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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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The replacement of work and wealth with welfare and debt-finance co-incides exactly with the post-ghetto rise to power of international Organized Jewry.
The Fed knows the real, unfudged, economic numbers.
The numbers must be considerably worse then we imagined.
This is an economic assault on the middle class, open economic warfare has been declared.
The first casualty are the savers, ZIRP to infinity.
The second casualty are the lower classes and those on fixed incomes, due to inflation in the things we need. Notice oil futures way up.
The third casualty is the middle class who will see increased wage pressure and job losses due to their employer absorbing increased input costs.
Another casualty will be the remnants of the housing market, everyone will wait on the sidelines to see how low rates will go.
Forget auditing the Fed, please end the Fed.
c...
What have you done to restrain politicians from bribing voters and running up debts in the process? Or do you only complain now that the debts arrive at your door?
New
I call my reps and write them letters- relaying the same simple message to them for years. End the fed.
End the fed, its my mantra, I tell it to everyone whom will listen.
I am involved in local politics and have considered state politics to retake the PA republican party, on an end the Fed platform.
Politicians bribing voters or the Fed bribing the politicians. Who gains the most?
IMHO the Fed gains the most for its owners, the voters are losing.
Losing their jobs.
Losing their principal.
And now we loose hope with ZIRP to infinity and the fiscal insanity it enables.
Exactly. The Fed is a private bank that prints the US currency. Shareholder banks of the Fed are primary dealers. They make campaign contributions. The Fed prints the money, transfers it to primary dealer banks, who control politicians through campaign contributions.
B.B. is the #1 domestic terrorist and he have just activated the timer on a financial atomic bomb.
Yours is a good list, just do not forget us small business owners. The squeeze on, rising costs, increased regulations that border on the absurd, rising margin pressure as clients do not want to pay higher prices. How can we make money?
Maybe it is time to jump ship.
sschu
It is time to Weaponize. November 6th is National Buy-a-Gun Day.
buy a .45 or a 9mm
will be easier to find ammo
Don't forget to buy a rifle and at least 1K rounds of ammo.
The Fed is supporting the TBTF banks because he has no choice. How are these banks making money? Not algo trading in a low volume, low volatility market, banks are not making money through lending or even on screwing people with 30% APR and $39 late fees on lowly credit cards.
As Tyler has pointed out repeatedly - it's all about the flow and the only source is the Fed - because retail is gone and the muppets are grabbing their coats and heading for the door.
I don't know about that...it is super easy to get credit cards. I keep getting ads for them, and decided to apply everytime I get one from now on. I now have two brand new credit cards with a total $8000 credit available....apr at 11.99%. I haven't used them and probably won't but I want to see how many I can get.
Good strategy. I did that too as a good friend once told me hey what if tomorrow you get diagnosed with terminal cancer?
ended up with like 50 different cards. What you do then is create a spreadsheet with all of them listed including the customer service number.
Then slowly, very slowly rotate the cards and call and ask for say 3K increase as you are going on a trip or some shit. The customer service rep. (probably down here in Costa Rica) says please hold and goes and talks to a supervisor as they check your credit scores etc. Then they come back and say well we cannot do 3K but we can do 1.5K.
Bingo. Wash rinse repeat.
I am out of that game having changed countries but anyone up there can still play.
Please do not consider this as financial advice. Just playing around.
Go ahead. Use them. Just don't pay. Reverse of Starve the Beast. Instead, make it die of a fecal impaction..
why did BAC jump so much? this is nothing other than a bailout for the tbtf that have MBS problems. 40 billion a month to unload to the fed anything you own, the worst stuff, anywhere you want to mark it is wonderful. it won't work, long term - but it buys this years bonus. montag must be leaping (to whatever degree the fat fck can). god bless him and jamie and lloyd and the 35 billion dollar bonus saved for another year. these guys owe bernake big time - and the stupid twat that bernake is - wait until you see what his comeuppance is in the long term. these guys sell there moms for crack money. nice job bennie. you fcking destroyed free markets. took a few years at princeton to learn how to do it, and then have the phd. to allow others to justify you. a beautiful legacy.
+1 for "(to whatever degree the fat fck can)"
+
Well said. Bernanke is destroying capitalism or what's left of it by in effect not forcing these banks who are insolvent into bankruptcy. He more than likely puts the entire system at risk. How in the world is he ever going to unwind this monster? He can't because as you rightly pointed out the Fed will end up with a laundry list of garbage from these mortgage backed securities.
I only hope someday he is held accountable.
Yeah, Bernanke has given up.
Be caught standing near a lifeboat if you know what's good for you.
Yeh
i'm bored of QE3
i want QE4!
QE4 is when QE3 fails.
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.
So, they go back to TARP strategies and buying up not only toxic MBS, but toxic everything.
who pays you people to regurgitate this crap???
1. the US is not in a depression
2. it is not possible to call the Fed's policies 'failed', as you do not and cannot know what for sure what would have happened without them. this is elementary logic, which is well known and understood.
3. i dont know which US$ this article is talking about, but the US$ i look at is stronger vs the Euro since the start of 2009, and about the same vs the GBP over the same period. as everyone here and everyone else knows.
4. oh yes, inflation is undershooting the low CB target. despite $2.2tr of QE so far.
At best the Fed's actions resulted in a temporary state of "less bad", it's not the same as "making things better" however. When a lightbulb burns out, you can spend 20 minutes shaking it to get the filament to connect again. You have light now, but it's not fixed, it's not better, it's just less bad and it's temporary. It buys you time to run out and get a new lightbulb. However in this case, there are no fucking lightbulbs left and you need to revamp the setup entirely. This is politically impossible to do in the current environment, so all you're left with is shaking that lightbulb now and again and hoping no one bumps it.
A leaking roof? A bucket to catch the drips solves the immediate visible problem of a wet floor, but that roof is rotting and needs repair. Pretending that the bucket is the solution just results in MORE damage over time, something that a bucket will NOT "fix". Too bad you're all-in on buckets now.
That's what's going on here. The system has failed and it needs to be allowed to die. No matter how painful it is, kicking that can down the road will only make it worse. Failed business models MUST be allowed to fail completely and the void be filled by better ones. What QE3 has done now, is say, flat out to the banks "go ahead, make risky loans, make stupid bets, if they pay off it's all you, if they fail, we'll pay for them". Do you NOT see what's wrong with this picture? Banks don't need more capitalization. PEOPLE DO. Supply-side trickle-down economics is a flawed and failed economic model, it simply does not work, unless you are at the top and can hoarde all the cash for yourself. When there is no demand, supply has zero motivation to increase. This is the most basic of basics and it's being ignored. Regulations need to go back into place to STOP the insanity that allowed for the problem to develop in the first place. Instead, we have policies that not only IGNORE the underlying issued, but rather REWARD them.
QE1 and 2 did not lead to massive inflation simply due to the developing economies of the world printing up their own inflation and buying up the excess USD to keep their growth levels from crashing. This resutled in massive inflation elsewhere, while the US pretended that inflation didn't happen. In the meantime, other countries have caught onto this scam and are couteracting it. No more loading up on USD, no more arab springs desired from food inflation. You now get to own all that inflation yourselves. Good luck, you'll need it.
I'm stocking up on Kool Aid. When SHTF, I will make a fortune getting people like you to do my work in exchange for it.
Fuck off, shit for brains.
1. the US is not in a depression
You're definition of a depression would be...what?
2. it is not possible to call the Fed's policies 'failed', as you do not and cannot know what for sure what would have happened without them. this is elementary logic, which is well known and understood.
No, its not well known or understood at all, as their "änswer" has always been to print and drop interest rates. You'll notice he said credit, not money. Credit is debt. Money (real money) is not debt.
3. i dont know which US$ this article is talking about, but the US$ i look at is stronger vs the Euro since the start of 2009, and about the same vs the GBP over the same period. as everyone here and everyone else knows.
Comparing one wheezing dog to another does not discredit the monetary decay observed in both.
4. oh yes, inflation is undershooting the low CB target. despite $2.2tr of QE so far.
You are either on food stamps, have no personal vehicle to maintain/fill up or live in a cave or stupid.
I'm going with the latter.
you're quite right.
my opinion is that everything is staged for 1 goal. DIGITAL CURRENCY
That is their ultimate goal.
http://www.graystatemovie.com/
$USD = http://stockcharts.com/h-sc/ui?s=$USD&listNum=
Inflation is, by definition, an increase in the money supply. Need only to look at COMEX close to see all the shit that when you drop it on your feet it hurts, was up 5% or better. But yeah, no inflation here. Feed barley - $5.25....FUCKING $5.25. Oats up 30%. Corn up 50%! Canola fetching $16 at most elevators. Fuel $4.00/USG. Are ya fucking retarded? Oh thats right, but, fucking Nintendo dropped 70%.
$USD = http://stockcharts.com/h-sc/ui?s=$USD&listNum=
Inflation is, by definition, an increase in the money supply. Need only to look at COMEX close to see all the shit that when you drop it on your feet it hurts, was up 5% or better. But yeah, no inflation here. Feed barley - $5.25....FUCKING $5.25. Oats up 30%. Corn up 50%! Canola fetching $16 at most elevators. Fuel $4.00/USG. Are ya fucking retarded? Oh thats right, but, fucking Nintendo dropped 70%.
Do some math, do you think the economy would recover if that 85 billion per month was going to employ people instead of prop up insolvent banks. These fuckers are pulling the old sheriff takes himself hostage routine while heading for the door.
With over 130 million taxpayers in our beloved USA Bernanke could have given each of them (us) $500,000 with the stip that we pay off our mortgage, put our kids thru college and spend some of the remaining monies on needed stuff so long as these items were made in America. Bernanke would have spent far less than with his bank bailouts and endless QE and we taxpayers would be out of debt, going to college and supporting our own economy by buying American made products. Now THAT would have been trickle-up policy. I know. WAY to simple a solution. Let's hand it over to the banksters instead and let them starve the world.
Similar thinking has percolated in the back of my mind for several years now, but you really articulated the idea well. In fact, that was very well written.
My take?
The fed gave 20 trillion to their TBTF buds. Why didn't they give the money instead to me? You? My sister? The couple next door?
I'd have taken it and given it to the TBTF buds. Yeah, sure. To pay off my mortgage. Some other debts.
Then the TBTFs woulda had their 20 trillion anyway, but I woulda been in a position to spend dough on iCrap or whatever 'they' wanted me to do.
Instead?
46 million people in soup lines...I mean on food stamps is a depression. The U6 is 15 - that is a depression. Millions of homes foreclosed on and millions more to be foreclosed on is indeed a depression.
You are mistaken ...
1.) 48 million Americans on food stamps.
4.) Inflation is just another manipulated number. Most agree inflation is much greater than reported. Look at your own bills. Trust me though when the stated goal of the Fed is inflation we are in a depression.
You are the reason they can do all of this crap. You are clueless.
Who has to pay for all these actions?
Our children, you are a very bad person for doing this to the next generation.
Thankfully you will believe all the fed bullshit and be financially wiped out in time.
1) If you grow at 2% while stimulating the economy by a 8-10% deficit you are in a depression...
2) You can only determine failure/success if you define a goal beforehand. Bernanke claims one of his main goals is lower interest rates. He did NOT achieve that... Every time QE started, rates rose!!! The only reason rates are low, is because growth AND inflation are low. In fact, if FED had done no QE at all, 10y rates would be below 0,5% already...
3) Ugly contest... Try some countries that are solvent for fun and see what their currencies did in this period vs USD
4) Of course, the credit bubble is imploding => deflation. Bernanke manages to pump in enough air to keep the bubble stable....
if he claims so that doesnt mean it's his goal.
you know, they lie, they lie and they lie again.
what about if the real goal is to have a digital currency where the "State" can see everything you buy?
could be that they are doing a great work in achieving this goal no?
Real GDP growth is nil. ZOG is measuring debt creation, price inflation, and the rich-getting-richer as "product". As Jewish as it gets. Shalom...Ben.
I knew we should have attacked his bunker when he was changing barrels.
Panicked?
I thought it was an invitation to a picnic! Go buy yourself a cheap house!
And the S&P thinks it is!
"new direction"? We need a New Order.
How is this going to help people afford a house? Last I saw, incomes are stagnant. Besides, mortgage rates are unlikely to dip much lower. At best, house prices may temporarily stabilize until corporate profits shrink and the layoffs start up again.
It won't help people but it will help Investor's
Distressed Home Prices Jump With Inventory Shrinking
snip
“There’s virtually no supply in a lot of markets right now,” Michael Krein, president of the National REO Brokers Association said in a telephone interview. “What we’re finding nationally is that 50 percent of all purchasers are investors because they can outbid the owner occupant buyers. Investors are bidding up anywhere from 5 to 25 percent over the list prices.”
Investors are taking advantage of home prices that are about 31 percent below the 2006 peak and growing demand for rentals from people with damaged credit, limited savings or lack of confidence in owning a house. Firms including Blackstone, Colony and Oaktree Capital Group LLC (OAK) plan to spend about $8 billion buying single-family homes to rent, according to company statements and interviews.
in full http://www.businessweek.com/news/2012-08-30/distressed-home-prices-jump-with-inventory-shrinking-mortgages
Illinois Foreclosures Surging Lure Investors: Mortgages
Flashback
A Huge Housing Bargain -- but Not for You
snip
NEW YORK (RealMoney) -- The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors -- vulture funds.
These homes, which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value.
You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS ) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.
In the process, these investors will instantaneously become the largest improved real estate owners and landlords in the world. The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.
It's fascism, and the sheeple are too fukkin' blind and stupid to see it.
Excellent post. too bad this won't be the lead item, in slow scrolling large print, on every evening TV news show; for a week. That would put some shit in the game.
They are spreading the meme that renting is more expensive than buying now. This may or may not be the case, but there is an agenda for spreading this type of thinking in a population that no longer has job security and has no such hope for the foreseeable future.
Speaking of "spreading memes", how about this one (being thoroughly spread as I type this:)
Let us begin the revolution here and now. Let's set the date. March 15, 2013. The Ides of March. The day Caesar was taken down. We all simply set down the Doritos, turn off the TV, and walk out into the street. Everyone. Let the crowds grow. If you're close to your city council, march. If you're close to your state capital, march on that. If you're near DC, march on that.
Against all enemies, foreign and domestic.
The enemy is domestic. They've trampled and abused every word of the Supreme Law of the Land. Through their machinations, crimes, corruption, and treason they have destroyed our way of life and will soon send us into the chasm. They must be brought to justice in the only manner possible.
March 15, 2013. Lock and load. Spread the word. Make it go viral. American Spring.
My house payment is at least $200-$300 less than what I would pay in rent for a comparable house. So, in some parts of the country, owning is a bit cheaper than renting.