QE2, Fed Policymakers Screw It Up Again!

By: Mike_Larson

Albert Einstein famously defined insanity as doing the same thing over and over again and expecting different results. But apparently the message hasn’t gotten through to the folks in the Eccles Building in Washington. Because the Federal Reserve is at it again!

This week, policymakers met in D.C. and decided to fire up the printing presses. Led by “Helicopter Ben” Bernanke, they pledged to buy new Treasury securities whenever old Treasuries or mortgage securities matured or were paid off.

That means instead of shrinking its $2.05 trillion portfolio, the Fed will maintain it by purchasing an estimated $10 billion to $20 billion per month in Treasuries. It’s focusing on securities with maturities between two years and ten years.

The stock market was impressed by the move … for all of a couple hours. Then equities tanked. Why? Because investors know the LAST, even BIGGER round of “quantitative easing” was a dismal failure for the real economy! Why should “QE2″ be any different?

Fed Move? Dumb, Dumb, Dumb!

The Fed plans to use more funny money in a desperate attempt to prop up the economy.

Starting in early 2009, the Fed vacuumed up $1.25 trillion in mortgage backed securities (MBS) … $175 billion in Fannie Mae and Freddie Mac debt … and $300 billion in long-term Treasuries.

The stated goal was to ease credit conditions, make mortgages and other loans cheaper, and therefore support economic growth and boost employment.

But lenders still aren’t lending. Consumers still aren’t borrowing. And businesses sure aren’t hiring.

The economy shed another 131,000 jobs in July on top of a massive 221,000 jobs in June. Private hiring missed forecasts, and the “all-in” unemployment rate held at a whopping 16.5 percent.

Heck, the Fed itself all but admitted its efforts have been a dismal failure.

In the post-meeting statement on Tuesday, the Fed said:

“The pace of recovery has slowed in recent months. Housing starts remain at a depressed level.”

The statement went on to say that household spending “remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit.”

In other words, the economy is rolling over! And in what must be one of the most UNDER-reported stories of the year, researchers at the San Francisco Fed just announced that there’s a “significant” chance the economy will tip back into recession.

Yet despite all that, Bernanke and his merry band of mad monetary scientists expect us to think another new dose of funny money will do the trick? Seriously? What planet are these guys living on?

Here’s Why the Fed’s Move Is Backfiring!

My take? Because the QE2 plan smacks of desperation!

Look …

Policymakers can’t cut the federal funds rate below zero percent, where it’s essentially at now …

They’ve already pledged to keep rates low until the cows come home, so more rhetoric on that front is meaningless …

And the suggestion that cutting the rate the Fed pays banks on idle reserves from 0.25 percent to 0 percent will somehow unleash a flood of lending? That’s one of the dumbest things I’ve heard out of Washington in a long time — and that’s saying something!

There is nothing anyone in Washington can do to prevent the economic slowdown.

What nobody in D.C. will tell you … but I will … is that a big economic slowdown is already baked in. There is nothing the Fed can do … nothing Congress can do … nothing the Obama administration can do … to prevent it.

The massive, reckless credit bubble that built up over the past couple of decades needs to be unwound. If you prefer the jargon term, it’s “deleveraging” — and it’s something we’re just going to have to get used to.

Fortunately, there ARE things you can do as an investor and an American to prepare …

I’ve just released an urgent report, The Ultimate Survival Guide for the Double-Dip Recession of 2010-2012, that’s designed to help you navigate these troubled times. You can get a preview, and decide if it’s right for you.

If not, suffice it to say that you need to lighten up on your stock exposure and pare down your holdings in riskier bonds. Because if I’m right about a double-dip recession, those kinds of investments are going to get slaughtered!

Until next time,

Mike

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