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Thread: Why the Federal Reserve's Quantitative Easing Strategy Won't Save the U.S. Economy

  1. #1
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    Why the Federal Reserve's Quantitative Easing Strategy Won't Save the U.S. Economy

    http://moneymorning.com/2010/11/19/f...he-us-economy/

    Truth or consipiracy theory?

  2. #2
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    Bernanke Steps Up Stimulus Defense, Turns Tables on China
    By Scott Lanman - Nov 19, 2010 8:01 AM ET
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    U.S. Federal Reserve Chairman Ben S. Bernanke is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. Photographer: Stephen Morton/Bloomberg


    Nov. 19 (Bloomberg) -- John Herrmann, senior fixed-income strategist at State Street Global Markets, talks about Federal Reserve Chairman Ben S. Bernanke's speech today at a European Central Bank conference in Frankfurt. Bernanke defended the U.S. central bank’s monetary stimulus, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak. Herrmann speaks with Erik Schatzker and Michael McKee on Bloomberg Television's "InsideTrack." (Source: Bloomberg)

    Federal Reserve Chairman Ben S. Bernanke took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

    The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in a speech in Frankfurt today. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

    The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics including Republican members of Congress have said it risks fueling inflation and asset bubbles.

    “Globally, both growth and trade are unbalanced,” Bernanke said, with economies growing at different rates. “Because a strong expansion in the emerging-market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

    As Bernanke spoke, the Chinese central bank said it will raise the reserve ratio requirement for the nation’s banks by 50 basis points from Nov. 29. The dollar fell to $1.3721 per euro at 11:50 a.m. in Frankfurt from $1.3634 yesterday.

    G-20 Failure

    While Bernanke didn’t identify China in his speech, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Barack Obama attacked China’s policy of undervaluing its currency.

    Bernanke said the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

    China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

    China’s Ministry

    China’s foreign ministry had no immediate comment when asked for a response to Bernanke’s speech. A China central bank spokesman couldn’t immediately be reached for comment.

    After the speech, Bernanke spoke during a panel discussion and responded to audience questions, saying that the use of securities purchases for monetary policy affects asset prices “quite significantly.” He said he’s “quite skeptical” of the criticism that central bankers are “pushing on a string.”

    At the same time, policy makers “don’t want to overpromise” on a program whose effects are “meaningful” yet “moderate,” he said on the panel with European Central Bank President Jean-Claude Trichet, International Monetary Fund Managing Director Dominique Strauss-Kahn and Brazil’s central bank president Henrique Meirelles.

    Dislikes QE2

    It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

    Fed officials are trying to make the case “it was probably a worthwhile gamble for the U.S. to try to print a little bit more money to stimulate the economy without triggering inflation,” former Fed economist David Cohen, now a director of Asia forecasting at Action Economics in Singapore, said in a Bloomberg Television interview.

    German Finance Minister Wolfgang Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster-growing economies such as Brazil, Meirelles said in October.

    Calibrating Policy

    Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

    “Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

    America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

    The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

    Job Concern

    Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

    “On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

    The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

    China’s vice foreign minister, Cui Tiankai, said Nov. 5 “many countries are worried about the impact of the policy,” echoing concern across Asia over the risk of a flood of capital that causes asset bubbles. Economies from Taiwan to Indonesia and Brazil have taken steps to counter inflows of speculative money, and South Korea yesterday said it will back legislation restoring a tax on foreign investment in the nation’s bonds.

    Currency Intervention

    Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

    Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

    “Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.”

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    Bernake Hits Back at Fed Critics, Points at China
    Published: Friday, 19 Nov 2010 | 8:28 AM ET Text Size
    B
    Federal Reserve Chairman Ben Bernanke hit back on Friday at critics of the U.S. central bank's bond-buying program and issued a thinly veiled attack on China's policy of keeping its currency on a leash.

    Bernanke, facing a chorus of protests about the asset-buying spree from within and outside the central bank, said a more vigorous U.S. economy was essential to fuel the global recovery and dismissed charges he was debasing the dollar.

    "The best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States," Bernanke said in a speech to a conference at the European Central Bank in Frankfurt.

    The Fed's Nov. 3 decision to buy a further $600 billion in U.S. government debt with new money generated outrage among policymakers in many nations, who accused the United States of seeking to weaken the dollar to gain an export edge.

    German Finance Minister Wolfgang Schaeuble called the policy "clueless" while domestic critics have argued the policy could ignite inflation and fuel asset bubbles.

    Fed officials circled their wagons this week to defend the program. Two added their endorsement on Thursday, but another expressed opposition and a fourth said monetary policy should not play the main role in driving a stronger recovery.


    RELATED LINKS
    Read Full Speech HereBernanke Has Done 'Fantastic Job': UBS ExecFed Must Abandon $600 Billion Stimulus: EconomistsOutraged Yet? What if Fed Buys Munis?
    "Deficits and surpluses are generated by many countries' behavior not a single currency," Bernanke said in a later panel discussion with IMF Managing Director Dominique Strauss-Kahn and European Central Bank President Jean-Claude Trichet.

    "It will be very difficult for exchange rates by themselves to restore the balance and so I think structural adjustments on both sides are necessary," Bernanke said.

    Strauss-Kahn said he too recognised the difficulties involved but said global imbalances could not be tackled without "important changes in the relative values in the currencies."

    "We need to move in that direction," he said.

    Addressing international criticism of the Fed's action, Bernanke said much of the recent weakness of the dollar reflected an unwinding of the increases that were notched as investors fled to the safety of the greenback during the European sovereign debt crisis in the spring.

    Many emerging economies have worried that volatile investment inflows sparked by the dollar's decline could be destabilizing—either fuelling inflation or asset bubbles.

  4. #4
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    Bernanke said the failure of some emerging market economies with trade surpluses to allow their currencies to appreciate was making the problems those countries face worse.

    "Currency undervaluation by surplus countries is inhibiting needed international adjustment and creating spillover effects that would not exist if exchange rates better reflected market fundamentals," he said, without explicitly pointing to China.

    U.S. officials have long argued that an undervalued Chinese yuan gives the Asian export powerhouse an unfair advantage. Bernanke said inflexible currencies were preventing a needed rebalancing of global growth and could end up destabilizing the world economy.

    "For large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account," he said.

    Bernanke said sluggish U.S. growth, falling inflation and an unemployment rate that has hovered near 10 percent for months convinced Fed policymakers they needed to pump in more stimulus.

    "On its current economic trajectory, the United States runs the risk of seeing millions of workers unemployed or underemployed for many years," he said in his speech. "As a society, we should find that unacceptable."

    Bernanke said a fiscal program that combined near-term measures to enhance growth and steps to address long-range deficits would be an important complement to Fed policies.

    The Fed's bond-buying plan— now as quantitative easing or QE, for short—won a surprise endorsement on Thursday from a policymaker who had been seen as an internal critic.

    "I believe that QE is a move in the right direction," Minneapolis Federal Reserve Bank President Narayana Kocherlakota told a conference in Chicago.

    Cleveland Fed chief Sandra Pianalto also defended the plan as a way to help lift "uncomfortably low" inflation and fend off the risk of a debilitating broad drop in prices.

    However, Philadelphia Fed President Charles Plosser said the costs of the program did not outweigh the benefits, while Fed Governor Kevin Warsh said the economy faced problems that monetary policy could not solve.

    "Monetary policy has an important role to play," Warsh told business leaders in Chicago. "But it is not a predominant role."

    Instead, he said, businesses need more certainty in terms of fiscal, trade and regulatory policies.

    Copyright 2010 Thomson Reuters. Click for restrictions.

  5. #5
    SiriuslyLong is offline
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    Ugh.

    The article was about "big banks" making big money on the policy. I appreciate the info, but was looking for a discussion on this.

  6. #6
    Atypical is offline
    Interesting article. I need to read more, and have already read Ellen Brown’s take. I will try to locate it for us.

    Other observations:

    He says - Mechanically here's how the Fed is enriching its family of insiders. By keeping interest rates low for years – not to mention by aiding and abetting an unregulated derivatives market – the central bank helped foster the mortgage fiasco in the nation's prime and subprime mortgage markets.

    Holy crap. He said unregulated. Wow. I thought I was the only one who cared.

    He says; Who is paying these higher prices and providing the windfall to the banks?
    The U.S. taxpayers, of course (in other words, you are).

    Holy crap. We are getting screwed again. Wow. I thought I was the only one who cared. Business actually does this? Who knew?

    He says: That's the primary goal of QE2 -- enrich the banks. They're doing pretty well after the crisis they precipitated. Meanwhile, the almost $2 trillion spent on the first round of quantitative easing did nothing to reduce unemployment.

    Holy crap; You mean business is selfish, doesn’t care about the country – just profit! Holy crap!!!

    He says: The sad-and-scary reality is that Congress has no policies to address fixing the economy or creating jobs. Our elected officials spend most of their time trying to get elected and re-elected. Given the latest political division in Congress, it looks like we're headed for more gridlock.

    What he should have added: Yes, they focus on being reelected but it is the republicans ONLY that are responsible for “no policies to address fixing the economy…”. Remember that repulsive snake McConnell who said the repubs first priority is to defeat Obama. F*** the country and its problems!

    This small look at the financial markets by the author mirrors the core of my complaints on this site; business is selfish, greed is good and screw us and the country. Business knows best.

    Bullcrap.
    Last edited by Atypical; 11-19-2010 at 03:31 PM.

  7. #7
    Atypical is offline

    Ellen Brown's Take On QE2

    QE2: It's the Federal Debt, Stupid!
    Friday 12 November 2010

    by: Ellen Brown, t r u t h o u t | News Analysis

    Unlike QE1, QE2 is not about saving the banks. It's about saving the country from Greek-like austerity measures necessitated by a burgeoning federal debt. The debt is never paid, but is just rolled over from year to year; but the interest is paid, and it is here that QE2 relieves the pressure, since the Fed rebates its interest to the Treasury.

    The inflation hawks are circling, warning of the dire consequences of the Fed's new QE2 scheme. "Quantitative easing" (QE) is Fedspeak for creating money out of nothing with a computer keystroke. The hawks say QE is massively inflationary; that it is responsible for soaring commodity prices here and abroad; that QE2 won't work any better than an earlier scheme called QE
    1, which was less about stimulating the economy than about saving the banks; and that QE has caused the devaluation of the dollar, which is hurting foreign currencies and driving up prices abroad.

    It might be argued, however - and will be argued here - that QE2 not only will NOT produce these dire effects, but that it is NOT actually about saving the banks, OR devaluing the dollar, OR saving the housing market. It is about saving the government from having to raise taxes or cut programs, and saving Americans from the austerity measures crippling the Irish and the Greeks; and for that, it could well be an effective tool. What is increasing commodity and currency prices abroad is not QE, but the US dollar carry trade; and the carry trade is the result of pressure to keep interest rates artificially low to avoid a crippling interest tab on the federal debt. QE2 can relieve that pressure by funding the debt interest free.

    The debt has increased by more than 50 percent since 2006, due to a collapsed economy and the decision to bail out the banks. By the end of 2009, the debt was up to $12.3 trillion; but the interest paid on it ($383 billion) was actually less than in 2006 ($406 billion), because interest rates had been pushed to extremely low levels. Interest now eats up nearly half the government's income tax receipts, which are estimated at $899 billion for FY 2010. Of this, $414 billion will go to interest on the federal debt. Raising interest rates just by a couple of percentage points would make income taxes prohibitive.

    Interest rates cannot be raised again to reasonable levels until this interest tab is reduced. And, today, that can be done most expeditiously through QE2 - "monetizing" the debt through the government's own central bank. Only its own central bank will advance credit to the government interest free. Congress also has a computer keyboard and could issue the money not just debt free but interest free, but Congress has not been so bold since the Civil War. The Fed has, therefore, had to step in.

    All About Monetizing the Debt

    Fed Chairman Ben Bernanke did not want to step in. In January 2010, he admonished Congress:
    "We're not going to monetize the debt. It is very, very important for Congress and administration to come to some kind of program, some kind of plan that will credibly show how the United States government is going to bring itself back to a sustainable position."

    His concern, according to The Washington Times, was that "the impasse in Congress over tough spending cuts and tax increases needed to bring down deficits will eventually force the Fed to accommodate deficits by printing money and buying Treasury bonds."

    So said The Washington Times, but bond magnate Bill Gross of PIMCO, writing the same month, said the Fed was already monetizing the federal deficit - fully 80 percent of it. Gross wrote in his January Investment Outlook that foreign investors as a group bought only 20 percent of the total 2009 deficit. The rest was substantially purchased by the Federal Reserve:
    Of course they purchased more 30-year Agency mortgages than Treasuries, but PIMCO and others sold them those mortgages and bought - you guessed it - Treasuries with the proceeds.... Now, however, the Fed tells us that they're "fed up," or that they think the economy is strong enough for them to gracefully "exit," or that they're confident that private investors are capable of absorbing the balance. Not likely.

    "Not likely" became a virtual certainty after November 3, 2010, when Republicans swept the House. There would be no raising of taxes on the rich, and the gridlock in Congress meant there would be no budget cuts either. Compounding the problem was that over the last six months, China has stopped buying US debt, reducing inflows by about $50 billion per month.

    In QE1, the Fed bought $1.2 trillion in toxic mortgage-backed securities off the books of the banks, using its power to create money with the click of a mouse. For QE2, Chairman Bernanke was expected to continue to use his QE tool to bail out the banks in this way, but that's not what he did. Immediately after the election, he announced that the Fed would be "monetizing" the federal debt - using its power to create money to buy federal securities on the secondary market, from banks, bond investors and hedge funds. As Gross noted, these investors would then be likely to use the money to buy more Treasuries.

    Bernanke said the Fed would buy $600 billion in long-term government bonds at the rate of $75 billion per month, filling the hole left by China. An estimated $275 billion would also be rolled over into Treasuries from the mortgage securities the Fed bought during QE1, which are now reaching maturity. Bernanke said more QE was possible if unemployment stayed high and inflation stayed low (measured by the core Consumer Price Index).

    Addison Wiggin noted in his November 4 Five Minute Forecast:
    [I]f the federal budget deficit is supposed to run $1.2 trillion during fiscal 2011 (that's the consensus guess) … and the Fed will purchase $875 billion in Treasuries over the next eight months (that's two-thirds of a year) … then we quickly see the Fed plans to monetize all of the debt that Treasury plans to spit out from now through the middle of next year, and then some.

    He quoted Agora Financial's Bill Bonner:
    "If this were Greece or Ireland, the government would be forced to cut back. With quantitative easing ready, there is no need to face the music."

    Bonner called it "financing America's trip to bankruptcy" with "brand-spanking-new money." But avoiding the Greek and Irish debacles would obviously be a good thing, IF it could be done without inflation resulting; and a close look at the data suggests that this is indeed the case. The Fed's QE power tool not only will NOT endanger price levels under existing circumstances; it could actually bring them down.

    What is new and different about the Fed buying federal securities directly is that the Fed, unlike any other buyer, rebates its profits to the government after deducting its costs. In 2008, the Fed reported that it rebated 85 percent of its profits to the government. That means that bond financing through the Fed will be nearly interest-free. The interest rate on the 10-year government bonds the Fed is planning to buy is now 2.66 percent. Fifteen percent of 2.66 percent is the equivalent of a 0.4 percent interest rate, a very good deal for the government.

    In eight months, the Fed will own more Treasuries than China and Japan combined, making it the largest holder of government securities outside of the government itself. While this trend, too, has been criticized, you could see it as another very good deal. Why pay interest to foreign central banks when you can get the money nearly interest free from your own central bank?
    Ponzi Scheme With a Twist?

    Bill Gross is not so sanguine. He calls QE2 "a bigger Ponzi scheme than Charles Ponzi's." He said in his November 2010 Investment Outlook:
    Public debt ... has always had a Ponzi-like characteristic.... [T]here was always the assumption that as long as creditors could be found to roll over existing loans - and buy new ones - the game could keep going forever....

    Now, however, with growth in doubt, it seems that the Fed has taken Charles Ponzi one step further. Instead of simply paying for maturing debt with receipts from financial sector creditors ... the Fed has joined the party itself.... The Fed, in effect, is telling the markets not to worry about our fiscal deficits, it will be the buyer of first and perhaps last resort.... It is not a Bernanke scheme, because this is his only alternative and he shares no responsibility for its origin.... [Y]ou and I, and the politicians that we elect every two years ... deserve all the blame.

    Gross calls it "a picking of the creditor's pocket via inflation and negative real interest rates," but he concedes that it is NOT actually a Ponzi scheme. Ponzi schemes collapse when no more new investors can be found to pay off earlier investors, or when compound interest charges become mathematically unsustainable. In this case, however, the government is not relying on new creditors to roll over the debt. The Fed itself will step in; and the Fed can always be relied on, because it can create the money on its books with a keystroke. Compounding interest charges are not a problem because the Fed can lend to the government essentially interest free.

    The federal debt has not been paid off since the 1830s under Andrew Jackson; and on those few occasions when it has been paid down, the result has been to hurt, not help, the economy.
    In effect, the federal debt IS our money supply, since nearly all money today originates as bank credit or debt. Better would be for a transparent and publicly-controlled Congress to issue the money it needs outright; but an interest-free loan from the Fed, rolled over indefinitely, is the next best thing.

  8. #8
    Atypical is offline

    Conclusion

    The Quantity Theory of Money Is Obsolete

    The bankers' stock argument to keep governments in borrowing mode is that the greenback solution would be dangerously inflationary. What the bankers have failed to reveal is that their own money scheme is actually more inflationary than for the government to issue money itself. Nearly all money today is created as bank credit or debt; and this money is due back with interest. New loans must continually be taken out to cover the interest not created in the original loans, continually increasing the debt-based money supply.

    The bankers rely for their argument on the "Quantity Theory of Money," which holds that more money competing for a fixed amount of goods will drive prices up. But in a post on Minyanville on November 1, James Kostohryz showed that the "dogmatic and simplistic view of the Quantity Theory of Money (QTM), by which increases in the supply of money necessarily lead to price inflation," is obsolete. He wrote:
    [D]espite QE1 and the massive expansion of the Fed's balance sheet that this implied, various measures of the money supply ... have actually contracted ....

    The fact of the matter is that numerous studies have shown rather definitively that in highly developed economies, the money supply, whatever the definition, has little or no causal connection to inflation. Some studies show a very weak positive correlation; some studies show no substantial correlation; and quite a few studies show negative correlations. And with respect to causation, virtually nothing can be established.

    Adding money ("demand") to an economy with high unemployment and unused productive capacity serves to increase productivity, increasing goods and services or "supply." When supply and demand increase together, prices remain stable. And adding money to the money supply is obviously not hazardous when the money supply is shrinking, as it is now. Bank credit is shrinking because banks are DELEVERAGING. Bad debts are wiping out capital, which wipes out lending capacity. At an 8 percent capital requirement, $8 of capital can support $100 in loans; but when capital gets wiped out, this money multiplier effect works in reverse. When capital is written off bank balance sheets, the loans are wiped out as well - in a ratio not just of 1:1 but of 12:1.

    Financial commentator Charles Hugh Smith estimates that the economy now faces $15 trillion in writedowns in collateral and credit. The Fed's $2 trillion in new credit/liquidity, he wrote on November 2, is, therefore, insufficient to trigger either inflation or another speculative bubble. His estimates were based on projections from the latest Fed flow of funds (September 17, 2010), which shows the largest reduction in collateral and credit to be in residential real estate. Its current value is $18.8 trillion and its projected value in 2014 is $13.8 trillion, a decline of $5 trillion or 26 percent. Projecting similar declines for commercial real estate, consumer durable goods etc., brings the total to $15 trillion over the next three years, according to Smith.

    If those estimates are correct, the Fed could, in theory, print $15 trillion and buy up the entire federal debt without creating price inflation.

    That isn't likely to happen, but it does make for an interesting hypothetical. If the federal debt were all held by our own central bank, which then rebated the interest to the government, the Fed could let interest rates rise to reasonable levels without worrying about the interest on the debt. Eliminating the threat of a growing interest bill would allow interest rates to rise again, benefiting those savers who rely on a reasonable return for retirement.

    Raising the interest rate would also fix the surging price inflation in commodities and in emerging market investment. This inflation has been blamed on QE, but QE1 barely affected the money supply, as has been shown. This is because it merely involved swapping dollars for other assets on the books of the banks. The idea was to stimulate lending by increasing bank reserves, but the banks already had excess reserves, which they were not lending; so putting more cash on their balance sheets did nothing to increase the availability of consumer and business credit.

    Despite surging commodity prices, the overall inflation rate remains very low, because housing has to be factored in, and housing prices have dropped by 28 percent from their peak. Main Street hasn't been flooded with money; the money has just shifted around. Businesses are still having trouble getting reasonable loans and so are prospective homeowners.
    What About the Inflation in Commodities?

    Critics counter the deflationists by pointing to the obvious price inflation in commodities, notably gold, silver, oil and food. But what is driving these prices up is not a money supply inflated by the Fed. It is a combination of factors including (a) heavy competition for these scarce goods from developing countries, whose economies are growing much faster than ours; (b) the flight of "hot money" from the real estate market, which has nowhere else to go; (c) in the case of soaring food prices, disastrous weather patterns; and (d) speculation, which is fanning the flames. Feeding it all are the extremely low interest rates maintained by the Fed, allowing banks and their investor clients to borrow very cheaply and invest where they can get a much better return than on risky domestic loans.

    This carry trade will continue until something is done about the interest tab on the federal debt, since the taxpayers cannot afford for it to shoot up, and Congress would not approve that result. Short of paying down the debt - which is highly unlikely today - the interest tab can be reduced ONLY through QE2.

    QE2 is not a "helicopter drop" of money on the banks or on Main Street; it is the Fed funding the government virtually interest free, allowing the government to do what it needs to do without driving up the interest bill on the federal debt. The Fed failed to revive the economy with QE1, but it may yet redeem itself with QE2. QE2 could set a bold precedent prompting other countries to break the chains of debt peonage and fund their governments with their own national credit.

  9. #9
    SiriuslyLong is offline
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    Quote Originally Posted by Atypical View Post
    Interesting article. I need to read more, and have already read Ellen Brown’s take. I will try to locate it for us.

    Other observations:

    He says - Mechanically here's how the Fed is enriching its family of insiders. By keeping interest rates low for years – not to mention by aiding and abetting an unregulated derivatives market – the central bank helped foster the mortgage fiasco in the nation's prime and subprime mortgage markets.

    Holy crap. He said unregulated. Wow. I thought I was the only one who cared.

    He says; Who is paying these higher prices and providing the windfall to the banks?
    The U.S. taxpayers, of course (in other words, you are).

    Holy crap. We are getting screwed again. Wow. I thought I was the only one who cared. Business actually does this? Who knew?

    He says: That's the primary goal of QE2 -- enrich the banks. They're doing pretty well after the crisis they precipitated. Meanwhile, the almost $2 trillion spent on the first round of quantitative easing did nothing to reduce unemployment.

    Holy crap; You mean business is selfish, doesn’t care about the country – just profit! Holy crap!!!

    He says: The sad-and-scary reality is that Congress has no policies to address fixing the economy or creating jobs. Our elected officials spend most of their time trying to get elected and re-elected. Given the latest political division in Congress, it looks like we're headed for more gridlock.

    What he should have added: Yes, they focus about being reelected but it is the republicans ONLY that are responsible for “no policies to address fixing the economy…”. Remember that repulsive snake McConnell who said the repubs first priority is to defeat Obama. F*** the country and its problems!

    This small look at the financial markets by the author mirrors the core of my complaints on this site; business is selfish, greed is good and screw us and the country. Business knows best.

    Bullcrap.
    And what about the Fed? They aren't culpable too? I mean your quick and correct to say that the private sector is profit driven, but in this case, what is the role of the Fed? Are they willfully enriching the banks?

    I read both of those articles. They were a little heady for me, but my take away is a "house of cards" feeling.
    Last edited by SiriuslyLong; 11-19-2010 at 03:48 PM.

  10. #10
    Atypical is offline
    I don't feel I know enough to comment on all of the factors connected with their responsibilities. But I think an audit might be advisable. They are apparently against that. I also am leery of what I regularly complain about; unbridled power and the secrecy associated with it. Consider what the Fed's mission is; the use of incredible sums of money in ways that are not always fully understood.

    Look at Greenspan's long tenure, which I believe, as in all large organizations, contained arrogance and avoided serious oversight at all costs. Additionally, the idol worship was integral to the problems he created. No one (politicians) wanted to question him closely. He was allowed to "instruct" the masses from on high. He was reappointed because "we need him in that position". The financial meltdown was a surprise to him, he admitted. Bubbles were his friends.

    Incidentally, an Ayn Rand acolyte he was.

    The Fed is supposed to be independant. If more closely controlled then by who? I don't want ANY repub near them and half of all dems either.

    Are they enriching the banks? My guess - yes - because the banks are their people. That's the way the world works.

    Solutions? Fresh out right now.
    Last edited by Atypical; 11-19-2010 at 03:56 PM.

  11. Ad Fairy Senior Member

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