The Chart That Shows QE3 Failed Before It Even Started

Tyler Durden's picture

While it is all too clear that a year from today, right about the time QE4 is gearing up for deployment, QE3 will have had absolutely no impact on the economy (in the upside case; the downside case would imply millions in job losses primarily in the financial sector courtesy of record low 2s10s and even lower Net Interest Margins, aka Carry Trades), just as QE2 ended up doing nothing not only for the US economy but for the stock market as well, what is somewhat disturbing is that the only primary purpose of Operation Twist, namely the lowering of 10 Year bond yields in order to make consumers "weathier" through cheaper refis, has already failed. Presenting Evidence A: 10 Year Treasury Yields (inverted axis where lower yields are plotted higher) and the MBA Refi Index, which today dropped by 6.3%, the third week in a row, sending the Refi index to 3169.4 from 3915.5 in the beginning of August. As the chart makes all too obvious, the correlation between the two series has been as close to 1 as possible... at least until talk of QE3 via Operation Twist not only picked up but was made virtual fact through Wall Street's wholehearted acceptance of more monetary easing. What has happened recently is a substantial break between dropping yields and increasing refinancings. It thus begs the question: if an ever flatter 2s10s curve, the explicit objective of Op Twist which has gotten priced in in the past several weeks, has no impact on the housing market currently languishing in a historic depression, then just why is the Fed focusing on lowering long bond yields even more?

And while one can attempt to attribute this drop to "transitory" factors such as hurricanes and summer vacations, the reality is that every single time the Fed commences another monetary easing episode, mortgage refi rates plunge, in the process undoing everything that the Fed tries to accomplish by forcing mortgage-holders to refinance into a cheaper loan.

This also means that the only other reason for QE is and continues to be the funneling of zero cost money to banks via excess reserves which can then be used for all sorts of asset levitating fungible purposes. It also has some unpleasant side-effects: such as sending gas to $5/gallon (for consumers) and gold to over $2000 (for central bankers).

And while none of this is likely to change any of the course that the Fed will embark on after its next FOMC meeting, the population at least deserves to know just why it is being fleeced over and over.

And tangentially, the most dramatic confirmation of just how much of a failure not only monetary but fiscal stimulus have been (and will be) is the following snapshot of major headlines on Gallup's economy page.

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razorthin's picture

gee, what the fukk could have changed in the early 70's...anyone? satan?

Nixon's remains should be exhumed and ground for me bread.

Ned Zeppelin's picture

RobotTrader is being sarcastic, I think, for those who may have missed it.

lieutenantjohnchard's picture

ned, i'm not so sure about that. the 'tard has posted quite a few posts almost exactly like this over the months. i think he really believes it.

lieutenantjohnchard's picture

must be a slow day on the 1099 desk at "my bank/our bank".

i like the part where the part time, contract 1099 processor can see into the future, and tell us what will be, and what would have been.

equally, i like the part where the 1099 processor tells us about the misery of 9% u3 with "millions upon millions on food stamps" living it up, spending money like mad etc etc ...

robottrader: still wondering why so few understand his brilliance.

csmith's picture

The credit transmission mechanism is broken. Banks can't refi because collateral values have deflated too far beneath existing nominal mortgage values. The ONLY solution is for the banks and the GSEs to take the necessary writeoffs and move on. This is the New-New Deal we need to reset the system. Some will win; some will lose, but GET ON WITH IT!

catladdy's picture

The mortgage refi string can't be pushed much more even at a zero rate. A myriad of problems exist: (1) Loan values exceed appraised value, (2) employment doesn't exist to support a new qualifying note.

What will occur with the Twist is further consolidation of banksters from thin margins, reduced credit for small businesses.

As Malpass stated in an earlier Op ed, higher rates are needed, not lower.

Rather than a balding wizard puppet behind a curtain whose strings are controlled by the bankster oligarchs, let the free market decide the rate.  


LongOfTooth's picture

Imo if you want to know why the Fed is so intent on lowering interest rates then you need to take a look at the paper written by Carmen Reinhart and others titled “The Liquidation of Government Debt”.  In the paper they go into great detail describing a subtle type of debt restructuring called “financial repression”. 

And yes, that's an IMF webpage.

Better yet, do a Google search on financial repression.  That's what they have in mind for us and the world.

Ned Zeppelin's picture

Except for the fact that very few can actually refi, and I have no idea where this continuing crowd of refi-ers come from, or if they are even real, which I truly question, this is interesting information.

Miles Kendig's picture

Driving the 10 below 2 has been a smashing success in the re-fi space. This is what success looks like. Everyone that can re-fi has.

cocoablini's picture

Amazing how interventionists never see how the realrates plunge below adminstered rates in the short end and nobody cares.
You cannot give the money away- nobody wants the debt and nobkdy wants homes. Homes are shitty because:
- the mortgages are a lot, even at 3%
- people prefer the cash flow to ownership
- people do not want debt
- homes have costs like maintenance
- governments keep going to the homeowner trough to collect more taxes, even as it causes more defaultz
- so, yeah your mortgage is less but it's still a costly non-investment since home prices will not budge for a decade or so. Theres NO RUSH to buy

ThirdCoastSurfer's picture

Usury, of course, is a word for the damage caused by the misuse of lending on one end of the curve, but we have no term for the other. If manipulating something one way is wrong, how can it be that the opposite is not true? 

If you read Adam Smith's take on the destructive effects on usury, it's easy to see how the universality of the principal applies to the other direction as well, it's just that even Adam could never envision a scenario where it would be possible. 

If insanity is doing the same thing repeatedly and expecting a different result, then bring on the 50 year bond. 


holdbuysell's picture

Well, on refis we're already holding the 3-4 handle with zero expense out of pocket. Yes zero. Basically, only the time and hassle factor investments result in rolling to a lowered rate.