Too much is happening, so I will restrain myself. Here come some brief and assorted comments.
Israel — Obama, bless him in this instance, has not responded to blackmail by Bibi Netanyahu. Is Likud trying to influence US elections? Uh huh. Will it encourage American Jews to support the Republican crazies who want to create a "final" mid-east war and bring on the Apocalypse? I don't think so. Jews, on average, are just a little bit smarter than the average redneck.
Eurozone — The German court and the Dutch electorate seem to think it's important to maintain the Euro, mostly because they have made a lot of money from the single currency. Granted, the Euro may not survive — but nobody in Northern Europe wants further erosion of exports.
The Mohamed Movie — Honestly, I don't know if I've seen the original movie trailer because there are so many parodies on YouTube. I tried, anyway. Most interesting, though, is the conjecture about who financed the idiotic but nevertheless inflammatory film. The career criminal now accused of being behind the film — if anybody is thinking about him at all — almost certainly was paid for his efforts. By whom? (Nobody's talking.) Let's think: who profits?
QE3 – While I appreciate the fact that the Fed is trying its best, I don't think monetary policy can do the trick at this point. Just as in Europe, we need fiscal policy. Europe can't do it because it has no fiscal union. We can't do it because we have Republicans — and, hence, no fiscal policy.
It's turning into another of those goddamned months. I'll try to stay on top of things.
Showing posts with label quantitative easing. Show all posts
Showing posts with label quantitative easing. Show all posts
Friday, September 14, 2012
Thursday, November 4, 2010
Aftermath
Let us assume, as Ben Bernanke apparently has, that the new Republican majority in the house is sincere in its desire to reduce the deficit by cutting government spending without raising any taxes. What will that mean?
Primarily, it will mean continued economic stagnation. Bernanke has suggested for months that monetary policy alone is incapable of getting business to start spending and hiring again. The $600 billion of quantitative easing announced yesterday — $900 billion, if you include the reinvestment of returns from mortgage-backed securities — is best compared to a "hail Mary" pass in the final seconds of a football game. It probably won't work, and it may turn out that the negatives outweigh the positives, but the Fed had to try something.
Both short-term and long-term interest rates already are super low. Big businesses are sitting on piles of cash, and really don't need more. There's no reason to expand if the demand for your product isn't there. Smaller businesses, which need loans primarily to tide them over until the economy improves, can't get them from the banks. Banks don't lend money to businesses that aren't making money, and they won't be making money until demand picks up.
The greatest benefits from this new round of quantitative easing will accrue to the financial industry. Since the Fed is not allowed to lend money directly to Treasury, it has to go through intermediaries like Goldman-Sachs and Morgan Stanley. Those intermediaries, of course, collect substantial fees for their "services," fees which help to swell executive bonuses. In the meanwhile, our trading partners will be understandably miffed at us for devaluing our currency again, and will find ways to retaliate.
The greatest risk is that the Fed inadvertently will create more inflation than it means to, without boosting business activity. Some of us are old enough to remember the stagflation of the seventies. It wasn't fun.
In the meanwhile, it's clear there won't be any meaningful fiscal policy coming out of a divided Congress — if we manage to avert total gridlock, it will be a minor miracle.
Primarily, it will mean continued economic stagnation. Bernanke has suggested for months that monetary policy alone is incapable of getting business to start spending and hiring again. The $600 billion of quantitative easing announced yesterday — $900 billion, if you include the reinvestment of returns from mortgage-backed securities — is best compared to a "hail Mary" pass in the final seconds of a football game. It probably won't work, and it may turn out that the negatives outweigh the positives, but the Fed had to try something.
Both short-term and long-term interest rates already are super low. Big businesses are sitting on piles of cash, and really don't need more. There's no reason to expand if the demand for your product isn't there. Smaller businesses, which need loans primarily to tide them over until the economy improves, can't get them from the banks. Banks don't lend money to businesses that aren't making money, and they won't be making money until demand picks up.
The greatest benefits from this new round of quantitative easing will accrue to the financial industry. Since the Fed is not allowed to lend money directly to Treasury, it has to go through intermediaries like Goldman-Sachs and Morgan Stanley. Those intermediaries, of course, collect substantial fees for their "services," fees which help to swell executive bonuses. In the meanwhile, our trading partners will be understandably miffed at us for devaluing our currency again, and will find ways to retaliate.
The greatest risk is that the Fed inadvertently will create more inflation than it means to, without boosting business activity. Some of us are old enough to remember the stagflation of the seventies. It wasn't fun.
In the meanwhile, it's clear there won't be any meaningful fiscal policy coming out of a divided Congress — if we manage to avert total gridlock, it will be a minor miracle.
Saturday, October 16, 2010
QE2
So, Ben Bernanke has all but formally announced another round of quantitative easing. I know I promised to stop making predictions, but this one is a no-brainer.
Quantitative easing will not decrease the unemployment rate. If done exactly the wrong way, it might help the banks survive their latest round of self-inflicted trauma. Ignore the Fed's history of putting the interests of banks before the interests of human beings, and we might be able to convince ourselves that another round of quantitative easing might be another desperate stab at reviving the economy (albeit the equivalent of drawing to an inside straight.) Well, maybe the Fed governors are well-intentioned — but before we evaluate their intentions, we'll have to wait and see just how badly QE2 is done. Then we'll have a better idea.
In its first round of quantitative easing, the Fed spent about $1.5 trillion on longer term T-bills from Treasury and a big batch of toxic assets from the largest banks. Buying the T-bills probably held down long-term interest rates, like mortgages — not that anybody's buying houses at the moment. Buying the toxic assets — mortgage backed securities — was just another bailout to the banks. The money used to pay for it all, of course, was created by the Fed out of thin air. It wasn't all bad — the value of the dollar dropped against most other currencies (but not the renmimbi), and whatever growth we've seen since then has come from exports.
Girls and boys, we are not going to export our way out of disaster — certainly not when every other developed or developing country in the world is simultaneously trying to do the same thing. What's needed is a genuine and concerted redistribution of wealth, so that our working and middle classes can afford to buy the products we produce. More demand equals more products equals more employment equals more demand. It's a virtuous circle, and one we sorely need.
But, getting back to quantitative easing, we'd best have a look at how it might be done.
If the Fed bought all T-bills with the new money it creates, the banks would not be especially happy. On all their outstanding loans, the money they collected would be worth less than the money they loaned to debtors. It would be kind of like going back to William Jennings Bryant and free coinage of silver. Other losers would include people living on fixed incomes, whose money would buy less than before.
More likely, of course, would be another round of Fed purchases of mortgage-backed securities — inevitably for considerably more than they're worth, since their value is approximately zilch. Yes, America, another bank bailout.
Okay, I'm making my usual pessimistic predictions. Sorry. I sincerely hope I'm wrong this time.
Just the same, I actually was paying attention during the Japanese "lost decade," and noticed just how well quantitative easing worked for them. Yes, I know, some economists today say they just didn't do enough of it, and that's why it accomplished nothing — but nobody seems to know how much is enough.
Right now, banks are awash in cash, but still not lending to small businesses. Heavens! It's just too risky! At the same time, they're borrowing money at near-zero interest and charging 18% and more on credit cards. Other corporations are also hoarding cash, hoping to survive if everything nose-dives again. Any new money the Fed pumps into the economy is likely to go straight into speculation in the commodities markets, not into job creation.
Yes, the threat of deflation is scary — but creating new money and tossing it at the banks by buying their worthless CDOs will not do a damned bit of good. Unfortunately, the Fed has no means —even if it had the will — to direct its newly created bucks to the people who actually would spend it on goods and services, thereby lifting the economy. The only institution capable of shifting wealth from the elite groups to those of us in the lower classes is Congress — and you know what that means.
We're fucked.
Quantitative easing will not decrease the unemployment rate. If done exactly the wrong way, it might help the banks survive their latest round of self-inflicted trauma. Ignore the Fed's history of putting the interests of banks before the interests of human beings, and we might be able to convince ourselves that another round of quantitative easing might be another desperate stab at reviving the economy (albeit the equivalent of drawing to an inside straight.) Well, maybe the Fed governors are well-intentioned — but before we evaluate their intentions, we'll have to wait and see just how badly QE2 is done. Then we'll have a better idea.
In its first round of quantitative easing, the Fed spent about $1.5 trillion on longer term T-bills from Treasury and a big batch of toxic assets from the largest banks. Buying the T-bills probably held down long-term interest rates, like mortgages — not that anybody's buying houses at the moment. Buying the toxic assets — mortgage backed securities — was just another bailout to the banks. The money used to pay for it all, of course, was created by the Fed out of thin air. It wasn't all bad — the value of the dollar dropped against most other currencies (but not the renmimbi), and whatever growth we've seen since then has come from exports.
Girls and boys, we are not going to export our way out of disaster — certainly not when every other developed or developing country in the world is simultaneously trying to do the same thing. What's needed is a genuine and concerted redistribution of wealth, so that our working and middle classes can afford to buy the products we produce. More demand equals more products equals more employment equals more demand. It's a virtuous circle, and one we sorely need.
But, getting back to quantitative easing, we'd best have a look at how it might be done.
If the Fed bought all T-bills with the new money it creates, the banks would not be especially happy. On all their outstanding loans, the money they collected would be worth less than the money they loaned to debtors. It would be kind of like going back to William Jennings Bryant and free coinage of silver. Other losers would include people living on fixed incomes, whose money would buy less than before.
More likely, of course, would be another round of Fed purchases of mortgage-backed securities — inevitably for considerably more than they're worth, since their value is approximately zilch. Yes, America, another bank bailout.
Okay, I'm making my usual pessimistic predictions. Sorry. I sincerely hope I'm wrong this time.
Just the same, I actually was paying attention during the Japanese "lost decade," and noticed just how well quantitative easing worked for them. Yes, I know, some economists today say they just didn't do enough of it, and that's why it accomplished nothing — but nobody seems to know how much is enough.
Right now, banks are awash in cash, but still not lending to small businesses. Heavens! It's just too risky! At the same time, they're borrowing money at near-zero interest and charging 18% and more on credit cards. Other corporations are also hoarding cash, hoping to survive if everything nose-dives again. Any new money the Fed pumps into the economy is likely to go straight into speculation in the commodities markets, not into job creation.
Yes, the threat of deflation is scary — but creating new money and tossing it at the banks by buying their worthless CDOs will not do a damned bit of good. Unfortunately, the Fed has no means —even if it had the will — to direct its newly created bucks to the people who actually would spend it on goods and services, thereby lifting the economy. The only institution capable of shifting wealth from the elite groups to those of us in the lower classes is Congress — and you know what that means.
We're fucked.
Saturday, August 14, 2010
Quantitative Easing
The figures keep coming in — and lately, as you may have noticed, they have not been looking too good. The chief problem seems to be that both consumers and producers are more interested in paying down debt than in expanding consumption or production. Some talk about double-dip recession. Some talk about deflation.
Ben Bernanke says the Fed has not exhausted its supply of tools for fighting such threats, but he has not been especially specific. Presumably he is referring to quantitative easing, a central bank policy that, essentially, creates a bit (hopefully only a bit) of inflation and makes the "security" of Treasury bonds less attractive by further lowering the already low rates of interest they currently pay.
The recent Fed announcement that proceeds from mortgage backed securities now beginning to bring in some earnings would be reinvested in Treasuries does not really count as quantitative easing, since it does not really increase the money supply. It suggested, though, that the Fed might be willing to purchase securities with newly created money — how much, or how soon, is anybody's guess.
There are a couple of problems, though, with quantitative easing. One is the possibility that it could stimulate inflation without prompting any increase in productive business activity. If that happened, prices would go up while unemployment stayed high — stagflation, seventies style — and people certainly would feel poorer. Those on fixed or limited incomes would be poorer.
More likely, though, it would accomplish nothing at all — the experience of the Bank of Japan when it used quantitative easing in an attempt to get Japan out of its "Lost Decade" of the nineties and the recession of 2000-2001. While a cheaper dollar ought to stimulate exports, it's just as likely to spark a trade war. Every country in the developed world is trying to export its way out of the current mess, and it's illogical to think they all could succeed.
I'm inclined to think the Fed really is out of ammo, so we're going to have to depend on Congress making intelligent fiscal policy. Since I'm not making predictions anymore, I'll let you decide for yourself how likely it is that that will happen.
Ben Bernanke says the Fed has not exhausted its supply of tools for fighting such threats, but he has not been especially specific. Presumably he is referring to quantitative easing, a central bank policy that, essentially, creates a bit (hopefully only a bit) of inflation and makes the "security" of Treasury bonds less attractive by further lowering the already low rates of interest they currently pay.
The recent Fed announcement that proceeds from mortgage backed securities now beginning to bring in some earnings would be reinvested in Treasuries does not really count as quantitative easing, since it does not really increase the money supply. It suggested, though, that the Fed might be willing to purchase securities with newly created money — how much, or how soon, is anybody's guess.
There are a couple of problems, though, with quantitative easing. One is the possibility that it could stimulate inflation without prompting any increase in productive business activity. If that happened, prices would go up while unemployment stayed high — stagflation, seventies style — and people certainly would feel poorer. Those on fixed or limited incomes would be poorer.
More likely, though, it would accomplish nothing at all — the experience of the Bank of Japan when it used quantitative easing in an attempt to get Japan out of its "Lost Decade" of the nineties and the recession of 2000-2001. While a cheaper dollar ought to stimulate exports, it's just as likely to spark a trade war. Every country in the developed world is trying to export its way out of the current mess, and it's illogical to think they all could succeed.
I'm inclined to think the Fed really is out of ammo, so we're going to have to depend on Congress making intelligent fiscal policy. Since I'm not making predictions anymore, I'll let you decide for yourself how likely it is that that will happen.
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