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A question for Bernanke
Bernanke said some things in his testimony to the Senate Finance Committee on Thursday that raise a question. One that I don’t have an answer to.
All comments/thoughts/answers are welcome. I will send this off to the
Fed. I doubt I will hear from them, but if I do, I will post the update.
Bernanke had this to say regarding the consequences of QE2:
Our analysis indicates that our actions (QE2) to be roughly equivalent to a 40-100 basis-point reduction in the Federal Funds rate.
Six months ago Bernanke said something similar to this. At that time he
suggested that $200b of QE was equivalent to a 25 BP reduction in
Federal Funds. The $600 QE2 was therefore a monetary policy equivalent
to a 75 BP reduction in short-term interest rates. The range that Big
Ben used this past week is evidence to me that the Fed is no longer so
sure about the consequences of QE. However, the range that Ben used
gives a mid-point back to that 75BP (25BP/$200b of QE).
Bernanke went on to applaud QE with this:
The net result of this action has lowered borrowing costs and created easier borrowing conditions throughout the economy.
What I get from this is that Bernanke believes (or he trying to convince us) that QE has a lasting and permanent consequence (until the QE action is reversed). I don’t believe that is correct. But I also don’t know how long the benefits of QE (if any) actually do extend. That’s my question to you (and the Fed). My effort at an answer:
There are only three possible results:
1) QE has a permanent consequence on monetary conditions (until reversed).
2) QE has only a very short-term consequence. The benefit of a
POMO operation is transmitted within 24 hours. Once transmitted it has
no lasting consequence.
3) Something in between 1 and 2.
For what it is worth I think the answer is 3. I disagree with Bernanke
that it has a permanent consequence. I think that any benefits are
short-lived; at most six-months. (My guess would be less than one month,
but I hate QE)
I base my conclusion on the following:
The total of QE1 and 2 is $2.3 trillion. Using Bernanke’s rule of thumb
that $200b of QE is equal to ¼% drop in Federal Funds (monetary
equivalent) one would have to conclude that the cumulative affect would
be -3% (2.3/0.2). I see no evidence that current monetary
stimulus is equal to minus 3%. If it were, the economy would not be
struggling as it is and inflation would be much higher than is being
recorded.
Bernanke has painted himself into a corner with this. He is maintaining that the answer is #1. That is the least likely possibility IMHO. To my knowledge, the Fed has not factually demonstrated this conclusion. I think it is important that they do so.
I would warn those Fed economists that if they try to defend the notion
that there is a perpetual benefit to QE you are on very thin ice. There
is no data to support that conclusion. If you try to convince us that
the value of QE extends for more than one year, your message will not be
credible. If you conclude that the benefit of QE is less than six
months, you have a problem.
If the answer to this question is that any consequence of QE is short
lived, then the Fed must take this policy option off of the table and
put it back on the shelf. It might be a useful tool in an extreme
emergency (2008) (where an immediate and significant short-term monetary
shock is required to stabilize a sinking ship). But QE has no role to play in normal monetary operations.
Face it Mr. Bernanke (and cohorts), monetary policy is range bound at zero. QE can’t push through this barrier. Your quiver is empty.
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there's no firm answer to that question -- only the market determines the answer -- in one set of conditions the answer could be six months...another set of conditions 6 days... it's unknowable
That the FED would suggest they have a model -- is only a ploy to appear they know the answer -- an attempt of buying people's confidence. Only the market will determine it.
The FED specialized in tossing around acronyms and fancy sounding terms. TALF, Quantitative Easing. It's ultimately all psychological...geez, they must really be smart and know what they are doing with all those fancy complicated words right?!?!
I think the effect of Fed policy changes take much longer when the economy goes into a sudden deflationary cycle....more like 36 mos to see inflationary effects....which most likely is summer of 2012, which only makes Obama's election prospects dimmer.
"Quantitative".
Qualitatitive easing would have a very temporary effect on money in circulation. That is the interest rate thing..
If actual money is created and given to the govt. to spend, it is in the economy. "Quantitative".
It may or may not gain velocity, but it is out there somewhere.
Qualitative is influencing interest rates and quantitative is actually creating money.
Does this make any sense??
gh
I believe QE had one purpose and that was to put cash in the hands of the big banks to cover the landslide of forclosures, bond defaults and litigation costs. Why else at the same time would the FED pay interest on reserves? They claim QE was to put liquidity in the market but the fact they pay them to hold onto the cash shows them to be liers.
And to allow the FED to get a return on the treasuries they buy to cover the losses on the shit MBS they bought above market value from the banksters to save them - and who pays the interest on the treasuries ultimately - the taxpayer.
Bruce, your analysis poses several problems that may have many answers in the academic world. However, my experience on the street is that FED QE actions have only deepened the problem and made further action advisable to maintain the status quo.
Bernanke is a junky, and like all others addicted to illicit drugs, more and more is needed to achieve the same effect over a prolonged period of abuse. In the beginning, a little bit will give you a real ear ringer, but after continued abuse, the reality of diminishing effectivity sets in and the addict is forced to use greater and greater amounts for less and less effect.
The only ringing in Bernanke's ears are from his master's incessant calling telling him to crank up the presses for more of the madness.
DaddyO
DaddyO, sounds like you are well aware of the effects of ilicit drugs, makes sense you work on the Street!
I won't hear a bad word for illicit drugs... they give more Bang (buzz) per Buck than legal drugs and they're less dangerous
80% of drug overdoses admitted to hospital are legal drugs which are not only more dangerous but also more addictive (and fuking boring as well)
you've got to be a peanut brained retard to follow any advise or recommendations societies greatest morons (the Govt) tells you to follow including that truly stupid stimulent for a 'great night out' (yes I luv being a staggering, stupid, dribbling, aggressive, incomprehensible idiot), alcahol
try the illegal stuff, soooo much better, cheaper and more intelligent (so i've heard)
But does class A guarantee better quality?
http://www.youtube.com/watch?v=DduAbLpZDHg
Classic.
This from a person who seems to work on Wall Street. Comforting.
Perhaps his 3% is from his calculation of how much he's moved the inflation rate up. With the FED rate at zero and bond rates staying low increasing inflation would give a negative real interest rate. It would be consistant with his oft stated goal of forcing money into risk.
I was thinking along the same lines. -3% for savers...
The simple fact that these people think they have valves and meters that enable these kinds of bull shit metrics tells me they belong in a padded cell.
that's right banzai. until the intellectuals are able to invent a the test tube that had all of the characteristics of the US economy without QE, selling its comparative effects with preceision rests somewhere between presumptuous and nonsensical.
my two cents is that QE did have a permanent effect. it's just, that permanent effect is not material. nothing is going to stop the value of all US federal & state government and EU promises to zero. it's either going to be outright default honestly or backdoor default dishonestly (inflation). Whether one would happen faster than the other is impossible & borderline pointless to judge.
Historically this level of debt has never been paid back by a major country.
It is most likely inflated away and this, therefore, is the most likely path in our current situation.
It might be a useful tool in an extreme emergency (2008) (where an immediate and significant short-term monetary shock is required to stabilize a sinking ship). But QE has no role to play in normal monetary operations.
If there is any argument for a QE, ever, it would be like this. But it doesn't help to have 'blown our load' on this when we could have let things sort themselves out. We just knocked up a hooker and a bastard is on its way.
What were 'we' thinking?
Well said.
Money printing cannot fix the structural problems in our economy. Rather, it is at the heart of what is wrong, and only exacerbates the problems.
For example, more QE will cause (1) further transfer of wealth to financial oligarchs; (2) further loss of confidence in the US and our economy; (3) further increase in the cost of necessities, as wages stagnate or decrease. This leads us in only one direction. Not seeing this is either madness, greed or both.
Ben's policy is based purely on assumptions. And he is wrong. The sleeping public will bear the brunt of his madness.
Well stated Ergo.
An ivory tower theory (devoid of merit in the real world) would suggest that by the stoking of inflationary expectations -- people will spend more now - thus helping the economy - knowing that their dollars will only be worth less in the future.
Here in the real world -- when people see prices rising for necessities -- THEY SAVE MORE. They squirrel away their cash.
Again, Ivory tower FAILURE!!
Judge him by his actions... and you will know who he is
you mean judge Ben by where he spends the money ...let's follow all that money ;
>>> Wall Street (bankrupt)
>>> Washington (bankrupt)
BB should actually do what he said he would do. Throw money out of helicopters. Think about this:
Add all the money he has created since 2007, divide it by the number of taxpayers and you realize that if he had given that money to the taxpayers, he would have had the elusive velocity he is looking for.
Can someone who knows these numbers please do the calcs?
+10...I said that from the get-go. All they had to do was send $10,000 to every citizen 18 & over = problem solved. Shows ya what a bunch of lyin' thievin', hypocritcal, spin-meister, bullshitters the whole bunch is. Instead, bankster make billions, us-un's get zero. I mean how blatantly obvios, insulting and out-right "fuck you, punks" can you get?
There are actual examples of this policy. Some Arab chieftains, e.g. the Saudis, are acting in this vein. Their subjects may be slightly less inclined to burn the place down, but have you got an impression that their economies really improved since?
This is the route we are headed - unaccounted government spending through the people. Hiking the debt ceiling will require jsp to get in on the fun if he is to remain in his seat, so they think... Spend your .gov checks wisely.
Correction. Ron Paul said it would have been $16,000 :)
It all would have been spent immediately, perhaps on Chinese do-dads. Would that have been a good thing? The underwater mortgages would still be there.