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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

The Big QE2 Shakedown

Politics / Quantitative Easing Apr 26, 2011 - 05:32 AM GMT

By: Frank_Holmes

Politics

Best Financial Markets Analysis ArticleThe New York Times is bit late to the party but, better late than never, right?

Times economics writer Binyamin Applebaum has just discovered that the Fed's bond buying program--aka QE2--has lit a firecracker under stocks but done zilch for the real economy. Applebaum--who apparently never trolls the econo-blogs to expand his understanding of what's going on in the world of finance-- is "shocked" that Bernanke's $600 billion "credit easing" strategy has turned out to be an utter boondoggle that's had no measurable impact on output, unemployment or growth. Who could've known? But let's let Applebaum speak for himself:


"The Federal Reserve’s experimental effort to spur a recovery by purchasing vast quantities of federal debt has pumped up the stock market, reduced the cost of American exports and allowed companies to borrow money at lower interest rates.

But most Americans are not feeling the difference, in part because those benefits have been surprisingly small. The latest estimates from economists, in fact, suggest that the pace of recovery from the global financial crisis has flagged since November, when the Fed started buying $600 billion in Treasury securities to push private dollars into investments that create jobs...

A study published in February found that interest rates decreased, but only for companies with top credit ratings. “Rates that are highly relevant for households and many corporations — mortgage rates and rates on lower-grade corporate bonds — were largely unaffected by the policy,” wrote Arvind Krishnamurthy and Annette Vissing-Jorgensen, both finance professors at Northwestern University.

Another indication of its limited success: Borrowing has not grown significantly, suggesting that corporations — which are sitting on record piles of cash — are not yet seeing opportunities for new investments. Until they do, some economists argue that the Fed is pushing on a string.

“What has it done? It has eased credit conditions, it has pumped up the stock market, it has suppressed the dollar,” said Mickey Levy, Bank of America’s chief economist. “But does the Fed think that buying Treasuries and bloating its balance sheet is really going to create permanent job increases?” ("Stimulus by Fed is Disappointing, say Economists", Binyamin Applebaum, New York Times)

Correction: The $600 billion in Treasury securities was never intended "to push private dollars into investments that create jobs," as Applebaum opines. That's baloney. There have been numerous studies which have shown that QE has little to no effect on employment. (Note--A study by Macroeconomic Advisors states that an additional $1.5 trillion in bond purchase would only reduce unemployment by two-tenths of 1 percent.) Bernanke is familiar with these studies, which means that the real objective was something else entirely. But just to provide a bit of context, here's a clip from a Washington Post op-ed that Bernanke wrote just prior to the launching of QE2 in November 2010. Judge for yourself whether the man can be trusted or not.

From the Washington Post:

"The Federal Reserve's objectives ---- are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.....Low and falling inflation indicate that the economy has considerable spare capacity, implying that there is scope for monetary policy to support further gains in employment without risking economic overheating. The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.....the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation." ("What the Fed did and why: supporting the recovery and sustaining price stability", Ben Bernanke, Washington Post)

By my count, Bernanke mentions employment/unemployment 5 times in the first 3 paragraphs alone. But QE2 has done nothing to reduce unemployment. The only reason unemployment has dipped at all, is because more workers are falling off the unemployment rolls. Is Bernanke taking credit for the people who now live under freeway off-ramps or forage for their meals in dumpsters?

And QE2 hasn't improved bank lending either; that's another fabrication propagated by the financial media. Just check out the Fed's own stats; it's all there in black and white. (Total Loans and Leases at Commercial Banks (LOANS) FRB of St. Louis) Total borrowing at commercial banks continues to decline as it has since the bubble burst in 2008. Also total "consumer credit outstanding" has decreased from that same period. (Ho hum)

Sure, it's boring, but think about it for a minute: Didn't we just fork over $3 trillion to the banks, so they'd start lending again? And, have they?

No.

So, let's review: The banks were given $700 billion when the TARP bailout was enacted. Then they were given $1.25 trillion more in the first round of quantitative easing (QE) where the Fed purchased the banks toxic mortgage-backed securities (MBS) and agency debt. They were given another $900 billion in QE2, in which the Fed exchanged $600 bil in reserves for US treasuries and another $300 bil in recycled proceeds from maturing MBS. So, altogether the banks have been given roughly $3 trillion, not a penny of which has benefited US taxpayers, increased demand, or strengthened the recovery. In fact--as we pointed out earlier--the money has not even increased lending which was the stated objective. (along with lowering unemployment)

So, we've been fleeced, right?

Imagine if that same $3 trillion had been given to smaller banks with the proviso that they temporarily drop interest rates on credit cards to 5 percent for (let's say) two years. Of course, the banks would still make boatloads of money because they borrow from the Fed at zero. (0.25%). But think of how much activity that would create if people could borrow at 5% instead of 18%. Most likely, it would lead to another credit expansion.

But, that's not going to happen because the banks want to borrow money from depositors (you and me) at 0.50% (1-year CD) and then rent it back at 18% (via credit cards), that way they can leverage their gambling operations in the equities markets and still hand out multi-million bonuses to their top predators.

Oh, yeah, and if those gambling operations go belly-up; guess who's on the hook?

You and me. And, if you can't pay, no problem; they'll just subtract it from your Social Security.

Is this the crookedest system you've ever seen?

So, let's cut to the chase; what is QE2 really all about?

It's obvious; it's about pumping up stock prices; there's nothing more to it. It's Bubblenomics 101.

Look, even the NY Times is willing to admit it's a farce, and that's quite a concession. But Bernanke is sticking with his story despite the mountain of evidence to the contrary. Why? Because the Fed is is the policy arm of the banking industry and Bernanke is their chief lobbyist. It's that simple. And, his job is to funnel more free capital to his loafer moneybags friends who hate work. That's it. It's not complicated. So, they make up some goofy story about "lowering unemployment" or "increasing lending" and try to hide what they're doing behind a name that sounds "way too smart" for the average guy to understand. "Quantitative Flim-flam" is what it should be called; One-part junk economics and 99% unalloyed hogwash.

Get the picture? What the Fed is doing has a long pedigree; it's called cornhole the taxpayer, and no one does it with such virtuosity and deftness as Ben Bernanke. He's a real pro.

And, one last thing: Bernanke and Co. know the real condition of the economy. They're not fools. They know that each business cycle is weaker than the last, providing fewer jobs, more slack in the economy, and more anemic growth. They know it, just as they know that mature capitalist economies drift inexorably towards stagnation, which is why the capital accumulation process must be endlessly tweaked to maintain profitability for the "lucky few". So, while at one time, the US produced precision widgets and eye-popping techno-gadgetry; the focus has since shifted to ever-wackier debt-instruments and computerized high-speed trading to fatten the bottom line. Because that's where the real gravy is.

QE2 fits perfectly in this new paradigm of profit-extraction via maximizing debt and goosing the markets. It's a sign that the folks at the Central Bank have completely abandoned the traditional ways of boosting earnings and moved on to Plan B, which involves cannibalizing the system and devouring the society to further enrich the illustrious 1 percent.

So, forget about the "self sustaining recovery". Fed policy has nothing to do with rebuilding the economy and putting people back to work. It's just one big shakedown. They grab you by the ankles, turn you upside-down, and shake. And, when the last copper penny hits the pavement, "PLING" they'll move on to China.

By Mike Whitney

Email: fergiewhitney@msn.com

Mike is a well respected freelance writer living in Washington state, interested in politics and economics from a libertarian perspective.

© 2011 Copyright Mike Whitney - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis.
Individuals should consult with their personal financial advisors.

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