Taibbi - 'Quantitavive Easing': The Hidden Government Subsidy for Banks

[Klukie]

This video went up on Zero Hedge yesterday, I believe. In the first minute you will want to throw both of these little bears in a sack and drown them, but by the end they win you over. There are so many things about QE that are crazy, but there’s one thing that I’d like to point out in particular. Yes, this is a huge money-printing program with potentially disastrous inflationary consequences. And yes, the influx of all this money could easily distort markets and prices far beyond the extreme distortions we’ve already been dealing with (commodities prices shot through the roof after this latest QE round was announced). But the thing I want to focus on is the subsidy aspect of QE, pointed out in the video. QE is designed to buy Treasuries and other assets, but the Fed does not simply go out and buy Treasuries itself; it does it through its primary dealers, who include of course banks like Goldman, Sachs. The Fed all but announces when it’s going to be doing this buying and in what quantity, which allows the banks to buy up this stuff at lower prices ahead of time and then sell it to the Fed at inflated cost.

Even forgetting about the obvious insider trading aspect to all of this, the official middleman status of the banks is a direct government subsidy and it is little remarked upon, even by the Tea Party crowd, which is otherwise so opposed to “welfare.” But these sorts of subsidies exist all throughout the financial services industry.

You want to take out a mortgage or a credit card; you obviously can’t get your credit from the government at 0% interest. What you do instead is you get a mortgage from a private bank at 4.7% or 5%, and that bank in turn has borrowed from the Fed at 0%. This would almost make sense if indeed these banks were legitimately providing a service for that 5% cut, i.e. if they were carefully and judiciously weighing the credit risk of applicants. But if anything these banks have been even more irresponsible (more irresponsible by far, actually) with their money than the masses of people who are now in trouble with their credit cards, mortgages, student loans, etc. They not only don’t deserve this subsidy any more than ordinary people do, they’re actually the worst possible destination for an appropriation of emergency funding, which is what this Fed money is supposed to be.

http://www.rollingstone.com/politics/matt-taibbi/blogs/TaibbiData_May2010/233953/83512

[ProSense]

1. Krugman:

Quantitative easing is literally the least the Fed can do.

[Klukie]

2. What's a girl with no real financial knowledge to believe?

No...I mean that sincerely.

[lumberjack_jeff]

3. It means that the financial situation forces government into choice a) bad or b) worse.

Taibbi's main point is good; "thegoldmansachs" has been put in the position of profiting at every misfortune the government experiences.

Absent QE, the very real likelihood is deflation. Thegoldmansachs is ready to profit from that too.
http://seekingalpha.com/article/205602-charles-nenner-on-euro-debtonation-deflation-and-how-to-profit?source=feed

[jeff47]

4. I recommend listening to the guy with the Nobel Prize in economics

(aka Mr. Krugman)

QE has lots of potential downsides. It would be far better to create the "National Hole Digging Administration" and the "United States Hole Filling Department" to hire people and have them work in a circle. But that requires an act of Congress. Due to the timidity behind the stimulus bill, that's not an option. QE is one of the few things left that can be done without Congress.

[The Northerner]

5. K&R QE only aids the banksters, devalues the currency, and harms the poor & middle class