We Speak to Real News Network About QE2 Posted on November 10, 2010 by Yves Smith I was tight on time for this interview, and as a result I spoke at an even more rapid clip than usual. Hope you enjoy it nevertheless! More at The Real News Post navigation ← Lobbying to Keep the Capital Markets a Casino G20 Proposes Fig Leaf Regulatory Regime for Biggest Banks → Subscribe to Post Comments 55 comments George Washington November 10, 2010 at 12:20 am Outstanding interview!!! One of the best short interviews I’ve heard ANYWHERE giving an overview of our financial situation. BRAVO! readerOfTeaLeaves November 10, 2010 at 12:53 am Agreed, and I thought TRNN interviewer’s questions were good. I also agree with another commenter that this is an important public service, helping us all understand the key relationships. Gooddog November 10, 2010 at 12:20 am Congrats Yves – great interview (possibly the best one of yours I have seen) – very clear and concise – you seem comfortable and engaging and totally on top of the subject matter. I think you are getting the hang of this! Ted K November 10, 2010 at 12:32 am I haven’t watched part 2 yet, but this is by far, by far, by far the best video appearance you have done that I have seen. The only one that’s close to this is your FIRST (underline first) appearance on C-Span. And that interviewer is terrific. You play off each other quite well because he stays focused on the issues but he has a warm personality and speaks from “the little guys” point of view. Some synergy there. I don’t know if you just did that because your other activity on Friday, but if this guy asks you to interview again you should jump at the opportunity (but you should INSIST the same guy and not another person at TRNN). You came across very well there. You should stick with the hot pink blazer too, not because it looks that great but it seems to be good luck for you in interviews. Great stuff. People out there in “Joe Six Pack” Land need to know this stuff Yves. That is a type of public service. I encourage you to make friends with Jennifer Taub when you’re over at Amherst Mass. Obviously I don’t know her personally but she strikes me as a very classy and intelligent woman. Oh, and next time you have a chance to meet Maria Bartiromo, carry a cross, some holy water, garlic, and carry a small wood stake behind your back, ok??? Vince November 10, 2010 at 12:43 am I’m wondering about something the interviewer said early on. He said, and you agreed, that QE2 was another way to help the banks. I think there was some contradictory logic involved in the answer as it evolved in the interview. If QE2 increases spreads between borrowing cost and what banks can lend at then they can only gain if they actually lend. You seemed to think it wouldn’t get the banks to lend though so in that case the lower yield on treasuries would hurt the banks , not help them. On the other hand, if they do lend, they are taking on risks. Right now we can assume that the spread they can get isn’t enough to compensate for the risks. If the current spread isn’t enough but QE2 makes the difference then it implies that increase of spread is now compensating for the risk that is out there. I guess I’m not seeing how this benefits banks directly in either case. The points about it increasing risk in the system is well taken. It could of course backfire leaving another mess, but it seems like no bargain for anyone involved. Paul Repstock November 10, 2010 at 1:14 am I can answer that vince. It washes the bailout money once more ans so frees the banks to do whatsoever they choose with the money..as opposed to lending to private Americans..Offshore lending for higher yeilds was mentioned as a possibility in the interview. As for the spreads the banks could achieve at this moment: don’t you think that the 100% profit they could get by lending into the domestic market would be sufficient?? Obviously the banks have higher expectation..lol Vince November 10, 2010 at 7:44 am Well, I don’t know. I don’t think the rest of the world is a playground either. I think maybe the question was just a leading question by the interviewer and that the proper answer was probably “no”. The banks are sitting on funds because the risks are too great. If you just wanted to help the banks you would just let them sit on their cash until their balance sheets recover. I think it is enough to say QE2’s goal is to increase risk taking as a means to grow the economy. And, that it may put tax payers on the hook for another bailout. I don’t think however it is a policy designed to get banks to crash just so we can give them more money, which seems to be the only way saying QE2 is for the banks makes sense. decora November 10, 2010 at 7:55 pm maybe they are sitting on their cash because they know their assets are in reality worth nothing, so they are waiting for someone to come along and make them mark it all down. if that happens they want to be all Goldman like and have a huge pile of gold in a Scrooge McDuck vault or whatever. just a theory. Siggy November 10, 2010 at 1:10 am Full marks! Made your bones! Best interview yet. Paul Repstock November 10, 2010 at 1:18 am Nice interview Fealess Leader. Good venue, good presentation. Mr. Jay did try to run off with the initiative a couple of times (Oh well, it is his program), But you did a good job of stayng on the program. Glen November 10, 2010 at 1:55 am Good stuff! Where is part two? Paul Repstock November 10, 2010 at 2:11 am Go to the Real New website. it was on top an hour ago. Marco November 10, 2010 at 2:33 am Aye, this is all going to end in tears. 1. Bernanke is playing who blinks first against the world. He thinks if he prints money fast enough, the rest of the planet will finally gives up, and raise their currency and US will then be able to export its way out. Except: the world is a much bigger place now. Bernanke’s printer isn’t big enough to make the rest of the world blink fast enough. (Who will explode first US, Saudi-peg, or china-peg.) I don’t see $600T will change anything in domestic economy, it will go all over the world. 2. Everybody thinks they are cleverer than the other guy and can out blink the rest, and call the other guy’s bluff. And I personally think China will win, simply because they generate 6 times new wealth out of their GDP growth that can be used to hold the peg. ($6T at 10% growth vs. $15T at 1% growth) 3. Europe will soon have to make their move to maintain their currency at competitive level, above 1.40, they will shrink. (story of Irish exploding can only bring down Euro so much every time.) 4. Israel-Palestinian problem will make OPEC jacking up oil price ever higher until Obama start taking the problem seriously. $88/barrel yesterday. Libya, Iran already making $100 dollar noise. 5. The too big to fail explosion will be Dollar run. China has one big advantage that dollar does not have, people actually holding yuan to replace dollar in asia. So china can play “print money” game when the usual tricks don’t work anymore. The switch from reserve/storing value to merely invoicing currency is going full gear in Asia. (Where to move value from dollar asset is the biggest question everybody wants to know. World commodity and hard assets are not big enough.) 6. US economy now is completely broken. A big investment/construction is not possible to calculate due to incoming raw material/wage inflation, while demand is low. While china has 2 advantages: high transportation subsidy/speed, hot home market, and construction momentum. They can build facility 1/5th the time and start flooding the world with product first. (I am talking anything steel, therefore railroad, ship, car, utilities) If China eonomy keep growing at highspeed despite cool down effort and high raw material cost, US economy is toast. They can play “hold the peg” longer until Saudi explodes in 10-15% inflation due to dollar flood of mispriced real-oil. whatever it is, US real economy is now broken, totally unpredictable and nobody can make plan for productive private construction. Speculation and rent economy is the only game left. Greg b November 10, 2010 at 8:36 pm Its important to understand that QE introduces no new money to the economy. Its an asset swap. There was 600 bil in bonds that is going to become 600 bil in cash. That is NO NEW MONEY. A bond is just as much money as cash, it took cash to buy the bond. Now this 600 bil cash will find a home but the new home will convert to cash (in aggregate). Its a psychological ploy the fed is operating on. They think they can affect inflation expectations and pull forward some spending to stimulate the economy. Aint gonna happen. Tell me, if you think things are going to be more expensive next year are you going to reduce what you need now so you can have more money later or are you going to buy a bunch of stuff now, that you dont need, and find a way to store it? Most will do the former IMO. These guys have their psychology all mixed up. They think the average joe is a psychopath like they are. Just waiting on Armageddon and ready to take to the streets with guns ablazin, storming the stores to hoard their goods. It didnt happen in the GD, why now? Evelyn November 10, 2010 at 8:59 pm The reason it’s called Quantitative Easing is exactly because new money IS being created. The quantity of money is greater. When they don’t want the quantity to increase they ‘sterilize’ the transaction. Greg b November 10, 2010 at 9:32 pm Evelyn The fed cant create new money,(thats a fiscal operation) they can only alter credit conditions and change the yield curve by swapping one type of asset for another. A type of security for another type of security. It really is that innocuous and ineffective thats why it did nothing in japan all those years. There will be price spikes in some commodities but that is not “new” money its reshuffling. The price rises wont last because the market will figure out its nothing sustainable. All the talk about helicopter drops…… fiscal operations, not monetary. This why monetarist economists love monetary policy it doesnt give people money and makes credit cheaper so they have to use banks. Greg b November 10, 2010 at 9:35 pm Oh and sterilization is a gold standard term, not really applicable today. A form of it applies to large volumes of foreign debt our CB might get, but we dont get much foreign debt. Russ Abbott November 10, 2010 at 2:44 am Great interview! carping demon November 10, 2010 at 2:48 am Really nice, Yves! Your modulation is even and your enunciation is perfect, you don’t pull any punches and each and every word is right on target. The listener doesn’t miss a thing. I hope to see more and more of you. When is part 2? Hubert November 10, 2010 at 3:35 am Great interview Yves. Strange, how much one can come to the point with a great interviewer. This guy is the smartest journalist I have seen on US TV. It is apparent that this guy is interested in truth and not the timing of the next commercial break. So he helps greatly. I thought TV is not the right medium for financial stuff, but, look, it is possible. Compliments. ds November 10, 2010 at 3:37 am I appreciate the post, but I am a bit confused over your criticism of QE. The first point made in the interview is that after the discount rate dropped to zero, banks, instead of lending, started to buy treasury bonds. The implication here is that banks were making ‘free money’ by borrowing at zero and buying risk-less bonds. So this is bad. The next point made is that with QE, banks are now using their money to re-inflate asset bubbles in stocks, commodities, etc., in addition to the carry trade. So this is also bad. So, in other words, it is bad for banks to hold treasuries because that is ‘free money’ and it is equally bad for banks to invest in risky assets because that is just re-inflating the asset bubble. I have a hard time understanding what you want out of monetary policy specifically. One one hand lowering the discount rate is bad because it allows the bank to borrow for free. So what should the Fed do then? Raise the fed funds rate? Using your logic regarding the effectiveness of QE — that, since we still have high unemployment QE didn’t work — perhaps you think the fed should raise the discount rate. After all, the rate went from 5.25 in early 2008 to zero today and unemployment is higher now than it was in Jan 2008! And certainly, a sufficiently high discount rate would eliminate the ‘free money’ the banks are getting from buying risk-free Treasuries. It could quell both excessive speculation and the ‘free ride’ of holding treasuries. But I doubt you would favor this. So what is next? You come out against QE but the only effective alternative is banks holding treasuries. According to this logic, there seems almost no form of monetary policy which you would find acceptable. In Part II you call for more fiscal stimulus — with which I wholeheartedly agree — but offer no solutions with respect to monetary policy. Clearly the Fed is not Congress. All the Fed can do w.r.t. monetary policy is facilitate favorable conditions for further fiscal measures, which is *exactly* what QE2 is doing. On the subject of the Tea Party in Part II, the interviewer asked why are Tea Partiers, who are mostly senior citizens, concerned about inflation — after all, if we have more inflation we will have higher interest rates which will increase the interest income of retirees. This particular argument is beyond absurd, but it echoed the idea pushed throughout the interview that low interest rates punish savers — an idea which you seemed to accept. I have no idea why so many seem to believe that higher interest rates and low asset prices are beneficial to anybody – including retirees — in an economy such as ours. Monetary policy can not be used to regulate banks or speculative behavior. It can, in the limit, stop commodity speculation, stock bubbles, carry trades, etc., but only at an extraordinary cost to the real economy. If QE is so bad, what then is your alternative for monetary policy specifically? Yearning to Learn November 10, 2010 at 9:51 am in my opinion you hit the nail on the head exactly (perhaps without meaning to). Dropping rates from 5.25% to 0% allowed the banks to borrow and then buy Treasuries. This is of course “free money” for the banks but it does (and did) little to help the “real” economy. going from 5.25% to 0% did help some borrowers who had adjustable rates however, although that was clearly a side-effect and not the main reason for the drop. Now QE2 will allow (force?) banks (and citizens) to speculate (not invest) in commodities and currencies and perhaps equities. Again, although this may give the banks more gambling money, it does not help the “real” economy. These two actions can be immensely powerful at increasing lending, HOWEVER not in our current environment where there is a lack of desire to lend and also a lack of qualified borrowers. In other words, we have a demand problem… not a supply problem. QE2 and dropping rates helps when we have a supply problem. The Fed of course “must” do what it is doing, because it (and our Govt) misunderstands the problem and the available solutions. They continue to think that there can be no recovery without the current banking regime, and they continue to think that all solutions then must route through our current banking regime. worse, they still after 3 years see this as a liquidity problem as opposed to a solvency problem. But this is inaccurate. our current banking regime IS the problem. the more we attempt to use them as transmission mechanism towards healing, the more we flounder and fail. This is the lesson the Japanese sort-of learned when they zombified their banking system. It’s sorta like meth to a meth addict. Meth IS the problem. buying the addict more and more meth, and then stealing meth for the addict, and then coming up with novel was to procure meth for the addict does not solve the problem. the answer is to get the addict off meth. Likewise: the answer is to bypass the banks as transmission mechanism towards recovery, and also to “reconfigure” the role that our banksters play in our economy. The banks are the problem, not the solution. Yearning to Learn November 10, 2010 at 9:54 am where there is a lack of desire to lend and also a lack of qualified borrowers. excuse me, this should have said: where there is a lack of desire to borrow and also a lack of qualified borrowers. clearly a lack of desire to lend is a supply problem, and thus lowering interest rates and QE2 can improve a lack of desire to lend. need an edit button! Greg b November 10, 2010 at 8:41 pm Monetary policy is ineffective because loans are demand driven not “availability of money” driven. Lowering interest rates will not prompt very many people to go deeper into debt if they are fearing further income losses. Monetary policy needs to be abandoned for some true fiscal stimulus. Slash taxes and DO NOT cut spending to offset it. shayre November 10, 2010 at 4:07 am Yves, You just keep getting better and better at explaining the situation the world is in today. I honestly think that the Fed doesn’t believe for a second that it can succeed, but it has to do this to give the impression that government is doing all it can to save the US economy (and unsustainable inflated asset prices). But, before they can let things crash on the next leg down, they have to get to the point where the masses demand that they stop, and that government stop with the stimulus. Then, when things fall apart, as they would eventually do, regardless, the government can tell the people, “it’s your fault (which it is in a sense in that fraud was committed from the bottom up, and the powers that be turned a blind eye to this, because it allowed them to maximize what they could accomplish before the credit card was maxed out and defaulted upon – by the fact that the US government will pay interest rates on their debt below the loss of purchasing power of the US$ globally). Things will get very bad, and then, people will beg government to do something, and the US will become a centrally-planned government (overtly instead of covertly) as it relates to the largest parts of the economy (facism really), and the rest of the economy will be left as free-market enterprise. Due to overcapacity, corporate profits will vanish, as companies try to outlast their competition in avoiding bankruptcy. Sooner or later, everything collapses and we start all over again. All that gets wiped out is the phony wealth that would never have existed had the bubble not been allowed to occur. The reality is, the world is a lot better off because of the bubble, otherwise, we would have been where we are today, but only ten years earlier, and we wouldn’t have housing in place for every American family. The reality is, this inventory overhang in real estate is going to bring prices down to levels that “investors” can buy these properties and still generate a positive cash flow based on the much lower rents they are going to recieve in the future. Rents will be lower as “landlords” compete for tenants (due to overhang), and the tenants they are fighting to attract are the people that are on unemployment insurance or welfare, people who lost their homes (homes they had no equity in, so did they really lose anything). And how much can these people afford for shelter costs. Especially with rising costs for food and imported goods like clothes. Boy, that is a lot of rambling, I hope you will also check out my blog: http://shayrethewealth.blogspot.com Take care, and keep on keeping on. shayre http://shayrethewealth.blogspot.com P.S. I think the powers that be in the US are a lot smarter than most people give them credit for, and that they really are doing what is best for America. The problem is, the only way to do this is to let wealth become concentrated. There really is no other option, and it really doesn’t matter much because much of this wealth is phony and will be lost in the upcoming debt deflation. The thing to remember is, where would the US be if the Fed had not done all it could to maximize the credit bubble and all the benefits it had to offer? And believe me, the US benefited greatly. There will be a price to pay, and that price is that we will no longer be able to enjoy the standard of living we have gotten accustomed to because the rest of the world will no longer be our slave-labour pool. And I think that this is the end goal that China (along with Russia, Brazil, and OPEC countries) are trying to hasten as much as humanly possible. Evelyn November 10, 2010 at 9:16 pm There is a problem for some of us who worked for what I now think of as “value-based money” and built up a nest egg (like responsible people are suppose to do) in order to be able to retire in some kind of comfort. The stock market is rigged, so you can’t store value there, real estate has also been in bubble mode for many years. Banks don’t pay interest. Short of buying a bunch of gold — which is priced pretty high right now — there is a limit to anything you could call a SAFE way of storing value. You are saying “hurrah for the destruction of the value of fake wealth” but by accepting and celebrating the massive dilution of value-based money that SOME people spent decades working for and accumulating, by the added bubble money created by speculation, leverage and simple keystroke fiat, you’re also celebrating the impoverishment of the aging suckers who bought into the system of US Dollars. My guess is youre very young and have little or no stake at risk in “the system” — nothing to lose. I’ll bet you won’t want to see us middle-aged people with our careers at an end. sucking down the social security we paid into all our adult lives, either…. ohioralph November 10, 2010 at 9:31 pm Intellegent comment, Evelyn. Please see my comment below. Good to see not everyone fooled by the nonsense expouned on by Yves. L Sewell November 10, 2010 at 4:50 am Yves, you’re awesome. Swedish Lex November 10, 2010 at 5:05 am Really good. fiscalliberal November 10, 2010 at 6:48 am Wonderfull set of interviews- While a lot of people talk about modulation and other delivery techniques, make no mistake, your forte is logic and the ability to explain. I just think of you as Depression Kansas tough – we need a lot more of this type of talk. As time goes on, you are definitely going to pick up new reaqders and listeners. You need to annunciate your business experience. At times you sound like a liberal. What is important that you explain that you come to these views through hard experience, again Logic. Please publish version 2 in the U-tube format as I do send your interviews to people I know DownSouth November 10, 2010 at 7:33 am I think the following link will work for Part II: http://www.therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5851 Vesta November 10, 2010 at 8:01 am This is very good. I see an intelligent, well spoken, attractive woman who’s becoming more and more comfortable in front of the cam. This interview is clear and understandable and I didn’t think you were speaking too quickly at all. tfitzaz November 10, 2010 at 8:22 am The Real News Network is one of the best sites out there. Great interview. Chris M November 10, 2010 at 8:57 am The best explaination I have ever seen. You need to be a regular on CNN and MSNBC. DownSouth November 10, 2010 at 9:05 am Yves, You made a very important point in Part II, and that is that our financial overlords are very much playing the race card side by side with the economic ideology. It makes for a nice pair of aces. But I think they are playing other cards as well in their attempt to get people to operate out of emotion rather than economic interests. In The Populist Moment, Lawrence Goodwyn described a similar situation during the Gilded Age. The operative political priorities with the “plain people” were 1) racism—-black vs. white; 2) sectionalism—-north vs. south; and 3) religion—-Protestant vs. Catholic. The operative political priority of the robber barons was money. The northern urban industrial (largely immigrant) worker and northern farmer were for the most part anti-racist, northern and Catholic, and Republican Party partisans. The southern farmers were for the most part racist, southern and Protestant, and Democratic Party partisans. The southern farmer, northern farmer and northern urban industrial worker had common economic interests. Needless to say these were diametrically opposed to those of the robber barons. However, the sectional, racial, religious and partisan loyalties created almost insurmountable barriers to bringing these three groups together to advocate for their common economic interests. And the robber barons knew this. Their trump cards were to play on and inflame these irrational passions. One current trump card the neoliberals are playing is national pride and ego. Here’s a one-minute video advertisement released recently by Citizens Against Government Waste. Note how it seeks to justify austerity under the banner of nationalism. The goal is to get people to operate out of passion and xenophobia—-nationalism—-and to abandon intelligence. Neoconservative intellectuals like Richard Bernstein laid the groundwork for this sort of demagoguery. Legitimate concerns about trade and capital flows, helped along by the propaganda apparatus of our financial overlords, easily morph into irrational national hatreds. Our financial overlords then use these irrational hatreds, and the kabuki that ensues, as cover for policies detrimental to the interests of everyday Americans. Evidently the Chinese elite is playing the same game. In response to Bernstein’s book The Coming Conflict with China came this review: I have read THE COMING CONFLICT WITH CHINA side by side with CHINA CAN SAY NO (in Chinese). (It’s far more than a coincidence that the two books were published one after another within a year.) Disturbingly enough, both are masterpieces of demagoguery. Admittedly, inasmuch as I am impressed by the empirical research both Berstein and Munro put into this book, I am exasperated by the way they systematically ignore countervailing evidence in order to sell their “China Threat” pop theory. Both of these two books are meant to rouse nationalistic sentiments, in the one case, American and in the other, Chinese. But THE COMING CONFLICT WITH CHINA is even worse, because in the case of China, they are, understandably, still struggling against postcolonialist forms of domination, but THE COMING CONFLICT WITH CHINA inexcusably advocates and rationalizes a kind of Pan-Americanism in a world that is fast becoming multi-polar, not to mention in a region that has a growing sense of its own identity and independence. Concluding reflections. The world is already fraught with conflicts and violence. We don’t need any more of this kind of stuff to generate further distrust, xenophobia and paranoia. Rather, we have to learn to treat each other with equal respect and to resolve our conflicts through reasoned deliberation and dialogue. There is much more to say about this. But that’s all for now regarding this book. It is extremely important that everyday Americans (and Chinese) stay focused on what behooves their economic interest, and not get sidetracked onto these emotional, non-thinking bunny trails of irrational national hatreds. When one starts operating emotionally, one becomes very susceptible to manipulation by the financial overlords of one’s own nation. Aunt Deb November 10, 2010 at 9:45 am Thanks so much for doing interviews such as this one. I have given donations to The Real News network precisely because they do interviews with people like yourself. I hope many of your readers do the same. Jackrabbit November 10, 2010 at 9:52 am After all that the Fed has done to support the banks, It amasses me that people (especially the MSM) take the Fed at their word – that QE2 is intended to reduce unemployment. The Fed itself has said that they are not sure to what extend QE2 will help the real economy (but they feel that they have to try). What we DO know is that it will help TBTF banks, which are still hurting badly: * Merdith Witney expects (before QE2) that they will lay off tens of thousands in the coming months * they have over $400b of seconds and thirds that are mostly worthless, and * they have the ongoing fallout from the foreclosure mess and demands for put-backs to contend with. If the policy is, in fact, targeted more at banks than unemployment, then we can better guess at some of the nagging questions that people have about QE2. For example, in order to provide the level of help that the banks need, I’d expect that the next round of QE2 (call it “QE3”) will be DOUBLE(delivered in the same time frame) the first round of $600b. And I think that will be the last of the QE “experiment”. P.S. PK called for 8-10T in QE2. Such a huge size is needed because only a fraction of that actually “trickles down” via the wealth effect. (He might also be throwing out large numbers knowing that they will get pared down.) The point is, I doubt very much that the Fed engages in QE2 to extent necessary to really help the economy because a) that level of QE2 likely causes more harm than good, and b) from their perspective, they get the biggest bang for the buck when they are nursing the banks back to health AND providing some support for the economy. Avg John November 10, 2010 at 10:05 am Good interview, but you seem to be a little to kind towards the intentions of the fed. I’m not convinced they believe their own book on their qe programs. Seems to me they have a little more “splainen” to do. I don’t think the question is “to qe or not to qe”, the question should be “what do we have to do to restore this country to economic growth and health”. After all, they know that too big to fail banks present themselves as a danger to our(average citizen) future economic well-being, yet all their policies seem to be aimed towards continuing to save them at the expense of the general public. We are either a government of the people, by the people and for the people or we are not. We don’t want the bread crumbs that fall from the table of the wealthy elite, we want a place at the dinner table. The fed and our elected officials need to start acting like it. This is MY country and I want these politicians bureaucrats to start acting in MY interests for a change or I want them replaced. If it’s ok for the behavior of multi-national corporations and investment banks (who have been granted citizenship rights) to be excused because their ultimate objective is to maximize shareholder wealth, then the average citizens ultimate objective should be to maximize their own individual wealth and well-being, and they should insist on policies that do that, even at the expense of the elite. If the U.S. took the lead on cracking down of these tbtf financial institutions and multi-nationals and adjusted their tax policies to punish their selfish behavior, other countries around the world would follow suit and it would stop them from engaging in playing one country off against another. That is the kind of thing the G20 should be publicly debating, out in the open where we can all see and hear. Sorry for rambling on, I guess I could have just said “I just don’t trust these people anymore”. LeeAnne November 10, 2010 at 10:43 am Fabulous! again Yves –not to worry about speaking fast. Its good for your expression – more animated. You still don’t miss a beat, and anyways, on the Internets, we can always hit the replay button. ohioralph November 10, 2010 at 11:19 am It appears that I am the only one who is disappointed by this interview. I also find the above comments quite lacking in substance. That said, let me elaborate. QE is a Federal Reserve policy. Accepting or rejecting QE means the acceptance of the Federal Reserve. All the FED can do is artificially lower interest rates by increasing the money supply which results in mal-investment. This includes business investment and human behavior. Not only does business invest unwisely but consumers make bad decisions. Speculation in the markets becomes a way of life for many people which leads to bubbles, booms then busts. As pointed out in this interview, people justify their behavior thinking that they can out maneuver the markets which inevidently fails. Symptoms of this behavior is properly identifed in this interview. Notably, the belief in this behavior and the association of others who share this belief. The primary problem is the belief that government policy is a solution to correct this problem. The government only has the resources which it steals from others. The FED can only manipulate the money because of its monopoly control. All of this leads to a moral hazard that creates the educational deficiency in our society. It you follow this logically, it leads to all our problems. The solution is to eliminate the source of the problem which is the FED and fiat money that it breeds. I also strongly object that senior citizens desire for higher interest rates is against their self interest is crazy. Capital formation comes only from savings. The FED only creates artificial money and distorts the economy. Proper fiscal policy is a sharp contraction of government not this malarky that deleveraging requires government spending. Money does not disappear by savings or deleveraging, it simply goes to more productive uses which will never be the government. ftm November 10, 2010 at 11:26 am You were great in this interview. Whatever you did just before the interview, (Had you already spoken to a group at Umass?) you should try to replicate. Video is such a strange medium, one has to be really hyper to get the viewers’ attention. Excellent! Grace Styles November 10, 2010 at 11:30 am US QE2 will not have as much impact, if any, on real economy as the first round, as economist here points out convincingly http://www.mindfulmoney.co.uk/2211/economic-impact/real-economy-the-loser-from-us-qe2.html. QE in general tends to encourage appetite for risk and this second round is only going to lead to asset bubbles all over the place. Basically its based on the theory of ‘trickle down economics’ – made famous in our lifetime by Regan and Thatcher. Of course the latest experiment with this in the shape of QE is rather more, er..shall we say adventurous?, bold? Nah, its great big gamble, playing cards in the last chance saloon. Bernanke’s Op ed piece in the WSJ stopped all the pretence that it has anything difrectly to do with the real economy, real jobs, real lending for small businesses and real households. Once the markets have ridden the asset bubbles, and they have burst, as they always do, I guess we can do QE all again and our illustrious, knowing policymakers’, with their penchant for learning about economics by studying miniature golf, can hock another few generations with their largesse. This market party will come to an end and real world will come crashing in for sure, its just mainstreet will have pick up the bill, yet again. EmilianoZ November 10, 2010 at 12:10 pm Excellent performance. I fear Yves is becoming too comfortable with the camera. I miss the dour unsmiling Yves. Re: turkeys voting for Thanksgivings The Tea Party will be sorely disappointed. Many of their members are past middle age, probably worried about retirement. The Fed’s policy means low interest on their savings and high inflation (through financiers getting cheap money to speculate on commodities and oil exporters losing faith in the dollar). But “turkeys voting for Thanksgivings” applies to everybody voting Republican or Democrat. In the end we only have ourselves to blame. Alternatives do exist. The Green Party had candidates in many elections. Steve Roberts November 10, 2010 at 1:35 pm QUESTION: In the second part you say that if you have government stimulus that generates 10,000 jobs at $x salary you grow the GDP by $Y. My question is, if the stimulus is really just throwing debt at NON-INVESTMENT (infrastructure?) programs, won’t the jobs effectively die out after the debt has been spent? Then aren’t we left with the debt and now the people have jobs that aren’t sustainable because we artificially produced them? To me, that’s how we got into one of our GDP comparison problems. If the economy is built to $12 trillion in size but to get there we had to spend and accumulate consumer debt (or home equity) of $8 trillion to get there, the GDP isn’t a sustainable $12 trillion. It’s really more of a sustainable $10 trillion GDP economy and we are going to do whatever we can to not realize that. Even if it means we must add $4 trillion to the government debt totals. But when the proceeds of the debt have been spent, we’ll still be a $10 trillion GDP economy but now we’ll have $16 trillion in federal debt to deflate. decora November 10, 2010 at 7:38 pm just don’t ask them how they ‘valuate’ information technology. vast lumps of amazon-type patents which are basically obvious ‘inventions’ that have no intrinsic value, (and that other countries don’t care about ripping off, even if they do have patent laws there) unless you have a gaggle of lawyers and lobbyists, make up some X percentage of the GDP. who knows how much, really. Paul Repstock November 10, 2010 at 2:58 pm The only way for Americans to escape the stiffling ‘Yoke’ of the Fed and the Corporate TBTF banks is to say “We don’t want your Marbles!”. The leverage and the implied threat here is always, that the people will loose everything if the banks are not continuously supported. I have news for you. The system is a fraud. If you would have nothing if the banks failed, then you don’t have anything now. The only people with anything to loose are the ones who own and control the banks. Do not imagine that the rest of the World’s governments are blind to this. However, they are using the deception for their own ends. What do you think would happen if the United States of America pushed the China too far and misjudged their importance to China… Then the Chinese government said as above…”We don’t want your marbles”; An subsequently piled every US Dollar, and every T Bill, Bond, and other US financial obligation, in the middle of Tianamen Square. Then they light a bonfire (forgive the debt). The Debt structure is being used to justify everything including itself. If the debt structure is repudiated on a large enough scale the whole government house of cards collapses. Why do you think it is illegal to burn or otherwise destroy a dollar bill which you have earned and should therefore be yours? john c. halasz November 10, 2010 at 3:10 pm Hey, Yves, you were smiling! Maybe it was an unconscious reflex to being in a more sympathetic, less hostile/obtuse interview context. And your smiles did seem more sardonic as the interview proceeded. But, silly as it may be, smiles do work in media-genic contexts. Still the motor-mouth. But I’d guess they were already telling you that in B-school days. Cynthia November 10, 2010 at 4:40 pm I love the way Yves uses Einstein’s definition of insanity to describe Ben Bernanke: someone who repeats the same behavior and expects different results from it…;~) I also love the way she describes Tea Party Republicans, namely small business and retired people, as turkeys who are dumb enough to vote for Thanksgiving…;~) Susan November 10, 2010 at 5:47 pm Excellent interview in every respect. (Both segments.) Thank you once again. Now I’m going to go watch it again. decora November 10, 2010 at 7:18 pm maybe it’s not just the big banks. i know a smaller bank which claims it had no CDO exposure but that is a very misleading statement if you dig into their 10k. Cathryn Mataga November 10, 2010 at 7:31 pm Instead “recapitalize the banks”, we should start saying “give free money to the banks.” That’s my idea. Evelyn November 10, 2010 at 9:29 pm Um, exact same thing. What’s interesting and sad is that when you explain these things to people they don’t find it credible that this is actually what is happening. Yes, we really are running a system that gives free money to very rich people who then rent it back to our government. . . . LJR November 10, 2010 at 10:13 pm Congrats, Yves. You remain my hero. This is the best interview of yours that I’ve seen. Your smile really lights up your face. I didn’t find your presentation too hurried. What a difference between this and the Bartiromo fiasco! And this time you got your plug too. Bernard November 10, 2010 at 10:25 pm great video and explanation of how things works. need to get this on You tube and other mediums so the average joe can see such simple language answers to the flimflam going on. Now, the Tea Partiers and Republican/Democrat scammer won’t like being told the truth. but we all need to hear this explained as simply as you do. looking for more. keep up the good work. and many thanks Charles November 14, 2010 at 10:26 am While I respect Yves’ opinion, I have two comments. First there’s no question we want to keep the banks from going under, if only because the alternative is so much worse, as we witnessed with Lehman. Furthermore, at least in this part of the interview, Yves did not mention that a major beneficiary of QE is the taxpayer, who is able to issue Treasuries at much lower rates of interest. Lower borrowing costs make it possible to do fiscal policy, which is what actually lowers unemployment and allows people to pay their mortgages. Second, Bill of Calculated Risk told me he believes that the writedowns are much closer to complete than Yves seems to think. This is a critical point. When we talk about trillions in quantitative easing, we’re only talking hundreds of billions in (so-far) actualized losses, and many of those have been written down. Now, there’s a corollary. As long as unemployment is high, foreclosures continue, and losses keep rising. So, what we urgently need to do is to spend money on employing people. This the Congress has done, but only half-heartedly. The CBO estimates that 3 million jobs were saved by stimulus. If they had spent twice as much on jobs (and maybe less on tax cuts and wars and other low-multiplier activities), we’d be sitting at 7% unemployment instead of 10%, and everyone would be much calmer. The point is that the problem is not so much QE– it’s the absence of effective fiscal policy to work in tandem. I think this is the critical perspective missing from most commentary, including Yves. The crisis will only be resolved when people get jobs. QE can be part of that, or it can be used to drive asset bubbles. The question that we really should be asking is why we aren’t raising taxes on the people who are profiting from the asset bubble. That would have the effect of taming the bubble and paying for the necessary fiscal policy. Comments are closed. Tip Jar Please Donate or Subscribe!