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QE3 Fed Panic

Interest-Rates / Quantitative Easing Sep 16, 2012 - 02:53 PM GMT

By: Stephen_Lendman


Best Financial Markets Analysis ArticleOn September 13, the Fed announced QE 3. Pimco head Bill Gross tweeted Bernanke plans to buy mortgages "till the cows come home."

It's open-ended along with near zero short-term rates. His move suggests desperation. What does he know, we don't, and why now? Things aren't as they seem. They're worse.

Troubled Eurozone countries are imploding. Obama practically begged Angela Merkel to keep things intact until post-election. Greece is bankrupt. Only its obituary remains to be written.

Portugal and Ireland are sinking. So is Italy. Spain is practically coming apart. It's been deteriorating for years. In August alone, depositors withdrew 70 billion euros from its banks. Their combined market cap is 114 billion euros.

They need 20 billion more euros monthly to keep operating. Fund outflows cause enormous pressure. Collapse may be impossible to prevent. Nationalization hasn't helped.

Bankia was taken over. Its problems persist. It just needed another 5.4 billion rescue package. For sure it'll need lots more.

Spain's regions are cratering. Andalusia, Valencia, Murcia and Catalonia requested federal help without conditions. Major problems across the country look intractable. Spain asked the ECB for 100 billion euros for its banks.

It needs sovereign debt help. It won't accept conditions. Its economy is too weak. It also rejects external interference in its internal affairs. It's got plenty on its hands dealing with public outrage.

For example, half of all working aged youths are unemployed. Conditions are combustible, and not just in Spain. One wrong-headed move too many could ignite things far more than already. People take only so much pain before they explode.

Germany is Europe's strongest economy. At the same time, it's weakening. George Soros said it's heading for depression in six months because of wrongheaded policies. It's bearing too much of the burden for other troubled EU countries.

Its debt to GDP ratio is 90%. It's already committed over 2.1 trillion euros in bailout help. It's spending itself to oblivion if this doesn't stop. At the same time, it's force-feeding austerity when stimulus is needed.

Perhaps QE 3 funds are earmarked for Europe. Call it backdoor bailout help. ECB money creation is limited. Bernanke can print all he wants. It's no secret that if Europe collapses, America and the global economy follows at a time China's heading for a hard landing.

Coordinated central bank intervention on top of everything done so far suggests panic. Things are worse than they seem. Bernanke, Draghi, and BoE's Mervyn King are scared stiff. Policy appears to be do something, anything, no matter how long the odds. Hail Mary attempts usually fail.

Few expected an open-ended Fed pledge to buy $40 billion worth of mortgage bonds monthly and continue Operation Twist. Officially it's called the Maturity Extension Program.

It exchanges short-term debt for longer maturities. In theory, it's to lower interest rates on 10-year Treasuries. It also represents QE without printing more money and thereby dampens inflationary pressures.

For how long in an environment of money madness. Official numbers mask its high level. Based on 1980s model, Shadowstats estimates around 9%.

Everyone who eats, drives a car, heats and/or air conditions a home, has health insurance and other medical expenses, and/or pays tuition bills knows inflation is high and rising. Household budgets are sorely stressed.

Lloyds TSB Bank analyst said Bernanke was true to his "Helicopter Ben" reputation. Pimco's Mohamed headlined his Financial Times op-ed "QE 3 is a sign of the Fed's policy purgatory," saying:

"(T)he Federal Reserve confirmed on Thursday that it is operating in policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences."

Previous actions failed. Economic conditions may be worse than most think. On August 31, Bernanke cited "daunting economic challenges."

He expressed "grave concern" about high unemployment. He knows headline U 3 deception masks its severity. Youth unemployment is dangerously high. Workers leaving the labor force in huge numbers shows how bad things are.

Monetary policy is the only game in town. Political Washington force feeds austerity with much more coming. Conditions aren't uncertain. They're awful and heading south.

Fed policy suggests panic mode. Will anything it does help?

"History and detailed analyses of the problems underpinning America’s prolonged economic malaise suggest these well-intentioned measures will again fail to secure a much better economic situation."

"This is also behind the widening gap between economists urging the Fed to do even more and those favoring less."

At the same time, Bernanke said "monetary policy cannot by itself (deliver) what a broader and more balanced set of economic policies might achieve?"

They're absent. Fed bullets haven't worked so far. Increasingly they're delivering less bang for the buck. They're treading water, buying time, and as far as the eye can see "in policy purgatory" until the whole house of cards (Greenspan and Bernanke built) collapses. They've only got themselves to blame.

A Wall Street Journal op-ed piece headlined "Bernanke Unbound," saying:

Bernanke entered a "brave new world of unlimited monetary easing." He offered markets a bottomless punchbowl. At issue is will it help? Don't bet on it. Expect short-term relief at best. Long-term pain is a high price to pay.

His actions contradict his caveat that monetary policy "is no panacea." It can't save the economy by itself.

"When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?"

What about shortchanged savers? Bernanke's hope for long-term relief doesn't soothe. Keynes said by then we're dead.

Bernanke isn't superman. He's super-con-man. He's pushing on a string. He already caused high inflation. Consumers see it daily. How much higher is tolerable? Why aren't these and other core issues factored into decision-making?

"The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion."

Bernanke says don't worry. That's what central bankers always say. Fulfillment doesn't match promises. Boosting equity prices short-term helps Obama. Perhaps it offsets harm caused by Muslim violence over the anti-Islamic hate film making headlines.

"For all the back-slapping" and pontificating for nearly five years, bottom line Fed analysis acknowledges things are rotten, "job creation stinks," and policies tried failed. Why think this time is different?

It's not, and the longer major issues aren't addressed responsibly, the worse crisis conditions will be when day of reckoning time arrives.

At the same time, his move highlights the law of unintended consequences. He likely made things worse, not better. He weakened the dollar, strengthened the euro, added another EU headwind, boosted commodity prices, made things less affordable, created more instability, and won't deliver what some observers hope.

One analyst said "let 'em eat stocks and housing" doesn't work. His policy doesn't spell relief. It's more feel good than do good. Super-low rates haven't helped. Economic numbers across the board are weak and heading south.

QE 3 isn't about more liquidity. There's more than enough around. Thirty year mortgage rates hover around 3.5%. Banks are hoarding cash. They're sitting on over $1.5 trillion in reserves. Corporations have around $2 trillion. Interest rates can't go much lower.

At issue are economic risk and inflation. Monetary policy alone can't help. The more freely it's applied, the less effective it gets, and if too much, soaring prices defeat it.

At the same time, fiscal cliff trouble next year looms. So are three straight negative ISM reads, dangerously high unemployment, and overall economic conditions heading south.

Coordinated central bank intervention is in play. It includes Bank of England's unconventional "funding for lending." The ECB promised open-ended sovereign debt buying up to three years duration provided governments request it and accept stiff austerity conditions. Now there's QE 3. Expect the Bank of Japan to have its say.

Together with Operation Twist, the Fed plans buying $85 billion through yearend and open-ended QE thereafter. If it buys mortgage backed securities long enough, it may end up owning them all, and then what?

Anything goes is policy. The Fed said it'll "undertake additional asset purchases and employ other tools as appropriate until such improvement is achieved in the context of price stability."

Call the latter alone a giant X factor. The more money printed, the greater the inflation risk. It's already shows. At the same time, expect no more from QE 3 than earlier easing rounds. It's almost like firing a gun with blanks.

It's an added reminder of how bad things are, and suggests the Fed in panic mode. Its most radical ever policies for over four years haven't worked. Expect no change this time.

Economic growth is fundamental. Without it, expect trouble and lots of it. Monetary policy ends up pushing on a string. A multi-decade long Japanese malaise or something much worse looks likely.

Median family income declined two straight years. In 2011, it was 8.1% lower than 2007. Household net worth dropped for an unprecedented five straight years with no end in sight to its free fall. Housing remains weak and troubled. Manufacturing is dropping.

Global weakening is apparent. US July European exports fell 6.6%. China's August EU exports plunged 13% year-over-year. Japan heads for negative GDP growth. Weekly US jobless claims hit a two month high.

Capex plans are down 3.7% next year. So are hiring plans. The latest JOLTS data (Job Openings and Labor Turnover Survey) shows weakness. The year-over-year trend is down. New hires are depressed. Most other economic numbers are soft.

Revenue and profit declines are increasing. What's happening in America and across Europe hits everywhere. Everything's coming up weeds, not roses. Poverty is high and rising. So is public anger.

At the same time, sequestered budget cuts are coming next year. It's madness when stimulus is needed.

They're automatic under the 2011 Budget Control Act (BCA). Initial ones total $1.2 trillion. Much more will follow over the next decade. Social benefits will be hit hard. They take effect on January 1.

Sequestered means mandatory across-the-board cuts. Congress and Obama agreed. Legislators have little discretion. Allegedly all programs will be affected. Don't bet on it. Defense is sacrosanct. So is corporate favoritism. Households needing help will be hurt most. It's been that way for years. Expect worse ahead.

Cuts are intended for deficit reduction. It's rising exponentially. It'll keep doing it as far as the eye can see. Claiming otherwise provides cover to slash Medicare, Medicaid, and other vital social services.

At the same time, nothing slows America's war machine nor will corporate favorites be denied. Bipartisan complicity assures it. Pain is the name of the game for most people.

Occupy Wall Street is right. The only solution is world revolution. Not a hint of it is in sight in America.

By Stephen Lendman

His new book is titled "How Wall Street Fleeces America: Privatized Banking, Government Collusion and Class War"

Stephen Lendman is a Research Associate of the Centre for Research on Globalization. He lives in Chicago and can be reached in Chicago at

Also visit his blog site at and listen to The Global Research News Hour on Monday through Friday at 10AM US Central time for cutting-edge discussions with distinguished guests on world and national topics. All programs are archived for easy listening. © 2012 Copyright Stephen Lendman - 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.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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