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I'm pissed because this little manuever caused gas prices to jump 18 cents in one day!
I'm pissed because this little manuever caused gas prices to jump 18 cents in one day!
you can't touch there billions in profit quota.
http://www.minyanville.com/businessm.../2010/id/31104I wanted to take a bit of time before weighing in on the Fed's QE2 because I knew there was going to be a lot of noise and very little signal. And in a time and place like where we find ourselves now, the job of filtering out the noise and paying attention to the signal is that much more important. But the problem is, it's actually tougher to do if you're constantly bombarded with other people's reactions. No, I didn't hole myself up in a cave but I did make an effort to step away from the TV, turn off the email and the RSS feeds, and just tried to sit and think.
But I did find some great nuggets when I decided to reengage and when you put them together, you can develop a mosaic of what's indeed going on here. It's kind of ambitious, but in case folks haven't realized it yet, just looking at select asset classes in isolation isn't going to give you the answers anymore. And indeed, we should be on the lookout for even more volatility and odd moves. I'll try to explain.
First we have the idea of inflation -- hyperinflation according to some -- that might result from the Fed's $600 billion in additional purchases of Treasuries. But there's one problem with that idea as the following charts show:
Click to enlarge
Click to enlarge
Currency in circulation is not increasing. At all. Indeed, as others have pointed out here and here, the US Treasury is the only government en y that actually prints money. The Wiemar Republic episode actually saw money printing run amok, which then translated into hyperinflation. We're not seeing that here. We're only seeing changes in excess bank reserves. It's excess cash sitting there in the corner, waiting.
This echoes something I wrote before, where I surmised the issue isn't buying Treasuries, it's the lack of buying other asset classes. The Fed's announcement in 2008 was designed to take illiquid assets off bank balance sheets and in exchange give them cash, which was supposed to make its way into the broader economy. It was also an extension of moral hazard, but that's another topic for another day and time.
But that would have only worked if you held to the assumption the assets they bought weren't impaired or suffered in credit performance, but were simply illiquid and not trading due to that. The other false assumption was that the banks themselves weren't suffering from an impairment in their capital structures, so they would be all too eager to resume lending. But, as we saw, many of them actually did suffer from capital impairments and sustained balance sheet damage. The fact is, those balance sheet purchase commitments were for assets that were most definitely impaired and the Fed's purchase was a godsend to the firms lucky enough to still be standing. Indeed, in a nicely written piece by Randall Wray over at Credit Writedowns, there's this gem (emphasis, mine):
So why would QE have any impact at all? Because to get those excess reserves into the banks, the Fed buys something from them. What did the Fed buy? Good, safe (mostly short-term) Treasuries and bad, toxic waste: mortgage-backed securities. Now, Treasuries are effectively reserves that pay a higher interest rate; they're like a savings account at the Fed, rather than a checking account. So when the Fed buys Treasuries from a bank, it debits the bank’s checking account and credits its saving account. This will have no appreciable impact on the bank’s behavior and thus will have no discernible economic effect.So what constrains the banks from lending more? Wray points out the possibility that we are still dealing with insolvent banks three years after we started seeing mortgage brokers going bust and warehouse credit lines to those mortgage shops get pulled. Indeed, the levels of excess reserves show that even the banks themselves think their counterparts could be unsafe. Doubt. Uncertainty. Fear. These are the thoughts/ideas that kill markets.
But if the Fed buys trashy assets, and at a nice price, the banks are able to shift junk they don’t want off their balance sheets and onto the Fed’s. And if the Fed were to do that in sufficient volume, it could turn insolvent banks into solvent ones. In truth, the Fed did buy a lot of junk, but banks were left with trillions of dollars of toxic waste assets -- probably much worse than the trash they sold to the Fed -- so they are still massively insolvent. Thus, while QE1 was useful, it did not come close to resolving the insolvency problem. It bought time for some of the trashiest banks, which they devoted to ramping up their dangerous and largely fraudulent activities, digging the hole ever deeper -- but that, too, is a story for another day.
With QE2, the Fed proposes to buy longer-term Treasuries. Since these are not toxic, it will not help the banks. It is like transferring funds from CDs they hold at the Fed to their checking accounts, thereby reducing their interest earnings. I suppose the idea is that the Fed is going to reduce bank income, impoverishing banks to the point that they will finally throw caution to the wind and begin to make loans to struggling firms and households. It is simultaneously a strange view of banking and also a scary remedy to a financial crisis that was created by excessive bank lending to those who could not afford the loans. It’s sort of like sending a covey of nymphomaniacs to the hospital bed of a nonagenarian suffering from myocardial infarction initiated by an age-inappropriate tryst.
Just imagine how much better life will be, the economic tide rising for all our boats, the trickle-down wealth gushing over our faces, once the Repugs gain control of all 3 branches of govt.
http://www.youtube.com/watch?v=5dd-Un22DzA
smoke signals:http://www.cnbc.com/id/46495095The U.S. economy is recovering at an even faster pace than the data suggest, negating any need for further monetary easing, Dallas Federal Reserve President Richard Fisher told CNBC.
With unemployment heading lower and housing sales posting gradual increases, Fisher said Wall Street chatter about a third round of quan ative easing — or QE3 — is probably “wishful thinking.”
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