QE and the new Fed plan: what are its dynamics?

RobertBrusca's picture

Paul Krugman writes,

The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.

It sounds so easy. Is there any sense that the third round of QE layered on top of an extend operation twist will really do all of these things?

In addition to extending QE the Fed has used more aggressive language, extended the period for which zero rates are likely and has assured us that once growth starts up it will not be quick to raise rates Krugman calls this letting the economy rip. I was not aware that the Fed was trying to prevent the economy from ‘ripping.’

I don’t see the magic. This is the third round of QE. The other changes being made by the Fed may be significant but they are still relatively minor and conjectural, and distant in their potential impact or so it seems to me. Will strong Fed language be so important? Does another six months of ZIRP really matter? Is the assurance on raising rates so crucial (or even believable)?

What Krugman does in this column Click here is to assume that this plan will create inflation. This is one of the first questions Bernanke dodged at his press conference. But is that how it works?

What is also so very interesting is that before Bernanke both Volcker and Greenspan had taken a completely different view, that the dual mandate could be collapsed into one policy objective. Under Volcker the Fed began to argue that the Fed does what it can to boost long term sustainable growth when it produces price stability. Under Bernanke these two objectives (roughly, growth and inflation) have been separated and now they come into conflict. Not only that but now price stability has become the enemy of growth, as inflation below the Fed’s preferred 2% mark is considered ‘too low.’ Under Greenspan a number of testimonies were given by the Fed Chairman arguing that true zero inflation should be the goal of monetary policy. Volcker was a ‘low inflation guy’ too.

If you did not realize it, we are now in a complexly different land under Bernanke that we were under with Volcker and Greenspan. Suddenly there seem to be a Phillips curve. Suddenly a strong form of Keynesianism is being endorsed that stimulus is safe with a large GDP gap (do we really have one of those?). But since nothing is really specified we really don’t know the model that is etched in the Fed’s brain as it heads down this path…Does Bernanke think that the GDP gap will prevent inflation but does Krugman believe in the Phillips curve and in the ‘saving grace’ of inflation? Are they on the same page? It’s really too confusing to make sense of since the Fed won’t tell us what its real plan is or how it works. So much for transparency…

The first order of business should be to look at what the Fed is doing to discern the impact. So far QE has been marginal despite the Fed’s estimates of its impact. It takes a lot of securities buying to have any economic impact. So far two separate QE programs have not boosted the economy to stronger growth and the Fed’s balance sheet has grown enormously. What makes this one different?

Extending the period for rates to be zero has not does any wonders and some argue it is counter-productive so what should another six months of ‘guarantee’ make any difference?

Here it is not the extension of the language but the pledge to not raise rates quickly when growth picks up that may matter most. Still, the Fed does not see appreciably strong growth until 2014 or 2015. So this pledge is for the future. And any attempt to pin Bernanke down on what this pledge really means met with frustration at the press conference. It is hard for me to see how such a pledge can effectively boost markets. Assume that this vague pledge is believed and the day comes when growth picks up and the Fed does nothing. Does anyone think market rates will stand pat with a near zero Fed funds rate and 3.4% GDP growth? What is the Fed’s pledge really worth? Is the Fed promising to get behind the curve? Will that be healthy? In its forecast it is behind the ‘excessive growth curve’ for two years in arrow at 3.4% and inflation does not even budge. This does not seem like Krugman’s world.

If the idea is to boost home prices and to increase future sales and to reduce the burden of debt how much inflation are we talking about and for how long? The fly in this ointment is that the degree to which inflation has these boosting influences is directly proportional to how much inflation we create and for how long we tolerate it. Is the Chairman hoping for 2.5% inflation? 3% inflation? 4% inflation? What is he aiming at? We really don’t know. And I’ll remind you that he dodged the question on letting inflation go higher and it is NOT represented in the FOMC’s own just offered ‘projections.’ The Fed appeard to live in a GDP-gap world. For now it’s Krugman that is embracing the Phillips curve world.

What gets the ball rolling? Do we really think this QE will boost the mortgage markets by cutting interest rates significantly further? Is possible to do that? An article in the FT today asserts that the mortgage pipeline is so full that there can be no rate impact because the process is already jammed with transactors.

Will this QE finally work by getting investors to buy those riskier assets they have been shunning?

While both Krugman and the Fed Chairman mentioned the positive impact sought on stocks and on housing the mechanism for this is unclear. Possibly it’s just the stronger message from the Fed that will elicit a response in markets? Will that be enough to get people over their fear of a crumbling Europe, of a fiscal cliff and of a stuck economy?

How does any of this boost housing prices without the proper microeconomic foundations (a fiscal fix)? There is a huge stock of foreclosures still waiting to happen and with banks still so careful about making loans and requiring such high credit scores how does housing get this boost? How does the housing market punch through that barrier and how does house price inflation get started? What are the mechanics of Krugman’s inflation assumption? Can the Fed get to this result on $40bln per month of mortgage backed bond buying? Is there enough spark here to light Krugman’s fire?

And isn’t it dangerous to try inciting the stock market on low interest rates instead of exciting investors through improved earnings? Isn’t this backwards and dangerous?

Of course, another objective will be to raise wages but wages are constrained by competition overseas. So to get any wage inflation going the dollar would have to fall significantly. We have seen some dollar weakness but China pegs to the dollar and Europe has so many of its own problems it’s hard to see the dollar getting very strong Vs the euro!

The last problem is that the kind of inflation QE inspired last time around was not the stimulative sort that Mr. Krugman wants. It boosted oil prices and commodity prices and the dollar did weaken a bit, giving rise to protests from abroad that the US was targeting a weaker dollar. Higher oil prices cut into and undermined consumer spending.

And, of course Bernanke has not even admitted that he is actually seeking higher inflation. Maybe he does think he can’t say it. But if he does not have a specific plan in front of the public then when/if inflation percolates it will look like a policy mistake and markets will not react to it very well. Moreover if inflation is in the plan why isn’t it in the Fed’s ‘projections?’

We know firemen sometimes set back-fires to create a burn barrier that they hope the main conflagration cannot cross. But if you did not know the strategy, wouldn’t you think that it sounds crazy for firefighters to set a fire to limit a fire? Similarly a Fed Chairman who is supposed to protect against inflation had better have a very clear plan if he is going to use higher inflation as part of his monetary plan.

I don’t think Bernanke is there yet; by ‘there’ I mean ready for public disclosure, true transparency. I fear that Krugman’s scenario is what the Chairman has in mind. And if so, exactly HOW MUCH inflation for HOW LONG is the Chairman ‘targeting? Is the whole FOMC on board for this or is this part of a secret plan or one that features some denial as its keystone? And is THAT why the future inflation outlook is so nice and stable despite stronger growth?

For these reason I am skeptical of the new plan. I am not a Bernanke hater as Krugman seems to suggest of anyone that disagrees with the Chairman. I just don’t see why we should add stagflation to our list of problems. What we need is fiscal medicine and arguably making people think that the Fed can solve our problems without the right fiscal fix may even be counter-productive.


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imapopulistnow's picture

Sometimes one is confronted with no good choices.  Do nothing and the economy likely falls.  Do QE and the economy likely grows but in distorted ways.

In a more perfect world, government would be busting its ass to help companies grow and export by streamlining regulations and lowering input costs, but this ain't gonna happen anytime soon and maybe never again. 

Hence Bernanke has got to do what he has got to do.

bunnyswanson's picture

http://www.youtube.com/watch?v=x0k2PmF-o5Q  (Glass-Steagall video 11 min)


The Fed, et al know exactly what they are doing.  It is the fruit of having had Glass-Steagall repealed, which they sought for decades.  Their plan is to shift the wealth of the US into the possession of global central bank as payment for what the country owes the fed, a private bank.



giovanni_f's picture

The Fed exists for 2 reasons: a) Making profits for its private owners (banks) easy and predictable, b) giving a discretely in the background operating bank of england a lever of control on her majesty's former colony. At times goals a) and b) appear not to be in conflict with the "interests" of the masses or the priorities of the us preservident-in-charge, giving the false impression that the fed acts in the long-term interest of the sheeple. Exegeting fed behaviour beyond goals a) and b) is complete idiocy.

bigbwana's picture

The Fed, owned by the Illuminati, is only interested in destroying the global economy, in their evil quest for a NWO, as evidenced by EVERY move they make.

Arthur's picture

Fed BS why not loan dollars through the SBA if you want to jump start business growth?  Just another bank bailout.

James's picture

Current ad on ZH and elsewhere has people who voted for O last time who've now changed their mind.

Bottom of page has figures that when O took office the U.S. ranked third worlldwide in ease of starting a business in the U.S.

We now rank thirteenth behind Rwanda and Macedonia.WTF?

Their are now 11,372 PAGES of new regulations to overcome.

Good luck w/that.

Dr. Sandi's picture

Just because the bus is a piece of shit, it doesn't necessarily mean the driver is responsible for its condition.

But when it goes over a cliff, you have to ask why.

James's picture

That's right Doc. Everything going on is not Obamas fault solely

But Obama owns those new regulations.

q99x2's picture

I don't know Mr. Bernanke but I'm sure he is a nice guy. Nonetheless the ChairSatan should be exorcised and the spirit that is expelled must be returned to hell. The carcass should be hung from a lampost then burnt. The ashes must be sealed in a 2 inch thick Kmonel container and sent into the sun. Bankster M'fer.


Bear's picture

This whole article imputes rationality to the FED (i.e. that they are really trying to achieve a mandate other than bailing out the crippled banks) ... they are not

gregga777's picture

The Fed cannot fight inflation because the interest payments would overwhelm the Federal Government's ability to pay.  Calculations I have seen estimate that each basis point increase in interest rates would increase Federal Government annual interest payments by one billion dollars.  I remember 1981 when Paul Volcker began jacking interest rates towards 20% to halt an outbreak of double-digit inflation that might have become hyperinflation.  If Bernanke raises rates by 1%, 100 basis points, that would add more than $100 billion to the Federal deficit.  

[As an aside, my wife and I bought a home south of Seattle in 1983.  We were fortunate to get a $0 down, 30-year VA home loan at only 12-1/4%!  Everyone else had to put 10-20% down plus closing costs and got 12-3/4% interest rates.]

Bernanke's QE's and Twist's have driven gasoline to averaging over $4.00 per gallon, not to mention food price increases.  What if inflation hits a BLS official rate of 10%?  Bernanke would have to raise rates to at least 13% just to slow the real inflation rate, increasing interest on the national debt by $1.3 trillion annually!  Does anyone believe that the Federal Government can afford an additional $1.3 triiion in annual interest payments?  The annual deficit would pass well beyond $2 trillion annually.  Plus the shock of rapidly rising interest rates would throw the economy into immediate recession driving the deficit even higher.

Bernanke has no means to fight the inflationary fires that he is stoking.  He is also fueling another bubble somewhere with his zero interest rate policy (stock market equities?), while destroying the Social Security Trust Fund (100% invested in US Treasury debt!), insurance companies, public and private pension funds and ordinary savers. 

He is incompetent.  He has not a clue about what he is doing.  He is destroying the US dollar.  He should be fired and replaced with someone qualified to hold the position, not with another Greenspan but someone more like Paul Volcker.

Dr. Sandi's picture

Do not believe that Ben is incompetent. He's doing exactly what his owners are telling him to do.

It's vital to remember that Ben doesn't work for you or me.

bigbwana's picture

Indeed. Owned by the Illuminati. Poor chap. Oh well, what goes around comes around. All those riches accumulated at the expense of the 99.9% will soon be worthless. Please allow me a little gloating. Yippee! 

lasvegaspersona's picture

the kind of inflation BB is getting ready for is the 'hyper' kind. He must know that his announcement was nothing less than an obituary for the dollar. RIP USD (1913-2012)

Hedgetard55's picture

The Bernanke knows exactly what he is doing, transferring wealth to the 1%, maybe the .01% or .001%, from the middle class, and keeping the TBTFs alive for a few more months. Maybe he is hoping for "The Big Payback" when he leaves the FED, like Greenscam got.

williambanzai7's picture

Krugman is a babbling moron. He started out babbling with abstruse formulas and then transitioned to doing it for the NYT.

falak pema's picture

In the high spheres of baboonic Olympus on planet of the Apes he would have a golden chair of chief formulator all dedicated to his prowess, high up on the altar of Economia unlimited. The more you babble baboonic wisdom from your Papal-Nobelised, ourangutan  perch the more you impress the monkey sheeple by your convoluted wisdom that only the empty peanut shells truly understand as silent victims of your past mayhem.

'Cos they have been emptied of their substance by your past fulgurance, whereas the congregation of Baboonia has been filled with hot air into levitated beatitude. Useful idiots are a rare breed that serve a true purpose of inadvertently spreading the bubonic plague in Baboonia Eden. The road to perdition is paved full of good intentions; even in Baboonia! 

orangutan - Recherche Google

Seems like the bubonic plague in Baboonia is now hitting China :

1000 Chinese Boats Set Sail Towards The Disputed Islands - Business Insider

Maybe this is one reason why the chinese orangutans are getting extremely restless, looking at their empty peanut shells :

Asia's Mega Rich Losing Big This Year - Business Insider

mharry's picture

The "Bernanke" is a flipping idiot.

Son of Loki's picture


(Reuters) - Crude oil should be at least $150 per barrel, Iran's oil minister was quoted as saying on Sunday, and the sanctions-hit country's OPEC governor said current oil prices were not high enough to threaten the world economy.




James's picture

It's just not Iran saying it.

BP is up in Prudhoe Bay drilling and just stopped saying they will resume when oil hits...............................$150.00.

Russia claims to have recently found a large feild albeit deep.Their current fields need oil @ $120.00 to break even.

'nankes' actions recently devalued the $ so look to that $150.00 to be soon.

Then throw WAR into the equation..................................

Dr. Sandi's picture

It won't take much devaluation of the USD to make those wells seem profitable then.

falak pema's picture

To think back; in the mid 80s, the average COST of Oil from Saudi well was 2$/bbl and from the top of the line North Sea well it was was 11$/bbl! Whereas oil had been PRICED from 40 $ to 25 $ at Rotterdam...

My, have the margins been good to the Oil Oligarchy for forty years, all parked in Caymanista land through transfer pricing! 

If you look at the extractive empire RAPE this lobby perpetrated you'll understand why our political Oligarchs all sing to the Oil patch like it were holy Jerusalem! "Its the Oligarchy Economy stupid!" 

Now in the winter of our depression discontent these uber-Oligarchs rub their hands; whatever the economic outcome they always have the upper hand! 

HD's picture

Is it just me, or is Mr. Brusca finally turning away from the darkside...

QE3 is nothing more than a back door bailout of the TBTF banks AGAIN - and not just the US banks.  The Fed and politicians depend on the ignorance of the populace to do whatever they damn well please.

Make 99.9% of the global population pay for the recklessness of the top .001%

James's picture

"Is it just me, or is Mr. Brusca finally turning away from the darkside..."


No, his lack of intellect made him follow the darkside for DECADES,right Robert?

Only when he's downsized from his Wallstreet job,economys' on its ass, and he's eating Ramen noodles does he see the lght.

Roberts' just like what happened in the Great Depression.

Some of those individuals who had a hand in the crash but were reduced to being a pauper donned their robe and stood in the soup line w/everybody else hoping/praying that nobody recognized them for fear of their very life.

This quote is the poster nmewn work-

"Just remember, when they come for you I won't lift a finger to stop them because you and others like you have attempted for my entire life to take so much from us all...through the state, under the guise of "fairness"

TruthInSunshine's picture

Krugman is about as disingenuous an economist and person to have ever walked the earth.

If Krugman were honest, what he'd really say is:

"I endorse the Fed's attempts to inflate/reflate more asset bubbles, the kind that create temporary (or to borrow a favored term of Bernanke's, transitory) wealth, that's here today yet gone tomorrow, as it only existed- however briefly- on a fundamentally flawed foundation of debt, with a hangover that inevitably leads to a worse outcome than the last bubble that burst. I endorse this centrally planned bubble-blowing, just as I expressly called for Greenspan to blow a housing bubble, because it papers over the fundamental rot, if only for a little while, and allows for kicking the can further down the street, rather than taking the medicine, as awful as it may taste temporarily, that will lead to recovery."

lasvegaspersona's picture


the medicine you speak of will NEVER be taken. It is too much to bear. Every currency that has gotten to this poing has hyperinflated. It is suicidal but it is less painful that the deflation that comes with what you suggest. 

No there will be no allowing things to play out 'as they should'. Paper will be produced endlessly...until it ends that is.

prains's picture

when at least three random bridge collapses occur within months of each other across the states then it will be obvious for all how far the rot has gone.

terminal infrastructure degradation in 3, 2, 1......

cbxer55's picture

Higher prices every time you blink your eyes. For me it simply means that I am buying nothing but food and energy products, and the least possible I can get away with. I ride a motorcycle and have not bought gas in three weeks. I eat one meal a day, and have lost some 25 pounds since this year began.

The higher prices caused by the inflation due to this QE3 are going to drive everyone broke. I saw a guy and his wife yesterday coming home from the grocery store on bicycles. Baskets on them containing all the stuff they bought (not much).

No one is going to have any money to spend on anything but gas and food. This is supposed to be good for the economy?????

km4's picture

What Does It Mean?

By James Howard Kunstler 

September 17, 2012


Nobody capable of thinking through these rather abstruse matters believes Fed Chairman Ben Bernanke anymore, and his demeanor in public is of a depressed person who has lost belief in himself and what he does. He announced last week's policy salvo - the long-awaited QE-3 - with absolutely no conviction. The Fed will spend $40 billion a month in money created out of thin air to buy non-performing mortgages from banks eager to dump them and interest rates on new mortgages will fall to record low levels. This will supposedly "stimulate" the housing market.

Virtually nobody else out there in blog-and-pundit land will tell you what this so-called "housing market" is, so I will. It basically refers to suburban sprawl, which I have previously defined in two ways: 1) the greatest misallocation of resources in the history of the world, and 2) a living arrangement with no future. The first proposition is obviously a function of the second. Interestingly, one of the first effects of Ben Bernanke's QE3 salvo was the inflation of oil prices to nearly $100-a-barrel, with a flow-through effect of gasoline above $4 at the pump, which only shortens the horizon of the suburban sprawl paradigm. Like the zombie banks choking on bad mortgages, sprawl is dead but doesn't know it.

My guess is that the euphoria over QE3 has already passed. The Fed actions of last week will mean nothing except the steady erosion of dollar value, higher food and fuel costs for all us muppets, and increased mistrust between crippled banks, further crippling bank activity, including the routine operations that make civilized life possible.

imapopulistnow's picture

Soviet style block apartments for the working classes would be such an improvement.