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The Fed’s QE3: No Exit

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The Fed’s launch of QE3 looks more than a tad desperate. If you believe the central premise of the Fed’s action, that propping up asset price gains would have enough effect on consumptions to lift the economy out of stall speed, it would seem logical to sit back a bit and let the recent stock market rally and the (supposed) housing market recovery do their trick. But the Fed has finally taken note of the worsening state of the job creation in an already lousy employment market and has decided it needed to Do Something More.

So the Fed is going to push the housing button harder, with $40 billion a month of mortgage backed securities purchases, along with a continuation of Operation Twist. Thi’s is less aggressive than past turns on the QE spigot; Ambrose Evans-Pritchard called it “calibrated”. The central bank depicted the commitment as open ended, but since it also promised to keep rates super low “at least through mid-2015,” Mr. Market expects the QE tap to remain on at least that long.

Now arguably, this move is a hedge against the slowdown in China, Europe, and the contractionary effect of failing to shrink the fiscal cliff. But QE weakens the dollar and gooses commodity prices (as confirmed by big moves in gold, silver, and oil on Thursday). The last thing Europe needs now is a stronger euro. With food prices already up sharply (note that while the USDA is now forecasting that the corn harvest will be only slightly below last year’s levels, rice output has also fallen) and previous rounds of QE having led to bitter complaints of its effects on commodity prices, any additional pressure on staples like food and fuel prices aren’t just unwelcome, they are politically destabilizing.

But the elephant in the room is what, if anything, these measures will achieve in terms of real economy impact. “Let them eat stocks and housing” has not been terribly successful. Even with super low rates, it has also taken massive sequestering of inventories for the housing market to have the appearance of stabilizing. We have low household formation due to young adults facing high unemployment, low paying jobs with generally short job tenures, and heavy student debt burdens. On top of that, we have generational headwinds as boomers hit retirement age and want or need to downsize. Keeping money on sale is not going to induce banks to lend more if they can’t find enough qualified borrowers. And the consumer deleveraging story is not as positive as the statistics would lead you to believe. A lot of it is involuntary, meaning driven by foreclosures. In addition, retirees also curtail their spending thanks to the fall in interest income they’ve suffered under ZIRP.

But another big issue is that the Fed looks to have painted itself in a corner. Is the US going to have 3.5% mortgage interest rates forever? If the central banks does manage to create a bit more inflation, how does it think it will exit? A mere 1% increase in interest rates, from 3.5% to 4.5%, increases mortgage payments on a 30 year fixed rate mortgage payments by 13%. That will translate into a meaningful dent in housing prices. And where does the Fed go if a financial crisis or other shock occurs?

The Fed failed to see the crisis coming, failed to push for restructuring of consumer, particularly mortgage, debt, and is now in full bore “if the only tool you have is a hammer, every problem looks like a nail” mode. And in the crisis, the Fed was slow to act and then overdid when it finally roused itself (remember “75 is the new 25″?) it looks as if the Bernanke Fed is incapable of looking at its own history.

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133 comments

  1. hermanas

    How about “Public Works” Bonds? Muni’s or something more imaginative? Have they fixed securitization problems of MBSs?

      1. LadyLiberty

        This has been planned for awhile..

        A Huge Housing Bargain — but Not for You

        snip
        NEW YORK (RealMoney) — The largest transfer of wealth from the public to private sector is about to begin. The federal government will be bulk-selling the massive portfolio of foreclosed homes now owned by HUD, Fannie Mae and Freddie Mac to private investors — vulture funds.

        These homes, which are now the property of the U.S. government, the U.S. taxpayer, U.S. citizens collectively, are going to be sold to private investor conglomerates at extraordinarily large discounts to real value.

        You and I will not be allowed to participate. These investors will come from the private-equity and hedge-fund community, Goldman Sachs (GS) and its derivatives, as well as foreign sovereign wealth funds that can bring a billion dollars or more to each transaction.

        In the process, these investors will instantaneously become the largest improved real estate owners and landlords in the world. The U.S. taxpayer will get pennies on the dollar for these homes and then be allowed to rent them back at market rates.

        On Wednesday, the Federal Housing Finance Agency (FHFA), the Department of Housing and Urban Development (HUD) and the U.S. Treasury Department issued a Request for Information (RFI) concerning the disposition of the inventory of foreclosed homes owned by the federal government.

        An RFI is ostensibly a way for the federal government to get input from the private sector on how to accomplish the goals laid out in the request. But that’s really just a facade, as the RFI was structured by the investors to begin with.

        more
        http://www.thestreet.com/story/11224917/a-huge-housing-bargain–but-not-for-you.html

        Intrade: Fed helped Obama’s re-election odds

        http://money.cnn.com/2012/09/14/investing/obama-election-intrade/index.html?iid=HP_Highlight

    1. citalopram

      Nah, if we had sizable groups of citizens rise up a la Egypt or Libya, things would be much different. The biggest mistake the elites could make is pulling the trigger if that happens. I wouldn’t put it past them, but their naked aggression would spell their doom.

        1. Bert_S

          Ya. If I wake up one morning in guatmo all cross-eyed with a NSA official peering down at me , I will disavow any knowledge of this conversation.

          But I’m getting too old and lazy to be a street fighting revolutionary, and I’m scared of bullets anyway.

          So I like to think how easy it would be for someone sworn to uphold the constitution to just “Occupy” DC and Wall Street and the rest of us could just watch it on TV.

          And it’s much closer than the Middle East so they may like it better there anyway. Good restaurants….and they may have it in for congress anyway for buying all that hardware that doesn’t work just so congress critters can get re-elected. Besides, if the country goes broke, there goes the paycheck.

          It just makes sooo much sense….

      1. Norcal_Steve

        I hate these continuing references to the Arab spring. How is that in a different universe to any ‘in-my-wildest-imagination’ extrapolation of OWS+things getting worse and worse in the USA? How are the actual social and political situations worlds apart? Let me count the ways in a very off-the-cuff analysis:

        1. Religious fundamentalists allied with middle and lower class malcontents is a huge force in AS. Ain’t ever gonna happen here. The evangelicals are not going to participate in attacking the state here and if we every get to where they do, the results will not be progressive. The results of the AS are most likely gonna fall into the Iranian model, eg the MB are the only legit organized heirs in Egypt and they won the elections in a landslide.

        2. The police states in AS countries have ruled for decades with far heavier and universal repression than anything we have yet to see (except for our black communities).

        3. The vast majority of every economic class in the US, except for the lowest rung and even there many totally buy into the ruling market and nationalist ideologies completely buy into the basic legitimacy of the state.

        4. In AS countries there was zero outlet for allowed criticism of the state of any kind.

        5. I have no data but AS countries had much higher youth employment and poverty at all levels, I am quite sure.

        6. AS countries middle class was/is much more limited in numbers. Numbers of the educated along with everybody else) were getting much smaller economic crumbs.

        7. The oligarchic thievery in AS countries was much more visable, limited to a smaller group, even to those with zero political understanding.

        1. citalopram

          Your entire post misses my point. It wasn’t about similarities with movements, it’s about numbers of people participating.

          :-)

          1. Norcal_Steve

            Really? You are imaging large numbers of people out on the street ‘a la Egypt and Libya’ without imaging what motivates them? Does not make much sense to me. Whether the authorities ‘pull the trigger’ has everything to do with the motives of such crowds. How easily the cops can bully and brutalize probably even including shooting without anybody caring much also has everything to do with who they are brutalizing and illegally arresting and how unified the public is in standing behind those who might come out on the street. If we’re talking about OWS, I think the general public does not care in the least what the cops to those ‘dirty hippies’.

            I’ll say it again. IMO the AS has zero to do with what mass movements might in our wildest dreams ever arise in the US so any cross-reference is ignorant.

          2. Norcal_Steve

            FWIW talking about ‘pulling the trigger’ on demonstrators in the US is just nonsense. First, mass demonstrations are not gonna happen and second, the state is never going to be seriously threatened in the US even if they are. Kent State got a strong reaction, but that was an act of grossest stupidity and low level incompetence. Personally I find the kind of references like your post to be ignorant and cheapening to the lives of those demonstrators killed in Libya, Egypt and especially in the huge and widening civil war in Syria. I guess I’m too serious for you and unable to take a joke about folks lying dead in the street.

          3. Norcal_Steve

            Sorry, i got a bit overwrought – the situation in Syria in particular is quite depressing and far too real for me. My issue with your post is that you are invoking the possibility of large demonstrations of some sort in the US against ‘the system’. That would be fantastic, but your imagination is running away with you. How could we possible get there from here? How can we possibly get large numbers of people to understand what the problem is when they are all watching either Jersey Shore and/or Fox news, or even at best getting a load of crap from msnbc. These people are going to wake up and get organized how?

          4. jonboinAR

            I agree. Things would have to get a LOT worse here before demonstrations would be likely that would be very concerning to TPTB. Relative to regime-threatening marchings in the streets, OWS was a big camp-out by a bunch of college age kids. It could have been a decent start to something, but the rest of us sheeple are still way too comlacent to get off our behindies. We can’t even put together a progressive voting block. Maybe we’re getting educated a little through the noble efforts of Yves, Lambert, et. al.

  2. ArkansasAngie

    But … but … The only way to save the banksters is to inflate prices.

    The can has been kicked.

    I was going to vote 3rd party now I will vote for Romney. Not because he is better than Obama. Only because he isn’t Obama.

    This move by the fedster will cost every man, woman and build at least 4 more years of economic slow blood letting.

    1. citalopram

      Housing prices are already climbing here in California. I can’t wait to see what they be after QE 3 comes to fruition. Maybe I’ll be able to get free and clear on my house, or refinance? Whoo hoo.

    2. ian

      It reminds me of Mae Wests dictum that “when faced with a choice between two evils, I pick the one I haven’t tried before”.

  3. fresno dan

    This is one of those things where it shows that wall street has not only bought Both parties, but all of media as well.
    The democrats used to describe “trickle down” economics as increasing the oats you gave to horses as the plan to feed the sparrows…
    Really, REALLY – making sure the rich take no losses, increase capital gains (at low tax rates) – while wages drop like a stone…THAT IS THE PLAN!?!?

    And some liberals think the Fed, a consortium of banks, are the people to run the economy!!!! You can’t make this stuff up!
    Its as if the gazelles get together and say things are too tough for the lions – - so the chief gazelle says let’s just run at the lions, lay down if front of them, and oh yeah, lets slit our own throats cause we don’t want the lions to crack a tooth…and the rest of the gazelles applaud.

    This is one of those things where it shows that wall street has not only bought Both parties, but all of media as well.
    The democrats used to describe “trickle down” economics as increasing the oats you gave to horses as the plan to feed the sparrows…
    Really, REALLY – making sure the rich take no losses, the price of stuff can’t come down – while wages drop like a stone…THAT IS THE PLAN!?!?

    And some liberals think the Fed, a consortium of banks, are the people to run the economy!!!! You can’t make this stuff up!
    Its as if the gazelles get together and say things are too tough for the lions – - so the chief gazelle says let’s just run at the lions, lay down if front of them, and oh yeah, lets slit our own throats cause we don’t want the lions to crack a tooth…and the rest of the gazelles applaud.

    http://www.ritholtz.com/blog/2012/09/the-middle-class/
    http://www.census.gov/hhes/www/income/data/historical/families/

    http://www.ritholtz.com/blog/2012/09/the-middle-class/

    1. C

      I think that this is less a comment about the dems than it is about the real power structure.

      Look at it this way. Obama promised to make fundamental changes to the military structure (more transparency, an end to Gitmo and the policy of indefinite detention, etc.), and was applauded by the Dems for it. He also promised to reign in Wall St. and insist on the rule of law. He was applauded for it. He also promised to help labor such as teacher’s unions. For all things the R’s vilified him.

      Now the opposite has happened and the D’s still love him and the R’s still hate him.

      One way to read this is that he never planned to do that. And there is good evidence that some of the people he surrounded himself with (Rahm Emmanuel, Arne Duncan, Gates, Jeff Immelt, & Tim Geither) never wanted these things to happen.

      But another way to read this is that it does not matter who is in office. The contractors, banksters and the like don’t *care* who is president because things will still happen the way they want. Take, for example the torture cases recently waived by the DOJ or the NSA’s illegal spying. In both cases agencies and individuals broke the laws limited as they are and may have done so without even deigning to check with the executive. But once found out they will not be punished, perhaps they cannot.

      At the end of the day it makes Obama v. Romney or any D v. R less of a meaningful race than a carnival sideshow while the real powers that be get on with business.

      I personally have stopped caring what Obama and Romney say they will do because whether they want things the way they are or just lack the ability to change it things will stay the same. The only hope of real change is to end this R/D sideshow.

      1. JD

        I think that there are a few Congress people who are alright but I don’t think the machinery of either Party is worth saving. The Presidential primary campaign are most enlightening in this regard. The first step to Liberty is destroy both parties.

        I will be voting Rock Anderson. I’m not throwing my vote away by giving it to either Obama or the other whore. I will be voting for a few of my local people regardless of Party, because candidates are usually not so controlled at the city & county by the Party machinery.

        Both of the major Party Presidents have been worthless since FDR died, except Eisenhower & Kennedy.

    2. Ian Ollmann

      > Really, REALLY – making sure the rich take no losses, increase
      > capital gains (at low tax rates) – while wages drop like a stone…
      > THAT IS THE PLAN!?!?

      I’ve been enjoying the fact that stocks have been paying very good yields on dividend. Capital gains don’t interest me right now. I’m not a seller of stocks. I would like to continue to buy stocks cheap. I really look at this as a bit of a disaster. Where does on go for returns when bond yields are below inflation and stocks become overpriced?

      1. Kokuanani

        Where does on go for returns when bond yields are below inflation and stocks become overpriced?

        Actually, I think that’s another part of their plan: make everyone so desperate as they look at the low returns on “safe” investments, accompanied by inflation, however small, but greater than those meager returns, that they will buy stocks, even though those stocks are overpriced.

  4. john bougearel

    $40 mbs purchases a month for the next three years into 2015 = a $1.44 Trillion expansion of its balance sheet…

    The elephant in the room is not what the “no exit” open-ended QE3 measures will achieve. Rather it is what the hell the Fed is so scared about? What do they see that we don’t see? Every now and then, the Fed pulls a stunner like this, when they see something that scares the daylights out of them, that their confidence plunges towards nil. The sensible question to ask ourselves, is what does the Fed see that we don’t see?

    They pulled a stunt like this in Jan 2001 when they surprise cut rates 75 bps on the intrameeting date of Jan 3 01, then again another 75 bps 3 weeks later at the Jan 01 FOMC meeting. And they kept on cutting all through the rest of 2001 and beyond, until they cut rates to 1%. But it did nothing to stop the stock market from plunging 50% by Oct 2002. Meanwhile Gold rallied 54% by June 2003 under that set of negative real interest rate policy.

    Something was radically wrong a decade ago, and something is radically wrong today to shake the Fed’s confidence towards nil. What took the stock market down in 2002 was tail risks related to a tech bubble and widespread corporate accounting fraud that the Fed could do nothing about. Today, the stock market has become one of the top dogs amongst asset classes today. A primary reason for that is a result of the Fed distorting both the long and short end of the treasury curve to the point where the SP500 dividend yield is greater than the 10 yr note….

    But while that is a nice cushion insulating stock investors today – Tail risks are still present. The stock market can still blow itself up, if not for its own internal rot, then perhaps it will be because one day there will be a reckoning in Europe (possibly delayed until 2014-2015 if the recent ECB scheming has any measure of success in the near term)and real losses will have to recognized on hte balance sheets of big institutions prompting margin and collateral calls from the LCH and CME Europe exchages, and forcing firesales from these big institutions all risk asset classes to raise a little capital, and where these big institutions may have to post gold as collateral at the LCH and CME Europe exchanges because its the tangible asset in their portfolios that is safe and secure.

    But for now, all is well – as policymakers tarry on with their muddle-through policymaking so no sovereign bondholder ever has to take a loss on their malinvestments.

    1. skippy

      Hay… John,

      You know the bit about the Meso Americans lopping more heads off to make it rain…. well….

      skippy… yeah its kinda like that… BTW I do respect your insights on the entrails. This place is better for it, I mean it.

    2. Doug Terpstra

      Yup, with stocks near all-time highs and real employment near all time lows, this permanent money-printing is so exactly bass-ackwards it reeks of desperation. It points to an imminent market crash, which all stops must be removed to prevent in order to ensure Obama’s reselection. Mitt, too, is waiting in the wings with new gaffes, just in case.

      But if all these should fail in the end, then pay no attention to the staged rift between Obama and his puppeteer Netanyahu. Orwell dictates that war must follow, and a nuclear Pearl Harbor may be required to mobilize a war-weary flock. The amoral elite will stop at nothing in their quest for absolute power.

      1. john bougearel

        Doug, you sound upset. As for an imminent crash, I don’t see that happening in either the economy or the stock market in the near to intermediate term, unless Greece or Spain were to create price instability and a disorderly decline in risk asset classes.

        More likely, the way it is shaping up, Greece and Spain will be onboarded safely until past Merkel’s re-election bid in Sept 2013.

        1. Doug Terpstra

          What, me worry? Naaah !-) Everything is under complete central committee control, except of course in Egypt, Yemen, Libya, Iraq, Tunisia, Algeria, Jordan, Iran, Morocco, Sudan, Bangladesh, Lebanon, Indonesia . . . Still, it’s nothing the drone fleet can’t handle.

          I think you’re right, though, because Benjamin Shalom has preempted an imminent crash by his accelerated counterfeiting and chopper sorties. Correction: BS has “delayed” the imminent crash until after Obama’s reselection.

          This exquisitely timed move just reeks of selectioneering. And if this doesn’t work, and if Mitt fails to deliver his scripted “gaffes” on cue, then war must follow. The Trojan Horse must remain in office for his second term agenda, completion of the global Shock Doctrine.

          So printing and free money for banks will continue and energy and food prices will continue to be bid up until Americans get off their fat asses and get back to the fields. Enough loafing. Then, sometime around midnight of December 21, after the “grand bargain” is struck, expect a panic-run on cat food.

        2. TC

          There’s definitely risk of an intermediate-term setback. Without banks and financials strongly participating in recovery, the risk of a stock market setback is substantially heightened. Broadly speaking, both groups have been lagging badly since QE2. Likewise, the hyperinflationary effect of quantitative easing leading to the shedding of so-called excess capacity (see oil refining over the past couple years) only further weakens the positions of these groups. Short-term benefits these experience on account of Fed largesse only is to become further cause making them the economic albatrosses they really are, while squeezed margins more broadly only serve to increase so-called “excess capacity” but further and create a negative feedback loop. Such is hyperinflationary breakdown.

          The Fed in effect is facilitating consolidation of physical and financial assets, and over the interim the global economy inexorably continues moving in this direction there is bound to be a market-driven extortion furthering the cause. This has been the name of the game for decades now. Whether the Fed knows it or not, it is playing into a cause that, with each new crisis of confidence and subsequent consolidation, in fact is proving entirely seditious, particularly as measured by principles eloquently stated in the U.S. Constitution’s Preamble. This really is the framework from which the Fed should be judged. Having tolerated the Greenspan-blessed casino, the Fed is reduced only to doing wrong, and for this institution to claim otherwise but invites an indictment of their treason.

    3. Susan the other

      That is the ominous question. What does the Fed see. Last nite I heard a radio broadcast of Bernanke and I thought they goofed because he sounded just like Jamie Dimon, same tone, same inflection, same rapid sentences. They say people pick up each others accents quickly, just a human trait. I think those two have been chatting a lot lately. We know JPMChase is involved with the military in a mining venture in Afghanistan, and that’s probably just the tip of the iceberg of JPM’s “investments.” I think the Fed is doing the bidding of the US Military. And look what just happened in Libya, Somalia, Yemen, Sudan, Egypt; not to mention the frustration over Iran. If the US banking system goes down the military goes down. So buying 1.4Tr MBS from the banks will help them keep up the good work. Whatever that is.

      1. psychohistorian

        John and Susan the other,

        My take on why is the ghost of unknown derivative positions.

        What were the promises of 2008 when the big boys and their puppets were caught with their pants down?

        So we have a stake in the ground on asset pricing and a headlong rush to the bottom on wages in the US. I hear the sound of assets slowly be sucked up by the global inherited rich….just part of the plan.

        Devolution is in full swing.

  5. jake chase

    The Fed is not acting to repair the economy. It is acting to prevent a collapse of asset prices. What you saw yesterday was a stampede of the shorts, in stocks, commodities, especially oil. This will have no impact on housing, except to keep prices too high to be affordable for today’s low wage working families. It will depress consumer demand as commodity speculation fuels price increases. The Fed has already impoverished everyone attempting to live on accumulated savings. The retired generation is stuck in houses which cannot be sold and lining up to greet customers at Walmart in order to make ends meet. But the Fed really cannot do anything else except funnel money into the banks, and the banks see no opportunity except fueling speculation and grinding out profits on consumer usury and servicing mortgages owned by nobody. The result is a working class depression combined with a speculative bubble in financial assets. This is the new normal and there is no exit without a second New Deal. What are the chances of that? Not too good.

    1. Stan Getz

      Well said Jake, and the baby book downsize housing supply phenomenoa is not discussed enough in mainstream media. The fed and fed gov policy only aim is asset inflation, and socializing the the finance industries losses yet unrealized from mal collateralized MBS. There is no working secondary market for mortgages, so the idea that buying up MBS is a mechanism for spurring consumer home loans cannot have its “targeted” effect. How could it, bank’s don’t loan money on a depreciating asset w/ unrealized unknown excess supply. But it does hide and socialize the finance industries losses and suspends the public’s disbelief in many investment options. It seems now they can’t sell new real estate bonds fast enough. The housing market won’t recover until we allow massive principal writedowns, which will further demonstrate the ponzi scheme and lead rational consumers to default or demand principal mods rightsized to the real value of housing. Thats the only way we get back to organic consumer demand. But the gov is busy discouraging price discovery in many markets and doing nothing to reinstall glass stegal or any other regulatory mechanism to stabilize and prevent future financial crisis while injecting more instability in the form of liquidity. I don’t see any way to avoid some combo of inflation in real goods and deflation in many asset classes. Medium term I have no idea where to put money, so I play the game of a sequence of short term moves. In the long term we’re all dead anyway, I guess that may be an apt description of fed policy since 1996, ala Haywood.

      1. taunger

        Its just a giant circle jerk – with Fannie/Freddie standing behind all the loans and giving guarantees (ie, the Fed Gov’t assuring banker profit), there is plenty of buy side demand at securitization level, esp. with the Fed now ready to ensure Fannie Freddie efficiency through MBS purchase. This puts a new wrinkle in the Fannie/Freddie conservatorship – we can expect them to be gov’t entities as long Fed is buying MBS.

        1. LucyLulu

          That’s what I wanted to know. WHO is the Fed buying these mortgage bonds from? The GSE’s? Not the banks, other than second liens they don’t own MBS, do they? Oh, and they own the loans they had to buy back but those aren’t MBS anymore. And I doubt the investors. So, Fannie and Freddie? And will they be buying the crappiest ones?

          Are they going to be buying NEW MBS (that they will be funding, if they can get the banks to lend the money) or will they buy MBS from past years?

          I’m with Beard on this one. Distribute the money to the people and call it the dreaded word – “stimulus”. QE1 and QE2 were pretty worthless, time to change things up. What did Einstein say about the definition of insanity? Or call it ‘providing a conducive environment for businesses to thrive’ and use the money to rebuild our shameful infrastructure, and hire some unemployed workers.

          1. F. Beard

            No. I don’t call it “stimulus”; I call it restitution for theft.

            What part of “loans create deposits = counterfeiting” is so hard to grasp?

          2. LucyLulu

            Sorry, Beard. I wasn’t clear. I was attributing “giving the money to the people” part to you. “Calling it stimulus” was an attempt at humor on my part, apparently not a very good one.

            How’s that water doing ya?
            Hmmmmm, where did I put those S’mores freshly roasted over an open fire?

    2. Jim Haygood

      Continuing with Jake’s theme, Marc Faber rips the Bernank’s face off with one of his most impassioned populist rants EVAH:

      http://www.bloomberg.com/video/faber-says-fed-policy-will-destroy-the-world-5WSieqSKQMCCncsYC7HDRA.html

      Faber sarcastically congratulates the Berwank for foreclosing on a large swath of busted middle-class housing speculators, so that the well-heeled can snap up distressed assets for a song and lease them back to the victims at rapidly-rising rents.

      Thank you, Mister Berwankey!

      1. gnome

        Faber’s got his panties in a bunch because he went to USD cash. He guessed wrong, short term. The applicable macro factors here in the US are the same ones you use in Congo-Brazzaville or Equatorial Guinea. Nothing matters but factional clout, which in this case determines the Dem’s reliance on currency debasement and the carry trade versus the GOP’s need for a systemic financial crisis. Will the next bank failure be deferred, or not? Precipitating a crash is riskless, with bank cadres in control of the executive, and potentially very lucrative (ask Deutsche Bank.) The bankers opened the trap door on disposable also-rans Bear Stears and Lehman, leaving Bush, and by extension the GOP, helpless and pathetic, teed up for humiliation at the polls. Turnabout would now involve European victim banks, selected the same way, to settle scores. If I was a kleptocratic patron of GOP puppets, I’d do it to Landesbank Berlin.

    3. Jagger

      Jake,

      You got it exactly right. Just because Bernanke is selling it as job creation, it isn’t. It is for asset prices, the stock market and wall street. The job creation line is also a sop for Obama’s re-election campaign.

      The job creation line is just another snow job for the 99 percent out there that will pay for it.

      Job creation isn’t even on the radar for our government or the Fed. Four years to do something about it and with an election looming, they still aren’t doing anything real about it.

    4. acmerecords

      contemplate if you will the addition of some other recent socital changes – privatized public education for the lower classes that trains these children to be uncritical order takers…and, add to the mix a total public awareness of the results of attempting to “petition the government” as the constitution allows that we all witnessed this spring in cities across America – storm troopers taking violent actions against non-violent Americans – and you have a real neo-fascistic state in the making …

      permanent working class depression, check
      government propping up the rentier classes with trillions, check
      militarized local police forces being directed by a federal government that has the capacity to monitor all communications, check …

      see ya’ll in our Brave New World!

  6. rjs

    i have a blog tag “exit policy” which references dozens of links…

    during the first year of QE there were a considerable number of posts discussing as to how the Fed would unwind QE and shrink their balance sheet back to prerecession levels…you dont see any of those anymore…

    1. Apj

      Yes you do. It was the negative IOR malarkey. Just know this: every time the exit strategy becomes a topic of conversation, the Fed goes and does more QE or Twist.

  7. Schofield

    Really it’s the concentrating on the selling of “money” in the shape of assets like toxic mortgage bonds, stocks, gold, silver, etc instead of concentrating on raising demand in the real economy that’s causing the continuing stagnation. But then what would you expect of a form of unbalanced (Neo-Liberal) market capitalism skewed in favour of the rich? The big fallacy is that there’s only this one type of market capitalism and a balanced one using restraints is out of the question. Not so. Nature always works to balance things up bloody or no.

  8. Jim Haygood

    So now the Bernank (monkey see, monkey do) has launched his own version of Outright Moonbat Transactions. With this madman gunning our clapped-out bus into a blind hairpin curve, let’s review how we got into this fix:

    Bubble I. Warned early and correctly by Robert Shiller in 1996 that he was overstuimulating, a deluded Greenspan kept the monetary pedal to the metal for four more years, producing a monstrous bubble in internet stocks. Individual investors and pension funds were badly wounded by the fallout, as stocks lost half their value by early 2003.

    Bubble II. In June 2003, with stocks already embarked on a recovery, Greenspan cut the Fed funds rate to one percent (the lowest since the 1930s) and held it there for a year. Housing began to sizzle and pop furiously, with new subdivision openings in Las Vegas attracting mosh pit crowds of ‘nothing down’ leveraged speculators. Bernanke arrived toward the end of the Fed’s two-year campaign of hiking the funds rate back to 5.25% by mid-2006, apparently failing to notice (or not caring) that they had inverted the yield curve, a reliable precursor of recession. House prices stalled. In 2007 dodgy securities packed with subprime mortgages became illiquid. In 2008, banks, the GSEs and housing prices came crashing down. Exuent Bubble II.

    Bubble III. Even as Bubble II lay in ruins, the Fed began laying the foundations of Bubble III. In March 2009 Bernanke expanded QE1 by $750 billion, finally achieving his desired result: a take-off in stock prices. Promises to reverse the ballooning of the Fed’s balance sheet were abandoned as QE2 was launched in November 2010. Now, with stock indexes already having doubled since early 2009, Bernanke has launched QE3, seeking still more asset inflation.

    While stock valuations are stretched, it’s bonds that constitute the marquee Bubble III asset. Short-term sovereign yields have been driven below zero in the core of Europe; five-year T-notes fetch only 0.65%. As always, banks trying to carry-trade their way back to profitability are stuffed with ‘safe’ sovereign bonds. But ‘safe’ refers to credit risk, not interest rate risk.

    When long rates finally commence to rise, not only commercial banks but also central banks will find themselves insolvent. While the Federal Reserve is leveraged fifty to one; the ECB is, according to one analysis, leveraged 300 to one. Simply put, a normalization of bond yields will wipe out their capital, and then some.

    Currently we have a front-row seat to view the spectacle of central banks forever destroying their credibility in an orgy of leveraged asset speculation fueled by counterfeit ‘reserves’ which they issue at their own discretion. The backlash, when people find out that these frivolous, feckless PhD punters have created and popped another bubble, will be vicious.

    Make no mistake — what’s on the line here is institutional destruction. The Bernankes and Kings and Draghis of central banking are deranged world wreckers, and their depradations must be stopped for good.

    1. Warren Celli

      Jim Haygood said; “let’s review how we got into this fix:”

      The only difference between wrestling, NASCAR, economics, politics, Hollywood, etc., is their jargon. The common denominator is that they are all pinata baubles owned and controlled by the sociopathic Xtrevilist few and they are all used to mesmerize, control, and now eliminate the masses. We got into this because the Xtrevilist few always provide a mesmerizing deflective pinata with little bits of candy prizes and we stay focused on them.

      Yes, its intentional institutional destruction, but with a goal — reduced global population and a two tier global society of ruler and ruled with the ruled engaged in perpetual conflict with each other.

      Keep hammering!

      Deception is the strongest political force on the planet.

  9. Andrew Watts

    The idea that the Federal Reserve can re-ignite economic growth via credit expansion and lowering the discount rate was proven not to work during the Great Depression. Since expanding the monetary base does little to affect the real economy when people can’t/won’t make use of more credit. Contradicting one of the major justifications for the founding of the Federal Reserve system.

    Not even Alan Greenspan thinks QE/QE2 has done much for the real economy. So what possible purpose could more QE have? Is the Federal Reserve merely justifying it’s own existence?

    1. Gordon Brooks

      Seems to me the purpose of QE is the same as the purpose for the Fed’s existence: to make more money for the banks at the expense of everyone else. In that purpose it succeeds wildly, and has for nearly 100 years.

  10. joebhed

    While Jake is right that the effort is strictly aimed at boosting asset prices, there is a kind of unspoken reality out there that is about being out of bullets,or tools in the FED vernacular.

    In this debt-deflating economy (forget the asset/commodity speculation) what is needed should become obvious.
    It is “purchasing power” -a.k.a. money – in the hands of the consumer to feed the demand side of the econommy.

    What is NOT needed is any more debt – precisely because it is the over-saturation of debt in the economy that is the cause of the debt-deflation crisis-downturn.

    So, two parts of the essential recipe are more money and less debt.

    Could we do that?

    Well, back in the 30s that is precisely what the Chicago School economists proposed to FDR.

    Recently two IMF monetary economists studied the potential for the Chicago Plan to work in a modern monetary economy.
    Their findings:
    A stabilizing of boom-bust cycles, and fluctuations in the money supply.
    An end to bank-run crises
    Dramatic reduction in public debt
    Substantial Reduction in private debt.
    Economic output gains of 10 percent.
    Steadt state near zero inflation.

    The IMF Working Paper is available here.
    http://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf

    The point here being that there MUST be ways to achieve economic stability by getting purchasing power into the economy without debt.

    The findings of the Chicago Plan Revisited working paper is that the Chicago Plan can achieve that end.
    Just saying.

    1. Doug Terpstra

      A brilliant stroke of genius—bring in the IMF, Uncle Milty, Irving Fisher, and the Chicago School to make things right. What could possibly go wrong? In the unlikely event something did, we could always bring back Greenspan, Ayn Rand’s disciple. (Sorry, I didn’t actually read the 70-page report, MEGO.)

      I wonder why FDR rejected the Chicago School Plan then:

      “High finance of this type refused to permit Government credit to go directly to the industrialist, to the business man, to the home owner, to the farmer. They wanted it to trickle down from the top, through the intricate arrangements which they controlled and by which they were able to levy tribute on every business in the land.” (FDR 1936)

      “. . . rulers of the exchange of mankind’s goods have failed through their own stubbornness and their own incompetence, have admitted their failure, and have abdicated. Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men. True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence….The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.” FDR

    2. Susan the other

      Thank you for the IMF Working Paper. I scanned it for legible paragraphs sans the equations and econo jargon. I can’t imagine something so rational. But it certainly sounds good, like Steve Keen and like Beard’s comments. One of Beard’s points is that in all this largesse of equity from the commonwealth, not only private debt, i.e. mortgages and business debt, should be transitioned from debt to equity, but those without debt should receive some equal benefit. And I’m also wondering something (maybe FDR’s hidden reluctance): How will war be accounted for? In a world of financial democracy war might become very difficult to finance.

      1. Stan Musical

        Not to be an usage nazi, but I believe you meant “skimmed” not “scanned.” The latter’s often misused; it means to look over in great detail, like a scanner catches every detail in a document it’s scanning. Cheers.

        “Flaunt” for “flout,” “scan” for “skim,” “infer” for “imply,” that used to be about it. Nowadays it’s “loose” for “lose” and a whole host like that (never mind “your” for “you’re” and so on)…..okay back on topic, earlier today I saw “guilt” for “gilt,” perhaps though that slip was Freudian ;-).

        1. Norcal_Steve

          nice try but e.g. these dicts says ‘scan’ has both meanings.
          it’s accepted common usage so pls don’t argue, i don’t care, i just don’t lke police who violate the law.

          http://dictionary.reference.com/browse/scan

          scan   [skan] Show IPA verb, scanned, scan·ning, noun
          verb (used with object)
          1.
          to glance at or over or read hastily: to scan a page.
          2.
          to examine the particulars or points of minutely; scrutinize.

          scan (skn) KEY

          http://education.yahoo.com/reference/dictionary/entry/scan

          VERB:
          scanned, scan·ning, scans
          VERB:
          tr.
          To examine closely.
          To look over quickly and systematically: scanning the horizon for signs of land.
          To look over or leaf through hastily: scanned the newspaper while eating breakfast.

          1. LeeAnne

            OR, how the hell can you scim it for legible paragraphs sans the equations and econo jargon.

            talk about distractions.

    3. Stan Getz

      joebhed,

      Ask Latin American in the 1990′s how well the Univ of Chicago boys helped their economy. No thanks

  11. mmckinl

    QE3 is all about the election … The “powers that be” here and in the EU can not afford to have Romney at the controls in the White House …

    The Bernanke panic implies serious doubts about where they see the economy even before the November elections. Obama will be needed to quell the coming disquiet of the proletariat.

    1. wunsacon

      >> The “powers that be” here and in the EU can not afford to have Romney at the controls in the White House …

      What difference would that make? He said he’d keep parts of RomneyCare, er, I mean ObamaCare. His econ adviser likes Bernanke. And he’d further raise commodity prices by cutting nominal tax rates. (“Not taking money out of circulation” ~= “printing”)

      1. mmckinl

        With Romney’s fiscal program of cutting taxes and increasing military spending while cutting social programs?

        A social, economic and budgetary Armageddon …

  12. Geojos

    Hey, if you want to be really skeptical, there is an election coming up, and it would be nice to have some “asset inflation” to kindle the spirits, prevent mutual funds from falling dramtically, and giving the illusion of hope. It also really helps the financial masters. Of course, some could interpret this move as saying we are doomed, nah. Just saying.

  13. Max424

    Ta-da!

    Thanks to Ben and QE III, my New Years prediction, that the Dow would this year exceed its all-time high of 14,093.08, looks like a mortal lock.

    Unless somebody attacks Iran, of course. Doesn’t matter, who, really. Could be the US, could be Israel, could be a deadly combination of international forces that includes the Royal Canadian Mounties. Whatever. If that happens, my prediction is, the Dow will plunge to well below its all-time low.

    Note: Hell, I’ll go even further. If Iran is attacked, the human half of Mr. Market will react logically and panic, and sell, sell, sell, then the inhuman half of Mr. Market, the Bigger Half, made up of algorithmic super/machines trading at the speed of light, will take over, and beep, beep, beep, short the Dow down to the zero bound in a matter of seconds.

    Or maybe the machines will figure out a way to take matters beyond the zero bound.

    (Is there a zero bound? That’s another prediction I’m making: We’ll find out)

  14. wendy davis

    Yves, I wonder if you’d expand on this: ‘…and previous rounds of QE having led to bitter complaints of its effects on commodity prices, any additional pressure on staples like food and fuel prices aren’t just unwelcome, they are politically destabilizing.’

    I have sincerely limited understanding of economics or finance, but have lurked here for a couple years to learn more. Leaving out ‘speculation’ on metals, is the inherent down side of QEs that banks ‘speculate’ on food and oil, or is it more that they end up ‘manipulating’ the prices? I stuck up an amateur post at my.firedoglake recently that featured a couple of Paul Jay interviews that addressed it (and a couple others, one from a former hedge fund trader in England). I’d pluck out the videos instead if I had more time.

    IOW, what is the model/thinking that new Fed money drives up commodity prices, and is it peculiar to economic conditions like these? How much of it is about a devalued dollar?

    http://my.firedoglake.com/wendydavis/2012/09/07/food-price-spikes-and-commodities-manipulation/

  15. Doug Terpstra

    “The Fed Panicked”, from The Daily Capitalist.

    BS Bernanke: “This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.”

    So, after QE1, QE2, and Op Twist, BSB is now buying another trillion dollars of MBS dreck to support a housing market supposedly in recovery?

    And: “… 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. …”

    Wait; hasn’t the BLS unemploylment been steadily, slowly falling since Obama’s inauguration?

    TDC: “The bottom line is that the Fed panicked. It is extraordinary that the Fed would announce an open-ended ‘we’ll print as much as it takes, as long as it takes’ policy. Chairman Bernanke is sending a signal to the markets and to government that the economy is bad and getting worse and that the Fed will do its part as everyone expects them to do. This is a clear signal to the markets and the world that the Fed stands for monetary inflation. They don’t know what else to do.”

    http://dailycapitalist.com/2012/09/13/the-fed-panicked/

    As john bougearel asks, “what does the Fed see that we don’t see?”

    At risk of incurring the wrath of Beard for blasphemy, I think I’ll buy more physical gold for the short term.

  16. Lambert Strether

    The Bernanke endorses The Obama. The Obama is by far the better con artist.

    And not to be foily, but all the actors seem to have sprung into motion at the same time: Ben’s helicopters, warships to the Mediterranean… One awaits Obama rushing into a burning house to save a small child from certain death. And all so that Obama ends up with a mandate to reduce American life expectancy — for old and young — which is what the Grand Bargain™ amounts to. USA! USA!

    And it’s not even October!

    1. Jim

      Lambert, key term is USA, USA.

      There is no USofE, yet, Draghi is OverReaching his mandate MUCH MUCH more in the ECB. He’s explicitly violating German democracy.

      So, let’s put things in perspective.

      Who would we rather have as a central banker. Bernanke or Draghi.

      It’s a no-brainer.

      1. Susan the other

        The benefit to Germany of a federation of European states is enormous and they know it. Germany will continue to export with a slightly devalued Euro, and rid itself of its surplus to the GIPSIs. Better term than PIIGS. Since they have been on such a strict diet. They will be eating better soon.

        1. Chauncey Gardiner

          Susan,
          Ray Dalio has an interesting take on this, which I found through a link from Jesse’s Cafe Americain. He discussed the mix of austerity, debt restructuring, monetization, and wealth transfers he believes will be necessary to resolve the issue of over-leveraging by reducing debt levels over a protracted time period. Dalio did not really address issues relating to who and what caused the underlying problems, nor did he discuss the issue of derivatives. But I found what he called his template of the economic machine and his observations about the credit cycle to be well worth the time.

          Particularly noteworthy to me is his recognition of the possibility of social unrest if matters are handled badly.

          The clip is over an hour in length and is titled “A Conversation with Ray Dalio” at: http://www.youtube.com/watch?v=SFaRazMpxcM

          Thanks, Susan.

    2. Greg T

      Yes, he’s the more effective evil, as Glen Ford puts it. I agree. I think the elites prefer an Obama re-election. He’s compliant, he neutralizes the “left” and he’s better at selling castor oil ( the Grand Bargain ) to a population that doesn’t want it. Romney is strictly an insurance policy. It’s a put option in case the vote gets away from them.

      1. Jim

        Greg, in the big picture, neither Obama nor Romney matter.

        The 0.05% have placed thier bets on Draghi.

        And all of you supporting Draghi’s monetization of peripheral debt are siding with the 0.05%.

    1. ohmyheck

      Wait, what? Ron Paul says, “You want to let the market determine interest rates and let it sort it out. People get so nervous, because we have lived so long with a Keynesian economic model of fixing interest rates and intervening in the market.”

      Sorry, does someone want to explain this to me? Since when is it “Keynesian” to fix interest rates and intervene in the market? This is Libertarian proproganda, imho.

      1. Bert_S

        “Advocates of Keynesian economics argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, particularly monetary policy actions by the central bank and fiscal policy actions by the government to stabilize output over the business cycle.[2] The theories forming the basis of Keynesian economics were first presented by Keynes in his book, The General Theory of Employment, Interest and Money, published in 1936. The interpretations of Keynes are contentious and several schools of thought claim his legacy.”

        http://en.wikipedia.org/wiki/Keynesian_economics

        You only have to know two things to be a keynesian economist.

        1) more monetary stimulus
        2) more fiscal stimulus

        And then they give you a PhD.

        Course the list is down to one for Chicago School. Slackers.

      2. JTFaraday

        They seem to have decided to call all right wing Friedmanite monetary policy “Keynesian” then associate it with liberals/socialists/marxists and whack it down all in one fell swoop.

        There was a commenter here about a week ago or so renominating monetary policy “Keynesian,” and arguing with people about as if that were an accurate characterization.

        I’ve seen this misnaming/ renaming in other places as well.

        I don’t know. Maybe they have an idea there. Call everything you don’t like Keynesian/socialist and dangle it in front of the Tea Party.

        No point in dangling it in front of the liberals/Keynesians because that doesn’t seem to do anything. When is the last time anyone saw an MMT-er criticize the banks/ the central banks instead of Angela “we must preserve the primacy of the political” Merkel.

        Exactly.

  17. Milton Arbogast

    A post almost devoid of detail or logical argument.

    Krugman says increase demand. If Congress won’t do it, the Fed must. What is the argument against?

    Ab initio, the only conceivable argument is that unconventional Fed moves will no increase demand. Make that argument.

    There is a ton of money sitting on the sidelines.

    1. Mary

      Yes, a ton of money on the sidelines. Both corporate cash (maybe it’s on the sidelines offshore..) and citizen money. Nothing has changed as far as front running trades by HFT, false orders, etc. OK, so let’s say we have a “melt up”, cause the HFT keep shearing sheep as they “Don’t fight the Fed”. This includes institutional money who is told to buy the shite as they execute their directives. It does not make immune the regular joe, who decides, OK, I guess I’d better get off the sidelines. Everyone else is making money – I guess I should do it. I’m protected by Ben. But not protected by any meaningful legislation from the lions a commenter noted above. This changes nothing for the investor. A false sense of security to lull everyone into a feeling of stability? It’s about who can out wait the Fed? First we had the false market of previous bubbles and now the false market of intervention? Tell me how the regular investor doesn’t get killed in this? The investor who doesn’t know how or have time to manage anything in technical investing. Meanwhile, even hedge funds are managing pieces of pension funds composed of government money that needs to find a home. So isn’t this rocket fuel for anyone who knows how to do some sheep shearing? Meanwhile, ride the “melt up” average joe. No worries.

    2. Yves Smith Post author

      You are operating from the “if the only tool you have is a hammer, every problem looks like a nail” fallacy.

      Increasing the money supply has no relationship to ANY macro aggregate. The impotence of monetary policy was proven decisively via monetarist experiments in the US and UK in the early 1980s.

      In addition, as we have written repeatedly, what you are articulating is the loanable funds fallacy, which was disproven in the Great Depression. Putting money on sale does not lead businesses to spend and invest more. The cost of financing is a secondary or tertiary decision. The driver for any business decision is “will customers buy my product” which in turn is based on an assessment of the possible market (general economic conditions, conditions in your niche, what competitors are doing), startup costs and risks, and expected margins. Whenever we’ve raised this issue, real world types (both businessmen and venture capitalists) concur. Startup and business expansion decisions (except in the financial services industry, where the cost of funding is a more important “product” input) simply does not come up in these conversations. I’ve worked for VCs and saw the same thing. I’ve complained SPECIFICALLY about Krugman’s and other prominent econonmists’ blindness (or deference to Bernanke) on this point. It’s actually embarrassing.

      In addition, the “cash on the sidelines” argument (as contending corporations will suddenly start investing) is also bogus. Businesses were net saving EVEN IN THE LAST EXPANSION. I discussed this in 2005: http://www.auroraadvisors.com/articles/Shrinking.pdf. And research has shown that business disinvestment is a global phenomenon. It took hold in every advanced economy between the late 1990s and mid 2000s, and perversely, most emerging economies ex China.

      Finally, as we DID discuss in the post, the past QEs did not do much if anything to stimulate demand. You can attribute the halting recovery largely to the ongoing Federal deficit. And the “recovery” in housing is due to a significant degree to manipulation of inventories. Remember, prices were falling in 2009 and 2010 even as the earlier QEs were on.

      The Bank of Japan, in the mid-late 1980s in the wake of the 1985 Plaza Accord which greatly increased the price of the yen, was the first central bank to explicitly try to boost asset prices to stimulate consumption. We know how that movie ended.

      1. Max424

        You work way too hard old girl. How many times to I gotta tell ya, we need you. This anguished planet, needs you.

        Rest up. Save your strength for the big battles. Let muckers like me handle the Miltons of the world …

        Hey Milton! Check it: The Fed can’t do shit. Not for the Real Economy.

        Note: Now Milton, if you’re talking can the Fed lend financial crime syndicates free trillions so they can leverage it up and gamble quadrillions, yeah, the Fed can do that, most certainly.

  18. James Seaburn

    While we ponder the way of the Fed, we need to realize that most are using logic and methods already tried. Most people, here, have honorable intentions. I would suggest that someone be appointed to oversee how these billions are spent: complete transparency. I think these funds will find their way into areas that will have nothing to do with housing, small business, construction or anything that we would consider to be part of our daily lives. Do consider what is going on in the geo-political sphere and how money may be diverted, without Congress approval. No, this is not a mistake. They want us to focus on perceived diversions. It is a fight between gold bugs and others. Stocks rise. But, this old bone will only last for so long. Dog will be kicked, and hard, soon enough. Too bad we will not be able to follow the money. This is called robbing America Part 3.

  19. Acadiana

    “A mere 1% increase in interest rates, from 3.5% to 4.5%, increases mortgage payments on a 30 year fixed rate mortgage payments by 13%. That will translate into a meaningful dent in housing prices.”

    Not necessarily. You’re holding “all else equal” here and that may not be the case in the future. The issue is whether rent inflation tracks the increasing interest rates when the latter begin increasing. If so, housing prices may not fall… in fact they might go up if rent inflation outpaces the increase in interest rates. See the ’70s and early-80s for an example of this. Mortgage rates skyrocketed… along with housing prices, because… rents were also skyrocketing.

    1. Yves Smith Post author

      We are so far from the conditions of the 1970s that it isn’t funny.

      1. Labor has no bargaining power, meaning we won’t get cost push inflation. Any inflation will merely reduce consumer spending power (as it is now)

      2. We have massive demographic headwinds (boomers hitting retirement age and lightening up on housing due to downsizing and eventually death).

      3. Household formation sucks

      4. A 30 year mortgage is now a terrible fit with job tenures and employment stability

      5. Related to 3, student debt is now senior to mortgage debt, another dampener on demand for housing that is not going away

      Josh Rosner, who was one of the first to call the housing bubble, is even more bearish on the long term prospects for housing than I am.

      So I don’t see the conditions even remotely in place to lead to strong increases in housing prices, even if we were to get commodities inflation.

      1. Warren Celli

        Yves said; “We are so far from the conditions of the 1970s that it isn’t funny.”

        This is an excellent point as so many in their heads are still living in the Vanilla Greed for Profit good old days. To add to your list…

        6. The rule of law is now a selectively enforced co-opted blatant scam. Freedom is available only in accepted channels. Test the illusion and you meet the police state head on.

        7. Property title chains are so poisoned and suspect that buying property is a real crap shoot as to the veracity of the title.

        8. Buying property only exposes you to increased exploitation through; taxes, forced insurance, sewer and water increases, uncertainty in neighborhood stability, etc., and at the same time it reduces your mobility. Its the Scamerican nightmare, a noose around your neck, not the American dream.

        9. The Xtrevilist sociopaths in the past fifty plus years have consolidated and now own and control the global propaganda machine and have shaped the global western culture to a ‘Greed and Evil are Good’ state that worships narcissistic wealth and puts morality in the toilet.

        10. The wealthy elite Xtrevilists have increased and consolidated their grip on global wealth and power. This is trickle down naked cannibalism. Naked class warfare, you can see it if you can deprogram from the now useless past brainwashing.

        One could add many more items to the list but suffice to say that the only guideline from the past one can trust is…

        Deception is the strongest political; force on the planet.

      2. Acadiana

        Yes, but… I didn’t say conditions were similar to the ’70s, so you’ve got a bunch of strawmen there. I merely made the point that the critical issue when rates rise will be the relationship between rent inflation and rising rates… not rising rates in a vacuum. Is it possible that rates will rise at a higher rate than rents? Absolutely. In which case housing prices will suffer. But it’s also possible that rent inflation will go hand in hand with rising rates. We don’t know… but given current household formation, new housing starts, and total excess housing units, 2014-2015 appears to be where some sort of equilibrium sets in (I’m will Calculated Risk on this).

  20. Paul Niemi

    What does the FED see, that would lead it to do what it has done? I would say that it sees a post-election Congress, still gridlocked, unable to provide any meaningful legislation to repair the economy. Right now there is no evidence the disfunction will not continue as problems get worse, so the answer is to print money. It’s a sorry state we’re in.

  21. Can't Help It

    Since it’s a long weekend, time for everyone to review the following :)

    “Bankers Psalm”

    The Federal Reserve is my Shepherd; I shall not want.
    It maketh me to lie down in green papers
    It leadeth me beside the recession.
    It restoreth my capital:
    It leadeth me in the paths of risk for profit’s sake.

    Yea, though I walk through the valley of the shadow of insolvency
    I will fear no losses: For the Fed art with me;
    Its interest rate and its printing press, they comfort me.
    It preparest a bailout before me in the presence of mine creditors;
    It annointest my head with bonuses; My pockets runneth over.

    Surely Power and Privilege shall follow me all the days of my life,
    And I will dwell in the House of the One Percent forever.

  22. The Dork of Cork

    If the euro rises against the Euro the fiefdoms held withen its deadly embrace cannot export to pay off the malinvested debt , if the Euro falls against the $ it cannot afford the fuel needed for its inherent waste based anti Labour enterprises.

    Europe needs national economies again , the ties that currently bind European economies are just too long , draining whatever limited domestic demand that remains.

    The Euro is a Nation killer , but if you kill nations you cannot have a functioning economy.
    Rational domestic money demand withen european economies began to die off withen these geographical units post 1980 , reaching to absurd levels soon after the “Big Bang” trigger of 86/87.
    Ireland for instance burns 3 times as much BTUs on air connections then it did in 1990 and God knows how much $s it exports for this local oligarchical play on depletion despite a depression which lowered air traffic by 12 % in Y2010 alone.

    The depression is a result of lowering wages to sustain these waste based industries…eventually all of Ryanair’s customers work for companies with similar work practises to Ryanair and it of course runs out of paying passengers.

    The Global failure is a result of a lack of money and excess credit which gave false demand signals which triggered the malinvestment.
    The Euro Market state is at the heart of this darkness.

  23. financial matters

    Just took a little more time (QE3 instead of QE2) and some hardball (Pimco’s Gross Slashed Treasury Holdings in August Wall Street Journal, http://online.wsj.com/article/SB10000872396390443884104577648022239510672.html)

    Why unwind the MBS fraud when it can just be added to the Fed’s balance sheet and let taxpayers and savers pay the bill?


    Bill Gross Telegraphs QE2 Green Light: Buys MBS On Margin

    10/15/10

    “””Is Gross saying that Bernanke will once again be forced to come out and buy MBS in addition to USTs? or 2) did Gross just get screwed on his doubling down MBS? With fraudclosure forcing such reputable MBS managers as Gundlach to claim that it will have no impact on their business model, we are also certain that the entire Fashion Island campus is sweating bullets currently. If the entire MBS model is indeed unwound as some speculate, this could well be the end of PIMCO”””

  24. curlydan

    For additional perspective, a mere 4 years ago in August 2008 the Fed balance sheet was $0.85B. It now stands at $2.8B, or a 35% CAGR–that’s right, a 35% CAGR!

    With $40B added each month, the Fed balance sheet will be at $3.2 to $3.3B by this time next year. In essense, the Fed will have created a net new 2.4 trillion dollars in the past 4 years to buy assets from banks.

    That money doesn’t go anywhere close to Main St.

      1. psychohistorian

        So the printing presses have been running since 2008 but just now we are going to start believing that inflation is going to happen.

        There is inflation of the money supply and then there is price inflation. We have had the first since 2008 and now we are going to have the second.

        Does this mean the dollar bubble is heading for a pop or just crushing all other currencies?

  25. F. Beard

    If the central banks does manage to create a bit more inflation, how does it think it will exit? Yves Smith

    In theory, a central bank can create and sell its own bonds to remove reserves from the economy, no? With a default risk of zero and the Fed able to sell at any low price (high yield) it chooses, why wouldn’t the banks snap em up? Or the Fed can raise the amount of interest it pays for reserves to drive up interest rates.

  26. Greg T

    Ben Bernanke is the Fed’s equivalent to Eric Holder at DOJ. He does what his bosses will allow and nothing more. It’s why both legacy parties support him; whether Obama or Romney ( “Robomney” ) wins in November, he will be re-appointed in 2014. The pattern will remain the same: unlimited bailouts/QE for the banks, a pittance for the population. Real help for the public is not forthcoming because the banks will be hurt in the process.

    If this isn’t a moment of clarity for people, nothing is. The banks must be nationalized, broken up and stripped of their power over policymaking. Otherwise the depression will continue, and as Yves suggests in this post, the effects will become increasingly dangerous on a global scale.

      1. Greg T

        I don’t trust what Romney says. He- like his adversary – will say anything if it will score him some votes from his Tea Bag base.

        Even if he wins and he decides not to reappoint Helicopter Ben, he’ll just find a different pilot for the helicopter.

  27. Hugh

    Unemployment is just a pretext. When has the Fed ever given anything more than lip service to it in the past? And while the real unemployment rate, by my calculation, is 12.9%, the official rate is 8.1%. Subtract 6%-7% of this, as so many neoliberals do nowadays, for “structural unemployment” and we are talking at most of a jobs gap of a little over 3 million. A problem but nothing so earth-shaking as to necessitate a major change in Fed policy.

    It is a good point that QE jacks up commodity prices. But ask yourself: who does this hurt, and who benefits from them? The answer is just what we expect. They harm the many and privilege the few.

    I think it is exactly right that the Fed is really moving to counter negative economic events in Europe and China. I would also just note that this could be some astute political maneuvering by Helicopter Ben because barring a collapse somewhere this should keep markets juiced through the election, thus helping Obama. Romney is not a Bernanke fan.

    1. Doug Terpstra

      “Unemployment is just a pretext” for accelerating class warfare. This blatantly Orwellian move continues to buy banksters’ MBS dreck and prints new free gambling money for the same casinos that tanked the real economy. It is pure trickle-down welfare with zero employment stimulus, but much worse, it maliciously hurts the 99% by inflating already high food, shelter and energy costs. Bernanke knows this and has no excuse; this is calculated evil.

      As you say, it is also transparent short-term electioneering, something the Romney campaign should be screaming about if they were running a real (not theatrical) campaign.

  28. steelhead23

    Missed among all these Fed pronouncements is the commitment to continue ZIRP beyond the tenure of the current Fed Chair. Perhaps Mr. Bernanke is counting on being reupped again. I pray he’s wrong – I would prefer to retire while I’m still upright, unassisted.

    1. Ms G

      I think it’s time for an OCCUPY ZIRP group. ZIRP might be one way to get the attention of millions who are not connecting the dots between their degraded circumstances (employed or not) and the deliberate actions ofthe Fe d, Obama and the FIRE sector. If you do not know your enemy you cannot fight the right battles.

  29. Jackrabbit

    Corporations *ARE* people!

    QEO: The kids move back home (Maiden Lane)

    QE1: Fed takes a mortgage

    QE1.5: Fed refinances (re-invests proceeds of QE1)

    QE2: Fed charges taxpayer credit card for lux vacation from reality. (“I went to POMO and all I got was this t-shirt!”)

    QE2.5: Bills are pilling up. Fed’s wife refuses to pawn Bush tax cuts. Fed needs new ‘twist’: goes back to school (with student loan from taxpayer)
    Jackson Hole 2012 Term paper: What we have learned

    QE3: Sadly, only low-quality jobs available for over-school-ed Fed. Political bill collectors demanding more. Fed takes a second mortgage and a payday loan (promises to pay after job recovery)

    1. Jackrabbit

      I see that there’s not much of a sense of humor over this Fed action.

      Of course Corporations – even govt sponsored – are not people, but the analogy between debt-laden households and the Fed is at least mildly entertaining (or so I thought).

  30. AccruedDistinterest

    Financial whack-a-mole. Quick, Ben!….there’s another one behind you. With all the whackin’, his 38 Louisville Slugger is rather more broomstick than cudgel.

  31. jal

    The chart that I like best is the one showing the employment rate of the population.

    We are in a golden age.
    Aprox. 40% of the people are not working. More people with leisure time.
    Since 15% of the population is at or below the poverty line something will have to be done to make their lives better.

    I got an idea …
    Actually, its Benny’s idea.
    Print money.
    Give money to contractors to build NEW houses.
    (It will give max impact to the GDP. It will employ the most people.)
    Sell those houses to the 15% of the population that are below the poverty line.
    Repossess the houses and repeat.

  32. indio007

    The FED can buy any ‘ol worthless thing and call it an asset. There buying is completely unrestricted. They have no worries about needing assets the back the currency. No one ever “redeems” dollar bills so what does it matter to the what backs it?

  33. C

    No, I’ve decided this is much much simpler.

    While I do suspect that there are things the Fed sees that others do not this is more like the response I get when I talk to people about tax cuts.

    “Cut taxes to stimulate the economy” one of my friends says. I readily point out that it has not worked but has instead led to debt. His response; “We didn’t cut enough.” It is also, incidentally, his response on deregulation. According to the Von Mieses school all bias is due to overregulation and the only solution is to deregulate more. Any time deregulation fails to produce the promised successes it is because we did not deregulate enough.

    Since the 80′s, or perhaps forever, the FED has pushed for trickle-down economics. It has not worked particularly lately. This, like the disasterous Europe plan is more of the same: “It did not work, so we do more.”

    This has many modern parallels:

    “Privatization of government functions does not save money… Privatize more.”

    “Raising the stakes in the war on drugs didn’t work… Raise them More!”

    “Bombing people with drones hasn’t made them like us… Use more drones!”

    Beatings will continue until morale improves.

  34. Vinnie

    Perceptive discussion in this thread about the political angle, with the two parties essentially colluding to achieve common goals which do not have the best interests of the middle class in mind. ALL we can do at this point in history is to tell these clowns that we know the game is up. IMO only a third party like the greens can make a difference.

  35. Conscience of a Conservative

    The wealth effect from stocks is significantly lower than it is for real estate. Of course what’s next Q.E. 4? One must ask what the stock market will do when the Fed reverses course(if in fact they ever do….)

  36. Mickey Hickey

    I have never seen anything remotely as positive as this in my whole life. 40 billion a month until the economy turns around, presumably 2 or 3 positive quarters. No wonder stock markets around the world are rebounding. Here in Canada the cheers were loud and long. Add in China’s stimulus announcement and Draghi’s win over the Bundesbank and there is a high probability that the good times will be rolling within a year.

  37. BR

    QE3 might strengthen demand in the US. There is a clear wealth effect from stocks, with consumption increasing by 3-4%. Then there’s the fact that it should cause the dollar to weaken, increasing exports. Also, the fact that the Fed is buying MBS will, to some extent, put less money into the hands of banks and more into the real economy.

    On the other hand, clearly QE has an effect on commodities like oil, which should be a drag. But it seems to me that there’s a geopolitical limit to how high the price can go. Reducing output too much makes it more difficult for members of OPEC with high population-to-reserve ratios. You would think that there would be additional pressure to investiage manipulations in the futures market…

    1. C

      The catch is that wealth is (a) all paper wealth; and (b) it goes primarily to the upper 20% who are the few really trading in bonds; and (c) it does nothing about the widespread market fraud that is kicking people out of their homes.

      As such it will only help a small portion who, per other articles on this site, will gain and likely reinvest in bonds since they are now too big to fail. And it will not address any of the underlying problems that are really dragging down our economy.

  38. enouf

    There are truly some very smart and analytical people posting here; however, the ‘analysis’ is almost always done within the confines of a particular paradigm, i.e., the “System”

    Almost all of us know that this behaviour (the Fed, our Congresscritters, etc) is completely and utterly unsustainable at best…so wouldn’t it be more prudent to discuss possible alternatives to the “System”?

    If one takes into account just these 2 (for starters) false axioms[1] upon which the foundational premises of the “System” is based, then one might want to use/exercise their time/effort more wisely …than analyzing that which is not worthy of analysis.

    [1]
    a) Debt = Asset
    b) Corporation != Government

    Love

  39. Foreigner

    A couple years ago, Yves favoured the QE and the print machine. Now Yves is against. Why?

    Nobody understands.

    The american way of thinking is imploding and the decay of this empire starts and ends in the decay of the people.

  40. curmudgeon

    You do not understand. Ben is doing a phenomenal great job. Ben’s job is not to save the economy; it is to save the banks (owners of the Fed — including the Rothschild family).

    He is the employee of the (unknown) cartel that owns the BOG. The BOG is a privately owned corporation that claims to be a government agency. Privately owned corporations do not have to publish any accounting records or profits.

    The BOG is currently making $4 billion EVERY DAY from the auctions of Treasury securities. That profit is hidden by the FRBNY’s exclusive handling of the auction accounts and distributed to the Primary Dealers (owners) disguised as purchases of securities being redeemed. There is NO PUBLIC information on the disbursements of the funds. Ref. FEDERAL RESERVE HEIST, http://www.scribd.com/doc/101937790 .

    If Ben did not infuse more money into circulation, the banks (owners) would have to devalue their assets to market value. They would be bankrupt. Ben is saving the banks. Temporarily.

    Congress members receive great increases in personal wealth; and campaign contributions, by supporting the scam.

    It is another chapter in Benjamin Ginsberg’s book, FATAL EMBRACE; “financiers” AND THE STATE.

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