyed when it is removed from circulation, ECON 101.

USD-JPY 79.9453 -0.1455 -0.18

  as of 3 minutes ago.



cranky-old-geezer's picture

Damn, sub-80, alarms are going off at every fx desk on the planet, carry trades collapsing, meltdown city.

Ikea nesting instinct's picture

"The actual process of money creation takes place primarily in banks."

I disagree.  In order for banks to create money, there has to be some kind of repo/loan operations from central banks. 

disabledvet's picture

awwww.  but you told me you loved that class!

Monedas's picture

Wouldn't mind if someone made a few counterfeit copies of you ! Anonymous 2011 http://trololololololololololo.com

DoChenRollingBearing's picture


Cual es el proposito de tu trololol...?

legal eagle's picture

Baby Blythe has a new photo.

Seasmoke's picture

that fat pig Romer should be hanged , if you can find a noose large enough to fit around her flabby neck

Concentrated power has always been the enemy of liberty.'s picture


At least her diabesity will be paid for with Obamacare until we lose reserve status.

jeff montanye's picture

obamacare sucks; it is not worth being called public health insurance.  i would bet romer is covered under a whole 'nother plan.

Concentrated power has always been the enemy of liberty.'s picture

oops, duplicate.

but to quote Animal House:

"Fat, drunk and stupid is no way to go through life son."

I am a Man I am Forty's picture

i still get her confused with donald trump

The Profit Prophet's picture


I actually think she's a slightly uglier version of Ned Beatty in a wig.

T.E.I.N. everyone!

P.S. Tyler - absolutly awesome commentary...I couldn't agree more. Mean reversion to the true state of economic equilibrium after 30 years of juicing the Klepto paper markets while they globalized the real wealth: productive capacity! 

Rynak's picture

I wonder how that chart would look like, when considering all the people that have been made "disappear" from those stats.... actually, that's untrue.... i know the stats already ( http://www.shadowstats.com/alternate_data/unemployment-charts ).

The Profit Prophet's picture

True dat....

The chart uses BLS numbers....just imagine what the actual curve would look like!!!!

T.E.I.N. everyone!

Dr. No's picture

This chart makes it slam-in-your-face obvious government cannot properly allocate capital. Are there any more socialist out there or do you need to see the chart again?

Re-Discovery's picture

and neither can their privatized arms --- the TBTFs.

Arnolds Love Child's picture

Not the United States government.

Rynak's picture

It is not that they "cannot", but that they "do not want to". Also, the only kind of "socialism" which QE+ did, was bankster-socialism.... While i agree that just throwing money at problems is no longterm solution (and incompetent too), i can think of a few hundred better ways, where all that money could have gone to.

Or to phrase it in your terms: They didn't just do mass-socialism.... they didn't even attempt to allocate it in a way that is useful to the population (as you said already).

P.S.: Or as the greeks would ask "Where the fuck did all our money go?"

Arnolds Love Child's picture

At least the Italian government would have thrown a party.

Rynak's picture

Well, they EACH MONTH pump as much money, as 50% of low income wages for ALL CITIZENS OF THE USA.

You can have a really big party with that..... EACH DAY.

Would it be a total waste of money with no longterm benefits?


But it at least wouldn't have resulted in longterm HARM, by keeping those zombie banks alive. The whole QE program is worse, than throwing money out of the window.

Xaqaria's picture

Its funny to think that if "helicopter Ben" had followed through with the idea that earned him that nick name, he would have done more good than what he actually ended up doing.

Incubus's picture

Turbo Timmy and Bubble Ben. 


Just two of the many marionettes.

Korrath's picture

Seeing as how they pissed such a colossal sum of money out the window and accomplished fuck all...why didn't they just pay all the banks holding MBS to cut eveyone's mortgage by 50%, across the country?  

Wouldn't that have given them the super-charged kick start they were looking for when all these short sighted under-water home owners now felt like they had won the lottery over night and started spending and racking up new debt like there was no tomorrow?  Not to mention that banks would now be compensated for the home value that has been lost in the last 3 years anyway. 

Cdad's picture

Yes, but the problem with your suggestion is...nothing the Fed or the Feds have done was intended to fix the economy or enrich Average Joe.  The debt they have created is the instrument which they will now use to break the Republic and consolidate power.

This tactic was most clearly demonstrated In Libya where, for some then unknown reason, the establishment of a Rebel Central Bank was of the utmost importance at the beginning of the conflict.  As well, look at the goodies that are in the pipeline to be stolen from Greece.

The debt created is the yoke, the shackles and the chains used to assume power, which is why the ECB will do almost anything to avoid any sort of debt default.  

Rynak's picture

I'm wondering how they want to do this though. I mean, look at europe.... once you push people too low, and especially too fast, they rebell. I don't see how they successfully want to pull this off, without provoking civil war, slaying  it down, and implementing dictatorships everyhwere.

As low as an opinion i do have about humans, it looks to me as if their bet is too greedy. They will not be able to keep the slaves as slaves, unless they treat them as slaves... and part of that is not pushing them below their comfort zone.

Honestly, i think they've made a mistake. Just because something works in 3rd world nations, doesn't mean that it will work in 1st world nations.

Cdad's picture

I'm wondering how they want to do this though.

Well, you are seeing it on a weekly basis with threats coming out of Treasury and criminal syndicate Wall Street banks, saying that if the debt ceiling is not lifted, armageddon will be upon us.  

I don't see how they successfully want to pull this off, without provoking civil war,

Ummm...do you think that war against American couch potatoes and iPad zombies is amongst the Feds' greater concerns?  I don't think so.

They will not be able to keep the slaves as slaves

Americans enslave themselves financially every single day, and of their own accord.  iPad zombies have already had their shackles fitted, and smart phone addicts already have their locations reported by Apple...for easy pick up.  What are you talking about?  You are obviously not American.

As for whether or not it works in America, well, that remains to be seen.  There are signs of hope, but the upcoming debt issue is very important to determine if any substantial awakening in the American spirit is out there, alive and well.