QE2 Trashing Trifecta: Peter Orszag Joins Gross and Grantham

Tyler Durden's picture

The president's own former advisor, and now very much outspoken critic, Peter Orszag has joined the cool kids by releasing the following scathing oped in the NYT, whose topic is, drumroll, QE2: "by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates." The message, for anyone having read the prior two essays, or Zero Hedge, is nothing new. What is, is the massive onslaught by virtually everyone of any political and financial stature on this pretty much inevitable policy decision by Bernanke. The question we have is did Goldman's estimate that QE2 needs to be up to $4 trillion blow the party? Are expectations for future monetary easing so high (and unattainable) now that the market had to be artificially be pushed lower so there is some upside on November 3? Because for all those who believe that the Fed has found religion and thinks a strong dollar is suddenly a policy goal, we have two words: "Wake up."

Sailing the Wrong Way with QE2?, posted in the New York Times

To bolster the economy, we need a three-part shift in policy:

    · more fiscal expansion (read: more stimulus) now;

    · much more deficit reduction, enacted now, to take effect in two to three years; and

    · an improvement in the relationship between business and government (the current antagonism, even if not the primary explanation for slow hiring and sluggish investment, does seem to be affecting hiring and other business behavior).

Unfortunately, the necessary shifts in fiscal policy are extremely unlikely to happen, and the strains between business and government are now so deep that they will take time to address. So we’re left relying on monetary policy — and in particular a much-anticipated second round of quantitative easing by the Federal Reserve — which may create more problems than it solves.

As Paul Krugman and others have pointed out, the net effect of “QE2” is similar to having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds. The result is thus that the average maturity of government debt held outside the government falls. (From a debt management perspective and given current interest rates, the Federal government should probably be lengthening the average maturity of debt held by the public rather than reducing it, but let’s not worry about that for now.)

What are the benefits of such a reduction in the average maturity of government debt in the current economic environment?

They’re quite limited for two reasons. First, at the likely scale of the Fed’s purchases, the long bond rate will fall only modestly. And second, a modest reduction in long-term interest rates will not have much effect on economic activity at a time when corporations are flush with cash and worried about the future. (As Alan Blinder recently emphasized, “To attach some illustrative numbers to this concept, suppose the Fed succeeds in trimming government-bond rates by 30 basis points, and that brings down corporate bond rates by 15 basis points. Will that make a big difference to corporate spending?”) Many commentators, including a few presidents of the regional Federal Reserve banks, have noted the risks to the Fed’s credibility from QE2.

Ironically, QE2 could make the right policy mix less likely. In particular, any substantial additional stimulus will probably not (and should not) be enacted without a medium-term deficit reduction package — and that medium-term deficit reduction package is less likely to be enacted when interest rates on long-term government bonds are so low.

In other words, by perpetuating an artificially low 10-year government bond rate, the Fed may be delaying (even if very modestly, given the modest impact of the action on long rates) the very fiscal policy action that the nation most needs, while doing little to boost an economy whose principal problem is not high long-term interest rates.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
SDRII's picture

"Because for all those who believe that the Fed has found religion and thinks a strong dollar is a matter of policy, we have two words: "Wake up."

 

Exactly. A lot of lateral passes happening at once

mule65's picture

Two Words: Ramp Time

Dr. No's picture

Yep; sentiment changed a little after 2 in the market.  Now the market is pricing in QE2 is bad.  Market is headed up.

HarryWanger's picture

And note the volume surge at 2:40 as well when the market started it's upward charge. The game is in full effect.

MeTarzanUjane's picture

Agreed, Mr. Gross can now wear this name tag to his parties

Hello my name is:
Shill

HarryWanger's picture

Like I said this morning, this is a simply a game with the market playing upon QE2 vs. economic news bullshit. Today's mantra was "maybe we don't need QE2 after all". So the market sells off. The whole point is to get in lower, right?

So, now the buyers come in knowing that QE2 will indeed be implemented and they will act surprised by the size of it at the announcement and it will be a buyer frenzy. Follow the bouncing ball. Pretty easy when you do.

CU1981's picture

Stop junking Harry.

He's actually making pretty good sense.

And I agree with him.

 

(ok, you can junk me now:)

MsCreant's picture

I only junked you to make you happy. I'll be number 3.

Edit: Make that 6!

HelluvaEngineer's picture

There's an intentional effort to keep things at 1185 until Nov 3.  This makes me think there's an intentional effort to crash the markets after that.

HarryWanger's picture

Don't be surprised to see 1150 by QE2 announcement. That sets up nicely at support and gives a base for the rally that will ensue when QE2 is much bigger than what the players ratcheted it down to to create the "surprise" on Wed.

Glasater55's picture

Really agree with this statement.

ElTerco's picture

Ramp time?   As in building a ramp to jump the shark?

homersimpson's picture

This might explain why I'm shelling out more green paper nowadays for a few rolls of toilet paper. I'd like a few rolls of extra scratchy, please.

TooBearish's picture

But Turbo timmy did say we have a strong dollar policy rite?

NOTW777's picture

this is a set up, a pre text so ben can do less and argue he is responsive

SheepDog-One's picture

OK say its all a set up so that Ben can do less, but big has already been priced in, so how is that dealt with?

SheepDog-One's picture

All the rats diving off the ship...those watching them from the Titanic deck sipping their free drinks have concluded it as a positive sign. After all, the pumps always keep well ahead of the incoming rush of seawater, thats a widely known supposition. And besides, the Titanic was already deemed 'unsinkable'.

Those of us already in the lifeboats watching from a distance snicker.

Cecil Rhodes's picture

I wonder what'd be most appropriate for this situation, guns or gold?

wiskeyrunner's picture

It's about time for the end of day pump, can't have a down market.

NOTW777's picture

all these liberals that promote and vote for crazed left wingers and then, act surprised when they win, implement insane policy and the wheels come off.

cougar_w's picture

Hey look everyone, a troll!

Get in line, I'm going first:

Idiot.

SheepDog-One's picture

I thought his post was pretty good myself. Political ideology is just for controlling the sheeple, always has been.

cougar_w's picture

Less for controlling, more for confusing. Works, too.

Cognitive Dissonance's picture

I called a troll a "Streaker" a week or so back. RockyRaccoon agreed, saying they bust in, show their ass and then quickly leave, usually never to be seen again on that thread.

May I suggest we call them "Streakers' for the asses they are as well as the ass they show on the way out the door

Wynn's picture

I concur. partisan hack.

zaknick's picture

lmao

 

I like that.

 

Partisan hack!  F@ck the demoscum and rethuglicans!

SheepDog-One's picture

Theyre just a bunch of crooks with no real ideals other than getting into the best place to steal from. Now they sense heat and trouble coming, so theyre slithering off into the corner. 

Hang The Fed's picture

AND dumping their outer ranks...I think a lot of the comfy CEO's who believe themselves to be well-insulated are going to be tossed aside like so much rubbish, and we'll wake up to a day in which all of industry, society, and policy is a function of a hybrid communist-fascist junta.

Segestan's picture

Don't you know by using the word 'liberal' ' .. you're offending the morons?  Better to exchange Liberal for Internationalist--- Globalist dreamers.

cougar_w's picture

Not a moron. Patriot. Patriotism transcends politics. Blame one group over another and all you do is get j6p to kill his neighbor. Which is what the King wants. The little people kill each other until they are bled to exhaustion and the King sits in his castle and laments the bloodshed over another glass of the Lafitte '87.

This is why you are a corporatist tool and an enemy of democracy. Not because I say so, and not because our politics differ, but because you are here to make sure the King wins.

You are on the wrong side. Sucks to be you.

The Alarmist's picture

Amazing how they get religion once they have some skin in the game.

Cognitive Dissonance's picture

QE 2 or 5 or 10 should by any measure be consider a human rights violation of the highest magnitude. But of course, our own government nor the unaccountable Federal Reserve could ever be guilty of human rights violations, especially when it comes to it's own citizens.

The world is still just a series of plantations liked by culture and geography. The only difference is that in first world countries, the slaves sincerely believe they are free. This has dramatically increased productivity of the slave population to the ever lasting delight of the slave owners/controllers/masters. Now that the system is coming apart at the seams, the last thing to do before crashing the system and starting anew is to strip the slave population of any remaining wealth.

As insulting as the above description may be to the readers sensibilities, how much more insulting is the behaviour of those who we supposedly elect to "serve" us nor those unelected, and thus eminently more powerful, masters of the universe who rape us? 

CU1981's picture

I second that, it's all coming together ..... unfortunately, for we surfs ....Pm's are our only hope for the other side.

schoolsout's picture

I just finished reading Confessions of an Economic Hitman today and this missive of yours reminds me of that book.

 

 

schoolsout's picture

I just finished reading Confessions of an Economic Hitman today and this missive of yours reminds me of that book.



andy55's picture

To bolster the economy, we need a three-part shift in policy:

    · more fiscal expansion (read: more stimulus) now;

    · much more deficit reduction, enacted now, to take effect in two to three years; and

 

Now I'm no ex-CBO chief, but what the hell is this?  Expand fiscal spending while also reduce the deficit??  Spend more but spend less??  Ya know, if this cast of characters wasn't leading the U.S. to what will probably be the darkest decade in the history of developed civilization, I'd laugh at how brain-dead the "debate" has become.

Both as a citizen and veteran, I used to feel anguish and pity for what the elite have done to America.  But now that it's been two years and the people haven't lifted a finger to take regulators, officials, representatives, or the administration to task, the buck now stops at the U.S. people.  No more sympathy.

Assetman's picture

Well it's the same trap set by the corrupt in Washington, and it goes something like this:

"We need to borrow into the future to solve today's problems by spending."

Sorry.  That hourglass is almost empty.

The time for deficit reduction is NOW, not 2-3 years in the future.  There's going to need to be a HUGE shift in budget priorities to pull that rabbit out of the hat.

I have absolutely no confidence it will happen. 

Calvin Jones and the 13th Apostle's picture

· an improvement in the relationship between business and government

 

Is there any reason why this matters?  Business is getting tons of free money from the government right now.  Improved in what way Mr. Orzag?  You mean government isn't captured by business enough as it is?

 

The Alarmist's picture

You mean government isn't captured by business enough as it is?

Maybe in the good old days. Nowadays it is an unholy alliance like that between the Church and Feudal Lords to ensure we poor serfs remain bound and in service to both.

 

SheepDog-One's picture

How could the relationship between big business and govt be any cozier? What Orzag calling for here, Obama to actually blow Blankfein right on national TV?

The Alarmist's picture

I think it would be better characterised as "69."

BrosMacManus's picture

Generalize much? ....only the businesses with something to offer in a quid pro quo arrangement (Google, GM, GE, GSE's, GenDynamics, Goldman and other money center banks/brokerages, etc.) are chugging from the trough of as yet uncollected taxes. Btw, what's with all the G's.

Bidness <> inherently bad.    

wiskeyrunner's picture

Down markets are a thing of the past, up is the new market.

e_goldstein's picture

with all the rats jumping ship it may be time to discreetly head for the lifeboats.

chet's picture

The Fed will now try to split the baby.  They're still doing QE2, but they're going to sell it like it's no big deal.  "Just a test program.  A little per month."

The rhetoric of "disappointment" might shake the market for a while, but the effect of pumping in $100 billion per month will be the same.