Bernanke Versus Pimco’s Mohamed El-Erian on QE2

Not only did the Fed announce its controversial $600 billion QE2 program today, but Ben Bernanke felt compelled to defend it in a Washington Post op-ed tonight. For the normally oracular Fed to feel it has to sell its program in a non-financial media outlet says Bernanke must recognize that he is staking on thin ice. The problem is he appears to believe the problem is at most one of perception, when it is in fact practical, that QE2 is unlikely to work, and if anything is more likely to produce collateral damage than achieve its intended aims.

And no one less than the co-CEO of Pimco, a bond fund and hence presumed fan of QE@ (bonds ought to benefit from Fed intervention) expressed his considerable doubts in an op ed at the Financial Times.

First to Bernanke, and the guts of his argument at the Post. After explaining why low inflation and the risk of deflation are reasons to act, he explains the presumed benefits of QE2:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

The Fed chair is so disengaged from reality it isn’t funny. This is the classic wealth effect argument, that if you goose asset values, people will feel richer and spend more. The problem is it was an abysmal failure the first it was put into effect as a policy idea, in Japan in the later 1980s. The result was rampant asset speculation followed by a twenty year bust.

And the assertion that QE1 was a success of any sort is a canard. Unemployment is still stuck at just shy of 10%, with job additions still too low to absorb workforce increases. Housing appears to have bottomed in some markets, but that’s only as a result of repricing so as to be more in line with long term relationships with income and rentals. The fact that Bernanke is worrying about deflation says it didn’t do much to create expectations of price increases (or more accurately, consumers most certainly do expect price increases, but in select but important areas like food and energy prices, which are not well suited to the sort of anticipatory purchases that help increase general price levels). The uncertainty over foreclosures and the reality of shadow housing inventory (delinquent borrowers banks have not evicted yet, plus people who would like to sell but are unduly optimistic re a near term housing recovery) means that any prod to demand from super low rates is offset by concerns about supply pressures on housing prices (as in consumers are correctly concerned that they still face downside risk).

In addition, even if it worked, the low mortgage rate inducement is a con. The Fed hopes to create inflation. That means higher interest rates. If the Fed succeeds in its goal of achieving modest inflation (2-4%), the increase in funding costs for homebuyers would cycle back into less affordabilty. Anyone who understands that dynamic is again not going to want to gamble on the possibility that the Fed succeeds.

And as for consumer stock prices boosting confidence, experts are not certain which way the causality runs. As a Fidelity report noted:

There is a relationship between confidence and stock market movements, although it is not clear which factor has a larger influence on the other (survey respondents may report lower sentiment as a reaction
to a decline in the stock market as opposed to a prediction of future weakness).

And the idea that a Fed induced rally will fool anyone into opening their wallet is spurious. Trading volumes are weak, the opposite of what you’d expect with a bona fide market rally. Retail investors increasingly are withdrawing from stocks, perceiving the market as manipulated. And many pros stress that equities are now driven by technical rather than fundamental factors.

El-Erain criticizes the Fed’s program for its risk of adverse consequences. The headline is blunt, “QE2 blunderbuss likely to backfire“:

Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries.

The rest of the world does not need this extra liquidity, and this is where the second problem emerges. Several emerging economies, such as Brazil and China, are already close to overheating; and the eurozone and Japan can ill afford further appreciation in their currencies.

Despite polite rhetoric to the contrary in the lead up to the Group of 20 leading economies summit in Korea this month, other countries are likely to counter what they view as an unnecessarily disruptive surge in capital flows caused by inappropriate and short-sighted American policy. The result will be renewed currency tensions and a higher risk of capital controls and trade protectionism.

The third issue relates to the gradual erosion of America’s central role in the global economy – including as the provider of both the world’s reserve currency and its deepest and most predictable financial markets. No other country or multilateral institution can displace the US, but a combination of alternatives can serve to erode its influence over time. No wonder commodity prices surged higher and the dollar weakened markedly in anticipation of QE2, pointing to increased input costs for American companies and unwelcome pressures on their earnings.

The unfortunate conclusion is that QE2 will be of limited success in sustaining high growth and job creation in the US, and will complicate life for many other countries. With domestic outcomes again falling short of policy expectations, it is just a matter of time until the Fed will be expected to do even more. And this means Wednesday’s QE2 announcement is unlikely to be the end of unusual Fed policy activism.

I am not certain that the Fed will be anywhere near as free to experiment as it was in the past. The Fed is a particular hobbyhorse of libertarians, and with Tea Partiers taking ground in the Congressional elections, the Audit the Fed movement might gain renewed energy. More aggressive intervention would be tantamount to waving a flag in front of these bulls. The Fed risks intrusive oversight if it goes too far down the policy activism path.

Print Friendly, PDF & Email


  1. Transor Z

    For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance.

    Good grief. 30-year fixed <5% and the home market is still in the tank. And refis as thin on the ground as unicorns.

  2. Meg

    *shudder* Bernake is the sexually transmitted disease of economics. Every time he speaks I have to wear protective ear plugs. The Fed is one gigantic waste of time, energy, effort, space, and air. Libertarians envision it as a shadowy government entity that can manipulate markets through devious psychological powers, but isn’t that giving it too much credit? Oh, it’s that Fed guy again? Yeah, nevermind him. He just likes to mumble at his podium to no one in particular.

  3. ds

    The logic of your and El-Erain’s criticisms is wrong. You argue that QE, by lowering yields, will generate inflation, which is bad because it leads to higher interest rates. So what should the Fed do then? Raise interest rates? A reverse QE to raise 10 year yields, cause deflation, which drives yields lower and makes homes more affordable? This criticism is circular and makes no sense.

    El-Erain first notes that some emerging nation economies are on the verge of overheating. In the very next sentence, he says that QE, by driving the dollar lower, will threaten the export sectors of the emerging market economies. But if emerging market economies are overheating, isn’t this EXACTLY what we want to have happen? Brazil, China, etc., are struggling with inflation. Their currencies need to appreciate in order to check the demand for their own domestic output. El-Erain is not only wrong, he has it absolutely backwards!

    Critics can talk about asset bubbles, dollar devaluation, etc., until they are blue in the face, but the bottom line is that QE is keeping yields lower than what they otherwise would be. In an economy with an extraordinarily high output gap like ours, this is exactly the kind of policy our monetary authorities should undertake. Higher yields discourage investment, reduce savings, and thus restrict output and employment.

    The previous round of QE might not have been that effective, and future attempts might prove ineffective as well. Monetary policy can swap assets in and out of an economy, but it cannot generate demand. Only direct government spending can automatically generate demand for output. The reality, however, is that the prospect of additional stimulus is a political non-starter and is completely off the table. That leaves monetary policy as the only hope. Without QE, there are no other alternatives left.

    1. Richard Kline

      Delusion and delusion, ds. Yes, the Fed should raise rates. The functioning part of the banking system, the large majority of modest banks who used to and will again write mortgages and who fund small business _cannot_ make money with zero rates. We have suffocated them to provide free money to the speculators at the top of the chain. Low rates aid borrowers to a point, but not if not one can make any money. Ultra low rates are simply a gift of money to top of the food chain speculator behemoths which should be put out of business. At this point, Fed policy actively works against any functioning loan activity in the bankind system; that is, Fed policy is totally counterproductive. Its a function of blind ideology and slavish bootlicking of the financial oligarchy rather than any reasoned thought about how to stimulate real economic production.

      Want to heal the US economy? Here’s a four point program:

      —Cram down stupid debt, especially mortgages written to nonsensical valuations
      —Low but real interest rates, to get real lenders back in business and speculators off Uncle Feddy’s tit
      —Fiscal spending for direct-hire effects, specifically targeting state and local public employment, and education for starters
      —Program of direct payments and loan guarantees for sustainable energy products and installation, with higher levels where these directly replace energy import sources

      The present oligarchy of wealth which has bought both parties and the political system will actively hate all points of such a program, or any others one would care to add that would work, because things as they now stand are PERFECT for the .1%: They have unlimited access to and control fo the financial resources of the state with a neutered governmental apparatus and a rock stupid citizenry plurality. So no, we won’t get a useful program without a struggle.

      1. nilys

        Who will borrow when about everyone is up to their earlobes in debt? Where is the demand? If there is little borrowing at 0%, why should there be borrowing at 1-2-3-4-5%?

      2. ds

        I don’t buy this argument at all. You miss the other side of the coin which is the demand for loans. If rates are high, demand for loans decreases. The ‘large majority of modest banks’ who, at higher yields, will supposedly be more willing to sell mortgages, will have no customers if interest rates are higher.

        Your argument rests on a supposed dichotomy between large banks and what you term ‘modest banks’. So on one side, large banks benefit from a flatter yield curve (which QE generates) but on the other, ‘modest’ banks get hurt. This makes no sense and really leads to no conclusion regarding what yields and spreads should be.

        The bottom line is that higher yields reduce demand for investment. Certainly it is true that more fiscal stimulus is needed, but the Fed cannot do this. Perhaps Bernanke’s mistake is his failure to advocate for more fiscal stimulus; after all, in his academic work on Japan he criticized the government for a failure to coordinate fiscal and monetary policy. And indeed he has erred in other ways. QE, however, is most certainly one of his better calls.

      3. RueTheDay

        “The functioning part of the banking system, the large majority of modest banks who used to and will again write mortgages and who fund small business _cannot_ make money with zero rates.”

        Well, hold on a moment there. The only interest rates that are near (though not at) zero are the rates at which banks borrow – the Fed Funds rate, the Discount rate, and the rates on time and demand deposits. The rates at which banks lend are nowhere near zero – the average 30 year mortgage rate is around 4.3% and the rates on unsecured business loans are higher.

        What matters for bank profitability is not the absolute level of rates, but rather the spread.

        I’m not sure where this whole “banks cannot make money in a ZIRP environment” meme started, but it’s flat wrong, because it incorrectly assumes a situation where ALL interest rates are zero, which is not the world in which we live.

      4. Bill

        It is a canard that there is no demand from small businesses. They were crushed by the banks, their credit lines closed, and given the run around when approaching banks for loans. Total, BS.

        1. John Smith

          Any business that needs to borrow in order to make payroll deserves to be crushed. And with all the over-capacity around why would a business borrow for any other reason?

          1. RueTheDay

            He didn’t say borrow to make payroll.

            However, it is a fact that most businesses do need to borrow to support working capital needs (e.g., to make investments in inventory and accounts receivable). The sudden freeze in the credit markets during late 2008-early 2009 did in fact shutter perfectly viable businesses.

      5. jake chase

        Exactly right as far as it goes. In addition, however, we must liquidate corporate and financial monopolies, rebuild sustainable manufacturing and avoid governmental leaf raking as a substitute for productive jobs. None of this will happen so long as existing elites can continue to cash in on Bernanke’s folly. Maybe after the next crash if it’s only big enough.

      6. Eta Carinae

        Richard Kline wrote:
        “Low rates aid borrowers to a point, but not if not one can make any money.”

        Yes, that’s clear to me. Also, Yves Smith explained how
        a weaker dollar would affect the production costs for
        businesses that must import commodities.

        For example, Chile is by far the world’s largest copper
        producer. Copper is very common in electric cables and wires. So one can expect that US goods where copper
        is a large part of the cost of manufacturing will
        cost more and more, and become less affordable for
        the average American. So that can’t help with
        US jobs in sectors that depend for stability/growth
        on stable copper prices.

        On a related topic, fixing finance, I recommend
        Mervyn King’s speech at a gathering organized by
        the Economist. The keywords to search for are:
        second Bagehot speech Bank of England.
        It’s available at the website of the Bank of England.

        A few statements seem to me rather doubtful, such as that
        “The present way of doing banking is the worst”.

        It’s a substantive contribution, based on work of
        staff at the Bank of England and other researchers.

    2. vlade

      “Higher yields discourage investment”

      That’s true – to an extent, but it does not automatically hold that the reverse is true.
      Cost of capital is one, possibly not even binding, conditions for investment. I have to have a market, generate some positive cashflows etc. first. Moreover, one could say that ZIRP will encourage projects that are not feasible, thus adding to the already large output gap. How’s that going to help?

      And FYI, cost of capital is NOT the rate at which you can borrow as a company. Cost of capital is (in theory) the rate an investor could achieve making a similarly risky investment somewhere else. That in these days means investing in a different country. I do not believe that in a globalized economy ZIRP automatically translate into a lower cost of capital.

      Moreover, pray tell how higher yields reduce savings? One of the point of ZIRP is for people to dump their savings and spend it (the fact that it may not work as advertised due to liquidity preference is a different story).

      1. ds

        New investment creates savings. New loans create new deposits in the banking system. By identity, that new money is saved. This is how people are able to save. Someone’s saving is always someone else’s debt. So if nobody goes into debt then nobody can save.

        Higher interest rates encourage people to save out of a given income, but it is impossible for this reaction, in the aggregate, to increase net savings. The result of an attempt by all sectors in an economy to save is therefore not more savings but merely reduced consumption and output.

        Your first argument is putting the cart before the horse. If someone can borrow USD cheaper than some other currency, then real investment is more likely to take place here than there. And in regards to your other argument concerning ZIRP and ‘unfeasible’ projects, I don’t see yields and spreads having anything to do with this. In 2006, the height of the housing bubble, when everyone was buying mcmansions with no downpayments, the 0-30 yield spread was flat. Today it is near 4 percent, but you don’t see banks out there peddling ninja loans anymore. So spreads really have nothing to do with the ‘quality’ of investment, however it is you define it.

        1. vlade

          Worry not, I understand accounting identities and loans = savings. Yet, it’s NOT one way process, because the banks can fund the loans not from savings but from borrowing from Fed – which they do with abandon, at 0 rates.

          Indeed, why would they generate savings when they can source overnight funds at much cheaper rate (yes, I know that fedfunds are technically higher than 0% account, but running the account has operational costs, while borrowing from Fed makes not much difference whether it’s 10mil or 100mil)?

          The argument abou real investment – well, can we have a look at Japan please? How much real investment (short of highways to nowhere) happened in Japan vs. other places?

          Thank you for making the ninja loans argument for me – it’s a perfect example of how rates are not necessarily binding condition for investment.
          Banks make no ninja loans now because even with low rates the projects would not pay off. Expected rate of return is so low, that even discounting it with 0 rates you still get close to nothing.

          On the other hand, when you make mcmansion-like investment where you hope for the value of the house to go up 10-15% annualy, 6% rate will not make much difference, you still end up with solid IRR (especially when leveraged).

          In neither of these, rate is/was a binding condition for investment.

          1. ds

            I am not sure what you mean by a bank funding a loan from its savings. If a bank has an excess reserve position it can ‘fund’ a loan without having to borrow on the fed funds market. If a bank is short of reserves it ‘funds’ the loan by borrowing from the fed funds market. In the aggregate, the Fed supplies the reserves when it defends its rate decision.

            Whatever it is, when a bank makes a loan it creates a deposit on the banking system. This creates savings. So if higher interest rates depress loan demand then by identity they depress savings. It has nothing to do with whether or not a bank has excess reserves on hand when it makes a loan.

            The situation in Japan was surely a failure. Just as it is here. QE is ineffective in the sense that it is incomplete. But the alternative — no QE or rising rates — would be worse.

        2. Samuel Morales Jr.

          US economy is about wealth destruction. It’s a consumer economy. That’s it’s role. That is why jobs leave, and americans buy stuff on debt. There is no additional output for the American economy, because as I said, it’s a wealth destroyer, or wealth consumer. A pecan farmer produces wealth when he grows, and sales his pecans, the consumer destroys that pecan by eating it. The value of the pecan has changed, or disappeared when the consumer ate the pecan. USA doesn’t really need more inflation. Deflationary lifestyle can be good. Perception is reality in the field of economics, and money, particularly fiat currency is just a illusion of wealth. Fiscal stimulus in the US economy will likely increase the trade deficit, which may be a good, or bad thing depending on your view, but why spend money, or print money to stimulate some miscellaneous economic activity. With Inflation being low, might as well print money so everybody can retire at age 45 instead of 65, have fantastic universal health care with great coverage.

          1. DownSouth

            Samuel Moralies Jr. said: “There is no additional output for the American economy…”

            I think you’ve been reading too many of Ludwig von Mises’ fairy tales.

        3. Samuel Morales Jr.

          Banks don’t have savings to loan with. Banks are not like traditional banks where they store depositor money, because the US economy in aggregate is busying spending money, not saving money. Savings are outsourced to foreigners. The housing bubble had banks originated securitized mortgages, but they didn’t finance those mortgages with savings, or depositor money, instead foreigners like the Chinese, and Japanese financed it, and Wall Street found the mechanism to finance the loan origination by selling foreigners these mortgage products.. As I said in my first post, US economy is about wealth destruction. US economy has no savings, puny foreign reserves. It’s a wealth consuming economy, not a wealth producing economy in big picture of global economic trade.

    3. Romeo Fayette

      I think the fault in most peoples’ logic comes in assuming that the Fed is responsible for mending the structural fissures in the economy. Explicity, the Fed is responsible for price stability & employment–although I’ll acknowledge that their responsibility is implicitly broader.
      However, structural issues (fiscal/trade deficits, demographics, politics, etc.) are to be handled by the Treasury, Congress & the White House… not the Fed. Further Fed monetary intervention rears decreasing marginal returns and increasing instability (see Bullard’s recent White Paper on the Taylor Rule).
      So, as an example, my implication is that we shouldn’t trash the USD to reverse trade imbalances with China. That approach triggers much collateral damage on unitended, multilateral fronts. It’s a matter better addressed in isolation.

      1. DownSouth

        But isn’t this the inevitable result of the nation’s infatuation with the twin-headed monster that Milton Friedman created? I’m talking about Friedman and Anna Schwartz’ A Monetary History of the United States being one head and Friedman’s laissez-faire absolutism being the other.

        As James Tobin wrote in his 1965 review of Monetary History, “Consider the following three propositions. Money does not matter. It does too matter. Money is all that matters. It is all too easy to slip from the second proposition to the third.” And he added that “in their zeal and exuberance” Friedman and his followers had too often done just that.

        In Friedman’s doctrine of laissez-faire absolutism, things like labor unions, minimum wages, fiscal stimulus, regulation, tariffs and other restrictions on trade are heresies. So if you take these policy tools completely off the table, and enormously exaggerate the importance and effectiveness of monetary stimulus, what do you expect?

        1. Siggy

          Money matters and it matters greatly. There are a multitude of other factors that matter as well. The factors that drive the economy at any given point are not a fixed set. They vary and when one changes all the others change as well. The only consistent factor is the money medium. And as its purchasing power changes, so changes the general economy.

          When an excess quantity of money is introduced into the economy, the level of prices does not proportionately increase across all goods and services. What you do see is a tendency towards disproportionate increases in those things requisite to the means of production. Now the means of production are best represented by hard assets. Housing is as much an asset as it is a commodity. It is an asset generally available to those of relatively modest means and it is a vehicle that tends to increase in price commensurately with the rate of inflation; i.e., the loss of purchasing power in the medium of exchange.

          Be very clear in your understanding of what is being committed to: the Fed intends to create inflation and that means that the purchasing power of our money shall decrease. To represent otherwise is to lie!

          QE2 will be inflationary, just how that fact will be expressed remains to be seen. Nonetheless, because of it you will probably be made very much poorer. That is unless your wealth is in income producing assets whose income streams are readily adjusted to the loss of purchasing power.

          Calling up Friedman etal to dither about what is about to transpire is a preoccupation with the wrong clock. More over, has not helicopter Ben said that he will print and print, all in the name of evading deflation. The only smart thing that helicopter Ben might accomplish is to force China and her mercantilist cohorts to revalue their currencies and to increase her wage rates, all the while our purchasing power evaporates and voila, we get to labor cost parity. Would that not be the time to recreate US manfacturing? That’ll take about 35 or 40 years. Will you or I still be here to enjoy that blessed event?

    4. Albert

      ds: “The logic of your and El-Erain’s criticisms is wrong. You argue that QE, by lowering yields, will generate inflation, which is bad because it leads to higher interest rates. So what should the Fed do then? Raise interest rates? A reverse QE to raise 10 year yields, cause deflation, which drives yields lower and makes homes more affordable? This criticism is circular and makes no sense.”

      ds, your reply is a textbook example of how two policy options seem to create a paradoxically circular train of events. Someone proposes a policy and articulates a chain of consequent events. You disagree and posit the exact opposite chain of events, followed by “It’s actually the complete opposite!!!!”

      This happens because the two options are two sides of the same coin; in this case, currency manipulation. The real solution is to stabilize the value of currency rather than to try to artificially make it weaker or stronger. In other words, the answer to your question of “So what should the Fed do then?” is: just stop. Stop screwing with the money supply because doing so simply shifts the economic damage and losses around and does not eliminate it, because someone has to eat the losses, somewhere. The Fed needs to stop trying to be the “hero,” and people need to force the various parties to this disaster to obey the law and take responsibility for their financial actions. Only then will people be able to make economic decisions with the confidence they won’t get screwed over by arbitrary policies that reward bad behavior.

  4. Avg John

    You don’t have to be an economist with a Phd. to understand we have become a nation led by tricksters and ponzi scheme artists. How did it ever come to this?

    1. Richard Kline

      Know Nothings were given the universal franchise, and they used it. Social engineering isn’t rocket science, it’s one part prejudice and two parts money . . . .

    2. Jim Haygood

      ‘Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.’ — Ben Bernanke

      Translation: ‘Central planning and currency depreciation work, dude!’

      Avg John hits the nail on the head. The fundamental objection to QE2 does not lie in the pragmatic argument that it’s likely to be ineffective.

      Rather, the fatal defect of QE2 is that it is based on publicly-announced fraud — manipulating securities prices with counterfeit thin-air money.

      Even El-Erian doesn’t go far enough in identifying this as a secular inflection point. The US is forever sacrificing its credibility by allowing the Fed to commit larcenous fraud on a vast scale, as it overtly steals the purchasing power of currency holders.

      Tellingly, the complacent conventional wisdom is not disturbed about QE2. Call QE2 a ‘libertarian hobbyhorse’ if you like. But QE2 will be seen in retrospect as a monumental mistake, an ’emperor’s new clothes’ point of recognition for the world’s central bank fraudsters.

      John Law was run out of France for a reason.

      Game over, suckers!

  5. Richard Kline

    Something that I find quite interesting about Bobblehead Ben’s ‘New’ New Plan is not the substance but the number, %600 b. Now, the number floated before FinMin 20 in Seoul was twice that, $1200 b. Ben and ‘Bama blinked. All this talk about how, “Today the US won consensus for [insert damned lies and fabulations here],” which hit the broadsheets at the time was such utter bunkum. Of course Carpetbomber Ben can and likely will fire off the other half of his queasing increment in time, but it’s hard to avoid the conclusion that the addle pates we have puppeteering things in the US for the financial oligarchy blinked at those meetings. Call that ‘a good thing’ or ‘a bad thing’ as yer all so inclned . . . .

  6. Sean

    Wouldn’t a bond manager be the last person to demand more inflation? And didn’t Japan try QE in the late 90s? And didn’t they withdraw it the moment inflation creeped above 0.01%, thus killing off the effects? Terrible post!

    1. marc fleury

      Yeah I think Yves got her “talking up portfolio” argument wrong.

      Very simply put the FED is depressing the yield curve. New debt will yield peanuts. All bonds are going to be depressed on the yield front going forward.

      So a good moment to sell the portfolio but not a good one to buy it. Pimco is probably doing both all the time and going forward people are going to sell their chips and get out of the bond market. Peak bubble in bonds is here. Pimco will have a rough time.

      1. Yves Smith Post author

        Please go back and read the Bernanke op ed. He stated his objectives very clearly, and it is to increase asset prices.

        1. marc fleury

          I said: “good for selling portfolio, bad to buy a new one”. Again as a bond shop and any bondholder, Pimco doesn’t like this going forward. It is kind of obvious too.

  7. attempter

    I don’t think Bernanke meets the legal definition of criminal insanity, in that even if he’s personally crazy enough to still believe that disproven trickle-down nonsense, he must still know that normal, reality-based intelligent people who aren’t initiated into the secrets of monetarist dialectic have rejected it based on evidence.

    I am not certain that the Fed will be anywhere near as free to experiment as it was in the past. The Fed is a particular hobbyhorse of libertarians, and with Tea Partiers taking ground in the Congressional elections, the Audit the Fed movement might gain renewed energy. More aggressive intervention would be tantamount to waving a flag in front of these bulls. The Fed risks intrusive oversight if it goes too far down the policy activism path.

    I’ll interested to find out (and maybe the tea types around here can speak to this), now that the Reps will have sufficient votes to pass many if not most of the things they claim to want to pass, whether they actually do so. And whether the tea partiers, who have claimed all along to oppose not just Obama, but certain policies, will now demand action from the Republican congress where it comes to those policies.

    The Fed is one. But I especially look forward, after all the Republican and tea party angst over Obama’s health racket mandate, whether they’ll at least repeal that. They have the votes in the House, and I’d bet they could get a few Dems to join them in the Senate. Sure, Obama would likely veto it, but so be it – make him actually do that and incriminate himself further. You guys, unlike the “progressives”, understand how this stuff works, right?

    So what about it, Reps and tea people? Or was it all BS?

    1. DownSouth

      Anderson Cooper interviewed Michelle Bachman, and I can already smell the whiff of betrayal in the air.

      The only true commitment is to extend tax cuts for the very rich, and other than that it’s pure equivocation.

      1. Anonymous Jones

        I think it’s a fair reading of reality to say that they have always been willing to sacrifice any professed social or economic policy in order to get tax cuts for the rich. You are what you do, not what you say. Too bad the vast majority of the country simply refuses to see that.

      2. attempter

        For pretty much the whole time I’ve been doing this, the Democrats had complete power. I’m limbering up for Republicans now having significant power in Congress.

        The tea partiers can’t just complain anymore. Now they have to deliver.

    2. Francois T

      But I especially look forward, after all the Republican and tea party angst over Obama’s health racket mandate, whether they’ll at least repeal that.

      “racket mandate” Sigh!

      I so love the smell of incendiary rhetorical napalm in the morning. It allows for such pleasant exercises in sophistry and pseudo-logic. (He! He!)

      It’s a “mandate” only because it is not called a “tax”.

      But taxes are…gasp!…mandatory!

      Ergo, taxes are a racket.

      Will the Republicans repeal taxes?

      I think they should; after all, what about this “bought and paid for” government?

      I mean, if it is already bought, why should I pay again?

      It’s simple isn’t it? The Master in Logic and Philosophy, knew all about resolving this kind of problem a long time ago:


  8. a

    “And higher stock prices will boost consumer wealth and help increase confidence.”

    IMHO this deserves more criticism than it won’t work. The correct criticism is, It’s absolutley morally heinous. Higher stock prices boost consumer wealth of *wealthy consumers*. Sure, Mom and Pop own a few stocks, but the vast majority of stock wealth is owned by the wealthy, indeed the wealthiest 1%. WTF is Bernanke thinking when he believes his job is to prop up the wealthiest 1%? I’ve had it up to here with trickle down economics, up to here with a rigged game that the government thinks it’s its job is to protect the wealth of the wealthy and the rest of the people have to hope they gather the crumbs which fall from the table.

    1. a

      Just to add that the usual suspects, Economist’s View, Brad De Long, Paul Krugman, are all chiming in that there should be *more* QE2. Bernanke says that he thinks his job is to boost stock prices and make the wealthy wealthier, and their response is that he’s not doing it enough. Unbelievable. Just unbelievable. Really, these three are just mouthpieces for the wealthy. They lure in the rest of the population with a call for a few meek taxes, but their reall agenda is to keep the rich rich and not to rock the boat.

    2. craazyman

      No kidding. I need an aspirin and a zanax just to read this stuff. I’d need a scotch too, if it wasn’t 7 am and time for pancakes and coffee. Couldn’t see having a scotch with pancakes, no matter how frayed my nerves are.

      There is a plague upon us, like in some Greek tragedy, and the people stumble in squalor looking for that epipheny, the sunshot of awareness, which is right in front of their blindness. This is about the point when the old tyme religion would look for a scapegoat to flay in propitiation to the gods, to lift the plague, in vain.

      and so here the flaying is done to those without capital, even in the very name of saving them, in a flagrantly toxic theology.

      It seems all economics is 16 equations and 19 unknowns. and the 3 unknowns are hidden like nuts in three card monte and mixed and switched in paragraphs of sophist rhetoric that give the hypnotic illusion of meaning something when they really do nothing but drive home the advantage of the stronger. the advantage of the big black hole pool of stagnant capital that enlarges and broadens its own event horizon.

      I have no doubt Mr. Bernanke is sincere and that he believes he is doing what is best for the country. I don’t believe he has a false conscience. But delusion is in full possession of his faculties, as it is with nearly anyone who believes reality can fit on a Cartesian x-y axis, and be probed by a sequence of x-y axial manipulations.

      I would dearly love 5% on my little piggy bank. And then I might actually spend some money. Right now I get 0% and I won’t spend a f—king dime.

  9. nilys

    PIMCO does not seem to see QE2 as a positive development for the bond market. Bill Gross said that the 30-year bull market in bonds is over. Gross fears inflation:

    “Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic.” (From Gross’ monthly outlook Run Turkey Run)

    Inflation and thus QE2 may be what is needed at the moment. Green energy, infrastructure investment, rebuilding the country – industrial and fiscal policies – have not happened. Outsourcing and labor arbitrage (make cheap in Asia and sell at a 50% premium in the West and pocket the difference) are here to stay and drive income stratification, labor degradation and inequality for the foreseeable future. Higher taxes on the uber wealthy have not happened and are unlikely to happen.

    Housing prices are still very high (one should be able to afford a medium price home for a medium income and still have money to eat) yet can’t go lower because this would put even more homeowners under water. Income is low and is trending down. Debt is high.

    An FDR-like politician has not emerged. The business leaders don’t seem to be bothered by the descent of the country into a third-world impoverished dirty mess without regularly supplied electricity and running water, but with nukes and a nonoperational star-wars system.

    Same old apologists for wealth inequality, tax cuts, labor degradation are out in full force. I used to like reading Broder, now he pitches a war as a possible solution to the economic woes. A war will solve nothing. A good amount of inflation will distribute the pain to everyone and may reset the economy to the plain field. Let the debt and saving burn alike.

    1. ds

      I agree. With respect to Bill Gross or El-Erian, their reasoning is based purely out of self-interest.

      Gross’s argument revolves around a misconception of the money-multiplier and assumes that banks need reserves to lend. This is both theoretically, and in light of Japan in the 1990s and the US today, empirically false.

      Yes the world is ruled by the rich. There is a cabal of bankers and oligarchs who dance politicians around like puppets on a string. It is all a conspiracy. I see that. But the argument El-Erian makes about QE is wrong.

    2. marc fleury

      Interesting commentary.

      I agree with you that the problem is not MMT but what MMT is used for. IN this case we have QE done to go purchase financial assets and stoke more asset bubbles. If you think about it, the hourglass effect (rich getting richer) is not so much linked to QE as to WHAT QE is being done.

      If you create 1T and give it to bondholders and home EQ then you are giving to the “haves”.

      If you create 1T and give it to social programs as usually argued by the classic MMT literature (full employment usually through social programs) then you are giving to the “have nots”.

      What is frustrating in this case is that the potentially most impactful policy of the past 20 years (here a free T) is being given to foreigners, asset speculators and home owners. THE MOST IMPORTANT SOCIAL POLICY DECISION IN YEARS IS BEING TAKEN BY ONE MAN.

      The current political debacle going on in the US is further put in ridicule by moves like this? you don’t like tax and spend? sure! how about just print and spend?

      1. DownSouth

        Doug Terpstra provided this link on a thread yesterday.

        Doesn’t this just about sum it up?

        Hardly a century passed after the ringing propositions of 1776 than America was engulfed in the gross materialism and political corruption of the First Gilded Age, when Big Money bought the government right out from under the voters.


        “Great wealth was to be gained through monopoly, through using the State for private ends; it was axiomatic therefore that businessmen should run the government and run it for personal profit.”

        1. DownSouth

          “…it was axiomatic therefore that businessmen should run the government and run it for personal profit.”

          That all but sums up the creed of the second generation of the Chicago School (Milton Friedman, Fredrich Hayek, etc.).

          1. Samuel Morales Jr.

            Lol, I don’t know why are you attacking Milton Friedman, and F.A. Hayek who has been dead for a long while. You are getting nowhere. The economy ain’t even austrian, or monetarist in nature. Paul Volcker, and Alan Greenspan said Monetarism doesn’t work. Monetarism is mild inflationst, Keynesianism is inflationist,and Austrian is deflationst, that is why they want the gold standard back, because to them money is just a loose joint, a tool for the economy, in which they are correct. James Galbraith said that the USA doesn’t need to worry about deficit spending. It has no problem, and USA can print it’s own money, so it never can run out of money. US outsourcing benefited the world yes, but to somehow put some blame on some Austrian like Hayek that is beyond pathetic, and pitiful. Well if your a communist who thinks capitalism is run amoke, well, what about Chernobyl? That’s government communism run amok. What about Sverdlovsk anthrax leak that killed 100 people “offcially”? That’s government communism run amok. Put things into perspective buddy.

          2. DownSouth

            Samuel Morales Jr. said: “Well if your a communist who thinks capitalism is run amoke..”

            So let me get this straight. Anyone who thinks that capitalism has run amok is a communist?

            You hit the squarely nail on the head. That pretty much sums up Hayek’s and Friedman’s belief system.

  10. purple

    Asset bubbles is all the U.S. has left. You can’t exactly blame Bernanke for 30 years of out sourcing and wealth redistribution.

    Very few in the U.S. elite realize how seriously their position has eroded domestically and internationally.

    1. marc fleury

      That is one view. The other is that they realize full well that debt to the outside world is killing them, the debt trap isn’t far and the US will screw china out of its debt holding until the printing presses fall apart. Clearly the reputation will not get better, but they have no choice.

  11. RueTheDay

    Bernanke needs to explain how adding $75 billion in reserves per month to a banking system already sitting on around $1 Trillion in excess reserves is going to do anything.

    To extend his “dropping money from helicopters” metaphor – location is everything – it matters where the helicopter is positioned when the drop starts. Right now, it’s hovering over a volcano.

    1. ds

      QE is not a helicopter drop. In the ‘helicopter drop’ metaphor the government spends money simply by crediting bank accounts — no bond sales, no taxes. QE is an asset swap. Bonds for cash. Bonds expire into cash anyways, so what is the difference?

      I understand the angst here but again the alternative to QE is higher yields. What purpose does that serve other than to discourage investment in an economy already suffering from an output gap?

      1. RueTheDay

        I expand my “helicopter over a volcano” argument in my blog:

        I agree that if we really wanted to have an impact on the real economy, we’d dispense with the whole monetary/fiscal policy false dichotomy and just have the Fed directly fund government spending through money creation until the economy is back at full employment.

        1. ds

          Thanks for your blog link. In regards to your argument on compositional effects, you might have a point. In my opinion though, the evidence that monetary policy is stoking asset bubbles is weak. And on the other side, lower yields do make real investment more attractive.

          I do agree though that QE is ineffective. But it is ineffective because it is incomplete. To get the helicopter to drop on Main Street requires fiscal policy, but, especially after Tuesday, that option is off the table.

      2. Bruce

        Ds, you are so completely wrong I don’t even kno where to engine. But let me try. If the Fwd buys every bond, bond investors, who would ROLL the cash into new bonds, have nowhere to put the cash.

        Let’s try a simple thought experiment. Let’s say the Fed bought every single bond , corporate and Treasury, and every single stock. Call it 20 trillion.

        What do you think everyone would do with all that cash? Remember, they can’t reinvest it in securities, because there are none. The Fed now owns them all.
        You think they are going to go and “invest in the economy”? Maybe open up new nail salons or hamburger joints, or buy empty condos buy the bushel? Sure they will, and much more, and the overcapacity we have now will double and triple and quadruple, requiring more and more QE to sustain it.

        This is the Red Queen’s race, and it will end with a currency collapse.

        1. ds

          I don’t understand the point of your thought experiment. If bond investors who get taken out by the Fed don’t spend the money elsewhere then nothing happens. The problem of overcapacity does not worsen. If those investors do to some extent spend the money investing in burger joints, empty condos and the like, then QE will have worked.

          In the end, QE might prove ineffective but is certainly not counterproductive. In an economy with a severe output gap, lower interest rates are better than higher interest rates.

          1. DownSouth

            ds said: “In the end, QE might prove ineffective but is certainly not counterproductive.”

            Think you might have unveiled the dogmatism of your position there?

          2. kensey

            > In an economy with a severe output gap, lower interest rates are better than higher interest rates.

            Not if achieved by increasing input costs and lowering demand. Rising commodity prices will lower consumer demand, thus keeping the output gap alive. It could be different in an economy which is self sufficient in terms of commodities. But as it is, real credit contraction stays real credit contraction whether as deflation or stagflation. The only thing the FED is doing is shifting pain.

      3. marc fleury

        no no no, yes it is an asset swap but how was the asset created? by fiat. Not by taxes on real production, not by other bonds. Just money out of thin air. Big big difference. This is where MMT runs into objections: on the one hand money is a lubricant and therefore we should just put more lubricant until we reach full employment, on the other hand money IS A STORE OF VALUE. in this case the value of created out of thin air and distributed to bond holders.

        Means 1T of money was given to bond holders to the detriment of everyone else on the basis that it will kick start the economy (cf bernanke talk). Trickle down QE as it were. Classic MMT will argue for QE on social programs.

        1. ds

          Exactly right. Money is a store of value. There is also a liquidity preference for money. But if the value of money does not erode over time, then what will motivate people to spend it?

          Commodities also are a store of value, but they are either expensive to store, waste away, or both. This fact motivates people to employ commodities in the production of real goods and services which we enjoy. But money is costless to store, and if its value does not erode over time, the liquidity premium attached to money will ensure that people will hold onto money rather then spend it.

          QE is an attempt to lower yields and raise inflation expectations in order to motivate people to employ rather than hoard money. Ideally it should work in conjunction with more government spending or dramatically lower taxes. But fiscal policy is off the table. QE is all that is left at this point.

          You can argue the system is flawed, there should be more of this and less of that, but the point I am making is that the criticisms of QE, both by El-Erian and the poster are not only wrong but backwards.

          1. Samuel Morales Jr.

            Creating inflation doesn’t necessarily create employment, or even enhance consumer spending. For one, just look at Zimbabwe, 1000% percent inflation, 80% percent unemployment. Zimbabwe easily debunks that inflation creates employment. 1970’s, you had inflation, and high unemployment. So again, inflation creating employment, or even growth is debunked yet again. I think you economist really have no clue what you are talking about, and bring out a mesh mash of economic theories, but really have no clue what you are talking about. A market consists of people with emotions, it’s not a machine. A weakening US dollar doesn’t mean it will increase manufacturing. For one thing, the US economy can’t increase consumption, and increase production at the same time. The trend of diminishing savings is clear from a historical chart. Export nations such as France, Canada, etc have higher savings rate than the USA, so the think that debasing the dollar will magically increase exports is utter nonsense, I can point out many currencies that are extremely weak, yet those currencies are not at all productive in export competition. Economics is little more complicated than that. Not that hard, but not that simple either.

          2. ds

            okay. qed. you win. inflation can’t create employment. so let’s raise interest rates, steepen the yield curve and depress investment demand. How exactly will that lower unemployment?

          3. marc fleury


            I think you are right on one point, that QE is the only to get out of the debt mess, by essentially defaulting on it through soft means.

            I disagree with the fact that QE should only be applied to bond buying. MMT’ers will argue (and shoot themselves in the foot) that they should be applied to social problems.

            Here the rich are getting richer. We invent 1T store of wealth and we give it to the rich right? Trickle down QE is bernanke’s credo. At a time where general populace is suffering this may badly backfire.

            I write a bit about it here.

  12. marc fleury


    Instead of being mad at everything and everyone you can push the argumentation a bit.

    1/ POLICY
    QE is being done to promote asset prices on the theory that it will TRICKLE DOWN. This is trickle down QE: buy bonds, buy homes, let the haves spend again. MMT has a vast litterature of QE on social program (which you may disagree with) that is proven to be less inflationary. Today, as has always been the case, SOCIAL POLICY IS CONDUCTED BY THE MONETARY AUTHORITY. He who controls the money printing controls society. Unilaterally. Congress may be locked up over deficits but here one man, will conduct policy in the name of everyone. A clear break down mode of democracy, be it in congress, where the cogs are stopped, or FED where the cogs run wild and without any supervision.

    2/ CHINA
    To me, a big bottom line of QE2 is “let’s screw CHINA out of its debt holding”. At the end of the day the USA is defaulting on its debt (without inflation) by printing money. It does not reflect real production, just bits in computers. If you are US based that is good thing, debt payments to china could represent a debt trap soon.

    Frankly what has always bothered about classic MMT (ala randall wray) is that they mostly ignore FX. Foreign relationships however may be the downfall of such theory. Look at what is happening already with emerging markets; most money flees, creating the mother of all carry trades, but to little effect domestically. IN retrospect thank god people are implementing capital controls as it will concentrate the money on the US.

  13. Romeo Fayette

    Love you to death, but don’t make “jaded” your default setting:
    “…Ben Bernanke felt compelled to defend it in a Washington Post op-ed tonight.”

  14. drfrank

    The Obama Administration and the Fed, I consider them one and the same in this political climate, are doing what they can to cushion the pain, knowing that a recovery that raises all boats is at least five and more likely ten or twenty years away. Unfortunately, they seem to have to talk as if they are making progress and as if a return to the status quo ante were possible. It never is.

    They can’t let the huge banks go down, much too disruptive. At best the banks might be slowly shrunk and weaned from taxpayer subsidies. They have to prop up the securitization markets, which came to represent close to 50% of the credit extending mechanism in the US. There’s no point in talking about Fed policy vis a vis lending without mentioning the securitization markets.

    We face a startling lack of new ideas about what to do and a reluctance to tell the truth about how bad it is, which are two sides of the same coin. Fault Obama for this above all, as he has the rhetorical capacity and the intelligence.

    In retrospect, Obama should have initiated massive public works programs to employ construction workers and their supporting enterprises, and to retrain people, but he chose instead to spend his political capital on legislation that improves the lives of poorer people with better health insurance and perhaps some better protection against consumer credit rip offs. It must have looked like a once in a lifetime chance to do something for his original constituency.
    Perhaps he thought: no matter what I do, hard times are here to stay. i give him high points for a seamless transition on the rescue policies originated in the last days of GWBush. Had he not come forward as President Elect to steady the markets, it would have been much worse. But then he was stuck with the continuity team: Timmy, Larry, Ben.

    I understand the truth in what Bernanke says to be something like this: Rich people will spend less if the market tanks, even if they may not spend more when it rises. Home prices will drop more if mortgage rates rise, even if they are not rising as the result of the lowest rates in any living person’s lifetime. The Fed may not be able to do much good, but it can help with a policy that I like to call “temporizing.” In other words, “easing” . . . “promotes” and “encourages,” etc. Remember what Greenspan said, “If you think you understand what I am saying, you haven’t understood me.” Or did I make that up?

    In my opinion, real financial reform and effective regulation are not possible. Derivatives, especially, are beyond regulation, let’s face it, you do have to be a rocket scientist or else you are scammed. The Wall Street game is always, has always been, to keep the winnings and get someone else to bear the losses. And no jail time for fraud. Buy your way out of it. It is the nature of the beast. So what? It serves a function. That is why Wall Street was fenced off from “utility banking” the last time we had this kind of blowout. A fence is not a regulation. Regulation, in any event, is a bad word for what is really a license to do business.

    Here are a couple of ideas:

    FDIC insurance coverage should be reduced to $25,000 per household. Anybody who really needs more will have to have multiple banks. A bank that wants more of your deposits will have to show you that it is solvent, a new PR field.

    The relevant figure in examining banks should be the extent to which liquid assets, including loans not subject to adverse classification of any type, exceed the amount of FDIC-guaranteed liabilities. Easy to understand. Banks should henceforth be prohibited by law from issuing interest bearing securities with maturities more than 90 days and prohibited from offering anything other than common common stock. Either it is risk capital or it is not.

    Defaulted mortgagees should be offered a sale leaseback option. The resulting cash-flowing properties should be packaged and securitized with a credit enhancement from the US Government so as to make a market in them. A new role for Fannie. An 20-30 year upside in recovered residential property values is a likely better bet than a Treasury Note yielding ~ 4%.

    Note: It’s important to make a distinction between the transfer of ownership from debtor to creditor on the one hand and eviction on the other. There is a public interest in avoiding massive dislocations and the resulting impoverishment of communities. The paperwork problems in the foreclosure process open the door to voluntary sale-leaseback deals.

    The mortgage interest deduction ought to be phased out in a way that people will rush to buy properties before they lose the subsidy. Home ownership without debt ought to be promoted as the American Dream.

    I’m tired of hearing about accounting identities. The fact is that the major export of the US to the rest of the world is inflation and this has been true for a long time. We have an unlimited capacity to export inflation. Bank’s promoting investments in “emerging economies” is something that has happened before, folks, with bad results when it payment time comes.

    It seems impossible to escape the conclusion that the new normal will constrain the culture of consumerism. More cooking from scratch, more mended if not homemade clothing, longer lasting cars, less driving on gasoline. The capacity gap will take a long time to fill and in the end the stuff people buy will be different. Scary to think about all those Chinese factories making stuff people don’t want anymore.

    The US has the capacity to feed itself, produce enough in the way of fibers and energy to care for its basic needs all around. That plus technological innovation should be sufficient to provide a basis for a good life. In every moment, we ought to be beating the drum for more education in math and science as the way out of this mess.

    1. dd

      Your musings about Wall Street reflect the thinking of major policymakers making the rounds on Dodd-Frank. There is no will to implement any reform that will further impede liquidity in the markets and make shadow banking transparent. There seems to be agreement that some sort of facade must be constructed to restore confidence; but there is no will to follow through (much like SOX).
      The risk here is a collapse of private retirement and pension systems as individuals decide the tax advantages are not worth the risks; but one assumes that legislation mandating participation is on it’s way.

    2. DownSouth

      • “They can’t let the huge banks go down, much too disruptive.”

      Not nearly so disruptive as allowing the same cabal of thugs and sociopaths who ran the world’s economy off the cliff, and are still at the helms of the banks, to remain in control of the banks.

      • “…he chose instead to spend his political capital on legislation that improves the lives of poorer people with better health insurance and perhaps some better protection against consumer credit rip offs…”

      Financial “reform” and healthcare “reform” do little if anything “to improve the lives of poorer peopole.” It’s all bait and switch. You truly have drunk the Kool Aid being dispensed by the Obama administration.

      • “…he was stuck with the continuity team: Timmy, Larry, Ben.”

      Poor old Obama. He’s incapable of making a decision. Excuse me, but he deliberately and with malicious intent chose Timmy, Larry and Ben.

      • “In my opinion, real financial reform and effective regulation are not possible.”

      Well they’re certainly not possible if you’re so thoroughly convinced they’re not possible.

      • “The Wall Street game is always, has always been, to keep the winnings and get someone else to bear the losses. And no jail time for fraud. Buy your way out of it. It is the nature of the beast.”

      Oh yes, rape is like the weather. If it’s inevitable, just as well to lay back and enjoy it.

      1. drfrank

        I think its important to try to understand what Obama is saying he has accomplished, taking it at face value. I offer an idea. I think the banks can be reigned in with some fairly simple changes, as mentioned, in place of regulatory overhaul. The uncivil tone of your post, common enough these days, brings to mind one of the most disturbing aspect of what’s happening now: the basic virtues that allow us to live together–trust, fairness, justice and so forth–are at risk. The rapacious banks got a pass and a bailout, then they paid themselves big bonuses, they don’t have their paperwork in order. . . , so why should anyone pay their mortgage and why should the banks be allowed to foreclose? “Moral hazard” doesn’t begin to describe it. You can’t transact simple business is you think the counterparty is going to fuck you. I don’t think the aggressive aspect of US monetary policy vis a vis the rest of the world is very well understood, or perhaps felt, which is what the elegant dude from Pimco is trying to say. Did you see Rand Paul say on election night that we all work for rich people so we shouldn’t be so concerned about who gets what and that we have to balance the budget. Like that do ye?

        1. Externality

          No one cared about “moral hazard” until average Americans began adopting Wall Street values. Businessmen who strategically defaulted on commercial mortgages and used legal maneuvering to avoid pension obligations were lauded on Wall Street, which had and has contempt for average Americans’ (former) view that people and entities have a moral, as well as legal, obligation to pay their debts. Morals, we have been told for a century by Wall Street and jurists such as Benjamin Cardozo, Learned Hand, and Richard Posner, have nothing to do with business.

          Now, average Americans are increasingly willing to strategically default on their mortgages and use legal maneuvering (”show me the mortgage note, please”) to avoid mortgage obligations altogether. Others see delays in the foreclosure process as an opportunity to live rent-free while saving money or spending it elsewhere in what lawyers and economists call an “efficient breach” of contract. “Efficient breach” basically means that if you can make more money by breaking a contract, do so, and you will be better off, even if you have to pay (narrowly defined) damages to the counter-party to the contract.

          Many mainstream financial blogs have pointed out the hypocrisy of Wall Street bankers simultaneously (1) supporting Morgan Stanley abandoning underwater commercial real estate and (2) denouncing average Americans who abandon their underwater homes.

          (An article re: Morgan Stanley’s strategic default can be found here:)

          For the growing trend among average Americans:

          Blogs comparing the residential and commercial defaults:

          1. Externality

            Of course, the damages owed to the counter-party need to be less than you made by breaching the contract.

          2. skippy

            Uppity slaves should get back into the pit NOW!. How dare they protest the means by which we make this country strong, its for their benefit, by which we mean, its US or the Muslim boogeyman.

            Skippy…got that slaves, we even parked some in front of your door, just to remind you, keep it fresh in those MSM altered ADHD coping skill raddled brains…what will befall you if you *stop obeying* our decree’s. Its our wealth, it is a gift from our god[s, we suffer you only as a unfortunate necessity. WE are already working on a solution to that inconvenience its called automation, and the few we will still suffer are to provide maintenance, the rest are scheduled to be culled…choose you fate…

  15. anon48


    QE is not the answer. It’s obvious that the source of the continuing economic downturn was (and still is) overpriced real estate. QE is generally intended to promote lending activity. That’s not going to happen because
    a) there are no large scale safe lending opportunities –and-
    b) there is no large scale loan demand for new investment opportunities(of any type)

    In addition, QE is too broad-based of an approach. Think of the overpriced real estate situation as being similar to the problem faced by firefighters when attempting to battle a huge wildfire in Yellowstone. Set aside the argument as whether it is more environmentally beneficial to fight it or let it burn naturally, and assume that everyone agrees it needs to be suppressed.

    What the firefighters don’t do is utilize their limited resources of water, fire suppressant chemicals, men and equipment and apply them evenly over the entire park- for obvious reasons. If they did, the effect of the impact on the actual burn area would be greatly diluted. Further, resources applied to all the areas not immediately threatened by the blaze are wasted because the effects will have dissipated long before the blaze reaches those areas.

    QE is the economic equivalent of spraying our limited resources over the entire country. What’s needed is a more precise application of capital to those areas most heavily impacted by the real estate downturn- i.e. those areas with the largest number of underwater homeowners. If we assume that a majority of those were the result of the private label option arm, negative amort, low doc subprime RMBS pools that were originated between the years 2004 and early 2007, then resources should be applied most heavily to the geographic areas where those loans are most heavily concentrated- FLA, CA, NV and AZ.

    Seems obvious to me that loan mods provide much better opportunity to focus the solution directly at the problem. In addition, it also provides an opportunity to set up an equity kicker (tax assessment), attached to those properties, whereby there is a extra capital gain or other tax that gets assessed on at least part of the gain recognized on any sales down the road. It’s not inconceivable, that within a decade all four regions (that have international demand in excess of many other parts of the country) could start to see significant price appreciation again. Only fair that there be a repayment of at least part of the cost of the rescue by those who benefited

  16. Victor

    I’m surprised that no one in either the media or the blogs has picked up on what, from my perspective, has always been the overriding concern of the Fed. When interest rates go down, the stock market immediately responds by going up. When interest rates go up, the market goes down. Why? Because high interest rates lure investors away from the casino into safer investments, such as bonds and savings accounts. In other words, by controlling interest rates, the Fed is able to manipulate the stock market, which, in a “healthy” economy, must always be headed upward.

    After interest rates fell to zero, I had assumed the game was up and the manipulation could no longer proceed. But Bernanke came up with a clever alternative, aka “Quantitative Easing.” So now, whenever its time to give the market a boost we’re going to have another round of QE. Those who naively take Bernanke at his word are missing the point. QE has nothing to do with boosting the economy in general, creating jobs, freeing up clogged credit lines, etc., and everything to do with the state of the Dow.

    1. ds

      I disagree with this. In 2007 when the s&p was at 1600, the fed funds rate was above 5%. Now the ffr is 0% and the s&p is at 1200. It is not necessarily the case that low rates cause asset bubbles. Same story with the other commodities excepting gold.

      Once again, the general criticisms here have merit and are valid, but the argument the blog poster makes and El-Erian makes regarding QE is wrong. QE can’t do it alone, but the alternative is higher interest rates which is decidedly worse for the real economy.

  17. OhIngardail

    I love that you say Ben Bernanke is ‘staking on thin ice.’ How true, even if only a typographical error. Time to head for the shore, I think…

  18. TC

    I cannot imagine those seniors said to be responsible for the Republican sweep in Congress are likely to remain quiescent as the purchasing power of their savings further collapses on account of this blatantly fascist QE policy. The last thing that every age is ready to accept right now is a furthering of the divide between the haves and the have nots. No bit of Bernanke’s sophistry can rationalize a policy 100% certain to accelerate a hyperinflationary explosion in commodity prices (on account of the fact there is an acute shortage of qualified securities available to absorb the added liquidity, because confidence in that game is shot) whose impact will be catastrophic on both personal and societal levels. What is sure to result from this is a further shut down of the physical economy. Scarcity looms.

    Now, to those who whine about Yves being “jaded” or “mad” none of your objections changes the fact that, Bernanke is painting a giant target on his chest and his hometown of Dillon, South Carolina is at risk of being burned to the ground in symbolic protest to what this foolish man is venturing. The growing millions whose lives are being thrown onto the scrap heap as a result of political incompetence and outright criminal fraud represent a highly disruptive paradox to those austerity-minded fascists among us whose cowardice is resulting in police and fire protection being scaled back. Truly, in matters of comprehensive policy being affected during this time of crisis one might find brighter things in a box of Crackerjax. Quantitative easing certainly is no exception.

    Per the matter of protest raised here a few days ago an evening torch rally held in Dillon, SC could make for a very powerful statement via introduction of a very real threat. Furthermore, the matter of leadership in Congress ought to be vocally challenged. We should not tolerate those personalities (Boehner, Pelosi, Reed, McConnell) who have presided over unprecedented, systemic, criminal fraud while turning a blind eye. While these people have every right to serve in Congress, their so-called leadership should be tolerated no longer.

    1. Doug Terpstra

      Very well said. “I cannot imagine those seniors said to be responsible for the Republican sweep in Congress are likely to remain quiescent as the purchasing power of their savings further collapses on account of this blatantly fascist QE policy.”

      Surely, the new GOP house “winners” will soon be like the dog who chases cars and finally catches one — road kill.

      1. Externality

        Actually, all the House Republicans need to do is PASS legislation that is popular with their base. The Democratic-controlled Senate will block it or Obama will veto it. Part of the reason that many Republican leaders campaigned against Angle and Christine O’Donnell is that they did not want control of the Senate. If they can keep the focus on the Senate and the administration, the Republicans can do quite well over the next two years.

  19. Hugh

    Bernanke has this exactly right. The only essential parts of his plan he didn’t mention are the pixie dust and ponies.

    1. readerOfTeaLeaves

      Sadly, I think you are correct.

      I say this with sadness, but it’s my view that Bernanke is probably fundamentally a decent, hard-working, bright man. He is imbued with a view of economics that Econned dissects, and shows how the ‘sciencish’ camoflage of late 20th c economics – particularly out of academia, but also in business – simply do not work.

      To me, this post is yet another tragic example of why we desperately need new economic paradigms. The old ones simply don’t fit the nature of economic behavior in today’s world. My idea of ‘market’ may have little or no relation to your concept of ‘market’, and that’s only the first of many problems with today’s economic assumptions.

      The economic assumptions on which the Fed appears to be acting strike me as roughly as capable of dealing with today’s realities as the Hollerith machine would be.

  20. Bas

    Whatever the further effects of QEII, and even if it succeeds in stopping deflation of the MBS-market, won’t it lead to rampant inflation through higher food and fuel prices, given the negative correlation between dollar rate and oil price?

    In other words, isn’t the Fed substituting low core inflation for high headline inflation? Wouldn’t that squeeze the wealth effects (if any) of higher asset prices (and worsen the trade deficit)?

  21. i on the ball patriot

    All logic fails when your government is hijacked, your president is a murderer, your electoral process is a corrupt farce, and your ‘rule of law’ is now a blatant two tier scam.

    Want to heal the global economy? Here’s a two point program:

    1. Focus on and eliminate the top dog elite scum oligarchy that own and control the global central banks.

    2. Dream some outside the box dreams. If a government can lend money to the mega banks at near zero interest for speculation then a better government can loan money directly to its citizens at near zero interest for socially responsible and beneficial; mortgages, educational loans, business loans, etc. Elections can be direct democracy with all factions represented in fair and open elections. Corporations can have elected citizens sitting on their boards proportional to dollar gross to insure social responsibility. Cops and troops can be drafted for eighteen month duty cycles from ALL parts of communities in NO deferment lotteries. Individuals can invent and create decentralized power and food sources. Individuals can have courage. Individuals can have moral autonomy. Parasites can be hung on lamp posts …

    Deception is the strongest political force on the planet.

  22. Eric L. Prentis

    The Fed has no QE exit strategy, and can NOT get off this insane merry-go-round because the entire house of cards the Fed builds will come crashing down the moment its QE programs stop. Blowing asset bubbles, at the same time increasing costs to the real economy (i.e., food and energy), act as increased taxes, causing employment to go DOWN, NOT up. For the real economy, QE is a self-defeating strategy, and the unintended consequences of the Fed’s QEs will be horrific.

    Why do these unelected Fed bastards get to play potentially catastrophic games with my wellbeing?

  23. F. Beard

    I am not certain that the Fed will be anywhere near as free to experiment as it was in the past. Yves

    We need fiscal policy now; a massive bailout of the population.

    The Fed is a particular hobbyhorse of libertarians, … Yves

    Yep, and the gold-buggers are on the warpath too. The whole idea of a sovereign government borrowing what it has right to create debt and interest free was bound to lead to trouble. And now the gold-buggers intend to shackle the government with golden chains just when it is needed to reverse past injustices.

    and with Tea Partiers taking ground in the Congressional elections, the Audit the Fed movement might gain renewed energy. Yves

    And what honest institution would fear an honest audit? The pragmatists are hoist by their own petard; they tolerated an inherently dishonest money system and now are concerned that the truth will wreck everything.

    A little principle would have gone a long way. Now we best repent, bailout the victims, and reform or EVERYONE may suffer.

  24. DonLast

    Why do we all toe the Orwellian line in referring to “QE”.

    Tell it for what it is – printing money.

    Running the printing presses as in Weimar days.

    Stop the cant.

    1. F. Beard

      Tell it for what it is – printing money.

      Running the printing presses as in Weimar days. DonLast

      Nope. However, that money printing should be directed to the victims, the general population, not the villains, the banks.

  25. ChrisPacific

    In related news, Bernanke was spotted this morning refuelling his car at a gas station.

    “I’ve put in 100 gallons so far and it’s still showing empty. Clearly more gas is needed,” he said, a puddle of gas beneath his car slowly expanding in the background. “Another 200 gallons ought to do it.”

  26. soloduff

    Bernanke should be careful of what he wishes for–explicitly, inflation; tacitly, dollar devaluation, aka currency war. Never forget that Bernanke is proceeding in a virtual theoretical vacuum regarding the workings of printing money (Quantitative Easing). And this bit about “no inflation”–presumably thanks to the Boskin Commission plus the “core” inflation dodge (i.e., inflation ex-inflation)–is a cruel joke to anybody who keeps track of expenses, especially seniors. Finally, Bernanke expresses great ignorance in the claim that QE can maintain asset prices at an artificially high level. The more suckers he lures into the markets at this late date in the rally, the more precipitous will be the fall when the inevitable “correction” comes, whether in response to stagflation, geopolitical surprises–remember, Obama may think that he has to knock off Iran in order to achieve re-election–or a combination of both.

  27. Rick Halsen

    Keep it simple boyz and girlz.

    Yes, the U.S. is a consumer economy. But we need jobs in order to consume.

    QE2, QE3, QE4….to infinity, per Bernanke’s playbook and thesis is replacing jobs – at least temporarily. Therefore to Ben, debt equals jobs. However debt needs to be paid back. But without jobs debt cannot be paid back quickly enough and grow out of control. Ben is therefore banking that someday enough jobs will return in order to pay back said debt.

    Conclusion: Ben is banking on certain things to happen to counteract his monetization of debt but if they don’t happen he’ll adjust his anti-depression thesis forward accordingly. He has stated that he has many ‘tools’ at his disposal and monetization is just one of them. In effect, he’s asking everyone to believe in his approach to solving our present-day economic problems even if his first anti-depression thesis proves to be wrong. In his mind, he’s not asking for much. Invest accordingly.

    1. Rick Halsen

      Pardon, should read…..

      “….without jobs debt cannot be paid back quickly enough without growing out of control.”

  28. Bas

    Guess they left this Hoenig guy as a credibility hedge?

    When it all goes down the way it’s supposed to, let Hoenig manage the Fedge fund with Volcker at the Trashury

    So easy

  29. New York Times Watch

    Guys, listen to this crazy radio show on QE:

    Some callers say that we should just give $600 billion to the people, rather than the banks. They’re dismissed as populist. Then the New York Times’s chief Fed reporter, Sewell Chan, piles on by saying that, in a country of 300 million, 600 billion dollars means just $20 a person…way too little to have a stimulative effect. (about 30 minutes into the show)

    But it’s $2,000 a person!!

    THE CHIEF FED REPORTER AT NYT DOES NOT KNOW WHAT’S IN A BILLION!!!!! He’s three orders of magnitude off.

    No wonder this country is screwed.

Comments are closed.