Q E 2 "futile": Growing Number Of Economists See It

[Realistbear]

http://finance.yahoo.com/banking-budgeting/article/111037/the-futility-of-qe2

Here's What Bernanke Should Do

by Daniel "No relation" Gross

Friday, October 15, 2010

Federal Reserve Chairman Ben Bernanke, speaking at a conference on Friday morning, says that the high unemployment rate and low inflation signal a need for further easing, but the Fed is still weighing just how aggressive that easing should be. The most likely scenario is that the Fed would purchase hundreds of billions of dollars worth of government bonds.

The ultimate goal is to boost faltering domestic demand for goods and services. In simplistic terms, Bernanke wants to reduce the unemployment rate, get more people shopping at Wal-Mart, and get them to spend more when they do. Consumers have yet to regain lost spending power due to the weak job market and falling home values. Businesses are reluctant to hire and expand when they don't perceive strong demand.

But while there are plenty of good arguments for QE2, there's plenty of reason to believe it may not bring about the desired results. And instead of hearing him talk about what the Federal Reserve can do to get more people shopping at Wal-Mart, I'd rather hear Bernanke talk about what other people can do.

Over the past two years, the Fed has done plenty of old-fashioned easing (lowering overnight interest rates to rock-bottom levels) and new-style quantitative easing (buying $1 trillion in mortgage bonds). Rolling out the heavy firepower has helped lower market interest rates, as this two-year chart of the 10-year U.S. bond shows, but hasn't done a great deal to spur consumer spending and domestic demand.

Market analysts believe the Fed stands ready to spend $500 billion on government bonds. Opinions differ within the Fed on the effects that would have. As Reuters reports, New York Federal Reserve President William Dudley believes that would be the equivalent of reducing short-term interest rates by 50-75 basis points, while Kansas City Federal Reserve President Thomas Hoenig says it would reduce them by only 10-25 basis points. But there's no guarantee that the purchase, alone, will bring the rates down. It's entirely possible market interest rates could drift down further without quantitative easing, as investors seek a safe haven or grow concerned about deflation. And it's entirely possible market interest rates drift higher even as the Fed steps up its purchases.

But assuming rates fall, then what? Mortgage rates may decline further, which will allow more homeowners to refinance mortgages. Refinancing activity has spiked in recent weeks. But lots of people can't refinance because their homes are underwater. When people do refinance, they're more likely to swap to a lower fixed payment rather than do cash-out refinancings. It's not likely mortgage equity withdrawal will come back as a fuel for consumer spending, as it was during the boom years.

Creditworthy companies will get even cheaper access to capital, and junk-rated companies will find they're able to replace high-yielding debt with lower-yielding debt. Microsoft recently issued three-year bonds at less than one percent. But companies are taking advantage of lower interest rates to refinance existing debt, or boost their capacity to pay dividends, or conduct stock buybacks. That's good for shareholders. As The Wall Street Journal reported Thursday, private equity backed companies are using favorable credit markets to issue debt to pay fat dividends to their owners. That may stimulate the economy in St. Barts and the Hamptons -- but not in Toledo.

Of course, companies could deploy capital raised through cheaper debt to invest in new productive capacity or to hire. But given the global macroeconomic climate, in which the U.S. is growing much more slowly than the rest of the world, large companies will be more likely to do so overseas than at home.

So if your goal is to empower consumers to spend more without taking on more debt, or to give small businesses the confidence to hire, spending $500 billion on government bonds may not be the most effective use of your money.

The real issue Bernanke faces is that he may have done as much as he can on his own. Stimulus can stem from monetary policy or fiscal policy. And while the nation awaits more of the former, we seem to have given up on the latter. The stimulus package, passed in early 2009, continues to roll out. But many of its effects have been offset by state and local government austerity measures -- job cuts, tax hikes, fare increases for public transit.

So instead of trying to talk interest rates down, Bernanke might perform a better service if he would begin to urge the political system to do its part. What if he summoned up some uncharacteristic passion, and begged the rest of Washington -- Democrat, Republican, Socialist, libertarian, Congress, White House -- to do something to help him help us? There are plenty of ways to get cash into the hands of people who will spend. A payroll tax holiday, rebates, tax reductions, infrastructure spending, aid to states, make-work jobs. All of the above, or some combination thereof.

Monetary policy alone didn't get us into this mess. And while it may be an extraordinarily powerful lever, monetary policy alone can't get us out

[aa3]

They better come up with more than 500 billion USD, on Nov 3rd.. or at least the promise of more.

The home equity train he mentioned was running at 700-800 billion in the mid aughties. In addition all the developers, flippers, realtors, mortgage brokers, all types of construction workers, were getting access to the even bigger money train of the no down, stated income loans. When some moron came and bought 7 new houses for 500k each, a lot of people were getting that money on the other side.

By the end of the run, people were buying 50k cars with 5 grand on the hood, that they used to make the first payments.

Right now QE has helped the situation, which was remember in 2008 total financial implosion and failure of all financial institutions and the saver's money. But still 1 trillion USD is only 3 grand per American. Start talking 30 grand or even 50 grand per American and things will start moving.

[mdman]

They better come up with more than 500 billion USD, on Nov 3rd.. or at least the promise of more.

The home equity train he mentioned was running at 700-800 billion in the mid aughties. In addition all the developers, flippers, realtors, mortgage brokers, all types of construction workers, were getting access to the even bigger money train of the no down, stated income loans. When some moron came and bought 7 new houses for 500k each, a lot of people were getting that money on the other side.

By the end of the run, people were buying 50k cars with 5 grand on the hood, that they used to make the first payments.

Right now QE has helped the situation, which was remember in 2008 total financial implosion and failure of all financial institutions and the saver's money. But still 1 trillion USD is only 3 grand per American. Start talking 30 grand or even 50 grand per American and things will start moving.

Let's say bernanke decided on $50tn of asset purchases using printed money. Explain to us how this helps the real economy

[aa3]

Let's say bernanke decided on $50tn of asset purchases using printed money. Explain to us how this helps the real economy

The best way is that the federal treasury issues long term debt, like 10 year and longer. And the fed steps in and buys them all.

The federal government then steps up with helicopters full of money, and just everyting gets approved. We're already seeing the first signs of it in America. 45 million Americans uninsured.. government can pick up the tab. Pentagon wants more money for weapons systems and fighting two wars, sure blank cheque basically.

One crazy idea I heard was to juice the national lottery. Right now it pays out something like 33% of the money customers pay. But what about increasing it to 200 or 300%.

[babesagainstmachines]

The best way is that the federal treasury issues long term debt, like 10 year and longer. And the fed steps in and buys them all.

The federal government then steps up with helicopters full of money, and just everyting gets approved. We're already seeing the first signs of it in America. 45 million Americans uninsured.. government can pick up the tab. Pentagon wants more money for weapons systems and fighting two wars, sure blank cheque basically.

One crazy idea I heard was to juice the national lottery. Right now it pays out something like 33% of the money customers pay. But what about increasing it to 200 or 300%.

I've got a better idea. Why don't we get a lot of men with guns to go around to middle earners houses and steal everything, then hand it to crack-whores and gangstas.

Both would be about as useful to the economy... because you are telling people that it doesn't matter if they work, or how they try and plan for retirement.... because we will screw you over whatever you do.

[Buccaneer]

They better come up with more than 500 billion USD, on Nov 3rd.. or at least the promise of more.

The home equity train he mentioned was running at 700-800 billion in the mid aughties. In addition all the developers, flippers, realtors, mortgage brokers, all types of construction workers, were getting access to the even bigger money train of the no down, stated income loans. When some moron came and bought 7 new houses for 500k each, a lot of people were getting that money on the other side.

By the end of the run, people were buying 50k cars with 5 grand on the hood, that they used to make the first payments.

Right now QE has helped the situation, which was remember in 2008 total financial implosion and failure of all financial institutions and the saver's money. But still 1 trillion USD is only 3 grand per American. Start talking 30 grand or even 50 grand per American and things will start moving.

You are Gordon Brown and I claim my five pounds!

[interestrateripoff]

They cannot get out of this mess, if you are going to QE the money has to end up in the pockets of the masses to have any effect on the real economy.

However as history has repeatedly shown this merely creates a temporary blip of increased demand and also increased malinvestment which results in more need for printed money and just leads down the road to hyperinflationary destruction.

There is no pain free fix for this mess.

[IMHAL]

The best way is that the federal treasury issues long term debt, like 10 year and longer. And the fed steps in and buys them all.

The federal government then steps up with helicopters full of money, and just everyting gets approved. We're already seeing the first signs of it in America. 45 million Americans uninsured.. government can pick up the tab. Pentagon wants more money for weapons systems and fighting two wars, sure blank cheque basically.

One crazy idea I heard was to juice the national lottery. Right now it pays out something like 33% of the money customers pay. But what about increasing it to 200 or 300%.

Seriously - you need help.

[OnlyMe]

LOL!

These financial meddlers cretaed this mess, unreformed they are continuing along their ways, they know nothing of prudence, nothing of creating wealth - past history proves them to be destroyers of both. They are manipulators of personal, company and country finances. They and their policies should have been consigned to the bin.

Edited October 19, 2010 by OnlyMe

[aa3]

I've got a better idea. Why don't we get a lot of men with guns to go around to middle earners houses and steal everything, then hand it to crack-whores and gangstas.

Both would be about as useful to the economy... because you are telling people that it doesn't matter if they work, or how they try and plan for retirement.... because we will screw you over whatever you do.

Back in the day, a man could get a good union job and be sure to get promotions and pay increases through his life, and it goes without saying full job security. And then retirement, and a nice pension from a stable company. And additional investments he made were at generous interest rates, in secure bonds.

That world doesn't exist anymore, at least not in the private sector. In 2010 about 90% of middle Britain works for the government or a contractor to the government. And they get paid because guys with guns collect taxes.

[OnlyMe]

http://questionsforamerica.com/?p=6309

Bruce Krasting: Ben Lied: How could he possibly be “confident” that this can be done? How can anyone be so certain about an uncertain future?

October 16th, 2010 | Tags: Monetary Ethics

…Ben’s lies will cost us trillions, and quite possibly our way of life. His lie:

I am confident that the FOMC will be able to tighten monetary conditions when warranted,

even if the balance sheet remains considerably larger than normal at that time.

Ben Bernanke

Chairman of the Board of Governors of the Federal Reserve System

How could he possibly be “confident” that this can be done?

It has never been done before.

No sane man can make such a promise when there is no history to guide us.

Bernanke is sane, therefore I conclude that he is lying to us on this critical fact.

What economic environment would exist when “conditions warrant tightening”?

Edited October 19, 2010 by OnlyMe

[Realistbear]

They cannot get out of this mess, if you are going to QE the money has to end up in the pockets of the masses to have any effect on the real economy.

However as history has repeatedly shown this merely creates a temporary blip of increased demand and also increased malinvestment which results in more need for printed money and just leads down the road to hyperinflationary destruction.

There is no pain free fix for this mess.

I would prescribe a period of de-tox (De-flation) to cure the sickess which is known as toxic bloating (unbalanced assett price inflation).

But this would be a long term plan and governments need votes to stay in power.

[Realistbear]

Seems that HPC's pin-up Babe Katie Barker agrees with the drift of the OP:

http://www.bloomberg.com/news/2010-10-18/barker-says-adding-boe-stimulus-risks-stoking-inflation-more-than-growth.html

Barker Says Adding BOE Stimulus Risks Stoking Inflation More Than Growth

By Jennifer "Jenny" Ryan - Oct 19, 2010 12:01 AM GMT+0100

The Bank of England risks stoking inflation with little benefit to economic growth if it expands its so-called quantitative easing program of stimulus, former policy maker Kate Barker said.

“If rising inflation expectations have followed the use of QE, there is a risk that relying on monetary policy to ride to the rescue of faltering growth might be misplaced,” Barker said yesterday at an event held by Queen Mary College in London. More stimulus could “have more of an impact on inflation than on growth if it feeds through into higher inflation expectations.”

Sounds like Katie has joined the growing number of economists who see deflation as the best medicine. As much as the banksters would hate it.

Edited October 19, 2010 by Realistbear

[aa3]

http://questionsforamerica.com/?p=6309

Bruce Krasting: Ben Lied: How could he possibly be “confident” that this can be done? How can anyone be so certain about an uncertain future?

October 16th, 2010 | Tags: Monetary Ethics

…Ben’s lies will cost us trillions, and quite possibly our way of life. His lie:

I am confident that the FOMC will be able to tighten monetary conditions when warranted,

even if the balance sheet remains considerably larger than normal at that time.

Ben Bernanke

Chairman of the Board of Governors of the Federal Reserve System

How could he possibly be “confident” that this can be done?

It has never been done before.

No sane man can make such a promise when there is no history to guide us.

Bernanke is sane, therefore I conclude that he is lying to us on this critical fact.

What economic environment would exist when “conditions warrant tightening”?

I don't understand why the fed could not tighten monetary conditions at a later date if the environment warranted it? Raise interest rates and sell some of the QE bonds back into the market is all they would have to do.

It only is hard to imagine because for the forseeable future the economy will need more and more QE and 0% interest rates.