This page has been archived and commenting is disabled.
What The Fed Does Next
Via Scotiabank's Guy Haselmann,
In 2008, various liquidity facilities, designed by the Fed, unclogged broken capital markets. Shortly thereafter in early 2009, QE1 was implemented to improve market liquidity and transform investors’ general revulsion to financial assets. The combination helped avert economic and financial disaster. The Fed responded well at that time; however, the cost-benefit equations for QE2 and QE3 are much less clear.
The Fed’s (subsequent) QE and ZIRP policies have enabled fiscal stalemate, turbo-charged wealth inequality, and arguably led to financial asset bubbles. For these reasons, I believe they have become counter-productive. New tactics, should they be needed, would therefore be welcomed.
- It is counterfactual to know, but it could be argued that current market turmoil is partially the result of the Fed purposefully encouraging asset price inflation, and staying in crisis mode long after the economy began to heal, and after the financial markets were operating smoothly on their own. Over the past few years, too many investors, piggy-backing off of Fed policy, have diverged valuations away from economic fundamentals. Recent down -grades to forecasts of global growth and inflation by the IMF and World Bank further expose this fact. In turn, wrong-footed investors are now belatedly trying to recalibrate.
The Fed’s feeling as if it is ‘the only game in town’ has been a factor leading to its unusual measures. Polarized politicians should take some blame. They are too frequently reactive (as opposed to proactive), so it could take a financial crisis to get them to act.
Another intention of the QE programs was to sufficiently boost GDP enough to deal with, and reduce, the problem of excessive debt. Since sovereign and non-financial corporate debt-to-GDP levels have risen significantly during the programs, QE, under this metric, has been a failure.
Financial repression unintentionally created growth in debt, but not in money or inflation as intended (thus resulting in higher debt-to-GDP). Furthermore, punishing savers at the expense of helping risk-takers and speculators is bad long-run policy for any country. Therefore, using zero interest rates and QE, as tools to ‘inflate away’ debt, will have to be replaced at some point with new tactics and remedies (below).
- Attempts to reflate will not be abandoned altogether, because rising debt levels and falling velocity of money means the US is now even more vulnerable to a deflation shock, but other tactics will have to be found.
- I believe that SF Fed’s Williams comment today about potentially revisiting QE if necessary is a complete non-starter.
Should the negative aspects of QE policies continue to materialize, the Fed’s efforts to ‘normalize’ rates (i.e., hike rates) may certainly be deferred. The real question is what remedies will, or can, the Fed turn to should market turmoil become unhinged, or should the US recovery falter? The answer, of course, is that the Fed will turn to “macro-prudential” polices. If you are wondering what this means, Kevin Warsh said it well at the IMF meeting this past weekend: “macro-prudential policies are vital, but we have no idea what they are”.
I have a theory. New onerous banking regulations have restricted the ability and willingness of banks to lend, shrinking bank credit growth and the velocity of money. The Fed’s enlargement of its balance sheet by more than $3 trillion via QE has been unable to offset these regulatory factors, because most money creation occurs as a function of lending in the fractional-reserve banking system. Therefore, I suspect that part of the “macro-prudential” remedy will include the Fed (or some other type of government agency) playing a role in targeted credit allocation.
Such a tactical shift will mean that the holders of capital who were so amply rewarded under QE will be badly hurt. The Fed (or other activist gov’t agencies) will decide the winners and losers.
This plan likely has many political obstacles, but it should not be considered a far-fetched idea. State-directed (subsidized) credit is not unprecedented and not dissimilar to the BoE’s ‘Funds for Lending’ scheme, or the ECB’s TLTRO program. Certainly, the Fed needs to find a way to better way to control credit growth with tools other than interest rates or security purchases.
The Fed has provided years of uber-accommodation. Its stimulus efforts were assisted by entities abroad. Today, global quasi-coordination has fractured with other countries now focusing on domestic issues. Markets are already showing signs of worry. Since the Fed’s balance sheet is still growing, withdrawing accommodation (the second half of the game) has yet to even start.
After years of one-way accommodation, markets are likely in for a messy unwind process; particularly as (and when) Fed tactics change. The US Treasury 30-year dropped below 3% well-prior to my “before Thanksgiving” prediction, and now sets its sight on my prediction “of a move toward 2.5% in 2015”. As I outlined in last week’s note, the global factors are aligning in the perfect storm. It is always easier to provide accommodation than to remove it.
“I took a course in speed waiting. Now I can wait an hour in only ten minutes.” – Steven Wright
»
- 12330 reads
- Printer-friendly version
- Send to friend
- advertisements -
someone keep an eye on the fed's procurement list to see if helicopters and pallets of cash have been ordered.
Perhaps that's why the price of oil is dropping. They don't want to pay top dollar for their jet and helicopter fuel for the getaway.
Nah.... Under capital allocations policies the Banks Get All the Funds.
Just like now, for it is the Banks that Do The Lending.
'Nuffin gonna change dere, mateys
what the fed does next?
as simple as it is obvious.
print a couple of trillion and give it directly to its foreign owners and to executives and shareholders of tbtf
yep, and when they go to spend it they find out it doesn't buy anthing because nobody works except the rice and bean wagon... Oh and the Obamaphones.
Obamaphone,
EbolaPhone
dat's raciss. why you wanna work? you get anything?
obama be workin' his mojo for you. what more you want? ask him for it.
oil drop is looking to me like a mini QE. CNN can pump the media with 'the american consumer is saving at the pump, and now they will SPEND it on made in china crap'. think about that. markets to the moon on consumer spending!!
duh. the cb's can't print right now, so they get saudi's to help. it's amazing. when it get's out - market up 3% tomorrow.
Oh, I figured it out. Those FEMA coffins are to keep the treasury printing paper dry... no you say?
An hour goes by for me in like 10 minutes, does that count for anything?
Yes, that means your salary will be reduced accordingly..... Over and out, That will be all.
That's okay, that 220 million should hold me over for a while.
It means you're smoking good weed.
Someone needs to explain to the author that a free market breaks when governments and central banks "do something".
His premise is biased and invalid.
Next.
I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do...
www.job-reports.com
If the real producers are lucky, what happens next is The Fed, all their PDs and their owners, fucking die...
don't hold your breath "folks"...
Nobody at the Fed has a PhD.
PD=Primary Dealers... Goldman, JPM, BofA, etc...
My bad. : > )
They have Ctl+Phds. Machiavelli covered this.
You obviously haven't watched Wolf of Wall Street. They rent a big fking jet with 50 hookers on it bowls of cocaine and qyluids and another 50 hookers for when the plane lands. Then they rent the 28th floor of a high end hotel at Vegas do more blow, more hookers and trash the whole thing until Leonardo wakes up the early survivor grabbing a spare tit before he previews the wonderful lights of Los Vegas..
If penny stock brokers can have a $2 million dollar party what do you think the Ben and Yellin club can have?
Judging by the looks of 'em, huge mutal barfing sessions.
Ebola
Doctors Without Borders: 16 staffers have been infected with Ebola, 9 have died
Latest:
http://tersee.com/#!q=ebola&t=text
What the fed does next is fuck more muppets.
Next, we blame free markets for the Fed's actions.
If people could use their EBT towards a house and car purchase thinngs would turn around quick!
Like a boat in a storm.
"The Fed (or other activist gov’t agencies) will decide the winners and losers."
I don't see how this represents any shift in policy.
Got silver?
Yes. But I'm starting to think, I have way too much.
I'm up to my ears in the shiny stuff. The more I get the poorer I become
Well she's got two choices as do all central bankers. One of these she can't do which narrows her options down a little.
Man killed in Iowa plane crash was Libertarian party candidate for US Senate http://wtfrly.com/2014/10/14/man-killed-in-iowa-plane-crash-libertarian-...
concur
Sadly suicided is now an adverb.
"I suspect that part of the “macro-prudential” remedy will include the Fed (or some other type of government agency) playing a role intargeted credit allocation."
Forget the FR ... FR Articles pretty clear can only dabble in govt debt ... credit allocation will have to come from Executive Branch (and i assume Legislative Branch blessing)
Is this a yes / no question? WTF have they done for the last 6 years? Print up more of "Their" money. Just remember its your privilege to serve.
Arguably led to financial asset bubbles?
Seriously?
What a douche, pretending that the activities of the Fed are seriously thought through on any level deeper than, "Anybody got a good story we can feed the slaves this time?
Only a Junior VP Candidate could possibly be this stupid.
With thinking like this author's, the one thing that can be guaranteed is that the general public will be correct in their perception that Banks have not learned anything.
This article is almost, but not quite, complete horseshit.
What the fed does next...well another round of QE, that is what. Who's gonna stop them? The politicians that benifit, the banks, the 99% that only care if they can rack up more debt for the new iPhone? So in otherwords, there'll be another QE.
As thought before, QE to infinity.
Obongo can double the deficit again. Shoot for $35 trillion. Spend like there no tomorrow because for the dollar there won't be one.
The Fed giveth , amd the Fed taketh away . See
http://andreswhy.blogspot.com/2008/10/bubble-management.html
What does happen is a pulse-system .
+QE is followed by -QE .
Ie money destruction by confiscation of capital .
See http://andreswhy.blogspot.com/2013/11/creating-and-destroying-money_9208...
“macro-prudential policies are vital, but we have no idea what they are”.
Then i guess they don't exist, do they?
And the buzz-words "macro-prudential" concocted by the Fed because they haven't a clue either but thougt some new buzz words would be an alternative to actual knowledge and ability.
"Attempts to reflate will not be abandoned altogether, because rising debt levels and falling velocity of money means the US is now even more vulnerable to a deflation shock, but other tactics will have to be found."
It makes sense that the U.S. is now more vulnerable to deflation shock, as the FED has been fueling that which they say they have been trying to prevent- deflation. Inflation causes deflation, as anyone who has seen a financial bubble, knows.
You can't really reflate something that hasn't been deflated, yet.
Anybody that credits QE1 with helping to "avert economic and financial disaster" is either stupid or crooked. It's amazing how many people still believe that the collapse actually threatened Main Street. Read David Stockman's "The Great Deformation".
Few mainstream analysts harbor any doubts about Anglo-Saxon central banking socialism per se. The criticisms and advice always center only on what allegedly "better plans" the bureaucrats are supposed to implement.
"revisiting QE if necessary is a complete non-starter"
'Non-starter' perhaps means not a part of their 'first string' squad, something they bring in only after their hapless policies suffer an injury ... like now.
Also, we may be overthinking the Fed's idea of 'macro-prudential', which I assume will be some guy at a big, well-known financial/insurance firm helping the Fed run the economy with a large 47-tabbed Excel spreadsheet.
Janet Yellen's gon up my FAFSA.
Regardless of what you call it the "Federal Reserve Nightmare" or the "Yellen conundrum", the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains. Bernanke has by passing the chairmanship to Yellen escaped from the QE trap but left the rest of us fully in its grasp.
The Fed has been superbly entrepreneurial when it comes to Ponzi schemes or pseudo-economics hocus-pocus that has allowed the current situation to develop. The Fed must at some point begin to ponder a real exit strategy and end the massive and corrosive stimulus that the economy has come to expect. To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward. More on this subject in the article below.
http://brucewilds.blogspot.com/2014/06/exit-strategy-from-qe-remains-elu...
So, Janet's phone is ringing all day long…every political hack calling and demanding she intervene. “The Fed must support the markets…there is an election soon!” Me thinks first comes more jawboning, “QE 5 is ready to go!” etc. I also think the Fed is f***ed. They know the markets are 100% dependent on them now. Without massive stock buybacks using cheap Fed $$, it would be earnings miss after miss as growth ends. Without loose credit to fuel fog-the-mirror auto loans, GM would go bankrupt again.
It is all a lie. I see nothing in the way of capex expansion. AAPL is building a new building for what reason? All their manufacturing is done in Asia. They should just move their headquarters there. No new jobs here, just ever larger government handouts to keep the masses from taking to the streets. Tech companies have been down-sizing for more than two years, and more layoffs announced every day. Without the tech bubble, we will be in the largest depression ever. Home prices have again peaked and are headed down. When the Silicon Valley property bubble bursts, look out below.
QE will no longer work, it has only postponed the final collapse for a few years. When fear takes over, the Dow will drop 1000 points in a day. The Fed will be seen as ineffective and the party ends forever.
No exit, maximum QE. They pretend there will be an exit to maintain credibility. The attempt to have the Bank of Japan and ECB take the baton will fail.
Certainly, the Fed needs to find a way to better way to control credit growth with tools other than interest rates or security purchases.
Yeah, right - if only we tinker long enough, we will finally discover the holy grail of central planning. What the Fed "needs to do" is abolish itself.