There is no way to know what would have happened if they'd have let banks fail and only bailed out depositors. What if the I-banks had been forced to take realistic haircuts on AIG instead of being made whole. What if the Fed had not lent so much to the banks? What if they had not executed all the various acronym programs.
I'm generally of the opinion there should have been less protection for the institutions (but again total protection for depositors), fewer desperate measures enacted by the government. My thoughts could easily be incorrect but regardless what anyone's version of should have is, we have only one reality which is what happened and what happened, among other things, is that the Fed bought a lot of US treasury debt which has become to be known as quantitative easing. They've actually done this under two different QE programs and both times it has come up short.
Regardless of whether QE should have been done, it was done at some expense and has not had the desired end result. This raises the question for which I have no answer; if there is no QE3 then were the first two simply a waste of time and money. Put another way, do we have to do QE3 (by that or any other name)? Then do we have to do another one until it finally sticks? Of course what then is the ultimate consequence?
The answer is not about anyone's philosophy it is about the fact that this is what has occurred up to this point (whether we like it or not) so based on what has been done, what makes the most sense. I was much closer to the tear the band aid off camp before but that was not our reality. Our reality was intrusion on markets on what appears to be an unprecedented scale. This intrusion cannot be undone, so in the face of that intrusion should there be more?
You may conclude no but the process that takes you to that answer must be different than how you would have answered the question three years ago.
18 comments:
Throwing good money after bad. QEII didn't work, except for those who want higher stock prices: Interest rates rose, commodity prices and inflation rose, and unemployment held steady.
This is a solvency issue, not a liquidity issue so QE is not going to help.
I tend to agree. QE hasn't fixed any problems, just kind of kept us chugging along. Let the BofA mess shake out, see if we can get some stimulus, say a prayer the Bush tax cuts expire, etc. Hope for single fixes at a time.
It seems like there is always the bias towards action as opposed to inaction. The fed and others crafting policy want to do "something" about the problem, which usually means throwing more money at it. That being said, i think the Fed needs to do whatever it can to prevent another collapse. Hopefully one day the govt will allow the market to punish the bad actors who made the bad decisions.
I just do not see helicopter Ben standing by and doing nothing. His past speeches indicate he will print, target interest rates, target inflation,...
It will not be a unanimous vote, but we will see QE3
BTW we are japan now and will kick the can down the road as long as possible.
A question that has been on my mind for some time to anyone qualified to answer it: Where does the Fed get its money, the money that it uses to buy US treasuries of whatever duration? Does the Fed simply say, "here is $xxB for some bonds," and just print up the money or send an IOU? Is the Fed bound by the gov't's total borrowing limit, recently raised? Are Fed purchases/money based on something real (I learned in Economics classes that money is a store of value received for some product created or service rendered), or is it just money printing based on nothing? Thanks to whoever responds.
Government policy is not being created independent of the bad actors. The bad actors filled policy posts in the previous administration and hold similar posts in the current administration.
Thus, policy has bailed out the large banks and Wall Street, but has ill-served other parts of the economy.
Paul Krugman, if I'm interpreting him correctly, has argued that the QEs were too small to adequately boost the economy. I agree.
John Hussman suggets letting the bad actors fail and providing support for infrastructure projects, technology, etc.
Liquidate the bad boys. They are dragging us all down. Then focus on the future. To the uber-conservatives and the faux liberterians, I'm sorry but government has a role in encouraging and supporting all of this.
BillM
anon 7:54
the fed can print when ever it wants to based on voting by fed govenors. Fed governors are not limited, but expected to be "responsible".
There is very little actual printing as it is mostly electronically registered on computers, so the fed can "print" billions with a few key strokes.
QE and QEII were initiated, in my opinion, to avoid a deflationary environment which would have been catastrophic to the indebted lower and (upper-) middle classes but great for the rich (includes individuals, investment banks, pension trusts etc etc) who could just park their cash in bonds (in the US or overseas) and watch their wealth increase. Of course heavily-indebted companies would also have suffered, and eventually this effect would've cascaded.
So the debts of the (upper-) middle and lower classes didn't become significantly larger, but nor did their assets or spending power, and the so-called 'wealth-effect' did not come about, which is needed in a recession when 70% of your GDP comes from the consumer.
The 'wealth-effect', for those still in full employment (85%+ of the population), was further reduced because of rising commodity prices brought about by QE and QEII, whereby the rich were able to use those excess funds, on margin because Bernanke had made his intentions clear, to make capital gains at the expense of the general population. I say this because demand for all commodities is not outstripping supply by any means, and companies like GS are now doing more business (on behalf of their clients) in the commodity markets than they did at any time during the housing boom. Of course, on the plus side, this will be good for long-term supplies of those commodities.
So keeping interest rates down is a good thing right now, but only if the prices of other things can be kept down at the same time. If we had falling prices on everything and negative interest rates on debt, we'd all be treading water or thereabouts. What we have now is the best fit for everybody but one where a lot of pain is still being felt disproportionately by those whose income is mainly used for food, clothing and energy.
Justin,
The rich would have been crushed by deflation as well. The rich do not have a separate economy and separate stock market.
Anon 9:13 - yes I addressed that point at the end of my first paragraph, albeit obliquely.
WIth or without QE, the economy will take time to reset, or find it's new level. Unfortunatly, patience is a virtue in short supply.
Delevereging, saving and fear are not behaviors conducive to economic expansion, so it will be a grind for a while.
Ben also gets a bad rap, but he is brighter by volumes than 99.99% of the rants and opinions you read/hear on the web & CNBS.
I also don't understand the macro infatuation with most investors, as macro is the dismal science. Show me an economist that is a good investor.
Instead of obsessing over QE whatever, investors might want to concentrate on their plan.
Retirement, emergency fund, debt, insurance etc., the things that they can control.
Got patience?
If the famed ecnomist, legendary commentator and financial journalist Paul Krugman had created only one job other than his own, I might give Sir Paul a listen.
My nextdoor neighbor owns a medium sized company and just laid off 20%of his remaining workforce. All he wants is the Feds and the EPA to get off his back with abusive regulatory contrivances. He could triple his workforce in smart order.
I trust him far more than the weasal-like Krugman to assess the economy. There are far too many pencil-pushers that have steered this country on the road to Hell.
Kirk,
Exactly where did interest rates rise in the US?
Anon 1:14:
What are the abusive regulatory contrivances? That story is a bit hard to believe at face value without details or background.
I did not write abusive regulatory contrivance, but as a materials engineer I can tell you it is impractical for a manufacturer to perform many surface finishing operations like plating etc. due to epa regulations.
A few still exist and large companies sometimes retain this capability, but by and large we have gutted small to medium sized manufacturing plants in the US due to this and other epa regulations.
No I do not want dirty rivers either, but I do not want a country with little to no manufacturing base either. This is one example, but I frequently have to recommend to my customers to buy over seas. So I for see me having a consulting job for years to come, but I worry about the younger workers and our country in general.
I'm probably in the minority, but I can't understand why anyone would want to do surface finishing (or casting, molding, assembly, etc.) in the US, regardless of EPA regulations. These are low value added operations that can be done quickly, at low cost, and with good quality by any number of fine Asian suppliers. Delivery is overnight to 2 days.
Consider the iPad. What would you rather have your kids do? Come up with the concept, figure out the marketing, design the hardware, write the software, manage the supply chain, or... polish the back cover?
Rich
All the electronic boards require plating. You are saying not only can we not "polish the back cover", but we can not make the inside stuff either. We do not make tvs, computers, etc., etc.
Applied Materials the most important electronics equipment design company on the planet moved their R&D headquarters to China
This QE thing is a disaster waiting to happen everytime the government prints more dollars the less their value. I believe that creating money out of thin air can only result in one thing and that is inflation. The growing inequality over the last three decades has been caused in large part because employees particularly low skilled and unskilled employees do not get an increase in their compensation that equals the increase in living costs. This will just cause the bottom third of the population to become more and more dependant on friends family private charities and the government for their support instead of their employers.
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