The Case Against QE: "Zombie Banks, Companies, Households, And Governments"

Tyler Durden's picture

In a quiet corner of Davos this week, Davide Serra (hedge fund manager) and Nouriel Roubini (doom-monger) laid out to the great and good attending just exactly what their puppet central-banking transmission channels were doing to our world. As The Telegraph reports, "Money printing is theft from our children and may merely be storing up problems for an even bigger crisis." QE has led to gross mis-allocation of capital, the two gentlemen go on to note, adding that they comprehend the reasoning why Bernanke's Put has replaced Greenspan's but add that in doing this money-printing-by-another-name, they have "made it difficult for bond vigilantes to do their job - force fiscal reform." QE just buys time - but the time must be used wisely. Roubini warned that central bankers need to think about turning off the cheap money tap or risk creating another, possibly even worse, bubble.


Via The Telegraph,

Speaking at the World Economic Forum in Davos, Davide Serra, founder of leading hedge fund Algebris, and Nouriel Roubini, the head of Roubini Economics known as Dr Doom for predicting the financial crisis, set out the case against those who think quantitative easing (QE) and low rates are benign policy tools.


“When governments borrow, they are taking money from our children. QE is the same – we are lowering returns for future generations. QE creates an inter-generational dilemma,” Mr Serra said.


Mr Roubini warned that central bankers need to think about turning off the cheap money tap or risk creating another, possibly even worse, bubble.


He argued that policymakers have encouraged markets and individuals to take on crippling levels of debt by leaving asset bubbles unchecked in a boom and coming to borrowers’ rescue in a crisis.


"Ten years ago we had the Greenspan put, now we have the Bernanke put. What are the long term economic consequences?" he asked.


He said loose monetary policy is creating a system biased to creating bubbles, "that's why we've been moving to more unconventional territories" in policy responses - from low rates to QE to credit easing.


"Central bankers have affected the behaviour of the private sector. They have to think about that," he said. "As you do a slow exit out of QE you may create another bubble and make another crisis.


“At some point, the consequence of postponing deleveraging is that you end up with zombie banks, zombie companies, zombie households, and zombie governments.”


The warnings came after the Bank of Japan caved into political pressure and pledged to buy government debt in potentially unlimited quantities in an attempt to stimulate growth.


The move prompted accusations that Japan had launched a fresh attempt to debase its currency and improve the competitiveness of its exports.


As an investor, Mr Serra said QE had led to a “misallocation of capital”, echoing concerns voiced by the Bank of England and others that QE might be distorting markets and creating new risks.


Both Mr Roubini and Mr Serra agreed that QE had been essential at the start of the crisis but, by protecting governments from attacks in the bond markets, it was now making it “difficult for the bond vigilantes to do their job – force fiscal reform”.


For Mr Serra, the time to stop increasing QE had come. "QE just buys time. When you buy time, you must use it. I'd follow the ECB [European Central Bank] model and not the Bank of Japan and US Federal Reserve model,” he said.


Defending QE in the panel debate, Adam Posen, director of the Peterson Institute for International Economics and a former UK rate-setter, argued that QE was merely an extension of normal monetary policy and has been used throughout history. The decision on whether to use the tool depended on the balance of growth and inflation, he added.


“Will the economy in two to three years be below where it should be, and is there an inflation risk? That’s the question. And it’s the same if you’re using interest rates or QE.”


He added that the current problems regarding the effectiveness of QE were less to do with monetary policy and more to do with investor behaviour.


“The same investors who blamed the crisis on central banks keeping rates low are now saying low rates are reducing risk appetite,” he pointed out. “We should shift the focus to investor behaviour.”

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barroter's picture

As far as I can see, the liberalization of finance has been a pathetic failure.  We're living in it's wreckage.  "Freedom!" I hear these libertarians shout. All I see is the noxiousness created by these free "individuals."  These few want the right to besmirch the rest of us as they grab the goodies?  You know what to do to the obnoxious bastard who is rocking the life boat, threatening to capsize us all? You throw the bastard overboard to the sharks.

I don't give a shit about the "freedom" of some pestilant and infectious jerk whose actions threaten the rest of us.  Fuck.Them.

StychoKiller's picture

Hmm, precisely WHO stuffed everyone in those lifeboats?

Bitchin' about the joo-joo-flop situation ain't helping, I suggest you buy

beans, bullets and bullion...

HoaX's picture

"QE just buys time. When you buy time, you must use it. I'd follow the ECB [European Central Bank] model and not the Bank of Japan and US Federal Reserve model,” he said.

nuff said.

SeattleBruce's picture

Wow, those are our only choices, huh?  I don't think so...

Nehweh Gahnin's picture

And Iceland says, "Yeah, go ahead and try that out, you brilliant fockers."

Miles Kendig's picture

Adam Posen equating central bank interest rate policy during the bubble years and now with the notable difference being investor behavior provides one of the clearest examples yet of how economic theory devoid of financial services implications, well, beyond some sell side shit slingers forms the foundation of the great global economic equilibrium we all enjoy today.

thepigman's picture

Fuck em all. Global GDP growth will be 1% this year(tops) and they've used QE to take the markets to  5year highs. Just listening to the overpaid media pundits....(that's you Tom Keane)sucking up to the central bankers makes me want to puke in my Cheerios.

wstrub's picture

If the money moves in tact to the next generation we will have a non-productive workforce.............and that will definately will not work....pardon the pun.  Inflation and taxation will take it away before it moves................Sadly, it has to!  It will not matter what wealth you have created through enterprise.  All generations before us have lost the value of their savings and the baby boomers are a more extreme case because they had less children that  the previous generation.  This massive imbalance will force a significant devaluation in all of our holdings so they don't move to our children.

Ignorance is bliss's picture

American's will have to become self-reliant when this paradigm shifts, and of course we appear to be entering the last stage of the fiat ponzi. Do not fear solely for your children. Rather fear for yourself and all your family. Paradigm shifts can be ugly, and we must be vigalente and brave to enure the next paradigm does not include our slavery.

Downtoolong's picture

“We should shift the focus to investor behaviour.”

Anyone but us right? Like Cramers article yesterday blaming Apple's fall on management's failure to provide Wall Street analysts with sufficient information about the company; and Goldman paying massive fines but refusing to admit any wrongdoing.

It's always someone else's fault on Wall Street.

There's your real problem.


Vooter's picture

Yup..."shifting focus" is Wall Street's stock-in-trade...

NoDebt's picture

I thought it was pretty obvious that QE was to support the orderly transfer of most everything to government control.  As long as the banks get their cut along the way, they're happy, as bankers always are in such favorable situations.  And since they have proven they are too important to ever fail, they know they have nothing to fear moving forward.  They know they're on the inside lane.

There is nothing about this situation that in any way would be fertile ground for "using this bought time to make important changes".  They like it this way.  They want it this way.  They want to go further this way, certainly not move away from it.  Those few in power can FEEL the power accruing to themselves.  They're giddy with it.  And they want MORE.  Always MORE.


SmoothCoolSmoke's picture

Does anyone really think the .01% is gonna be hurt no matter how bad it gets?  To funny!  Hence, they do not give a shit anyone.


Cycle's picture

The Fed is flying "instruments only" and when it doesn't like the readings, it just kicks in the dials by completely screwing up market mechanisms for pricing future risk and future value of capital.

Kantbelieveit's picture

The sad thing about ZH is how it inflames paranoid hatred of THEM. This makes for good site traffic, but it is toxic to social cohesion. This is a perfect example of how "real entrepreneurs" can poison society while achieving personal "success."

ZH readers are encouraged to hate the BLS for cooking the books. They are urged to hate the Fed for money printing. They are told to hate the Keynesians for advocating fiscal stimulus. Anger is stoked, but nothing constructive is offered. Consistency is not a problem at ZH. While denouncing crippling austerity in Europe, the opposite policy is mocked and discredited at home.

One is left with the impression that the only governing principle at ZH is the maximization of page clicks. Mission accomplished. Witness another splendid example of the private sector contributing to public paranoia and tearing down social capital. I look forward to the extension of ZH brand marketing to survival biscuits, assault weapons and concertina wire.


StychoKiller's picture

Hmm, the site you're looking for is --->

Besides, if you've a mind, I'm sure that the stawk-tradin' bots on Wall St.

will be happy to trade yer FRNs...

steve from virginia's picture



QE doesn't buy time, it buys assets that may or may not be worth anything.


QE doesn't rob from the future it doesn't do anything. Robbing from the future is the job of automobiles and luxury housing ... vacations in Davos and empty cities in China ... it isn't finance that is bleeding us but rather our precious industrial enterprises we claim as 'productive'. They aren't ... they are thieving enterprises ... the plutocrats use them to borrow immense fortunes that the rest of us are required to repay.


Clever criminals offer 'technology' with one hand while stealing the elderly folks' pensions with the other ... we have a system built out of a fabric of lies, we've been fooling ourselves for 400 years now we are literally running out of gas and can fool ourselves for only a little while longer.


It is the capitalists who give capitalism a bad name ...



Kantbelieveit's picture

We live in a society that manufactures and empowers sociopaths. How else could a psychological cripple like Steve Jobs be hailed as a great business leader? What is off limits if it makes you insanely great? How many FoxConn suicides does an iPhone justify? Popular culture exalts crazies who achieve impressive monetary results. This sickness will end up killing us all, because crazies don't care about ANYTHING other than their immediate obsessions. The more we empower crazy people, the more dangerous our world becomes.

StychoKiller's picture

You understand this, yet you piss'n'moan about all the pessimism on ZeroHedge -- stay on one

side of the fence or the other.

e-recep's picture

design what jobs designed and i'll hail you as a business leader.

polo007's picture

The minutes from the Federal Open Market Committee’s Dec. 11-12 meeting show participants were “approximately evenly divided” between those who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date. A number of policy makers are concerned the size of the Fed’s holdings “could complicate the Committee’s efforts to eventually withdraw monetary policy accommodation,” according to the minutes.

The central bank’s balance sheet has provided record windfalls to the U.S. Treasury. The Fed uses interest income from its bond holdings to cover its own expenses and sends the rest to the Treasury. In 2012, that dividend to taxpayers was $88.9 billion.

One risk from a large balance sheet is the possibility that the Fed’s interest income could evaporate in coming years as rates rise, according to a paper released last week written by researchers in the Fed’s monetary affairs division. The paper studied different scenarios and concluded that the central bank’s payments to Treasury “will likely decline for a time, and in some cases fall to zero.”

polo007's picture

The 2007 Federal Open Market Committee (FOMC) transcripts were released last week. Media reports have concentrated on the Fed's forbearance during the credit meltdown. Implied, but not stated (in what I have read) is the major reason for such nonchalance: The Fed only acknowledges flows, not stocks. This might sound boring. It is also very important to understand.

This approach to central banking has not changed. All of the major central banks use the same framework. The media and Wall Street spend most of their time interpreting the meaning of central-bank talk. Central banks will never mention a growing concern about loan defaults since the academics can always thwart potential catastrophes by modeling preventive flows (e.g., liquidity). The catastrophic financial failure that most of us endured in 2007 and 2008 was not a failure at all, according to central bankers. Their models still conclude there is always a central-banking solution that will prevent any catastrophe. In conclusion: when the current financial bubble topples, there will no forewarning from central bankers, the media, or Wall Street. Given their processes of thinking, they will be more surprised than the average hairdresser.

"Stocks," in this case, does not refer to common stocks, but the accounts and categories in which assets (and their liabilities) accumulate. The Fed, a creature of academia, knows everything. Knowing everything limits policy to sufficient "liquidity": flows. It - to be more precise - its DSGE model, does not care about accumulations: stocks.

The Fed was taken unaware when credit cracked up in the summer of 2007. Unlike many local realtors and carpenters, the FOMC did not understand the connection between flows (bad loans pouring into off-balance sheet Special Investment Vehicles) and stocks (of mushrooming mortgage credit going sour). The Fed presumably noticed pieces of the mortgage machine (subprime lenders, appraisers, Fannie Mae, commercial banks, investment banks, CDOs) even though it did not comprehend the artificiality of this contrived structure. Hence, the Fed missed the connection between the economic expansion of the mid-oughts and its artificial nature. (As we know now, the Fed does not blanch at running an economy by rigging its prices, so, we know now, central banks do not understand an artificial economy is unsustainable.)

All of which is to say the Fed and its FOMC did not know a loss of forward momentum would be followed by an abrupt shift to backward momentum. Again, this has not changed. Despite talk of deleveraging, the U.S. economy has continued to lever up since the non-catastrophe of 2007 and 2008. Total non-financial debt has risen from 240% of GDP in the fourth quarter of 2008 to 249% of GDP after the second quarter of 2012.

The Fed does not understand the artificial credit created by central banks that has flowed since 1971 has coagulated into unsustainable imbalances around the world. The FOMC will be in the caboose when government debt loses its imaginary, "riskless" character (e.g., banks do not need to reserve against most sovereign bonds). As in 2007 and 2008, the stated price of artificially produced assets is illusory, so the assets cannot stand on their own without ever increasing flows to support prices. The flows accumulate in stocks, the artificial composition of which will topple.

polo007's picture

Oaktree Capital's Howard Mark's most recent memo titled Ditto

DR's picture

Sorry to disappoint you Mr. Serra but my children are going to default on this debt and your trust fund children will end up broke and will have to go work for a living. 

terryfuckwit's picture

good comments mr polo  keep em comin

neutrinoman's picture

It's funny how cautious they are, "may create another bubble." Of course, bonds are in a bubble, a large one, and have been for 2-1/2 years (at least). It's even reached the retail press, like the WSJ. Only CNBC remains to catch up with the absurd situation with bonds.

The real question is, can the central bankers/planners move fast enough to deflate the bubble without doing a lot of damage. Their dilemma now is, if they avoid doing something now about the bubble that they created, a larger, more violent collapse will happen later, forcing the central banks' hands.

Furthermore, ALL financial assets of any significance are inflated: stocks are inflated, bonds are inflated, commodities are inflated, etc. The normal relationship between stocks and bonds has been destroyed.

Adam Posen is just pathetic -- he blames investors for not behaving the way the central (planning)(banking)(take your pick) Five-Year Plan says they should -- shame on them! Wreckers! They're probably putting glass grounds in the butter. Onward! Avanti populo! Euthansia of the rentier! There's an infinite supply of capital out there, at zero cost, if the greedheads would just get out of the way!