No QE3 (Yet)

So Bernanke announced a twist operation, shifting the weight of bonds toward the long-end of the maturity spectrum, and a program to roll maturing mortgage backed securities. This means that the Fed’s balance sheet will remain largely unchanged — in other words, very bloated.

But in the immediate term there will be no QE3, no drop on interest in excess reserves, no purchases of equities, commercial paper, foreign debt or any of the wackier theories about Bernanke surprising the economy into recovery. What does this mean for projections on the US economy? Very little — without an artificial updraft of stimulus, and with the ongoing global pressures, it seems inevitable that equities — Bernanke’s metric of choice — will sooner or later end up in the ditch by the wayside.

From the Guardian:

The Fed said the economy faced “significant downside risks”; one of those risks being the volatility in financial markets around the world. US stock markets reacted badly to the move. The Dow Jones Industrial Average closed down 283.82 points, or 2.49%, at 1124.84. The Dow has fallen two of the last three trading days following fears that Europe’s financial woes will spread to the US.

As I wrote last month:

Bernanke’s policy since 2007 as Governor of the Federal Reserve has been to pump money to reflate the rest of the economy to catch up with swollen debts acquired during the bubble — debts, especially in real estate, that would otherwise be defaulted upon as post-crash deflation took hold, leading to bank failures, credit retraction and a huge deflationary spiral to the bottom. That was his thesis in 1983 in regard to the 1930s, and he has been particularly lucky (or unlucky) to be able to test his thesis through policy. The real question is — what is supporting asset prices now? Is it real, new organic growth in America? No — growth is low, stagnant, and led by corporate profits, not small business or industrial output. Is it a booming real estate sector? No — confidence and prices are as low as 2009. Is it lower dependence on foreign oil, and a booming energy sector? No — America is more dependent on Arab oil than at any time in history, and the Arabs are wealthier than ever. Is it deeper, wider and burgeoning consumer demand? No — consumer demand for all but the rich is stagnant, burnt out by crippling food and fuel inflation, and rampant unemployment especially among the young.

He will print eventually — perhaps not this week or month, but he will — no matter how clear Wen Jiabao has been that QE3 should not happen.

Some interesting commentary comes from Peter Tchir of TF Market Advisors

Disappointment With The Fed

There are lots of things out there that once they have been done, can never be undone. Ben just disappointed the market for the first time. Whether he knew it or not he failed to beat expectations. He has been so good at managing expectations and using that as a policy tool he lost sight of how far ahead of itself the market had gotten. Everyone expected twist and seriously, what’s a 100 billion in size between friends in this crazy market.

He downgraded the economy but didn’t use that as an excuse to do more. There was no new, ingenious idea. If anything they tried to clarify the commitment to hold rates low til 2013 is dependent on economic conditions remaining weak.  Yet there were still 3 dissenters.

Ben has been a fan of making markets dance to his tune based on expectations. By disappointing some people I expect his ability to keep the market up by talking will be reduced as investors will need to see action rather than being told vaguely that there could be action. That will take time to play out and even I have to admit he gave us something today, just not enough.

The conclusion is very simple: intervention breeds expectation of more intervention, which breeds dependency.

About these ads

6 thoughts on “No QE3 (Yet)

  1. After researching the mechanisms of the Federal Reserve, all that the USA has to do is outlaw or rescind the legislation. The buck stops with the Member banks of the Federal Reserve. The people who lent to the Federal Reserve can take a hair cut like any Creditor..

    Just check out their website. The member banks earn a 6% dividend. Risk free.

    But if theire is nor Fed who will lend?

    New banks can spring forth and raise capital from overseas for innovative projects. However Lending is not needed in the USA. It has plenty of infrastructure and goods to see it through. If innovative hard working Americans can get ahead unfettered by Government hindrance, the USA will survive.

    • I have a huge list of posts I need to do. I will do a post on the 6% dividend, eventually.

      It’s a total sham. We discussed it earlier. The Federal Reserve system is the dictionary definition of a cartel.

  2. The Fed system is a cartel, members protect each other risk free privileges granted and protected through state laws. Private member banks benefit and all of it appears to be government owned. They distort and fix the value or price of money. I think democracies are doomed to be dominated by oligarchic bankers who rob others to benefit themselves, this is why they promote democracy it allows them to buy the state and gain total control of the economy.

    If there were no fed system, private banks could exist even printing their own money and if they over print and lend, they can lose their business, a free market banking industry has fewer ‘too big to fail’ type problems. If the government does not tax how does the money circulate in society and how does new money (if gold and silver) get injected in the economy if it is needed is a more interesting question.

  3. Pingback: The Emperor is Wearing No Clothes « azizonomics

  4. Pingback: QE3: When Will Bernanke Pull the Trigger? « azizonomics

  5. Pingback: A History of Reserve Currencies in One Graph « azizonomics

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s