How the 'Hedge' Has Shifted on QE
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My interpretation of Bernanke’s remarks is to take him at his word. He stands ready to act if needed. It will be needed, or we are clueless as to the economy and it’s current and future state.
Feel quite sure it will be called by a new name however, QE3 has become a most boring dull tag for what will be needed.
What difference does the timing of his move make unless you are a stock market or commodity speculator?
golden oxen,
It seems to me that, for practical and political reasons, Bernanke is hog-tied and cannot do anything more at this point, under any guise. As you mention, he’s “prepared to act”, but it appears he may require a far more extreme, sudden market change to gain the impetus and licence to follow through with more Q-Anything. The paradox is that this will be woefully too late. By the time the “big market event” gives Bernanke that licence, the horse will be out of the gate. He’ll be the poor farmer running through the mud in his gumboots after it. At that point, there will be no amount of Q-Anything within his power to make things right again. Talk about impotent.
There are two interrelated factors in the Feds non QE decisions not mentioned here. The big one is that Bernanke knows another QE announcement would spike commodity prices and at least temporarily break the bond market. In addition it would almost certainly cause at least a short term melt up in stocks. After all the promise of blessed liquidity, and then its appearance at the Primary Dealers would be Risk On big time.
Now Bernanke may not mind all that but it is too near the election now. Rising markets are virtually always good for incumbents. He nor the Fed want anything to do with being seen as helping an incumbent president. Especially a non ‘conservative’. To be seen as such is political poison for the Fed and as time passes could be an existential threat to them. I mean that literally.
Rapier (welcome to TAE?) — I agree that the need to appear apolitical can be part of the Fed’s inaction. But given the election is still 4 months away, I have to wonder, if we assume Q-Anything can actually help the situation (I still believe it cannot) then can they afford to wait even this 4 months until the political smoke of the US elections has cleared? A major financial event could come much sooner than that.
On another note, does anyone else think Bernanke is starting to look just plain sad? I think his world is crumbling. The smiling man who promised helicopter drops looks shaky. Or maybe I’m just reading something into his beautiful eyes.
The game afoot is what I call “managed deflation.” There will be a QE3, but the air needs to be let out first.
Finance makes it money when things go up AND when they go down. Finance does not fear deflation, it thrives on it. There’s nothing like a bargain.
Something I wrote back in November 2010:
The Deeper Game: Managed Deflation
On the heels of the Fed’s announcement of QE2, the Fed today announced the results of it “Senior Loan Officer Opinion Survey on Bank Lending Practices,” which Calculated Risk summarizes, stating “in general banks have stopped tightening standards (they are alredy very tight) and demand has stopped falling (there is little demand for loans).”
A couple of things to note. First, this report only discusses lending to households and non-financial businesses. I don’t know whether there is a similar report for lending to financial institutions, but the banks are very secretive (and the Fed protects that secrecy), so I doubt it. Second, the FOMC must have known the results of this report, but they went ahead and announced QE2 anyway.
Got that? The Fed knew last week that adding more liquidity to the system would have no direct effect on households and non-financial businesses, but they went ahead and announced QE2 anyway.
What does this mean? It confirms that the Fed is not even pretending to follow its dual mandate of price stability and maximum employment. Yes, Bernanke says he’s trying to combat disinflation/deflation by creating inflation (you know, an increase in the money supply), but he knew last week that none of the QE2 “money” can or would find its way into the real economy through lending, increased employment, or higher wages. In other words, he knew that QE2 would have no impact on M0 or M1 (and perhaps M2).
He also knew last week that a lot of the QE2 money had already found its way into speculation in the commodity markets, as he acknowledged that the prices of staple commodities were rising. All this will do is shift spending away from discretionary goods into necessities, to the detriment of non-financial businesses and to the benefit of financial speculators (aka the banks).
The screwflation will continue until the next round of layoffs, which will cause a tumble in the commodity markets, which the banks will have shorted by then as many from the “lower rungs of the rich” will have piled into the trade, just in time to get fleeced.
The Bernank is saving his ammo for when he really needs it. Bernanke previously told us what QE is for: “….. I’ve kept asset prices higher than they otherwise would be…” In other words, Bernanke is primarily concerned about maintaining the value of the collateral for loans in order to keep the big banks alive. And that’s it. If we see asset prices collapse and the TBTF banks teeter on the edge of insolvency again, Bernanke will act. But he will want to look the Depression Monster in the whites of its eyes before pulling the trigger. The Fed already owns such a large fraction of Treasuries, that shooting his wad right now would be a nakedly political act.
The article brings to mind this quote:
“There is no means of avoiding the final collapse
of a boom brought about by credit expansion. The
alternative is only whether the crisis should
come sooner as a result of a voluntary
abandonment of further credit expansion or later
as a final and total catastrophe of the currency
system involved.” –Ludwig von Mises, Human Action
(pg 572)Mario Draghi just made it official. Still no QE in Europe! And following Bernanke’s feckless showing last week, it’s all just further confirmation that so much of what TAE has foreseen is materializing, plain as day–central bankers are increasingly impotent.
In fact it’s getting downright pathetic. Obviously, markets have been waiting with bated breath to see what Draghi would bring to the table in terms of his promise to do “whatever it takes” to maintain “stability” in the Euro. Many saw this as a declaration that the big guns were coming out–as in outright bond buying by the ECB itself. But then we got some rumblings from German finance ministers that no such policy had been agreed. So what was all this bluster from Draghi about “we’ll do anything” and “just you wait and see…it’s gonna be like major awesome” (here I’m paraphrasing).
Apparently, he’s got nothing. Absolutely nothing. I just stayed up late to watch the live press conference and the guy was a joke. Hey, I’m not just being flip when I say that–the whole spectacle was actually comical, and at one point a journalist couldn’t help herself. I heard a distinct guffaw from a journalist in the room when Draghi repeated (for the seventh time?) in his presentation that “we MAY act if needed.”
You mean that’s it?! The big plan to save the Euro is that “we MAY act if needed”? His emphasis was on the word “MAY”. I’m not even adding that myself. So Draghi’s announcement is that they might, or might not, do something, which might be any manner of things, quote, “within our mandate to do whatever is in our power to maintain the Euro as a stable currency.” The guy is talking in circles.
Oh, but the Euro is “irreversible”. That is his promise, cross his heart and hope to die. When a journalist asked for a specific meaning to this supposed “irreversibility” of the Euro, Draghi answers, “It’s pointless to bet against the Euro. It’s pointless to short the Euro. It’s pointless because the Euro will stay.”
Right. The markets will not bet against the Euro because you say it’s irreversible. But you are not buying Spain’s bonds. You are not proposing any definitive action at all except to come back to us again once the committees of the ECB have made a decision. It’s another agreement to agree on something unknown at an undetermined future date. Swear to gawd, he couldn’t even bring himself to say that any decision has been made at all, and that his pronouncement was in fact “not a decision” but “a guidance…to design the appropriate modalities for such policy measures.” Oh, appropriate modalities. Good to know.
So more than a few heavy weights said that Euro had only a few weeks left before the markets took things into their own hands. That was, like, uh, a few weeks ago? And this is the best Draghi gives us? A “guidance” for “appropriate modalities”?
So does Europe only have hours now? Because that was really, really lame. If I were Draghi, I wouldn’t have even shown up. I’d have left town and I’d never come back. I’m still waiting for the day when one of these clowns does just that. I think it’s coming.
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