MISUNDERSTANDING THE EFFECTS OF QE2 WAS A GRAVE MISTAKE….

[girl gone mad]

MISUNDERSTANDING THE EFFECTS OF QE2 WAS A GRAVE MISTAKE….
by Cullen Roche

http://pragcap.com/misunderstanding-the-effects-of-qe2-was-a-grave-mistake

No story has dominated the market news flow in the last year like QE2. From its very inception I said the program was a “http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1655039">monetary non-event” and not going to achieve its targets for several reasons (it’s not money printing, it doesn’t alter the amount of outstanding private sector net financial assets, it’s not debt monetization, etc). But perhaps more importantly, I’ve discussed the potential negative effects the program could have through the channels of misconception. In other words, the myths of “stimulus”, money printing and debt monetization were all likely to fuel investors with a misguided perception as to how the program would impact the real economy.

I have called this effect an http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1867524">embedded disequilibrium in the market caused directly by the Fed and exacerbated by market participants who quite simply don’t understand what QE is or how it actually works. From the perspective of the Fed, they thought they could “keep assets higher than they otherwise would be” (infamous last words of Brian Sack of the NY Fed). But because http://pragcap.com/quantitative-easing-3-another-monetary-non-event">QE had no transmission mechanism through which it could impact the real economy it in fact only created a disequilibrium between market expectations and the real economy via psychological channels. And as the real economy has sunk we’ve seen much of this embedded “Bernanke Put” come out of the market in the last few months.

In just the last 24 hours we’ve seen the wheels come off of the “Bernanke Put” bus. The markets appear to be realizing that the Emperor truly does have no clothes, that QE isn’t all it was cracked up to be and that the Fed can’t save the economy with their magical printing press (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625">don’t worry – the Fed doesn’t print money anyhow, but that’s for another day).

(snip)

Now, I think it’s a bit hyperbolic to say that the markets have lost faith in the Fed entirely, but I think we’re certainly seeing the market lose some faith in the Fed’s omnipotence. 20 years of flawed monetary policy, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625">mythical thinking about the workings of our monetary system and misguided market intervention bring us to this point. Unfortunately, misguided policy has now created such disequilibrium in the markets that the backlash has the very real potential to cause real economic declines. So buckle up folks. We’re living in a golden age of economic transformation and theory. Unfortunately, that means we have to erase the decades of myth and fantasy perpetuated by the same neoclassical economists who got us into this mess in the first place (most of whom are still driving this bus). And that’s going to cause a great deal of policy error, misconception and uncertainty. Hopefully in the end we’ll come out of this a bit wiser. One can hope….

http://pragcap.com/misunderstanding-the-effects-of-qe2-was-a-grave-mistake">more...

[aquart]

1. QE2?

Ocean liner, right?

[MADem]

3. My thought, as well.

Enjoyed a delightful crossing on her from SOUTHAMPTON to NYC many years ago--first class, top of the line, no expense spared--those were the days!

She's been retired now, I think.

[Hardrada]

6. I think they phased out passenger liners

when I was toddler.

[MADem]

8. No--Cunard built a brand new pair to replace QE2. They make QE2 look like a

rowboat. One's Victoria and the other is Elizabeth (but not 2). They're HUGE. Way bigger than previous vessels. They specialize in transoceanic travel, as opposed to the island-hopping jaunts or mini-vacays to coastlines of Canada, AK, Mexico, and so on.

It's not your CARNIVAL CRUISE to nowhere experience (even though CUNARD is now a subsidiary of CARNIVAL)--it's way more low key, way more high-end/luxurious; and impeccable. They actually go from point A to point B, then C, D, E. If you want to travel by ship to France, or Australia....you can.

You do, of course, get what you pay through the nose for!! Unless you're rich or win a prize/the lottery, it's out of reach of many travellers.

[Hardrada]

9. Interesting. I'll check Cunard website to get a glimpse of these.

[Myrina]

4. Same thought here!

:shrug:

[leveymg]

5. QE2=$16 Trillion in "total flow" injections into the NY bonds markets. Mainly the Repo Market

where the the biggest banks, the Fed's Primary Dealers, rent out Treasury bills to each other in order to balance out their portfolio risks according to the Black-Scholes model. You have to rent a certain percentage of "zero-risk" T-bills in order to be able to market a bundle of crappy junk bonds and still be considered a good investment risk.

The "Repo Market" is a secondary market run by the NY Fed for public debt issues where the bond holders -- big banks -- gain "rent" value in their holdings of Treasury Bills. It's the biggest market, by far, but nobody off the street knows anything about it because it's not publicly traded.

Amazing.

[leveymg]

2. QE2 made bankers richer by providing them with additional chips at the casino that they

couldn't take with them outside the casino, but they could "cash-out", exchange winnings for cash, and then offshore the proceeds. That's how Quantitative Easing works, and why it doesn't benefit anyone but big banks and their stockholders.

The way the chips exchange deal works is that holders of Treasuries, and even crap mortgages, got much higher cash-back at the NY Fed overnight window when they cashed out.

No mistake - by not imposing domestic reinvestment requirements, Bernanke, Geithner the NY Fed kept the foreign banks in the game. But, unfortunately, big global banks don't give a damn about US jobs.

[aquart]

7. Quantitative Easing. THANK YOU!!!!!

[Po_d Mainiac]

10. Either the chairsatan is a crook or an idiot

The problem has never been a lack of cheap money...The problem has been (and continues to be) too much leverage.

High unemployment compounds the problem, as does inflation in D2D necessities. Trying to prop up the banks instead of marking the liabilities to market did nothing for unemployment, and added to D2D inflationary pressure. At the end of the day, the banks are no better off (although the banksters got a few more bonus packages), and the working class got a busted scrotum.

[golfguru]

11. Correct, to stimulate economy, demand has to be stimulated

If there is no demand out there for goods, services, etc because people can't afford them, no amount of printing money will help.

The "stimulus" also failed because it was directed towards sustaining government employment, instead of stimulating demand by creating self sustaining long term jobs which can only exist when someone can make products which have demand world wide.