QE2 Leaves Port, Bernanke Takes Leave of Senses
Okay, so youāve heard that Federal Reserve Chairman, Ben Bernanke is at it againā¦ heās doing some more of that Quantitative Easing or āQE2,ā if you prefer the wonky acronym the media has attached to the program.
Itās the Federal Reserveās plan to rescue our economy and stop the deflationary spiral that is keeping Ben Bernanke and Tim Geithner up nights, although they would be loathe to admit it.Ā And I have to imagine that my readers are paying attention in the sense that they are watching, reading and/or hearing the news, on various blogs and in the general media.Ā I also have to imagine that many of my readers are trying to get their arms around what the heck is going on and what it meansā¦ exactly.
You know what I meanā¦ really understand itā¦ in kind of a simple, I-can-explain-it-to-my-wife (or husband, it doesnāt have to be wife) sort of way.Ā There are really three areas of information you should understand about the whole affair, so you can think of things falling into one of three buckets: past, present and future.
Past ā What is it and what have we done to-date?
Present ā What are we doing now and why?
Future ā What will it affect and ultimately accomplish?
Make sense so far?Ā Donāt worry, Iām not only going to make this easy to understand, but Iām going to live up to my reputation and figure out a way to make it at least moderately entertaining and even somewhat funny, at least in parts, although donāt ask me how at this moment.Ā Iām counting on the right side of my brain figuring something out in that regard as I typeā¦ so, okay right brain, the pressure is on.
The numeric identifier ināQE2ā signifies that itās Quantitative Easing, for the second timeā¦ yes folks, theyāve been trying this same sort of thing throughout the last year, and with no lasting or curative impact.Ā In other words, the $1.7 trillion we āeasedā into the economy last year hasnāt worked in the sense that it created no positive lasting outcome.
(In case I have readers who want to read the Federal Open Market Committee Statements going back to 2008, which describe QE1, Calculated Risk has them in an easily accessed layout.Ā Iām not recommending reading them to anyone who hasnāt previously generated the desire to read them on their own.Ā In other words, if you havenāt thought of reading these things before, donāt do so now on my account.Ā Iāve read them more than once, before I understood them, and the experience gave me a headache and made me want to go lay down.Ā Then I had this āfallingā dream and woke up in a cold sweat, so like I said, read them at your own riskā¦ your own Calculated Risk, that is.Ā Wasnāt that clever?Ā I thought so.)
Iām not going to go back in time to analyze whatās already happened as related to QE1, except to acknowledge that the Federal Reserve has engaged in the practice of buying U.S. debt (read: bonds) for some time, but they didnāt call the Fedās purchases āQE1,ā for the same reason that we didnāt refer to the first World War as āWWI,ā until weād had āWWIIā.
QE1 came in many forms, for example last year, the Fed announced that it would purchase $1.25 trillion in mortgage-backed securities (read: bonds) to help keep interest rates down, stimulate lending, and prop up the demand for housing.Ā So, I guess we should say, very well done there.Ā And I believe that when QE1 ended, if you want to look at it that way, the Fed had upped its final purchases to $1.7 trillion, throwing in some asset-backed securities (also read: bonds), as well.
Did it accomplish anything?Ā Who cares?Ā Itās in the past.Ā Obviously, it didnāt produce any significant lasting positive impact, or we wouldnāt have a QE2.
So, the logic of that last statement being undeniable, weāre going to start with QE 2.Ā What is it?
Is it a Marvin Gaye song to which Bernanke knows all the words, and that heās known for singing while walking the long halls of the Federal Reserveā¦ the āBā side of āSexual Healing?ā
No, but thank you for playing, and weāll let you go back to bed now.
QE2 means weāre printing up dollar bills and using them to buy our own National Debt.Ā And according to Bernanke, heās doing it because inflation is too low and unemployment is too high.
Release Date: August 10, 2010
Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.
So, weāre buying out own National Debt, and itās not normal and we wouldnāt be doing it if everything was fine and recovery was around the corner as ātheyā keep telling us.
Xia Bin, who is Bernankeās counterpart at Chinaās Central Bank, said the day it happened:
āAs long as the world exercises no restraint in issuing global currencies such as the dollar ā and this is not easy ā the occurrence of another crisis is inevitable.ā
Japanās economy has been stagnant now for two decades, which is ever since itās own mortgage bubble burst, so figuring that if we can do it why canāt they, Japanās Central Bank announced today that it would be printing money and buying its own bonds too.Ā So, yay!
Thailand and South Korea announced today that they have had discussions with the Central Banks of neighboring countries, and will ādeal with the United States,ā taking coordinated steps to prevent speculative dollars from coming to the region.
The U.S. dollar is the international reserve currency, which means that countries around the world hold our dollars in their reserve banks, and they use those dollars primarily to purchase oil, which is priced in dollars.Ā Were the dollar to ever lose its status as the worldās reserve currency, one of the immediate consequences would be the price we pay for oil would jump significantly and we would quickly find the price of gas at the pump to be several dollars higher than what we are used to paying.
But, generally speaking, the more dollars the U.S. Federal Reserve Bank prints, the less value the dollars being held around the world have.Ā Last year, Bernanke bought $1.7 trillion in U.S. debt.Ā But it wasnāt Treasury bills that he was buying last year, it was mortgage- and asset-backed securities, and no one but the Fed would buy those.Ā Now, in a sense, Bernanke is doubling down and going for $600 billion more in QE, but this time heās buying our bondsā¦ the same bonds we sell to China.
Zhou Xiaochuan, governor of the Peopleās Bank of China, said yesterday that the decision by the Fed will not help the global economy. He adds āThe question comes down to whether there is a problem with the international monetary system when there is a conflict between the international role and the domestic role of the U.S. dollar.ā
As economist Simon Johnson said in his blog post of November 13th, āThe Chinese are digging in hard on their exchange rate; this is headed towards a mutually destructive trade war.āĀ That is not a good thing.
Johnsonās blog post was titled, G20: Profound and Complete Disappointment for the US Treasury, and it should not be missed.Ā Johnson, if youāre not already familiar with him, was the Chief Economist for the International Monetary Fund, and is currently a professor at MIT.Ā He wrote āThe Quiet Coup,ā last year for the Atlantic, and as Iāve written many times before on Mandelman Matters, itās probably the single best article on the subject of the banking oligarchy that now controls our government, ever written.
I want to go on record as saying that Bernankeās QE2 has no chance of working, in the sense that it will do nothing positive in the long run, and wonāt even do much in the short run to help our economy.Ā Itās not only bad policyā¦ itās stupid policyā¦ and even more importantly as far as Iām concerned, itās totally out-of-touch-with-reality policy.
Our government continues to demonstrate that they do not understand the problems our economy is facing, and the cause of those problems, and itās frankly reached the point where itās scaring me to death.Ā Here are my thoughtsā¦ you can let me know yours via email or in the comments:
1. Creating the Wealth Effect ā One of the stated goals for QE2 is to create what is known as āThe Wealth Effect,ā which means that when we all āfeelā wealthier, we spend more.Ā QE2 potentially will give the stock market a boost for some short period of timeā¦ maybe six months at absolute bestā¦ and thatās what Bernanke is thinking will create the desired wealth effect.Ā Will it?
No chance.Ā For one thing, QE2 has been known to be coming for some time, so chances are the market has already priced in any boost, as the market is prone to do in such situations of advance knowledge.Ā But even more importantlyā¦ ITāS NOT THE STOCK MARKET that is making us āfeelā more or less wealthy, Benjaminā¦ itās housing prices, the lack of good-paying jobs, and the absence of available credit that are combining to kill consumer spending.Ā We, meaning the real people in this countryā¦ the 95 percentersā¦ donāt give a ratās behind about the stock market.
Consider thisā¦ regular people have the majority of their wealth in their homes.Ā Rich people have the majority of their wealth in the market and other investments.Ā In this last meltdown, therefore, the regular people have been wiped out while the rich have not.Ā I realize that Geithner and his ilk seem to think that spending by the rich will pull us out of our Great Recession, but anyone who thinks that is innumerateā¦ in other words, they canāt handle basic mathā¦ and theyāve simply never been to the real America.Ā Around them are rich people all the time, and theyāve forgotten to travel outside the beltway or the Hamptons to meet real Americans.
Lastly, I recently read that 70% of the trades on the NYSE are held for 11 seconds on averageā¦ does that sound like real Americans investing in the stick market, or does that sound like a bunch of āquantsā gaming the system to squeeze fractions of a cent from high speed trades?Ā Hmmmā¦ need to think about that, do you?
Bottom-lineā¦ no, QE2 wonāt create any sort of āwealth effect,ā even if some investors are stupid enough to actually listen to the cheerleaders on CNBC.
2. Keeping Long-Term Interest Rates Low ā This is the second stated goal for QE2, and I just canāt decide which one of these is stupiderā¦ the wealth effect or this one.
First of all, in case you havenāt noticed, interest rates have already been at or near all time lows throughout the Great Recession, and so what?Ā The low rates havenāt done much, if anything, beyond keeping a few mortgage brokers employed for an extra year or two.Ā For all intents and purposes, the only lender in this country is the Federal Government, either through now bankrupt Fannie and/or Freddie, or through the FHA, and thatās going to be the case for the nextā¦ oh, I donāt knowā¦ letās say the next decade.
A couple years back, we used the low rates to refinance the people not at risk of foreclosure, then last year we did the same thing again.Ā I suppose we can do it again this yearā¦ but so what and who cares?Ā Here are the facts about interest rates and jobsā¦
The stock market placed a bet a few years back that cuts in the discount rate would fuel our recovery, they took the federal funds rate basically to zero in December of 2008, and back then the Fedās forecast was that unemployment would be down to seven percent by nowā¦ itās still closer to 10%.
Then in March of 2009, we had QE1, which was $1.7 trillion pumped into mortgage- and asset-backed securities, and againā¦ here we are with unemployment still at a reported 10%… and much higher if you consider U6ā¦ the real unemployment rate, which has been rising consistently all year, and now sits at 17%.Ā (That link just above will take you to the Bureau of Labor Statistics, a site you should become familiar with, if you want to decipher the crap coming out of Washington and widely disseminated by CNBC et al.)
Soā¦ would someone like to explain to me how QE2 might help to create jobs via lower interest rates, let alone do anything at all to slow the foreclosure crisis that is dragging us towards depression every single day?Ā Donāt worry, that was rhetoricalā¦ it canāt be done.
3. The āDā Word ā The word Bernanke fears most is not ādepression,ā itās ādeflation,ā and he goes way out of his way to avoid its use.Ā Iāve heard ādisinflationā take its place lately and it always makes me laugh out loud.
The fact of the matter is that U.S. households are deleveraging themselves, getting rid of our unnecessary debts, partly because we see that weāve been burned badly by the way our banks have jumped to cut our credit limits and raise our rates the moment weāre a day and a half late on a payment, and partly because we have no choice but to do so.Ā I know I use my debit card almost every single time I reach for plastic and prefer using cash to anything else.
In any case, the household sector is 70% of our GDP, and as long as weāre spending whatever money we have to pay off our debts, and as long as our home values keep droppingā¦ the situation is DEFLATIONARY, not inflationary.Ā Period, end of discussion.
That means that prices are dropping, not rising.Ā Canāt you tell?Ā Wait six more months, if you donāt believe me today.Ā I donāt care what youāre thinking of buying, a flat-screen television or a new carā¦ itāll be cheaper in six months than it is today.
Okay, so I feel like Iāve failed in writing thisā¦ I canāt find anything funny to say about it. Bernankeās proven once again that he doesnāt know how to deal with this balance sheet recessionā¦ a recession caused by a drop in asset pricesā¦ like the one Japan had beginning in 1990, and continues to this day.
He continues to treat our Great Recession like itās a liquidity crisis, lowering rates and pumping in cash like itās going to accomplish something.Ā It hasnāt and it wonāt.
Weāre on our own, peopleā¦ help is not on its way.Ā Obama has lost control of the House, and the Senate still looks like a group of badly behaved children.Ā Now the G20, which in case you donāt already know, is āThe Group of Twenty Finance Ministers and Central Bank Governors,ā has just met and hereās a few of the things Simon Johnson had to say about his review of the communiquĆ© prepared for the Wall Street Journal:
āIt is hard to imagine how the summit could have gone any worse for the US Treasury and the president.Ā The spin machine is now working overtime ā and youāll see big efforts to get more positive stories over the coming week ā but on all fronts the outcome is very bad.ā
āThere was less disagreement atĀ the summit regarding theĀ āregulationā of global megabanks ā but only because this had been gutted so effectively by the bankersā lobby and officials who bought their specious arguments.Ā There is nothing here that will prevent or limit the impact of another major worldwide financial crisis.ā
And thatās not funny either.Ā I apologize.Ā I tried my best.
Hereās somethingā¦ if you remember the introduction to the Six Million Dollar Manā¦
Ben Berrnanke, Fed Chairman
The man charged with keeping the American economy alive.
Gentlemen, he can rebuild it.
He has the printing technology.
His idea is to make the first bionic economy.
Ben Bernanke will be that man.
Printing and spending more than ever before.
More, weaker, faster.
The Six Hundred Billion Dollar Manā¦ (Theme music upā¦)
And… here’s a video on quantitative easing, which was sent in by one of my favorite foreclosure defense attorneys, Zach Roberts. Ā And even if I wasn’t that funny… this video is.