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The Fed Panicked
This article originally appeared on The Daily Capitalist.
Here is the Fed Open Market Committee's announcement of November 25, 2008 announcing the implementation of QE1, a $600 billion bond purchase program:
This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
On March 18, 2009, the Fed announced a second phase of QE1, expanding the program by another $750 billion to bring the Fed's total to $1.25 trillion for the QE1 program. The Fed noted that:
Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. ...
In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. ...
On November 3, 2010 they announced another round of quantitative easing called QE2 in which they purchased another $600 billion of longer term Treasurys:
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters. ...
To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
On September 21, 2011 the Fed announced Operation Twist in which they extended the maturity dates of $400 billion of their Treasury portfolio in order to drive down interest rates and to "support a stronger economic recovery". The Fed's reason:
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Recall also that the Fed has kept the Fed Funds rate at almost zero rates (ZIRP) since the beginning of the 2008 crash.
Today, the Fed announced an open-ended purchase of "agency" mortgage-backed securities of $40 billion per month at least until the end of the year, which along with its Operation Twist purchases, amount to $85 billion of such purchases each month. Again they wish to "support a stronger economic recovery". Their justification was:
Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.
This time the Fed added some significant wording:
... If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. ...
The bottom line is that the Fed panicked. It is extraordinary that the Fed would announce an open-ended "we'll print as much as it takes, as long as it takes" policy. Chairman Bernanke is sending a signal to the markets and to government that the economy is bad and getting worse and that the Fed will do its part as everyone expects them to do. This is a clear signal to the markets and the world that the Fed stands for monetary inflation. They don't know what else to do.
As we have long been telling readers, unemployment is the key to Fed policy and they have formally made it their policy linchpin. As far back as May, 2011, on Fox Business News I said that Mr. Bernanke has no other real alternatives other than QE and that with rising unemployment, he would be pressured to "do something."
One may ask why none of these policies have led to economic recovery. Why didn't QE1 work? After all they told us then that it would promote "sustainable economic growth". By the time QE2 was released we heard much of the same thing: it would "promote a stronger pace of economic recovery". Had QE1 worked as they said, why did they need QE2? Now the Fed tells us again that another round will "support a stronger economic recovery".
That begs this question: If QE1 and QE2 and Operation Twist didn't work, why would QE3 work?
The quick answer is that it will fail like its predecessors.
I discussed this at length in my February 14, 2012 article, "Is This Recovery." In that article I anticipated that the following things would happen:
1. The economic “good news” is largely based on fiat money steroids and will not last without continuous injections of new fiat money into the economy.
2. The last injection of fiat money (QE2) is already wearing out and money supply is most likely declining.
3. A declining MS will result in further economic weakness (stagnation) and flattening-to-increasing unemployment.
4. This is likely to occur in Q2-Q3 2012.
5. As soon as unemployment goes up again, the Fed will announce QE3.
6. The dollar will continue to be weak.
7. It is likely that price inflation will continue to be “modest” (as the Fed sees it) in light of ongoing real estate related asset devaluation. This depends on the amount of QE.
The article thoroughly discusses the reasons why the economy is stagnating and why further rounds of quantitative easing will not change it. One of the charts from that article (shown below) attempts to show that each round of QE has been less effective at boosting nominal GDP. The vertical bars show the dates of QE1 (orange) and QE2 (light blue), the money supply (TMS2- aqua-blue line), and GDP (thin black line with its own scale [left]). The result is that economic growth measured by nominal GDP has been largely illusionary.
The truth is that GDP is not a very good measure of economic growth, at least when the Fed increases the money supply through QE. Since GDP measures spending, if new money is injected into the economy, there will be more spending and thus GDP will increase. The second point is that "printing" money never creates organic economic growth. In fact it never has at any time in history.
What can we expect the consequences of QE3 will be?
1. Money steroids will give a temporary boost to the financial markets as evidenced by today's euphoric response to the Fed's announcement.
2. The impact on organic economic growth will be nil even though it may slightly increase GDP by Q1 2013.
3. Unemployment will remain high.
4. Economic growth will stagnate, if not decline, through the remainder of 2012 as money supply growth declines (TMS2).
5. Post Q1 2013, economic activity will again stagnate, assuming there are no policy changes or political changes (Romney is elected).
6. Europe and the rest of the world's economies are in decline which will further depress the U.S. economy.
7. Price inflation is a guessing game. My guess is that it will remain within the Fed's parameters. The key to price inflation will be credit creation through lenders and, while lending has shown some life (mainly the big banks with big companies), it is likely to flatten again as the economy stagnates, thus inflation will remain "Japanese."
8. Interest rates will remain around their historic lows. While the housing market is showing some signs of life, its recovery largely depends on job growth which will remain subdued.
9. How much QE is a good question. I cannot see that any Fed chairman would print endlessly to a point of high price inflation. That would require much greater amounts of QE-type monetary stimulus plus it would require banks to lend, which means businesses would be willing to borrow, thus expanding credit and money supply to much higher levels. QE is not an efficient way to price inflation, and in a stagnating economy, borrowing will remain flat.
If you are a true believer and feel that the Fed is correct, you have to ask yourself hard questions about your assumptions since the Fed has been consistently wrong in their forecasts and policies. Now they insist on pursuing the same failed policies. Why would they work now?
The Fed continues to follow the same wrong policies as it has since the beginning of this depression. We now have one of the longest depressions in history that has been caused by the Fed and the fiscal policies of the Bush and Obama Administrations. They are devaluing the dollar, destroying capital, thwarting growth, and cheating savers out of their hard earned money. It is a cruel blow to the 23.1 million un/under-employed in the U.S. who need economic growth to create jobs. We need a new direction.
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"other policy tools as appropriate until such improvement is achieved in a context of price stability" ... they will use more printed money to short gold, silver, agi, copper, until finally we have price stability
The FED should realize that printing more money or driving rates down actually causes job losses, destruction of assets, and compresses margins. Companies may have large amounts of cash, but they actually have larger amounts of unrealized losses on their balance sheets. By forcing rates lower across the curve, outstanding debt increases in value and in most cases cannot be retired early. If the correct accounting rules were in place, many corps. would have to mark these large unrealized losses against earnings. It does not matter how much cash they have. The debt remains outstanding at higher rates. The cash earns nothing. This also causes a further dislocation in the employment markets since newer technology and newly created companies can raise money cheaper to buy newer updated manufacturing equipment that requires fewer works and is much more efficient. Existing corporations, plant and equipment are obsolete and margins get squeezed, people get laid off. So the lower rates go the higher the unemployment rate, and the barrier to entry for new competition increases lowering profit margins. A vicious circle. The FED has created a situation whereby the financial elite benefit from carry trades against the curve, and manipulate assets; but the rest of corporate America, in fact the rest of the world is caught in margin squeeze and profit spiral. Existing businesses basically get forced out of business because they have existing debt outstanding that cannot be called; creating a fixed cost that works against them to a greater and greater degree as rates drop. The model is broken.
The fed nor the general public carwe all they see is what they want to see....the stock mkt going up....they donot understand or care about anything else...PERIOD...just listen to CNBC puppet heads and think they know the market...sort of like monday night football listen to an announcer and now you know the game
BB3 you said a mouthful ... "If the correct accounting rules were in place..."
If the correct accounting rules were in place our federal prisons would be filled to the rafters.
Excellent post. But I think you're confusing the Fed's stated mission with their actual mission. They state they want to boost the economy and add jobs. But what they really want is to inflate away debt so banksters and politicians can gorge on more and more of it, pure and simple.
It is simpler than that. The Bernank wants to keep his job for another 4 year term. He already knows that Romney will fire him, so he has to reelect Obama.
Occams Razor - the simplest explanation is probably the correct one.
Bernanke wants to keep his cushy job.
http://en.wikipedia.org/wiki/Occam's_razor
Just specualtion on my part - but maybe the Bernake has been breifed theres a very disruptive Middle-East War coming very soon, and that the Bernanke & Company need to get the extra financial lubrication in place before the S.H.T.F.
The man behind the curtain, twiddling the knobs.
Unfortunately, no amount of clicking your heals will get you out of this mess.
It may not be panic, it could just be a subterfuge to help incumbent president look good before the election by providing a large temporary boost to indicators
Agreed. there's nothing panicy about it; it's coldly calculated.
"The Fed continues to follow the same wrong policies as it has since the beginning of this depression. We now have one of the longest depressions in history that has been caused by the Fed and the fiscal policies of the Bush and Obama Administrations."
Lets see....FED founded in 1913, in 1929 we have the crash and the start of what is now known as 'THE great depression', and we are still in that depression until we get in to WWII in 1941.
That's 12 years. This is only what, 4 or 5 years, so hard to say this is longest depression in history.
But, what do they both have in common? BOTH HAVE OCCURRED UNDER THE FED"S WATCH.........this ain't how it's sposed to have worked......is it? They couldn't get us out of the 'great depression' so why the hell do we think they can get us out of this one?
I absolutely must beg your pardon Dexter, wrong policies? Wrong for who? The Fed is just a consortium of private banks and they are doing VERY well indeed thank you, so from their point of view they could not possibly be doing a better job and first one depression and now a second are like Jesus coming to dinner for these boys, not only have they looted the nation of assets but in the ultimate deflation their debt holdings will appreciate even more.
Today was an admission that Main Street is screwed and you will not even recognize it this time next year. If Spain and Greece can survive 50% unemployment then they figure we can too.
I say we start a pool, every day between October 1 2012 and December 31 2015 (almost 1,200 days) will be available to pick from as the start day for the next world war. Because that is ALWAYS how TPTB get us out of major/impossible economic messes.
You pious bunch of hyprocrits, buying gold and silver while bewailing the Fed. Choke on your metals as they soar. (sarc)
Even MORE despondent now about my recent boating accident.....AARGH...........
By the way, I notice Bernanke did not say he would spend 40 billion a month till employment improved on AMERICAN mortgage backed securities. What do you want to be he buys an assload of Spanish MBS.
Total abandonment of the price stability mandate, as if we had stable prices to start with. I say we have good old 1970's style stagflation and the cure is to raise interest rates till the fire is put out just like Volker did. There will be no rebound in jobs till we have real price stability as measured with REAL metrics of inflation and increased prices.
Buy shares of Friskies because grandma will be eating tuna helper for cats by next year.
Unfortunately, they can't even do that now. A large increase in interest rates would soon assure the federal government was paying more in interest each year than they collect in taxes. That is, KABOOM.
So they truly are trapped this time. Well, "trapped" in any conventional sense. Of course predatory authoritarians will borrow all the way up the hyperinflationary curve, and will also create utterly insane mandates on prices, employment and everything else you can imagine (which will make the "real economy" become the "black market").
Solution? Only one. The end of fictions. And the end of predators.
funny - chocolate bars were a nickle for most of my youth - and gas was 30 odd cents a gallon.... prices were pretty damn stable when I was a kid 50 years back BEFORE Vietnam, Nixon, the death of Breton Woods.....
Mommy, are we there [QE4] yet?
Here we go again!
Bernanke has tried the QE and discount window operations and the effects have been underwhelming. Adding more credit to a saturated environment is counterproductive.
Central banks are collateral constrained, for them to increase new money they must make loans in excess of collateral: leveraged (unsecured) loans, the same kinds of loans that have put the entire banking system on the rocks, the reason there is QE in the first place!
- The central bank takes its clients bad loans onto its own balance sheet OR,
- The central bank makes its own bad loans. In either case the central bank is no different from all the other banks, the central bank is insolvent, there is no lender of last resort.
Keep in mind that 'reserves' are bookkeeping artifacts, ledger entries, not real money. Reserves only emerge when there are 'runs on the bank' (They can also become collateral for new loans, however these are unlikely b/c there is evidently nothing that is worth lending to).
During runs reserves become deposit refunds ... due to collapsing asset worth and capital inadequacy. How much good are reserves under such circumstances? If there is a systemic failure with central banks offering unlimited reserves, what is the deposit money actually worth? After all, the money is a only a (proxy) representative of the system that makes use of it.
What Bernanke is saying indirectly is the Fed will maintain (make) all bank depositors whole. Not a very positive remark for the Federal Reserve Chairman to make, don't you think?
If the Fed loses money, its losses simply add to the Federal Deficit. The only limit is the official debt ceiling and Congressional tolerance for such losses. Neither the Fed nor the Treasury can ever be insolvent as long as Congress raises the debt ceiling.
It is a act of desperation . gas is $4.00. driving is way down from what little driving ws being done.
Fail to do your duty as a citizenand get out and vote for Romney and gas will be $8.00/ gallon; yes, I know you think I'm just kidding; boy are you in for a surprise.
Precisely.
Just another analysis with no mention of oil scarcity.
It therefore has no value.
There's no scarcity TODAY; numbnuts. People with tiny brains love one element theories of reality; it's all they can handle.
QE = Economie-ism
Economie-ism = Bankopoly
Bankopoly = US Demockracy
Therefore;
QE = Unconstitutional Government
QED
Shiny on the outside, rotting from the inside would be how I would sum it up.
Weekend at Bernie's. Dragging around the dead body of the economy so the party can go on.
A debt based economy is a like a shark, growth is akin to swimming.... And the growth done died...
Must make the banks appear solvent, fuck the taxpayer. Think about an 85 billion dollar per month stimulus to taxpayers, think things might turn around? Bloody sheep.
Absolutely they panicked. He said the economy would improve, but then delivered open-ended stimulus signaling a major problem!!!!
http://confoundedinterest.wordpress.com/2012/09/13/fed-pulls-the-trigger-with-new-bond-buying-program-40-billion-in-mortgage-backed-securities-per-month/
The real economy gets clobbered again. The Fed’s QE-infinity debacle will bring average gasoline prices to $4.50 per gallon, and a 30% increase in the cost of food.
President Obama, try getting reelected on that!
Politicians play. The people pay.
qe is the tar baby from which the fed will never escape - it is debatable only if it is by design or incompetence....
qe is the long fuse leading to financial armageddon - the fed will NEVER end qe - it cannot. its balance sheet is so loaded down with horse shit that cessation of said policy would immediately ruin its portfolio of horse shit....and it has a lot of horse shit on its balance sheet - enough to choke a horse.
the counterpoint is that qe4 (which is what this round really is) will decimate the gold shorts - there will be death warrants put out for wall street and other western banksters.....evil days are in front of us....it shall not be avoided.
I think I can learn why this is called Fight Club by asking the following:
What does it matter/who gives a shit what the fed's 'balance sheet' is? Four trillion? Forty trillion? So what?
Hypothetical one: Suppose that the fed takes all of its records out into the parking lot tomorrow morning and sets fire to them, and then declares, "Balance sheet zero." So what?
Conversely, hypothetical two: The fed admits what some of the more extreme among the ZeroHedge community think that, indeed and in fact, they are an international conspiracy of Zionist Jews manipulating, lying, defrauding, bribing, murdering, etc., et al., and, indeed and in fact, they are behind everything on the planet and their balance sheet is four [wait? ... what comes after a trillion?]. A gazillion, I guess. Well, so what? Who cares?
Moreover, suppose they take that bunch of records out into the parking lot, burn them, and declare, "Balance sheet zero?" Then what?
Finally, hypothetical three: Even if the fed wasn't some giant conspiracy of international Jews (or even if they were), suppose they go ahead, print up a buncha dough and buy every piece of crap on the planet, including my mortgage, raise their balance to four gazillion, and then burn all the records? Well, then what?
Suppose the fed printed up a million dollars and gave it to each American. Or each American taxpayer? Or every human being on the planet. Yeah, sure, I know ... that will "cause inflation." Or will it? Okay, I'm being a dick. Hookers will charge more (and get away with it) ... for a while. Ditto other crap lusted after by the lower classes. But I wouldn't buy hookers with the windfall, and I doubt very many reading this would either. I'd pay off my mortgage, and so would you. I might buy income producing property. Guess there'd be inflation there? I'd finally go buy the stuff I need to grow my own food. Inflationary? How so? I wouldn't buy a new car, but I would fix the air conditioning in the one I have. That causes inflation how? My baby daughter loves the Chinese buffet (so do I). So I might agree to go once a month (which is more than enough) rather than once every two or three months. Well, you know? The last time we went, the place was half empty. How could it hurt anything to boost attendance at the Chinese buffet? Maybe another will open in my little town, and, with competition, prices will come down?
Ben B. says I'm a gonna print. And gold, silver, oil, and soybeans all go up. Why? Just 'cause we've all been taught that they will/should go up? I took out a roll of silver this evening. Looks the same to me. But Kitco says they went up $22(?) in a minute and a half. Why? I mean, seriously, why the fuck why? I mean, the fed can have a 747 fly into their headquarters tomorrow and reduce their balance sheet to zero. And then aren't we all right back where we were five years ago?
The Fed cannot legally simply burn its balance sheet, but Congress can. They can simply cancel any Treasury bonds held by the government's own central bank. That is called "monetization".
Did you say "legal"?
When it comes to:
predators-DBA-government
predators-DBA-centralbanks
predators-DBA-largecorprations
there is no such thing as legal or illegal. They do whatever they wish, and the 100.000000000% captured "justice department" does nothing.
When you are never charged, never have to appear in court, and cannot be fined, what meaning do you ascribe to "legal", anyway? For the predators, that term and concept has absolutely no meaning whatsoever.
Meh.
Own gold, silver and land. This is the Republic, not the slave nations elsewhere whose politicians can rob with impunity.
Please allow me to suggest Silver and Land; Gold has a hypnotic attraction for governments in crisis. Silver will out perform Gold in buying power; save yourself the stress.
The Fed did not panic. It made a calculated decision. It chose to give money to the U.S. government which wants to carry on with its spendthrift ways, bribing voters.
and in particular with an executive branch headed by Barack Obama.
It's up to you; it's your decisions. get out and organize your neighborhood. make some U-tube videos. volunteer for the Romney campaign; make no mistake about it; this is a crucial electiion. If you turn out the yes boy for the puppet masters; it will come as a slap in the face to them, and they will know they can't get away with everything they want, yet. Obama with nothing to lose, on his last four year term, will obey every instruction to the letter; and you will not like the results.
This is a very sad day for America. Anyone who thinks we are going to get out of this mess by printing money only needs to look at Europe. Did anyone ask Bernanke today why he thinks creating more debt can possibly be a solution? Our media is so fucking stupid and or complicit it makes me wonder if I'm living in an alternate universe.Do these people have any understanding of history or am I the only one who remembers how debasing currency worked in Germany, Zimbabwe, Japan, etc.
So, I'm just looking at this from an accounting standpoint. From where I sit, QE as such needn't be a disaster. The problem is not fiat currency per se; the problem is that we have a private system of money, controlled by and created to support an elite economic class. It's rather insane. Our government abdicates responsibility for money creation, cedes that right to private insitutions called "banks", and then promotes monetary policies that only benefit a small circle of super-wealthy individuals and corporations. Buying up agency MBS and promoting ZIRP compels citizens to go into more and more debt - meanwhile the real value of a working wage falls, and the banks realize billions upon billions in profits through their "under-writing" of all of the new-fangled credit instruments.
I think that a lot of you out here in ZH land totally miss the boat. You rail on and on about eveil Obama and the bought-and-sold government, but you would NEVER be willing to admit that, if the government created the money ITSELF, there would be no more Ponzi-economy, no more "banksters" [sic], no more MBS and related securities fraud....credit would be extended by the government as a public good, for entrempreneurial enterprise...and financialization - the thing that got us in this mess - would be history.
Who at ZH is not willing to listen to what you are saying? I think this subject has been raised as somehing that needs to be looked at - after all, the Constitution reserves to Congress, not the Fed, the power to create money. The Fed is a tool foisted on a complicit Congress.
In the grand scheme of things, neither government nor bank money, will make much difference.
Money by itself cannot create 'investments' where there are none. What passes for investments today are 'flavor of the month' fads. Insert your favorite here: ______________________!
Where government issue would help is in Europe, to get the people back to work, open some of the shuttered shops. However the 'free money' would be diverted to the usual suspects.
Another use would be to retire debt as it matures. Keep in mind, if govts issue notes, the tactic would certainly rebound in unforseen ways.
So, I'm just looking at this from an accounting standpoint. From where I sit, QE as such needn't be a disaster. The problem is not fiat currency per se; the problem is that we have a private system of money, controlled by and created to support an elite economic class. It's rather insane. Our government abdicates responsibility for money creation, cedes that right to private insitutions called "banks", and then promotes monetary policies that only benefit a small circle of super-wealthy individuals and corporations. Buying up agency MBS and promoting ZIRP compels citizens to go into more and more debt - meanwhile the real value of a working wage falls, and the banks realize billions upon billions in profits through their "under-writing" of all of the new-fangled credit instruments.
I think that a lot of you out here in ZH land totally miss the boat. You rail on and on about eveil Obama and the bought-and-sold government, but you would NEVER be willing to admit that, if the government created the money ITSELF, there would be no more Ponzi-economy, no more "banksters" [sic], no more MBS and related securities fraud....credit would be extended by the government as a public good, for entrempreneurial enterprise...and financialization - the thing that got us in this mess - would be history.
I believe the federal government would essentially do all of the stupid shit the FED does. The elimination of the FED would be a good thing, because it would at least remove one layer of misdirection making it easier to place the blame where it belongs.