How markets interpreted the Fed’s Operation Twist as a sign of double dip

Edward here again. I just posted this up on Credit Writedowns. I am not in the right frame of mind here to give this topic the well-developed attention it requires, but, with things unravelling in global stock markets, I feel that I have to take it on. By the way, feel free to ping me with comments on twitter too. I’m at edwardnh

At some point soon, maybe tomorrow, I will be writing an update to two 2009 posts: The Fake Recovery and The recession is over but the depression has just begun. The gist of those two posts is still operative and also very relevant, namely that the problems which created a global panic in 2008 are still with us waiting for economic weakness to reassert themselves. When that weakness comes, bad things will happen. I think that about sums it up. We are about at that point right now.

As for this post, I’ll bullet it out to be more brief and I’ll try to tamp down undue alarmism. I just had a meeting with former US President Bill Clinton. He was explaining to us why inspiring, connecting, and empowering global leaders to forge solutions on problems that are most pressing in developing countries is still relevant during these trying times. I will write this up for a future post. But his comments there reminded me about the negative impact I could have in amplifying crisis by hyping pessimistic outcomes unnecessarily. So I’ll try to keep it real but not alarmist. Tell me how I do at the end.

  • The global economy hit stall speed earlier this year as Europe and the US became susceptible to a double dip at the same time.
  • Double dip will likely lead to such severe turbulence politically and economically that cohesion could rip apart in a way that creates depression instead of policy support and muddle through.
  • Until now, most people realised that fiscal support was lacking in both the US and Europe but they deluded themselves into believing monetary support would ride to the rescue. It will not.
  • The Fed statement yesterday, while initially billed as the post-QE3 meeting statement should now be seen as the Fed reload to find its run out of ammo meeting. I should stress as I did yesterday that “it’s not that monetary stimulus is completely ineffective. It’s that you must really jam it on and you would have to target price instead of quantity to get any measurable effect and even then the transmission channel is going to be weak.”
  • The Fed is not going to jam it on. “the Fed is already feeling political heat from its previous policy actions, so it will allow the economy to slip before it embarks on the next round of asset purchases. Therefore, if and when the next recession hits, debt deflation will take hold. The calls for stimulus will be deafening. And because the Fed will have resisted more aggressive prior action, the Fed will then be forced to be extremely aggressive in its policy response. That is when expanding the balance sheet will be a go and the Fed won’t just buy Treasuries, but a lot of other assets too.” [Roubini: No QE3 announcement at Jackson Hole but QE3 will happen]
  • In Europe, the problem on monetary policy is the same as with the Fed; they want the fiscal agent to take on a larger role. From an ECB perspective, that means liquidity to buy bonds requires an austerity and structural reform quid pro quo from the periphery, something which is deflationary and depressionary. Unless Germany, the Netherlands and others loosen fiscal policy in turn, a double dip recession was always inevitable. [Spain’s debt woes and Germany’s intransigence lead to double dip]
  • Recent data show an economy that could already be in recession. That was how the European data released today was perceived.
  • Combine this with the Fed statement, which was very downbeat on the US economy and people are now panicked about a double dip for the reasons I mentioned above.

My greatest concern is the French Banks SocGen, Agricole and BNP Paribas. A wholesale funding run on these three is like a run on JPMorgan Chase, Citigroup and Bank of America in the US or HSBC, RBS and LLoyds TSB in the UK. This is major. Look at my posts on Chinese shunning trade with French banks or The European Bank Run. The French must do something. Unfortunately, that means one needs to consider not just the sovereign, but quasi-sovereign debt that creates contingent liabilities which the sovereign could be reasonably expected to cover in the event of crisis. In France, we may well see this problem crystallized next due to the liquidity crisis affecting French banks. As I see it, these banks will need a commitment from the EU on liquidity. I believe we have that. But they also need a commitment from the sovereign on capital. Look for a statement by the beginning of next week.

And, yes, I still do have hope even now that policy makers will get it right and prevent worst-case scenarios. But, the number of different upside outcomes has dwindled the longer this crisis has proceeded. I will leave it there for now. I don’t have a ton of trading ideas here. Right now, it’s a liquidity crisis, a panic, and it’s all on policy makers. Good luck in the markets.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Richard


    The French banks are facing a solvency crisis. The withdrawal of funds by the US money market funds makes it look like a liquidity crisis.

    The French banks have tried to restore confidence by turning to disclosure. Specifically, they are revealing their current exposures, net of writedowns, to troubled sovereigns.

    If you believe their disclosures, there is no reason for the French government to step in and provide capital.

    I expect the trend towards much more disclosure will continue. With this data,the market participants can assess for themselves the solvency of the banks. A crucial step in restoring confidence.


  2. Jim Haygood

    Trading ideas? The 30-year T-bond yield is within hailing distance of its 2.5% low of Dec. 2008.

    If the yield tests that level again, it will be the Short of the Century.

    Soros broke the Bank of England. Now it’s time for us to break the Fed.

  3. tts

    Shorting the 30yr is still a bad idea. For all practical intents and purposes it akin to betting against the house still and we don’t know when that will change. The timing is nearly impossible to pull off and you’re likely to get burned.

    The “safest” thing to do instead IMO is to buy a commodity of most any sort and hold it long term and do your best to ride out the volatility. I think most any commodity will do very well over the next 5 years at a minimum.

    FWIW: currently sitting in cash, doing a wait and see on PM’s.

    1. F. Beard

      I think most any commodity will do very well over the next 5 years at a minimum. tts

      Commodities, outside bare essentials like food, depend on a healthy economy to use them. So why should they go up? I would not recommend food speculation unless you wish to be cursed:

      He who withholds grain, the people will curse him, but blessing will be on the head of him who sells it. Proverbs 11:26

      1. tts

        The world’s currencies are all going to be engaged in competitive devaluation for quite a while. Their respective central banks are attempting to keep the effects of this from entering the “real” economy as much as possible but eventually the effects will be felt through commodity price increases over time.

        1. okie farmer

          As a long life producer of food, I can tell you with certainty that food commodities always have cheapened drastically in recessions. At least they did before the funds started their speculative control of commodities. Its a natural tendency of govts, if they can, to cheapen food in economic hard times. Reduces rioting, you know. It will be interesting to see if AgDept reductions in price supports can “win” against the hedge and pension funds who manipulate commodities. If the economy sinks badly, I certainly would NOT bet that commodities will hold up.

          1. tts

            They’re already heavily subsidising food directly as well as providing food stamps en masse through the mail. That is the only reason why we haven’t seen Great Depression-esque soup kitchen lines yet. Prices are still rising.

            BTW commodities also includes things like copper, oil, etc. Its not just food stuffs.

  4. Jim

    Always enjoy your work, Edward.

    With respect to France, how can the government guarantee the capital of the banks? Sarkozy doesn’t have a printing press, as does the US.

    And let’s say that France does guarantee the capital. What happens to the French debt rating at that point? Wouldn’t it be committing the same mistake the Irish government did when it guaranteed bank obligations?

    1. Edward Harrison Post author


      That’s the problem, isn’t it? France can’t really credibly backstop it’s banks. They are too big. See here from 2009:

      But there aren’t a lot of options here. I have thought about this in Spain previously because that’s where the similarity to Ireland is greatest. The best thing to do is to recapitalise the banks or allow them to be recapitalised while trying to give them an implicit guarantee of some sort. The point is to be able to show they are well-capitalised and that you won’t allow a run to proceed.

      If the run does continue and that guarantee is tested, the French would have to allow one of these bank to default, give out haircuts, call a bank holiday and then clean up afterwards. That would be the Armageddon scenario. A ways off yet but it’s not good.

      Bottom line: without monetary sovereignty a government is constrained. And those constraints are a double-edged sword.

    2. JTFaraday

      So, does that mean we’ll be seeing anti-austerity general strikes in France next– or are France & Germany just more special than Greece and Ireland?

    3. Richard Kline

      So Jim (and Ed), yes, the Irish Wasting Disease. If one ‘guarantees’ _the bank_ rather than the deposits, one inherits the bank’s obligations when it busts, i.e. one is guaranteeing the bondholders. That is ridiculous, and as we have seen in Ireland is political suicide. But not to guarantee the bank is go guarantee that a run occurs. This is why a supra-national authority with funding depth is needed, but the ECB isn’t equipped. The alternative is to _seize_ the bank, and let the bondholders get in line, but that would only work if the bank, in effect, had already failed.

      So that’s the choice: Irish Wasting Disease or amputation. Is it any wonder that Sarko is uncharacteristically distant from the television cameras just at this time, hey?

      1. Glen

        Funny, banks runs may one of the only ways that the peons get to influence the bankers who seem to be running the governments (rather than the peons) especially in places like Ireleand.

        It would seem natural then that banks runs will become more and more common events.

        1. Typing Monkey

          It would seem natural then that banks runs will become more and more common events.

          I was thinking about this today.

          Yes, they will become more common. And (as I’ve said before) at least one major US bank is going to go under, and possibly more. Now that there’s no longer even the pretension that the US is going to recover, there is simply no way the gov’t can bail them out (again) at a time when unemployment is likely going to hit 20% (broadest measure) within twelve months. It’s not going to happen.

          I think Buffett is going to have lost quite a few billion on his bank bets over the next year…

          As a side note, Obama should just come out and say he isn’ re-running in order to give his party a chance to re-win the presidency.

          In fact, if Obama sits out, (1) Elizabeth Warren will significantly increase her odds of election (for all the good it will do) and (2) she might actually be able to do something because the Dems might actually manage to occupy Congress and the Presidency, since the country is going to shift very far left very quickly (for better or for worse).

          As for trading ideas: my best idea so far is to short EUR/CHF.

  5. Hugh

    Clinton is just another kleptocrat. I could care less what he has to say about anything.

    A double dip implies that there was a recovery at some point, but as I have said before, a bump is not a recovery. What we have had is an L-shaped depression that has been papered over with lots and lots of extend and pretend.

    Markets are rigged but they aren’t monolithic. Everyone who can has their eye on the exits and plans to get out before the sh*t really starts coming down. That’s why even though markets are rigged they can still cliff dive. Oh and the markets are 90% owned by the top 10%. They aren’t a stand in for the real economy. So the up markets of the last couple of years have very little to say about the down state of the rest of the country during this time.

    QE1 gave banks, not the economy but the banks, a respite because the Fed took a trillion or two of their dreck off their hands. QE2 was all psychological. It didn’t really do anything in straight monetary terms. Operation Twist seems more like QE2 than QE1 but lacks even the psychological component. And if things get worse the Fed is going to get real aggressive? QE3? Tell me one thing the Fed can do that will directly help the real economy and not just jack up a bunch of zombie banks, market casinos, and looting elites.

    The real issue is kleptocracy, elite looting. Traditional solutions don’t work because they just become opportunities for new looting. Kleptocrats aren’t out to fix anything. They don’t fear crashes because they learned in 2008 that crashes provide, if anything, even more and better opportunities to loot. Looking to kleptocrats and their policies to get us out of the mess they created is deeply, deeply suicidal.

    1. wendy davis

      Thanks, Hugh, for pointing out who the f Bill Clinton is. He thinks that since he apologized for helping Haiti turn into a third world sweatshop, he can do it again now and call it ‘A global Initiative’. He thinks if he says, “Oopsie; sorry about the CFMA and Gramm-Leach-Bliley’, and he’s all good to give financial advice: Feh!

      Sure, Bill; we’ll take your advice on repatriating off-shore funds at a 5% tax rate just to start an infrastructure bank. Gee; ya think the same old folks would get all that money and waste it right into their own pockets?

    2. Doug Terpstra

      Yes, thanks, Hugh. Listening to Slick Willie explain about forging solutions on problems that are most pressing in developing countries is like taking advice from a pyromaniac about how to put out fires. Clinton shredded the safety net, demolished the wall between gambling and banking, monopolized mega media, and sent jobs overseas with rigged trade SHAFTA pacts. It’s a classic definition of insanity to listen to the same people who caused the problem and expect different results.


        Doug, you have to admit, even now next to Angelo Mozillo and Dick Fuld, slick willie doesn’t look soooooo bad.

        1. Ray Duray

          Oh, yes he does! He’s just better at hiding the trail of his destruction than his fellow charlatans.

          I’d strongly encourage anyone who still has a remote bit of respect for Bill Clinton to come to your senses.

          Here’s two antidotes I can recommend for the naive Clinton fanboy:

          Robert Scheer: “The Great American Stickup: How Reagan Republicans and Clinton Democrats Enriched Wall Street While Mugging Main Street”

          Michael Parenti: “The U.S. War on Yugoslavia”

          Anyone reading/listening and still praising Bill Clinton should understand categorically, you are a sociopath.

        2. Doug Terpstra

          True, Mozilla and Fuld are even creepier, but very few people listen to them anymore. Yet people still kneel for the crooked Willie.

  6. spigzone

    Perhaps the most pertinent question is why, when Peak Oil is turning into Declining Oil, there is this sudden propaganda campaign to convince the world Peak Oil is a hoax and all the ‘new’ action is in exploring and developing western oil reserves which will lead to oil independence for the west.

    I’m thinking the monied elites have made a decision to shift the bulk of resources and monies from our overseas attempts at oil security hegemony, rapidly becoming economically and politically infeasible, into an all out effort to explore and develop every conceivable petroleum based source within the western hemisphere no matter how marginal the EROI.

  7. Richard Kline

    So Ed, ‘preciate your backstopping Yves here on a busy day. I would concur with most of your bulleted assessments, and furthermore “The recession is over but the depression has just begun” is one of the best headers I’ve ever seen!

    I diverge in one important point of emphasis, however. There was no recovery. Yes, in Financialstan there was a ‘recovery’ because truly enormous volumes of liquidity and pixelated money were handed to financial system alpha predators to target price, just as you allude to a different end. This had a weak effect on the real economy only since most of the cash was sluiced off into speculation or to give the illusion of life to dead zombie financials. (You know all this, I differ in emphasis only.) Juicing financials doesn’t amount to an _economic_ recovery; at most we had a long stall on the slide down, but for two-thirds of the population the situation didn’t even amount to that.

    From corner offices watching the scrolls at the bottom of the image, there was a liquidity-induced ‘recovery’ but for everyone else we’ve had a four-year long recession. What is ending is the political viability of bailing out the rich while the poor, old, young, and crippled are pitched over the side in bunches to lighten the load on the ship of state. We’ll find out what the passengers are really made of over the next 18 months. (And yes, I know that ‘mutton’ is the most obvious hypothesis, but still . . . .)

    1. Glen

      I cannot agree more, most of us have been expecting this outcome since it was pretty obvious in 2008 that our governments just gave the guys that caused this mess a lot of our money and told them to do it again.

      The rest of us were hanging on by our fingernails or already flush down the toilet in 2008.

    2. Carla

      Thank you, Richard Kline, whoever you are, for the best comment so far in response to this post.

      Come on over to Cleveland, where we were pitched over the side decades ago. You’ll find that (economically) poor communities are generous and genuine.

      1. Richard Kline

        So Carla, I’ve been a commentor here on NC for nearly four years, and an infrequent guest poster. I’ve been largely absent from comments here since the Spring, being far more focused on events in the Near East. Now that the rooks are coming home to roost, I have more of my attention on American political-economy for the nonce My perspective—systemic, historical, economic, and political—has been consistent over that time, and Yves and I’m sure Ed both know it (for better or worse). It has been my position for years that there has been no recovery in any meaningful sense; that indeed that term, ‘recovery,’ is a state and media deliberate misnomer to wuther the thin veil over the state bailout of the rich: “We’re in a recovery, it just hasn’t reached you yet [sucker], so be patient [and shut up].” The technical aspects of the recovery are to me a larger conceptual distortion because the technical have been extensively massaged over the last generation to explicitly exclude labor and consumptive aspects as much as possible from ‘the official position.’ It is not politically in the interests of 90% of the public to accept those terms of debate because they are inherently false and favor capital over the populace. For the populace, then, there has been no recovery. I’m not very interested in talking about what’s up with the oligarchy (though of course a grasp of the financial markets operated by said oligarchs _is_ of relevance to handicaping what’s up and what of it).

  8. Economics Considered

    I am somewhat puzzled as to why it seems like nothing is being written/blogged about the (to me, enormously) destructive effect of the Fed’s policy, and certainly of all three QEs, on the average American who has no access to simple savings vehicles such as savings accounts or CDs that give any effective return whatsoever (and in fact have a real negative interest yield).

    The same holds true for any previously fractional allocation of funds by pension funds to mundane return vehicles, including Treasuries.

    For the average person, savings are a net loss forward proposition. How is this going to effect the behavior of ‘saving’ ??

    For the portfolio investors, the Fed policies seem pretty obviously to be driving this whole segment of the country’s ‘wealth’ to significantly (if not exceedingly) higher risk.

    It seems worth some more robust treatment. It’s hard to imagine that it isn’t a major factor in a much more fragile economic structure.

    1. Because

      What a dumb post. There was no “third” QE idiot.

      Posts like these are embarrasing. You need your nose turned up and given some pain.

      Who cares if the “FED” is abolished or not. That would just send the acting power back to the monied families which is what the families outside the FED’s power want(Duponts,Rothschilds).

      People like Jim Haygood are the problems in America. They live for the global capital, committing treason against country. Haygood would not be a American if I was in control.

    2. Economics Considered

      One interesting corollary to the minuscule return on savings would seem to relate to the economic behavior of consumers to high inflation rates. It would seem worth discussing the substantial likelihood that next-to-zero interest rates in combination with even mild inflation might produce the same consumer behavior.

      1. JasonRines

        The survey I ran a few months ago on the question: Are Households Deleveraging gives some clues. See Q&A number 5:

        But you peaked my curiosity to run another survey on the rate of change based on several other variables. Perhaps can cross-tab the results of the one already done and overlay with the new data, since the two topics of deleveraging and savings are related. Any variables you want me to input? Tell you what, email and I’ll run it and post the results here as a Naked Capitalism research. Actually, just ring me: 603-953-3388.

  9. Jim Haygood

    ‘[Bill Clinton] was explaining to us why inspiring, connecting, and empowering global leaders to forge solutions on problems that are most pressing in developing countries is still relevant during these trying times.’

    ‘Solutions’ such as the Gramm-Leach-Bliley Act which Clinton signed on 12 Nov 1999, removing the separation between commercial and investment banking?

    It never occurs to the Clintons that the most positive contribution they could make would be to withdraw from public life, and stop pestering decent people with their shameless, interminable hustling.

    1. Because

      LOL. Who cares what Clinton signed into law then. Clinton was the Astor’s man back then. Signs though he has pulled his tail between his legs and rejoined the Kennedy’s is pretty evident.

      Considering your dupontian/rothchilds leaning Jim, you better be careful.

    2. JCC

      Gramm-Leach-Bliley, NAFTA, both written by the Republican Party… It’s no wonder Clinton is known as “the Best Republican that Democrats ever elected”. He is just just one more example of the American, “Two-Party”, Nincompoop Leadership we’ve had to live with for the last 30 years. And based on who’s in charge today and the potentials in both wings, it’s looks to be a rough ride for quite some time.

    3. kemo sabe

      Slick Willie’s still busy drinking and making merry with the uber rich who he worked for and still does. His foundation is just a sham for lobbying activities for huge multi-national companies who pay him huge $$$ to have him attend their “meetings”.

      The Fed’s just playing a role here trying to keep the market buoyed long enough for Sheriff Obama to set up shop again. In the meantime they get to make money in the Casino while keeping the market in a narrow range. Their money (loaned to them by Bernanke and cohorts) helps them move the market. Soon there will be a thunderous crash when big money heads for the exits. That’s what this author’s trying to tell you but doesn’t want to panic the markets!

  10. MyLessThanPrimeBeef

    Not hyping pessimistic outcomes unnecessarily, but I feel, and this goes for all disasters, we dignify those who are suffering by letting the world know how bad it really is.

    For example, if the company is really laying off 20% of its workers, and it says it’s 12% through some sort of newspeak, it insults those out of work.

  11. steelhead23

    Edward, … But his comments there reminded me about the negative impact I could have in amplifying crisis by hyping pessimistic outcomes unnecessarily. So I’ll try to keep it real but not alarmist. Tell me how I do at the end.

    Oh puhlease. This advice reminds me a bit of Obama, when responding to questions regarding Bush Administration War Crimes – “We will look forward – to the future – not the past.” Sir, telling swimmers that there is a shark approaching is NOT fear-mongering. And who is better off in the end, the skinny-dipper who is eaten by the shark, or the swimmer who races to shore in a panic? That is, sometimes, every now and again, panic is the appropriate response. Run like hell.

    No investment advice? Why not? Over at BoomBust, Reggie has us shorting BNP – and making money. C’mon man, you know what you’re talking about, you know where the lies lie buried, you know how to make some money here, why not just say it?

    BTW – as regards what you say moving markets, perhaps you should give a little advice to the FOMC which just dropped a load into the global punchbowl. Or maybe not – it is fun to watch how the party responds.

  12. Matt

    The FRB is the puppet, the banks own the FRB. With Greenspam’s reserve requirements at about 1 percent of Bank deposits, the only smoke the FRB had to control money was the fed funds rate. Well the Fed funds rate and the T-bill rates are locked down at 0.01.

    The FRB has had no ammunition for anything for several years now. Now it just serves as a conduit for holding long term securities while it’s owners stay short term and foreign interests reduce their long term Treasuries and MBS.

  13. TC

    Yo Ed, grow some nuts. The trans-Atlantic banking system whose “assets” were inflated to the high heavens during the Greenspan era in a manner no different than a Ponzi scheme has for three solid years been proving itself perfectly insolvent and there is no getting around this fact. You know, financial alchemy appeared to work so swimmingly when the fee junkies euphemistically called “banks” did not have to worry about investor confidence. However, that gig took a dirt nap with Lehman Brothers, and like Lehman, investor confidence in whatever hair brained concoction venturing to sustain the banking system’s Ponzi “assets” ain’t coming back anytime soon. Now, how hard is it to break this “news” to a man whose legacy is getting his dick sucked in the Oval Office by women half his age? As much as Mr. Clinton has shown himself agreeable to getting something nasty, he probably is equally agreeable to taking something nasty, too…

  14. Ian Ollmann

    My gut (more known for ice cream than brains) says you all are a bunch of chicken littles and that the panic is a good buying opportunity. My gut doesn’t know much, but that is what it thinks.

    The rest of me thinks name calling is perhaps inappropriate here — sorry about that. However, being (lovingly) attached to my gut as I am, I can help but feel we will muddle through, and I can only hope that in the mean time, our policy makers will not do irreparable harm to the country attempting to fight what is inevitable and probably not as actually terrible as it may seem. It is better to fight the rising ocean by building a fishing boat, than by spending billions on heavy earth moving equipment.

    Make the best of it. A downturn is a great time to invest! Certainly (per Steve Jobs’ announcement at the time) Apple spent its time during the bust investing in its future. That worked out pretty well, I think. Now is a time of great skepticism. This is good. You actually need a business plan and some hope for success. What few ideas there are that survive this ruthless climate are probably going to be real winners in the years to come.

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