Stiglitz Bashes QE

The comment by Joseph Stiglitz in the Financial Times lambasting the Fed’s expected move to quantitative easing is certain to have no impact on the central bank’s course of action. His article nevertheless is proof that this idea is not as well received as the officialdom would like you to believe.

It isn’t merely Stiglitz’s stature that makes his critique noteworthy; it’s that he is of the left leaning persuasion, and thus believes in government intervention to promote broad social goals, like reducing unemployment, which is something we seem to have in abundance these days.

Note that Stiglitz doesn’t see QE as merely unproductive; he contends it might well be detrimental:

In certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy…Whatever the merits of this position in general, it is nonsense in current economic circumstances….

….the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.

Indeed, in the last US recession, the Fed’s lowering interest rates did stimulate the economy, but in a way that was disastrous in the long term. Companies did not respond to low rates by increasing investment. Monetary policy (accompanied by inadequate regulation) stimulated the economy largely by inflating a housing bubble, which fuelled a consumption boom.

It should be obvious that monetary policy has not worked to get the economy out of its current doldrums. The best that can be said is that it prevented matters from getting worse. So monetary authorities have turned to quantitative easing. Even most advocates of monetary policy agree the impact of this is uncertain. What they seldom note, though, are the potential long-term costs. The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting. But no one should be fooled….

A final argument invoked by critics of fiscal policy is that it is unfair to future generations. But monetary policy can have intergenerational effects every bit as bad. There are many countries where loose monetary policy has stimulated the economy through debt-financed consumption. This is, of course, how monetary policy “worked” in the past decade in the US. By contrast, fiscal policy can be targeted on investments in education, technology and infrastructure. Even if government debt is increased, the assets on the other side of the balance sheet are increased commensurately. Indeed, the historical record makes clear that returns on these investments far, far exceed the government’s cost of capital. When, as now, there is excess capacity in the private sector, such public investments increase output and tax revenues in both the short term and the long. If markets were rational, such investments would even lead a country’s cost of borrowing to fall.

Yves here. One seldom mentioned issue in analyzing government spending is that no private business keeps books like the government does. Government budgets are cash flow based. Proper accounting would differentiate real investments (balance sheet items) versus expenses (income statement items). For instance, a jet fighter lasts more than a year; it should be put on the balance sheet and depreciated like any other capital asset. That presentation would highlight the difference between current period expenditures and investment, and would hopefully encourage greater emphasis on investments.
John Hussman argued the same point in his newsletter, that QE would be ineffective:

A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment.

Economics is essentially the study of how scarce resources are allocated. To that end, one of the main analytical tools used by economists is “constrained optimization” – we study how consumers maximize their welfare subject to budget constraints, how investors maximize their expected returns subject to a various levels of risk, how companies minimize their costs at various levels of output, and so forth. To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed’s governors to remember the first rule of constrained optimization – relaxing a constraint only improves an outcome if the constraint is binding. In other words, removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back.

On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand. Loans are desirable when businesses see opportunities to make profitable investments that will allow the repayment of the loan, without too much uncertainty. Similarly, loans are desirable when consumers see opportunities to shift part of their lifetime consumption stream toward the present (or to acquire durable items such as autos or homes which provide an ongoing stream of benefits), and where they also believe that their future income will be sufficient to service the debt.

Broadly speaking, neither businesses nor consumers are finding attractive borrowing opportunities, or have sufficient confidence that they will be able to repay the loans and end up better off. A few years ago, individuals did have the confidence to shift a portion of their lifetime consumption to the present because the values of their homes and other financial assets gave them the impression that their future consumption needs were well covered. Lax lending standards created a feedback loop of soaring mortgage debt, consumer debt, home values, and consumption. At the corporate level, the return on equity capital was progressively boosted by taking on increasing leverage, which eventually reached catastrophic levels in the financial sector. The subsequent collapse forced the recognition among consumers and businesses that their ability to service debt, based on expectations about the future value of their assets, was not as strong as they previously believed.

Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?

On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present. U.S. commercial banks already hold $1.066 trillion of reserves with the Fed, and another $1.626 trillion in Treasury and agency securities.

Randy Wray provides a sophisticated objection to QE, that the Fed can’t use it to do the one thing that might actually be useful (see his post for a long-form discussion), buy bad assets to clean up the banks (it would have to buy so much as to be politically controversial, and of course, there is the wee problem that big scale intervention would make it hard to resist big scale changes in the banks themselves, a third rail issue). So it does things that aren’t much good at all:

So the Fed is left with the only option available to a central bank that has already pushed short-term interest rates to zero: buy longer maturity treasury bonds in order to push longer rates toward zero. It certainly can do this. It could, for example, buy all 10 year Treasuries, bidding up their prices until their yields fall to zero. Historically, 30 year fixed rate mortgages have tracked 10 year bonds fairly closely, so such an action could conceivably lower mortgage rates. But they are already below 4%, so it is not clear what could be gained. Dropping rates still further is not likely to bring forth any buyers except hedge funds that have been buying foreclosed homes. The “foreclosuregate” scandal has at least temporarily killed that demand.

Other potential buyers are waiting for house prices to fall further, or for a real economic recovery to begin — one with job creation and rising wages. In short, the problem in real estate markets is not that mortgage rates are too high, but rather that prospects for real estate and job markets are too poor. The Fed is in a Catch 22: Interest rate policy will not spur borrowing until economic recovery is underway, but recovery will not begin until spending picks up. Only jobs and income will stimulate spending, but the Fed cannot do anything in those areas.

And interestingly, Hussman, a savvy investor, is on the same page as Stiglitz as far as fiscal measures are concerned:

A second round of QE presumably has two operating targets. One is to directly lower long-term interest rates, possibly driving real interest rates to negative levels in hopes of stimulating loan demand and discouraging saving. The other is to directly increase the supply of lendable reserves in the banking system. The hope is that these changes will advance the ultimate objective of increasing U.S. output and employment.

Economics is essentially the study of how scarce resources are allocated. To that end, one of the main analytical tools used by economists is “constrained optimization” – we study how consumers maximize their welfare subject to budget constraints, how investors maximize their expected returns subject to a various levels of risk, how companies minimize their costs at various levels of output, and so forth. To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed’s governors to remember the first rule of constrained optimization – relaxing a constraint only improves an outcome if the constraint is binding. In other words, removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back.

On the demand side, it is apparent that the U.S. is presently in something of a liquidity trap. Interest rates are already low enough that variations in their level are not the primary drivers of loan demand. Loans are desirable when businesses see opportunities to make profitable investments that will allow the repayment of the loan, without too much uncertainty. Similarly, loans are desirable when consumers see opportunities to shift part of their lifetime consumption stream toward the present (or to acquire durable items such as autos or homes which provide an ongoing stream of benefits), and where they also believe that their future income will be sufficient to service the debt.

Broadly speaking, neither businesses nor consumers are finding attractive borrowing opportunities, or have sufficient confidence that they will be able to repay the loans and end up better off. A few years ago, individuals did have the confidence to shift a portion of their lifetime consumption to the present because the values of their homes and other financial assets gave them the impression that their future consumption needs were well covered. Lax lending standards created a feedback loop of soaring mortgage debt, consumer debt, home values, and consumption. At the corporate level, the return on equity capital was progressively boosted by taking on increasing leverage, which eventually reached catastrophic levels in the financial sector. The subsequent collapse forced the recognition among consumers and businesses that their ability to service debt, based on expectations about the future value of their assets, was not as strong as they previously believed.

Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?

On the supply side, the objective of quantitative easing is to increase the amount of lendable reserves in the banking system. Again, however, this is not a constraint that is binding. The liquidity to make new loans is already present. U.S. commercial banks already hold $1.066 trillion of reserves with the Fed, and another $1.626 trillion in Treasury and agency securities.

The distressing thing about the Fed is the fact that is has come to be dominated by monetary economists. That’s a comparatively recent development. Shortly after Bernanke was appointed, I had lunch with a former Fed economist who in his next job could have taken credit for having invented swaps but refused to. He remarked drily, “The record of academic economists as Fed chiefs is poor.” Sadly, his assessment looks better by the day.

Print Friendly, PDF & Email
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone

38 comments

  1. OHOA

    The problem with a fiscal stimulus is that most of the fiscal stimulus escapes out of the US through our misguided Trade policy. Apparently 87% of the increased demand after the first stimulus was enacted escaped via the escalating trade deficit. This issue was well dealt by Steve Waldman in his post after the recent treasury visit. In that he writes

    “A Treasury official agreed enthusiastically about the importance of finding more sustainable patterns of trade. But he characterized trade balance as a medium-term issue that might resolve itself over time, especially if China (which he described as the “anchor” of a whole block of trade partners) allows its exchange rate to appreciate. He suggested that although the issue is important, we could worry about other things for now and save trade balance for later if it fails to self-correct.

    I disagreed. I think that the trade imbalance makes stimulus both intellectually and politically difficult to defend (including my own “guaranteed income program”), because the pattern of business expansion we would stimulate would continue to overproduce domestic services and underproduce tradable goods relative to the patterns of production we will require when unsustainable international flows cease or reverse. In Austrian terms, I think demand stimulus in the context of continuing trade deficits will lead to malinvestment and another dangerous recession when what can’t go on forever stops. Rather than reinforcing patterns of investment that will have to be reversed, we should begin to wean ourselves of unbalanced trade flows, so that investors find it profitable to bolster the sectors we will require in order to pay for current consumption with current production. Unfortunately, it did not sound as though nondiscriminatory tools for enforcing trade balance, such as capital controls or “import certificates“, were anywhere on Treasury’s radar screen.

    ——————————–

    Please consider a bucket with a hole in it.

    The hole is the trade deficit. Filling the bucket is equivalent to a fiscal stimulus. Before filling the bucket with more fiscal stimulus, it is essential to plug the hole. Otherwise the fiscal stimulus merely ends up in enriching China and South Korea and a whole lot of other parasites, while making US more indebted.
    This administration seems to have made up its mind absolutely not to plug the hole. In this scenario, choosing not to fill the bucket, i.e. fiscal austerity, however insane it may seem, is actually the right course of action. We may have to wait and hope that there is a change in the administration, either from a democratic challenger or a strong but comparatively sane Republican who have a measure of mercy for their countrymen and finally close the freaking hole in our trade deficit so that we can fill the bucket and drink.

    1. alex

      “Apparently 87% of the increased demand after the first stimulus was enacted escaped via the escalating trade deficit.”

      How do you get that number? I fully agree that addressing the trade deficit is important, but that number seems incredible high.

    2. industry accountant

      This is a good analogy, that, while not perfect, does a great job of illustrating the problem with MMT/fiscal solutions to our problem in the medium to long run. I will use it in hammering on the problem of simple demand side solutions to the current predicament.

      I too am curious about the 87% number, but given that our trade deficit runs anywhere from 40-70 billion per month, various analyses comparing increases in GDP (from stimulus) to the total trade deficit accumulated over a similar time frame may show this to be not so impossible.

      It should be noted however that plain vanilla fiscal austerity, while looking like a reasonable chioce from the analogy, isn’t as clear cut a solution as may seem. It probably looks logical *if* you are primarily concerned with stopping the outright devaluation of your currency in the short run. On the other hand, reducing demand, GDP and probably other things like innovation/production has the nasty effect on catching up to your currency value in the medium to long run. My personal take is that the approach needs to be nuanced either way you tackle it, and I do think this can be handled from either direction (i.e. fiscal austerity bias vs. MMT-type bias). At that point it just becomes a question of political preference/will…

      1. john

        It’s fiat money. If you want to plug the hole in the bucket, stop selling bonds and start paying a supporting rate on treasuries. Canada and Australia control their funds rate this way. Fiscal policy then becomes constrained to the dollar economy where inflation will not be a real risk until slack capacity and unemployment approach normal levels. We continue to pretend that we are on a gold standard with our institutional forms. This has left us vulnerable to trade predation by our foreign partners and incapable of putting our citizens to work.

        1. john

          Also, with regard to austerity, look at what is happening with Ireland and Spain. The more you reduce the current flow of deficit spending, the more you accumulate the stock of debt as automatic stabilizers, unemployment benefits etc, kick in. The increase in automatic spending from the stabilizers combines with the collapse in tax revenue to increase stocks of debt even as budgeted expenditures are cut. In addition the process pretty quickly starts to cannibalize the capital base as the under utilized fixed capital of business gets liquidated to pay debts at the same time that citizens spend down their savings and begin to withdraw investments to support consumption and debt services. This is Fishers Debt Deflation Spiral for anyone who cares to look at it.

    3. Ming

      Hey…. Be aware of who you are calling the parasite. Consider this, it is the Ceo’s, supported by a small legion of consultants and directors, who decides to outsource the American manufacturing and engineering jobs to China, korea, India, and eastern Europe, in order to increase his short term profits, so that his stock options increase in value. It is the lobbyists and economists who work for the banks and pension funds,
      who push the government to open the US to free( and unregulated) trade… This does legitamitley pressure companies to take advantage of the ultra low manufacturing costs in order to survive in the marketplace in the short term… Even as it devastates local American communites with joblessness and pollutes the countries that manufacture;
      in essence damaging the longterm prospects of both America and the manufacturing country. It is those men( and women) and their narrow minded self- interested Ayn Randian Inspired ideas that are the deadly parasites that have infected the whole world. Indeed, they can be aptly described as a cancer… They grow bigger and stronger even as they destroy the economic and institutional heath of the nation. They confound the natural defenses of the nation with their intelligent sounding non- truths(ie..the savings glut is forcing America
      to cnsumme) and by co-opting the regulaters, politicians, and the legal system which were supposed to protect the nation. And their ideas, influence, and leadership penetrate all the different layers and function of society( just like a metastasized cancer).

    4. Rodger Mitchell

      Re. “bucket with a hole in it,” analogies can be misleading, and this one is.

      First, you can fill the bucket with a fire hose, and the federal government, being monetarily sovereign ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ ) owns the fire hose.

      Second, that water coming out the hole is not wasted. It enriches the world.

      Here’s an analogy for you. The U.S. economy is starved for money. To help a starvating person, you must feed him. You don’t preach austerity by telling him he must eat even less.

      Frankly, I don’t see austerity as being a mechanism to cure anything.

      Rodger Malcolm Mitchell

      1. skippy

        “Second, that water coming out the hole is not wasted. It enriches the world.”

        That’s a pretty broad brush Rodger as it could be likened to nanites, replicating the same problems the industrialized world suffers, at a later date.

        Skippy…a moistened towel is considered torture by some and can kill if one wants, application is the key methinks.

  2. fresno dan

    “The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.”

    Does anybody know of any data that shows the relationship between Federal Funds rates and the rate paid by different borrowers (large AAA corporation, high credit score consumer, etc.) over the years?
    Has there been a 1 to 1 drop between the Fed Funds rate and what borrowers are paying, or is (as I suspect) large banks getting most of the benefit of the lower rates?

    1. Ted K

      I would guess WSJ has a group of interest rate numbers with associated maturities. Forbes used to have good graphs on rates in the late eighties and I assume they still have that now. Shouldn’t be to hard with some searches. The only rate I found is hard to find for free is the 5 year sovereign CDS rates. Those are kind of a bit*h to find for some reason. If that doesn’t work, my guess is the 12 Federal Reserve sites should have enough rate info to make you nauseous.

  3. alex

    “To assess whether QE is likely to achieve its intended objectives, it would be helpful for the Fed’s governors to remember the first rule of constrained optimization – relaxing a constraint only improves an outcome if the constraint is binding. In other words, removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back.”

    That’s it in a nutshell. It’s an obvious point when you think about it and should be repeated frequently.

    In all fairness to the Fed, they’re nothing but a hammer so the only way they can attack a problem is as though it were a nail. The problem is that the US government is unwilling to do anything, so it all falls to the Fed.

    Monetary stimulus is politically popular because there is the illusion that it costs nothing, but the current debt hangover puts the lie to that. This is a “hair of the dog” strategy. Just one more drink, no really!

  4. toxymoron

    Hi Yves,

    As an aside, the citation from Hussmann is repeated for the “savvy investor”, although that doesn’t change the pitiful outcome of the Fed wasting someone else’s money once again.

    1. Yves Smith Post author

      Yes, it isn’t clear, I added the Wray bit later, makes the reference confusing. I tweaked it, thanks for the catch.

  5. nilys

    Fiscal policy is a prerogative of the congress, and it seems that the congress is not in the mood to do another stimulus. Besides, the phrase “industrial policy” just does not sound very much like us. The FED can’t force the congress to act. On the other hand, the FED has a mandate to keep inflation steady and low and to maintain employment at a low level. Both of these targets are presently outside of acceptable ranges: inflation is too low and unemployment is too high. The mandate is used as a justification to act, and once a decision to do something is taken, the question becomes to do what.

    As an ordinary citizen without large savings, I do not necessarily mind a bit of inflation, provided inflation in staple goods does not outpace increases in my wages. Econbrowser has a post that shows that QE2 already took place, i.e., it has been already priced in by the market, and all it brought was a 10% increase in prices of commodities, oil in particular, and some basic points reduction in the 10 year note yield. This has not shown up in the CPI yet, will see in the coming months. Will higher CPI translate into higher wages? That would be interesting to see. Someone argued elsewhere that the idea is to have wages fall behind prices, and in this way indirectly reduce labor costs to levels at which it would be profitable for companies to hire again. The premise here is that unemployment is so high because labor is too expensive as wages are sticky and don’t move downward during recessions. I personally do not see this, as further reduction in real wages seems to me would lead to further demand destruction and deleveraging through default, as consumers would have to redirect increasingly decreasing in real terms income toward the necessities.

  6. JKH

    Very good point on government accounting – re balance sheet items.

    Hussman is wrong on the bank reserve effect in general – as your MMT contributors will confirm. The Fed has always been a bit ambiguous on whether they understand this or not, but seem to be backing off it as a rationale lately. The key variable is rates. QE shortens the duration of consolidated government/CB liabilities (including reserves and currency), with price effect.

  7. a

    “A final argument invoked by critics of fiscal policy is that it is unfair to future generations. But monetary policy can have intergenerational effects every bit as bad. ”

    Excellent argument for fiscal stimulus! Monetary stimulus can be as bad. Therefore let’s do fiscal stimulus.

    There is *no solution*. It’s a game of musical chairs with half of the chairs missing. The macroeconomists are pretending no one has to suffer because they can keep the music playing, but at some point it will have to stop. And once it stops, a lot of people will find that they don’t have a chair, i.e. their wealth has evaported. Once that happens, things will begin to get better. But only once that happens.

    It’s no co-incidence that the depth of the First Great Depression was 1932-1933, when the banks went bust. It’s only then that enough wealth evaporated so that things could start to get better.

    Once wealth evaporates sufficiently things will get better.

    The only question is, whose wealth will evaporate.

    1. Doug Terpstra

      Whose wealth will evaporate? Under QE2, clearly the common wealth. Isn’t that the point of a class war? Instead of an old fashioned bailout, the Fed will simply counterfeit money in order to buy all the bad casino bets, pushing more bad money and power into the hands of the privateers and warmongers, the same malefactors who created the crisis—almost certainly by design. This is why all the bad actors have been conspicuously kept in place and no investigations or indictments are forthcoming.

      The conceptual/theoretical difference Stiglitz is arguing for, IMO, is investment with public purpose, an industrial social policy. Certain public investments, under visionary leadership, can rebuild a wealth-creating foundation/infrastructure better than others. The banksters failed miserably; it’s time for new management.

    2. Doug Terpstra

      Sorry, I meant to quote Siglitz’ pertinent point. Instead of bankster-driven debt bubbles:

      “By contrast, fiscal policy can be targeted on investments in education, technology and infrastructure. Even if government debt is increased, the assets on the other side of the balance sheet are increased commensurately. Indeed, the historical record makes clear that returns on these investments far, far exceed the government’s cost of capital. When, as now, there is excess capacity in the private sector, such public investments increase output and tax revenues in both the short term and the long. If markets were rational, such investments would even lead a country’s cost of borrowing to fall.”

  8. small business owner

    the impact on the real economy of changes in the interest rate remains highly uncertain. The fundamental reason should be obvious: what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. I would like to address this part of the article. Beginning in 2008 the squeeze started,lines of credit withdrawn,business credit card interest rates increased from 4.99% currently 17.99%, payments from clients before 2008 50% deposits balance upon completion, currently no deposits but we have work for you payments made 30-60 days after completion of work 10% held for another 30-60 days then the process starts all over again plus pressure for reduced labor and materials line of bids now no more the 10% profit margin before 45% profit margin. Most businesses I deal with in the construction trade are dealing with this same scenario.

  9. Jackrabbit

    It is widely acknowledged that the banks have to raise more capital and will also take a hit form mortgage buybacks and the foreclosure fiasco.

    Everything I’ve read about QE2 indicates that it is a blunt instrument. The stimulative effect is only a fraction of what is spent. It seems that the only group with a sizable benefit is the big banks.

    The logical conclusion is that QE2 is just another back door bailout. But it gets worse: QE2 is actually detrimental in that it is an excuse for Congress to do nothing as they wait for the Fed to save the day.

  10. ManitouMonk

    “The Fed has bought more than a trillion dollars of mortgages and long-term bonds, the value of which will fall when the economy recovers – precisely the reason why no one in the private sector is interested. The government may pretend that it has not experienced a capital loss because, unlike banks, it does not have to use mark-to-market accounting.”

    1. The Fed does NOT equal the government
    2. The fed makes and destroys money on a daily basis. The value of the treasuries and bonds that the fed owns is irrelevant.

    What am I missing here?

  11. Siggy

    QE is a form of devaluing the currency. The Fed is going to buy up bank held assets. That cash inflow to the banks will then be used to do what? Create new loans? Write off bad loans? I don’t know. What I do know is that QE is a form of inflation and helicopter ben has repeatedly stated that he will inflate as much as necessary in order to avoid deflation.

    Lets be clear, inflation is a loss of purchasing power, a devaluation of the money medium. In that devaluation we shall all be made poorer. The difference between nominal and real prices is a calculation that recognizes the loss of purchasing power of the money medium. The rest of the world understands that and QE is devaluation and so we have the reaction of we’ll devalue more and faster. Well, well, lets see who can get to catastrophic failure first.

    The quantity of excess reserves is telling and the banks are not lending against those excess reserves because they have yet to absorb all of the losses they hold in bad loans and failed derivatives. Hell the banks can’t even demonstrate standing to foreclose. The extent of the corruption and fraud is massive and I can’t grasp why it is that the markets continue to operate.

    That fellow Keynes famously said something to the effect that in the long run we are all dead. Gotta love that thought, tells me everything I need to know about QE, iteration x, it will be a debt that the kids can either repay or repudiate and I’ll be long gone. Repudiation now might prove to be cheaper, albeit very painful.

    Indeed QE???, pick an iteration, will not work because it is merely a continuation of the failed policy of lets inflate our way out of this little mess. QE is crap think!!

    Now Mr. Geithner says the US will not devalue. Just what the hell is QE other than devaluation by printing press and electronic transfers. Golly gee, aint it neat the way those little electrons whiz around. Especially when they travel over the internet that that fellow Gore invented. Talk about hubris and political puffery.

    We are in the throes of a failing fiat currency, a failing fractional reserve banking system, a somnulent regulatory and prosecutorial apparatus and we have a central banker who sees the world thru a set befogged spectacles that are only focused on a policy of, ‘lets throw a little money at it’, well actually a lot of money, after all, it’s easy and cheapt to create.

    Corruption and fraud are rampant and the appointed and duly confirmed minions of the Fed and the Treasury haven’t got a clue. That maggots that have devoured Joe Goebbels are in a tizzy. The propaganda that is abounding in quantity and confounding in contradiction is mind boggling. You can’t make this stuff up.

    1. Jackrabbit

      The risks of QE – devaluing the dollar and commodity inflation (especially oil) – make it such that they have to proceed cautiously. They have taken pains to make that point (as well as the point that the Fed MUST do something – even if the cost/benefit ratio is low). So I take Geithner at his word that there is no plan to solve US economic problems by devaluing.

      Krugman has pointed out, however, that for QE2 to provide the stimulus that the economy needs, it would have to be massive: as much as $8-10T. Such a large size probably WOULD result in a significant devaluation.

      QE2 can only go so far before it is counterproductive. TBTF banks appear to be the biggest beneficiaries. Conclusion: QE2 is Just Another Backdoor Bailout (JABB – we may as well have an acronym because there are so many,). QE2 helps the banks in a number of ways but importantly, it improves their ability to raise capital as well as the terms of any raise.

      1. Jackrabbit

        In the UK and Ireland, a “shot” of medicine is called a “jab.” Dr. Ben will see you now Timmy.

      2. Doug Terpstra

        JABB is appropriate for financial terrorism and your analogy the other day—economic rape (to which some readers affected righteous offense). In fact the trauma and lasting damage is enormous and generational.

        Siggy is right, “You can’t make this stuff up”. Never mind the Fed’s disposable employment mandate; this is clearly targeted to benefit the (pseudo) elite, and you have to wonder if Helicopter Ben is truly prepared for the deadly fallout. In this case, the documentation of corruption and fraud is now so meticulous and exhaustive, by Yves’ NC blog and many others, that he can no longer use Schmuck Greenspan’s excuse after the fact: “shocked disbelief” (who could’ve foreseen a connection between greed and fraud; it’s never happened before in world history).

        1. Skippy

          It always starts off with a bump, just one little silver spoon full, just experimenting…see what everyone’s on about. Good times ensue, life is large, yes *I can* comes to the fore front…I’m one of the beautiful people. Bumps become lines which in turn become piles and the next thing you know…your sitting next to the masters of the FED and their cohorts with a garden hose inserted up your olfactory.

          Life becomes a blur, forgetting whence ye came, carted around by companions like a corpses last night…only to wake on ruff bedding…eyes first blurry focus on prettily painted toe nails. Will the obligatory call be used to activate solicitation or inquirer grave diggers if ye are still the same man.

          Skippy…drug dealers eagerly await QEII…me thinks…cutting product IS the easiest way to increase profit…eh…dulsution is the small time players problem…customers wax for the old days.

          PS. QEII = Monetary Venturi device…it both sucks and blows…just depends on which side you are standing next too….

    1. Jim the Skeptic

      LAS says: “Demand won’t rebound until jobs rebound. There has to be job creation for things to change.”

      That was concisely put and strikes right at the heart of the matter.

      In the meantime, if bail outs are called for, then let’s bail out the unemployed and the savers who Bernanke is currently abusing.

      It seems to me that the Great Depression taught us all the wrong lessons. When the banks failed the depositors lost their working capital or their life savings. That loss was the major impact on the economy and FDIC was the cure. We should not be devising one technique after another to prop up failed banks.

  12. Sean

    The FED doesn’t need to encourage private sector spending, the lower rates on government debt encourages larger fiscal deficits by lower interest expense and making borrowing cheaper today, which should encourage the government to pursue things like infrastructure spending. QE is a nice pair with fiscal spending in this situation, but even if it isn’t directly paired it has lowered the costs of funds to the government which will encourage future spending.

    Also it seems to have an effect on the dollar which should help our net exports. The money doesn’t need to flow into private borrowing. Trade and government spending it is working.

  13. tyaresun

    Unlike many other academics Stiglitz has important papers on credit rationing. Maybe Ben should read those papers.

  14. Ron

    The U.S. economy has become addicted to high end luxury consumption which cannot be supported by J6P without high levels of debt that leaves the truly wealthy to pickup the buying but their numbers and wants cannot create the volume necessary to drive a 13T economy.

  15. sherparick

    The only way QEII makes sense if the Fed is seeking to devalue the dollar, make imports more expensive and exports cheaper, and thereby shrink the drag the current account and trade deficit are on the economy. By the way, for the Austerians out there, this is part of the classic IMF solution for restoring an economy in a current account crisis. I am sure the catfood commission will follow with the other part of the IMF plan, shrink Government social spending in order to service outstanding foreign debt. A general devaluation also operates to reduce real median wages.

    Another bad side effect of QEII will be a flattening yield curve, usually a sign that a business cycle is ending and a recession is pending.

    I think Hussman’s and Stiglitz’s criticism of QEII quite acute. Paul Krugman is also skeptical about it, but given the stasis in our politics with a neo-liberal, pro-banker Democratic administration and a reactionary group of Republicans who believe in oligarchy, I don’t know what else is likely to be done in the near future.

    I am begining to think that like the 1930s, this era is going to end badly. I think of Auden’s September 1, 1939, may well be apropros to our time:

    I sit in one of the dives
    On Fifty-second Street
    Uncertain and afraid
    As the clever hopes expire
    Of a low dishonest decade:
    Waves of anger and fear
    Circulate over the bright
    And darkened lands of the earth,
    Obsessing our private lives;
    The unmentionable odour of death
    Offends the September night.

    http://www.poemdujour.com/Sept1.1939.html

  16. gf

    I think part of the problem is that Congress can shirk its responsibility (to use Fiscal policy) by relying on the FED to take action/heat when monetary policy does not work to improve the real economy. It works to deflect political pressure off of Congress to act, while the FED can maintain “independence” from political pressure so it forms a political circle jerk of no accountability.

  17. flow5

    If the FED didn’t print money, the U.S. economy would collapse. Too little money growth will result in more unemployment, less tax revenue, & higher local, state & federal deficits. I.e., there isn’t much price flexibility in our economy, upward or downward. But money printing is a balancing act.

    However, there is another option other than QE2 (open market operations of the buying type). The solution to the current shortfall of money (aggregate demand), is to lower the remuneration rate on excess reserves (or charge them for holding them). The BOG’s present remuneration rate @ .25% on excess reserves (IBDDs), now exceeds the “Daily Treasury Yield Curve” – past 1 full year.

    I.e., let the free markets determine interest rates. And let the free markets allocate credit. Force the commercial banks to expand their earning assets, & disgorge of their un-needed, & un-used, excess reserves.

    The member banks already have a capital cushion. They are regulated under Basel II. Thus, leave Reserve bank politics, the FED’s balance sheet, & FED credit, alone (as much as possible). I.e., let the commercial banks create new money & credit, not the Reserve banks.

    The member banks aren’t reserve constrained in the first place (the housing bubble was a good example). IORs have just been a dis-incentive to lend & invest (contractionary, i.e., the functional equivalent of required reserves) & used to offset the FED’s lending & liquidity programs (& expanded balance sheet). IORs are no longer needed.

  18. Rodger Mitchell

    The fundamental problem is the economy is starved for money. Up one level is the problem that Congress and the President do not wish to take the one action that will cure the fundamental problem, massive federal deficit spending.

    So either in ignorance or cowardice, the President and Congress want the Fed to cure the fundamental problem, and the Fed simply does not own the tools.

    As long as debt-hawks control Congress, the President and public opinion, we will have a long and difficult recovery. Sadly, they seem to have no idea about the implications of monetary sovereignty ( http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/ )

    Rodger Malcolm Mitchell

    Rodger Malcolm Mitchell

Comments are closed.