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Bernanke's Shooting Blanks

Why QE3 is Bound to Backfire

by MIKE WHITNEY

You’d think that the Fed’s announcement of “unlimited monetary easing” would send stocks into the stratosphere, but that hasn’t been the case. Equities barely managed a 2-day rally before sliding back into the red on Monday and Tuesday. Investors seem to know that Fed chairman Ben Bernanke is out of bullets and that pumping more reserves into a cratering banking system just isn’t going to work, in fact, it could make matters worse. As Dallas Fed boss William White opined recently in a paper titled  “Ultra Easy Monetary Policy and the Law of Unintended Consequences”:   “Reductions in real rates… might at some point be offset by falling inflationary expectations.” That means that all this crazy bond buying could have the opposite effect than intended. It could lead to a loss in confidence that would slow consumer spending even more than present.  That’s why its important for policymakers to “get it right” and stop messing around with these goofy programs that have zero impact on the real economy. If activity continues to drop off and the economy goes back into the tank, it’s going to be a lot harder to dig out than it was in 2008 when the budget deficits were still manageable.  Bottom line: This is the wrong time for wacko experimental policies that are likely to backfire. It’s time to roll out the fiscal stimulus and put the country back to work before it’s too late.

Have you read the Fed’s statement from last Thursday?  Bernanke pledged to purchase $40 billion of mortgage-backed securities (MBS) per month until he sees some improvement in the labor market. In other words,  QEternity. Here’s a clip from the announcement:

“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

What rubbish. People who follow the Fed’s statements will tell you that Bernanke has been prattling this same bunkum from Day 1. Whenever stocks look a little squishy, Bernanke goes into his unemployment song and dance. It’s pathetic. Here’s what he said back in 2010 in an editorial in the Washington Post when he was prepping the public for QE2:

“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… 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.”

Sound familiar?  By my count, Bernanke mentions employment-unemployment 5 times in the first 3 paragraphs alone, giving the impression that he actually gives a hoot about working stiffs.  If only it was true.

At the time, unemployment was tipping 9.5 percent. Today, it’s 8.1 percent, which means that it’s fallen a mere 1.4% in 2 years all of which can be attributed to the fact that millions of workers have dropped off the radar and stopped looking for work entirely.  Is that what Bernanke calls success? Here’s how Mish sums it up at Global Economic Trend Analysis:

“This month (Aug) we set another record high with a whopping 581,000 dropping out of the labor force. If you are not in the labor force, you are not counted as unemployed.

In the last year, those “not” in the labor force rose by 2,723,000

Over the course of the last year, the number of people employed rose by 2,347,000.

Participation Rate fell .02 to 63.5%.

Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%”

So QE really hasn’t reduced joblessness at all. The unemployment trope is just public relations hype to pacify the masses. The real objective is to keep stocks airborne while the economy slips deeper into a coma. None of QE’s benefits are transferred to Joe Sixpack. True, mortgage rates have dipped to historic lows making it cheaper to buy a house (provided you can get the financing), but credit card charges have stayed the same (12 percent) which means that all the gains are being passed on to the banks.  If Bernanke really wanted to rev-up consumer spending, he’d order the banks to slash credit card rates to 3 or 4% above their borrowing costs, which are currently a paltry .25%.  But of course neither Bernanke nor Congress will do that, which means that QE is really just a stealth bailout.

Here’s something else to mull over. This is from the New York Times:

“The federal government agrees to shoulder the cost of defaults in nearly all of the mortgages made today. Banks make mortgages to borrowers, and then take those loans and attach the government guarantee of repayment to them.

After that, they package the loans into bonds, which they then sell to investors. The Fed’s purchases of these bonds have helped their yields fall to 2.2 percent. But the cost of mortgages to borrowers hasn’t fallen anywhere near as much.

The banks are choosing not to reduce mortgage rates further. One reason: By keeping the rates elevated, they are able to earn much larger profits when they sell the mortgages into the bond market. If the level of profits on those sales stayed at recent average levels, borrowers might, for instance, pay $30,000 less in interest payments on a $300,000 mortgage, according to a recent New York Times analysis.

Based on these practices, it seems as if the banks are an obstacle to the Fed’s latest efforts to generate economic growth.” (“How Much Does the Fed’s Plan Really Help Main Street?”, New York Times)

Think about that for a minute. If, as the NYT says, “The banks are choosing not to reduce mortgage rates further”, then why is Bernanke purchasing $40 billion of their MBS per month? Wasn’t that one of QE’s selling points, that it will stimulate greater activity in the housing market?  But the article says that buying MBS won’t improve sales  at all because “the banks refuse to pass on any of the savings to homeowners.” But that’s not what Bernanke said, is it?  He clearly stated that:

“Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.”

So even that was a lie, right?

And why is the Fed buying the very bonds that were at the heart of the financial crisis? (without even requiring the banks to put up any capital –”risk retention”–to pay for potential bad loans) Wouldn’t it make more sense to provide the resources for the banks to write-down the principal on underwater mortgages (cramdowns) so that millions of people can stay in their homes and so housing prices stabilize? That would be the sensible choice, wouldn’t it?

Critics of cramdowns argue that the practice is beyond the scope of the Fed’s mandate which is “price stability and full employment.” But that’s nonsense. If it’s okay to purchase pools of mortgages, than why isn’t it okay to purchase individual mortgages? It’s all the same.  The only difference is “who benefits”, which is what this is really all about.  When the money is funneled to the big banks and brokerages, then everything is hunky dory, but when some small token goes to the little guy, then all hell breaks lose.  The NYT’s even concedes this point when it states: “By keeping rates elevated, the banks are able to earn much larger profits when they sell the mortgages into the bond market.”

So it’s all about profits. The gov. guarantees the mortgages at origination, then buys them back in the form of bonds. Nice work if you can get it, eh?  The only way to improve on a scam like that, would be to skip the financial mumbo-jumbo altogether and set up a conveyor belt directly from the Treasury to Wall Street. That’s what it amounts to anyway; free money for the gangster class.

“We have to do more, and do enough to make sure the economy gets on the right track,” Bernanke thundered at his press conference on Thursday.

Yup, gotta do more for the stock market, that’s for sure. If the banksters want more money, then, dog-gone-it, that’s what we gotta do.

Of course, there could be a downside to all this  unconventional “trickle down” monetary easing, in fact, some of the experts believe it could be deflationary.

How could that be?

It’s because the lower rates created by QE narrow the margins on futures trading, money market funds and swaps transactions. Artificially-low rates reduce  the profitability of many activities that take place in the shadow banking system and that can lead to trouble.  Here’s how Eugene Linden explains it in a post at naked capitalism:

 ”The tiny margins at the zero bound mean that the short-term collateralized lending that supports money market funds and much of the shadow banking system can become unprofitable in the blink of an eye. Thus, ultralow rates, historically associated with the risk of inflation, can actually withdraw liquidity from the market, and produce a deflationary spiral.” (“Eugene Linden: In a World of Underpriced Risk, What Could Possibly Go Wrong?”, naked capitalism)

And Linden isn’t alone in spotting this deflationary pothole that could derail the Bernanke bandwagon. The Financial Times anticipates problems, too,  Here’s a clip from a recent post on the topic:

“A similar concern might arise concerning the viability of money market mutual funds, supposing that asset returns were not sufficient to even cover operating expenses. A final example of potential problems has to do with the swaps markets, where unexpectedly low policy rates can punish severely those that bet the wrong way. This could lead to bankruptcies and other unintended consequences.” (“The unintended consequences of QE: not what you think”, ft.com)

But that’s impossible, isn’t it, I mean, how do you get deflation from printing more money?

Well, first you create a great deal of uncertainty by addressing a “lack of demand” problem with all kinds of experimental monetary hocus pocus instead of regular, old fiscal stimulus.  Then, you flood the markets with liquidity pushing up prices on risk assets like stocks and commodities while the real economy continues to sputter and underperform. Then you let the banks block any new regulations from being implemented (Volcker rule, TBTF, risk retention, money markets etc), so the financial system remains permanently on the brink of a major heart attack. Then you expand the central bank’s balance sheet by $3 trillion so that prices are so distorted and over-bloated that risk aversion falls to record lows and investors are lulled to sleep believing that the Bernanke Put will ease them through any unfortunate hiccups in the market. And, finally, you go to the well one time too often hoping to goose equities a bit higher only to discover that  your deep-pocket Wall Street speculator buddies have deserted you because they think the economy is headed for the shitter and they don’t have confidence in your ability to put things right. That’s how QE3 morphs into Great Depression 2. We aren’t there yet, but there’s no doubt where things are headed if Bernanke keeps raising the stakes every time the stock market looks a bit wobbly.

Now get a load of this from Lance Roberts at Business Insider:

“While the most recent bond buying program will push liquidity into the equity markets pushing asset prices higher – it will do little to help the economy, employment or housing.  The evidence is abundant that the only beneficiary of these balance sheet programs is Wall Street.” (“QE Won’t Work Because There’s No Demand For Credit”‘ Business Insider

This is the one thing that everyone seems to agree on, that the real winners in Bernanke’s QE Lotto are the bigtime speculators. A recently released report by the Bank of England confirms that a full “40% of the gains (from QE) went to the richest 5% of households.”

So all the doe is going to moneybags investors?  What a surprise.  In other words, Bernanke’s uber-accommodative policies are just welfare for tycoons.   That may be why the majority of economists surveyed by the Wall Street Journal “said it would be a mistake” for Bernanke to launch another round of QE in 2012. Of the 51 economists questioned, 28 opposed more QE, while 17 said “it would be the right thing to do.”  Here’s more:

“Private-sector economists, asked about the impact of a hypothetical bond-buying program of $500 billion, on average estimated it would reduce the unemployment rate by only 0.1 percentage point over a year. The jobless rate was 8.1% in August. They also projected such a program would increase annual economic output, or gross domestic product, by 0.2%.” (“Economists Are Uncertain More Fed Moves Will Work”, Wall Street Journal)

So, don’t expect QE to lower unemployment or boost GDP, because it’s not designed to do so. It’s designed to inflate stock prices and lower the banks’ costs, and that’s about it.  If policymakers were serious about kick-starting the economy, they’d abandon the asset purchases altogether and provide another round of fiscal stimulus to extend unemployment benefits, enhance the food stamp program, and rebuild the nation’s worn infrastructure. That’s the way we used to fix the economy before the nutcases took over.