So How’s That QE3 Working?

Obviously, it’s a little early to reach a verdict on QE3, but market pundit love reading the tea leaves early and often, so we figured we’d join the fun and look at early reactions.

First are the contradictory responses on the inflation expectations front. Even though TIPS and six year Treasury bond prices reflected higher inflation expectations, Monday saw a mini-crash in oil futures and an only partial recovery that day, with a further decline on Tuesday. The initial explanation, such as trader error to fears of releases from the Strategic Petroleum Reserves, omitted to mention that American oil use is still below 2007 levels and China is looking wobbly (even normally cheery Australians are beginning to think their Chinese ride is about over). But FedEx reducing its profit outlook seemed to focus investor minds on the lousy prospects for growth even after QE3. The GSCI was also down 2.2% on Monday (note oil is part of the GSCI, which tracks 24 raw materials; ). It fell a further 1.3% on Tuesday). Even Treasuries had regained over half of their initial QE3 losses.

Second, overnight, the Bank of Japan joined the central bank stimulus party, increasing its 45 trillion yen asset buying program by another 10 trillion. Asian stock markets and commodities rose, but not rip-roaringly, with the MSCI Asia Pacific Index up 0.6% and the GSCI up 0.4% as of this writing. Was this surprise move simply to keep the stratospherically high yen from going any higher in nosebleed terrain?

Third, some analysts are already discussing, meaning asking for, more QE. While Chicago Fed president Charles Evans favors setting targets for QE (meaning more, bigger QE as long as unemployment exceeds 7% while medium-term inflation expectations are below 3%) while Richmond Fed president Jeff Lacker is unconvinced QE will do little save increase inflation, this Bloomberg story gave more attention to the Evans position:

Now of course, there was some cheerier news, for instance, a Bloomberg story on how QE would help housing, and the wealth effect would help spending. It’s true that the wealth effect of home prices appreciation is stronger than that of stock price gains, and so in theory should do more for consumption. However, we’ve questioned how much this round of pushing secondary market bond prices lower will do for mortgage rates, since banks are choosing to increase their spreads over funding costs rather than lower interest rates and write more loans. There also may be a wee problem with a shortage of creditworthy borrowers (although the work of top mortgage analyst Laurie Goodman has highlighted overly stringent lending standards as an issue).

But even if you thought QE will help raise housing prices, it’s still an open question as to how that translates into consumer buying activity. Remember, in a balance sheet recession, businesses and individuals focus on shoring up their financial condition rather than exploiting opportunities (save maybe an iPhone splurge). So all the past norms on how housing price increases translate into a particular level of additional consumer spending are likely to be very much dimmed down. If your formerly $300,000 house, which went down to $230,000, is supposedly up to $245,000, are you really going to go out and spend more? You’ve still taken a hit on your net worth and are in catch-up mode.

As we keep saying, the first time a central bank tried lowering interest rates to increase asset prices as a way to stimulate spending was Japan in the mid 1980s. We know how that movie ended, and the Fed ought to. But despite the failure of the earlier QEs to do much more than goose asset prices, the Fed acts as if it can have a meaningful impact on the real economy when the central bank is already in ZIRP mode. It would be better if we were wrong, but we’re not holding our breath.

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  1. mmckinl

    Quantitative Embezzlement 3 or QE3 will work just fine for the banksters … the public … not so much …

    1. Jim Haygood

      ‘Some analysts are already discussing, meaning asking for, more QE.’

      QE is kinda like a nasty coke habit. You start with a couple of lines a day as a ‘pick me up.’

      A couple of years down the road, you’re going through ten grams a day, and half your nose is missing. That’s the ‘QE3’ phase.

      As every ex-addict knows — and Ben Bernanke will soon learn — it only ends when you smack the wall head on. And it’s a coin flip as to whether you survive it or not.

      Too bad Bozo Ben has 300 million unwilling passengers in the back of his careening bus. Abolish the freaking Fed already!

      1. Carol Sterritt

        We already had one Presidential candidate, Ron Paul, that thought that abolishing the Fed was a good idea. That individual may actually have won his Party’s nomination. But the Party leadership of the nut wing side of the two Party system put him out of his misery, in terms of viability of a campaign.

        Our nation will not prosper until we get rid of our ONE BIG MONEY PARTY.

    2. Hal (GT)

      Totally agree. The benefit of this action will go to the big banks and those who are wealthy. It won’t help those who are middle class and below. Though it might make life a bit more difficult as the currency continues to get debased.

      1. mmckinl

        Exactly …

        Increased profits for the banksters …

        Increased prices for the public …

        Speculators helped …

        Savers crushed …

  2. Foreigner

    I repeat this again and again.


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

    Nobody understands.

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

    End of quote

    Why Yves changed her mind? Why?

    Why she is following the Tea party? Why?

    What chnaged in her economic theories to change her mind?

    Why the american people is so stupid?

    Why the american people think people around the world is so stupid like them? Why?

    Federal Reserve started another printing machine because american exports are falling againt and the american gouvernment is doing a hard and nasty economic and currency war against China and the Europe. This is why the Fedreal Reserve is printing and trying to export the crisis.

    Why the american people is so stupid and do not see the facts behind the money printing machine of the Dollar?

    Why the american people is so stupid?

    1. Foreigner

      Why the american people is so stupid?

      Why they think others are so stupid like them?

      Why the american people is so stupid?

      Why they do not understand the american authorities are doing an economic war against the world?

      h/t Jerry Khachoyan, of

      Why Yves changed her mind? What happened in her economic theories to change her mind and join the Tea Party?

      Why the american people is so stupid?

      Why the american army is bullying everyone who do not accept the “pax americana”?

      Why the american people is so stupid?

      Accepet the way you are. Stupid. Very, very stupid people. Stupid, blind and arrogant people.

      Why the american people is so stupid and later complains against the “anti-americanismm”? Are you so stupid to no see the crude facts behind your oligarch political system?

      1. woah

        I’m an american and think understand your frustration, so I will try to explain my viewpoint.

        Many american people are aware of the serious problems with the way the american political leaders treat other countries around the world and use the US dollar to wage war.

        In fact they used derivatives to practically destroy the whole world in from 1999?-2008 in case you didn’t notice.

        The problem is complicated and involves the federal reserve, money in politics, oil, and outsized political influence by a small minority(unscrupulous minority).

        This has been going on for centuries around the world (read the bible) and the world has just begun to wake up in large numbers since the 911 attacks. We woke up to a terrible mess and things have gone terribly wrong.

        Right after 911, many of our freedoms were taken away in the USA and many bizarre laws were put in place; Like the patriot act and NDAA. 911 was used an an excuse to wage war on the mideast. General Wessley Clark told about all the mideastrn countries USA would destroy over the next few years.

        We have had our religion marginalized. Our news media lies to us constantly and does not report on any topics of substance. We have had mass immigration which makes everybody a stranger. We’ve been flouridated and medicated and told we are being healed.

        It’s really a select few powerful people (0.01%) who have taken over governments and NOT the people living here. Don’t be angry at us, but try and learn the bigger picture.

        Look at the history of the Rothchilds, the federal reserve, and work your way up through history of world war 2, the Bolshevik revolution, the USS liberty bombing, 911 attacks up until today.

        Keep in mind there is much disinformation along the way towards your search for the truth.

        God bless us all.

        1. woah

          Correction. I’m not even sure how many of the politicians understand what is going on, but mainly the %.01 buying their votes.

    2. Yves Smith Post author

      I wonder why this blog is having a sudden influx of commentors who have major reading comprehension problems.

      I challenge you to find a single post that approved of any of the QEs.

      I also challenge you to find a single post in which I’ve supported the Tea Party. Hint: saying Ron Paul is to the left of Obama on some issue is NOT tantamount to supporting the Tea Party.

      Being in favor of MMT is not at all the same as favoring QE. MMT describes how fiat currency systems work. MMT proponents advocate more deficit spending now, since it can be financed by the central bank (as in no need to borrow) because the economy is so slack and labor has so little bargaining power that we are a very long way from creating inflation. Deficit spending (a FISCAL operation) is not at all the same as QE (a MONETARY operation).

      Better trolls, please.

      BTW, your comments (both the attack on readers generally and the multiple misrepresentations of the views of this blog) are an assisted suicide request, which I am all too happy to oblige.

      1. Hydrogen Alpha

        Please rescind the ban Yves. Trolling is intentional disruption, and I don’t think Foreigner was arguing in bad faith. Even if he wasn’t clear on the finer points of NC’s economic stance, it hardly invalidates the remainder of his post, which airs feelings that usually don’t get any voice precisely because this sort of reaction usually ensues.

        I recall a similarly frosty reception given to an East Asian poster on Hullabaloo who, during the expansion of the RE bubble, justifiably complained that the U.S.’s economic policies were looting East Asia’s savings accounts. (Remember all the crowing in the American financial press about East Asia’s “excess” savings?)

        While Whoa, in his reply above, states confidently that it’s only the elite few who condone such things with the rest unwillingly or unwittingly pulled along, the way nationalist dander always seems to get up in this context, even in apparently liberal or cosmopolitan venues, really makes me wonder.

  3. Conscience of a Conservative

    Funny you write this story now, as the Washington Post’s top story on their Business page site discusses the major banks not willing or wanting to increase their origination capacity preferring to keep rates where they are and benefit from higher margins while keeping more higher coupon loans on their books and not refinanced. QE is more about aiding and abeting bank profit while robbing Americans of interest on their savings and not about boosting the economy

    1. Yves Smith Post author

      The WaPo is late. Dealbook picked up on the failure of banks to drop mortgage rates on Friday (we put it in Links then). The FT got to it on Sunday evening (we addressed their running of the industry excuse in a Monday AM post).

      1. Conscience of a Conservative

        Quite True and Chris Whalen has written about this for months. Yet most people don’t get it.

    2. bhikshuni

      Haven eaten the carcasses of the working poor, the scavengers now need to go after the middle classes (and having succeeded with wage stagnation, the only other end to squeeze is savings).

  4. J Sterling

    Rich people start recessions and depressions, by having all the money and then declining to invest it in labor. This time round they started in 2008: the stock market crashed, then they started laying off workers.

    You can’t fix a recession by giving the rich people even more money: they’ve got almost all of it already, and they’ll only keep the new money just like they’re keeping the old. FDR did it right, you take the money away from the rich people and use it to employ workers who spend the money, until the rich decide to start investing in labor again.

  5. ArkansasAngie

    Who is insolvent?
    Who is evading moral hazard?
    Physician … Heal thyself
    And … Quit making the rest of us take your medicine.

    1. dirtbagger

      QE1 did help the economy, but there were few benefits to the general economy from QE-2 and operation twist. I fail to see any benefits whatsoever coming from QE-3. The only answer that I can come up with is that after nearly 4 years, bank balance sheets are still in a miserable condition. The US economy is going to have a hard time repairing itself until someone removes the heads from the zombie banks, and in the case of GS, drives a stake through their heart(assuming GS even has a heart).

      1. Yves Smith Post author

        No, I don’t agree with the claim that QE1 helped the economy. Jim Hamilton ascertained it lowered interest rates by 17 basis points. With reserves piling up at banks (on top of that) there is not proof that such a small reduction in interest rates did squat.

        1. bob goodwin

          I hated QE1,2, and 3. I agree that the in the presence of debt deflation that each had negligible effect on interest rates. However it is clear that QE was the primary support system for asset prices, which by rights should have been subjected to the natural actions of debt deflation. Sustained collapses in asset prices certainly would have yielded meaningfully lower GDP than we have seen.

          We are now trapped, of course, where the heroin must continue. We have chosen to fight debt deflation today with inflation tomorrow.

  6. Susan the other

    We have not had any believable estimates of the cost of the war. It has been going on for almost 12 years. I betcha it is costing us at least a trillion per year. Who’s gonna finance that? Not the great American labor force. Not the great American “economy.” So maybe whereas Japan failed to liquidate their banks because Japan was totally dependent on its exports to survive and needed its banks to keep their system working; we are keeping our banks bloated because we have to surreptitiously steal a trillion a year through them (good cover) for this war effort. I say steal because it is an undeclared war still. It is breaking all the rules and all the banks and all of us. But the Fed is keeping the banks on life support. The only way to do it is with a ZIRP. Buying those MBSs is a red herring. And the doubletalk about unemployment is a ruse. The low inflation rate is the only thing that makes it all possible. It’s stealth austerity.

  7. steve from virginia

    The presumption this is a balance sheet crisis is false. Whatever derives from this presumption is not relevant to anything.

    We have an accelerating capital shortage: there is an accompanying (false) presumption is that capital is money (more loans). Instead, capital is non-renewable resources that we burn through with zero-consideration to the consequences.

    Mr Bernanke can make loans until the collateral runs out (QE-Max) then he is stuck. If he makes loans in excess of collateral (unsecured loans) the Fed ceases to be a central bank and is insolvent.

    Why is this so? Because the Fed would be no different from all the other insolvent banks … which are insolvent due to their own unsecured lending. The perception of insolvency matters, as is the case in the Eurozone, when the central bank is perceived to be insolvent there is no lender of last resort, no guarantor for deposits, the outcome is bank depositor runs (as are currently gaining force in Europe). As in the US there is no worthwhile collateral for any new loans from the central bank or any other institution for that matter.

    That is the real outcome of QE: no lender of last resort, accelerated business failures then bank/currency runs. All of these are underway right now which indicates the market/public already considers the central banks to be insolvent.

    Also, the car industry is in the process of collapsing (underway in Europe), giving you guys something to live for.

    1. F. Beard

      when the central bank is perceived to be insolvent there is no lender of last resort, steve from virginia


      no guarantor for deposits, steve from virginia


      the outcome is bank depositor runs (as are currently gaining force in Europe). steve from virginia


    2. liberal

      Instead, capital is non-renewable resources that we burn through with zero-consideration to the consequences.

      Wha? Capital is most definitely not non-renewable resources. In the language of classical economics, that’s called “land”.

  8. financial matters

    We definitely have a capital shortage with it being pledged multiple times in many areas which will lead to a very destructive game of musical chairs when the music ends. (including derivative bets being made on the fallacy of these pledges)

    We also have a balance sheet recession.

    A common denominator is the debt overhang. Capital needs to be deleveraged. As Hudson points out money can be extracted from the non-producing tax evading segments of society and pressure taken off the productive side of the economy.

  9. Hugh

    I was surprised that QE3 was only able to goose markets for about a day. I suppose market people will say that the markets had already factored it in, or that it was insufficient, or some other claptrap.

    Personally, I think it is about Bernanke giving markets just enough support to get them through the elections, and if it weakens the dollar a little against other currencies that’s an added plus.

    Bernanke didn’t go bigger probably because he thought he might need to do so later with Europe tottering on the near horizon and China on one a little further out.

  10. Yalt

    A naive thought that’s been troubling me about Evans’s position: doesn’t explicity tying continued liquidity injections to a high unemployment rate create an incentive for banks, and the financial services industry generally, to behave in a manner that will maintain high employment?

  11. mac

    Has anyone considered that the events of late(last few years) are far more complex than most can understand, even some who think they do don’t and thus things like QE may not do what the FED and others think they will.

  12. jerry

    Inflation has always been a difficult topic for me.. but I really don’t see how this can be a big concern right now. Household wealth went down about 15-20 trillion dollars as a result of the recession. Certainly we’ve spent a bit on TARP, stimulus, etc., maybe somewhere in the 2-3 trillion range total? It’s not clear to me how QE would cause inflation at all if the money being created is not even being used by the banks and other corporations. If you create trillions of dollars but it sits on the shelves, is not lent out, and doesn’t get spent into the economy, it wouldn’t cause inflation, right?

    1. curlydan

      Right. There’s an equation that states PQ=MV or the (P)rices of all things times the (Q)uantity of all things sold equals the (M)onetary base times the (V)elocity of money. So you’re correct, that one could increase the money supply but if (i) the velocity of money drops due to the money being put on the sidelines and (ii) the quantity of all things sold stays the same, then the prices will basically stay the the same.

      Prices will not start to increase until the velocity of money increases. The QE3 money probably won’t have very good velocity sitting in reserves or going to buy stocks.

      1. jerry

        Thanks for the response, that makes sense. The follow-up question I would have to that is.. if 15-20 trillion in household wealth was lost due to the recession, how is that we have not had massive deflation? Average CPI % change from 07-08 was +3.8, 2008-2009 was -.4, 2009-2010 was +1.6, and +3.2 for last year. Some money was created of course but nowhere near the 15-20 trillion range.

  13. bulfinch

    I’m not exactly keen on the idea of wealth effect, in that it seems like a vote for thicker smoke and bigger mirrors. I guess if I had one hope following the 2008 meltdown, it was that we might finally be able to say ‘goodbye to all that.’

    And I’m still not clear how it is the PTB think that agressively targeting what amounts to a rise in the cost of living (juicing housing) is going to ameliorate the unemployment numbers. It seems like of all the bad ideas at his disposal, Bernanke went out of his way to choose the least imaginative.

  14. Jim

    How’s QE3 working?

    Better than Draghi’s QEInfinity. At least Bernanke didn’t violate democracy as Draghi has done.

    Is Bernanke perfect? Of course not. But forced to choose between CBkers, I choose Bernanke.

    And so should every Progressive.

    1. Yalt

      “forced to choose between CBkers”

      Forced? How about permitted? Or given the right to?

      It’s a nice thought but I don’t think that particular degree of democracy is on the table at the monent.

  15. MontanaMaven

    Good quote from Automatic Earth “The markets have so far only been able to keep up their look-good appearance because they have had, and continue to have – through the world’s central banks – access to everyone else’s cash, even the cash that everyone, no-one, hasn’t even made yet. And all that is going to run off the tracks in spectacular fashion, be it tomorrow or the day after, because you can’t run an economy forever on money that no-one has worked for.”
    “It’s time to get this through our heads once and for all: Bernanke And Draghi Are Not Trying To Save Our Economies. Perhaps they would if they could, but the question is moot: they know they can’t. Instead, they’re trying to save the financial system by stealing our remaining wealth while making us believe that the economy and the financial system – a.k.a. the banking industry – are one and the same thing. They are not, and that’s why we see our jobs and benefits and homes go up in thin air and smoke while the S&P looks rosy.”

    1. Rob

      That makes a lot of sense to me.except for the creation of bubbles,these macroeconomic news points don’t really seem to effect main st.only the largest financial consumers have any benefit to 1/2 or1/4 point interest adjustments…..and when they collapse,that is when regular people feel the wind.when credit is arbitrarily is curtailed.Most if not all the news stories really just reek of one thing.self preservation of a actual attempt to fix anything.certainly not like trying something that hasn’t actually failed before.And considering the 16 trillion dollars the fed “lent” out in the recent years to banks and large companies,American AND foreign,that was evidenced by what was found thru Bernie sanders’s committee findings on some( not all by any means) of the Feds books,we really don’t know what is going on.I see a story about a trillion dollars here,a trillion and a half there…..but 16 trillion dollars balancing someone’s books,balancing this many fortune 100 companies books(I’m assuming)’then we don’t really have a sense if the stock valuations are correct,if the credit ratings are good,if the consumer confidence levels are justified,or anything that we are relying on having actual information to form opinions about.Even if those trillions were just on balance sheets,well if some of that was a bank… with the fractional reserve rules, they can lend out how much????100 trillion ,conservatively….
      Even if that money was just sitting there,who knows if speculators didn’t keep that somewhere to keep these commodity prices unreasonably high…that does effect everyone…building materials,food,energy,whatever it is… That is inflation…..I think the numbers are so big, that the nuances of what is supposed to be, are just buried.with the leveraging on wall st being what 20- 100 times…..what do we know?

  16. Dean

    The Fed’s statement: “Agency MBS purchases will likely be concentrated in newly-issued agency MBS in the To-Be-Announced (TBA) market because these securities have greater liquidity and are closely tied to primary mortgage rates.”

    A day later, Fannie Mae revised its Selling Guide (SEL-2012-09) to ‘enhance’ the uderwriting and documentation policies for REFIPLUS and DUREFIPLUS mortgage loans. Enahncements include: “Reducing (seller) representations and warranties”, “Providing an alternative to income verification for REFIPLUS loans…”, “Reducing documentation for income and assets”, removing the lender’s responsibility for key elements of the property appraisal.

    The Fed will indefinitely purchase $40B/month in newly issued agency MBS. Concurrently, Fannie relieves lenders of their obligation to remedy REFIPLUS and DU REFIPLUS mortgage loans starting 1/1/13.

    Existing loans packaged in agency issued MBS’s will be refinanced with looser standards. The Fed will buy them up at a clip of $40B/month. All the associated problems with chain of title, REMIC tax issues, illiquid market for MBS seemingly will seemingly disappear down the rabbit hole that is the Fed’s balance sheet.

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