(QE 1)+(QE 2) +(QE 3) = ??? Do Three Negatives Make A Positive?

I’m not uying that three negatives make a positive. But, Ben Bernanke thinks so and he is much smarter than I am. From reading his profile at Wikipedia,  I learned that Ben was class Valedictorian of his highschool. His highschool didn’t teach calculus, so he taught it to himself. He did his undergraduate  studies in economics at Harvard and graduated Cum Laude. He then got his Doctorate in economics at MIT. Me? I managed to get a Masters in Metallurgical Engineering at a state college in Michigan. Game, Set, and Match_ Bernanke!

Despite my disadvantage, those who have visited this site more than once know that this humble observer is not shy about voicing his opinions and today will be no different.

Let me start by giving you my layman’s definition of what QE or Quantitative Easing means. In a nut shell, it is a fancy term for printing money with the goal of juicing the economy. However, in this modern age, they don’t actually turn on the printing presses to produce more green backs. With a few keystrokes on a computer, digital money appears like magic.

A little background is in order. Ben Bernanke and Hank Paulson (Secretary of the Treasury under Bush II) and Tiny Tim Geithner were, up to a few weeks before the sub-prime mortgage bubble burst, telling everyone who would listen that our economy was rock solid and was only going to get better. it was these same gentlemen that when the bubble broke, convinced the President Bush and most of our Congress that the world would come to an end if they didn’t immediately to bailout the Too Big To Fail (TBTF) banks. The result of their sale of panic was TARP and Obama’s stimulus package. So, think of QE as monetary stimulus in the same way Obama’s program was fiscal stimulus. The same thing happened in Europe and other countries for all the same reasons. To my knowledge, the only country that did the smart thing by telling the banks to go to hell, was Iceland and they have recovered very nicely, thank you very much!

While trying to keep up with all that is going on in the political arena and now the events in the middle-East, I have read many articles about Bernanke’s announcement of the Fed’s lattest launch pf QE 3. It should be noted that Bernanke and the Fed also had, and still have, a program going on called Operation Twist. I’ll give a short explication of what the funny money is used for in the QE and Twist programs in a moment. First, here is a short list of some of the articles I’ve read, along with some annotations by me,  that you can peruse at your pleasure. You will recognize that some of the sources are from my blogroll.

  1. Sherman Broder at property…Fredom…Peace worte Obama Is In The Catbird Seat. Sherman sees Bernanke’s action as politically motivated to help Obama win reelection and there by save his own  job. There is definitely a political element to Ben’s QE 3.
  2. John Galt at America¡s Chronicles wrote,  Ben Bernanke – Destroying The Independence of The Fed And Our Future Growth.  John also sees a political element to QE 3 and points out that the goal to reduce interest rates to kick-start the economy is doomed to fail because interest rate are already near zero. he correctly points out that this may backfire on Bernanke and Obama if inflation takes a jump before the elections.
  3. Brian at Frankenstein Government wrote, Bernanke Screws the Pooch! Welcome to the Idiocracy. Brian sees us heading for hyperinflation because of Ben’s maddness. There certainly is that risk.
  4. John Carney at CNBC wrote, Could Fed’s QE Spiral Out Of Control? Of course, he thinks it will and so do I.
  5. Robert Frank at CNBC wrote, Does Quantitative Easing mainly Help the Rich? He and I agree that is the case and I will have more to say om that in a moment.
  6. Catherine Boyle at CNBC wrote, Gold Set for Even Bigger Bernanke Boost. yep! That’s what happens when there is inflation.
  7. marc Faber, the famous author of Gloom, Doom and Boom, wrote at CNBC,  If I Were Bernanke, I would Resign. Farber blames Bernanke’s expansionist monetary policies for the financial crisis we are still in today. he is right!
  8. Nouriel Roubini, a well know economist, wrote at Project-Syndicate, Fiddling at the Fire. He believes that the markets in Europe and the US are very unstable and is predicting an investment bubble burst in 2013 and it won’t be pretty. Roubini has an excellent track record so he may be right.
  9. David Harsanyi at Human Events wrote,  The Fed Goes Political. Seems there is a lot of agreement on this point.
  10. George Will at the Washington Post wrote, A different kind of inflation problem. His article relates to an interview he did with the head of the Kansas City Federal Reserve Bank, Esther George, prior to Bernanke’s annoucement. She sees the Fed¡s role as strictly monetary policy; but it is becoming more and more political and the lines between discal policy and monetary policy are becoming blurred. She is right!

Although every author of the articles listed above are much more knowledgeable about economics and monetary policy than I am, I still have something to say even though I agree with these authors on almost everything.

What is it that Bernanke is planning to do with his new digital dollars from QE 3? He announced that he will spend  (my number four  and dollar sign key is giving me fits again today) forty billion dollars a month to buy mortgaged backed securities and put them as assets on the Fed’s balance sheet. The theory, we are told, is to reduce mortgage interest rates and spark home buying in the US. he is a smart man and he knows he is talking BS. With current interest rates at about 3%, the reason people are not buying isn’t because the interest rates aren’t 2.9%.  Bernanke says he will also continue Operation Twist, a program to buy longer term bonds to drive long-term interest rates down, to the tune of another 45 billion dollars a month. The math is easy. The total comes to about one trillion dollars per year. And, he said he would keep  the Fed interest rate at near zero until at least the middle of 2015 even if the economy becomes more robust. This last point is important and I will have more to say on that shortly.

Those that say the Quantitative Easings have mostly helped the rich are right. Only a small part of all of these digital dollars have reached the main stream economy. It has been enough, because of the debasing of the dollar, to cause some inflation. You see it when you buy gasoline or food. The Fed, however, ignores oil price and food price in their calculation of inflation because they are too volatile. Most of the QE dollars have only helped a very small part of our economy. The Big Boy investors and the  Wall Street bankers have benefited big time. Most of  these new dollars ended up with the TBTF banks and is now sitting, about two trillion dollars, in their excess reserves accounts at the Fed. After the announcement of QE 3, the stock market has taken off.  The QE 3 funds will be used to buy securities backed by mortgages, right? Who do you think are holding those mortgage back securities? The TBTF banks, of course. It is like TARP all over again.

The bearded wonder “crapweasel” and nobel laureate economist, Paul Krugman,  is forever wagging his finger at the Austrian economist and others critics of stimulus who argue that stimulus will lead to inflation. He says “Where is the inflation?”. And he is right because he is not talking about the inflation you are seeing at the gas pump and grocery store. He is talking about real serious inflation. But, he is being dishonest because he knows why the serious inflation hasn’t hit yet. That two trillion dollars, and soon to be three trillion, is sitting on the sidelines in the excess reserve accounts. And, there in lies the real danger of Bernanke’s Quantitative Easing policies. When our economy does start moving again, the banks will start lending again. The money will come out of the excess reserve accounts as the banks decide they want to get in on the action of a growing economy.

Here is an easy question for you. Which  of the two candidates for the Presidency is most likely to get the economy growing again? Right! So, if Americans want to avoid some serious inflation, they should vote for Obama because he will delay the day of reckoning. If there are enough adults left in America, they will vote for Romney and accept some years of high inflation as being the price we must pay for decades of bad fiscal and monetary policies.

Earlier, I noted that Bernanke plans to keep his zero interest rate policy going well beyond the economic surge. That is because he knows that inflation is going to take off and that the normal Fed response of raising interest rates to curb inflation would send the economy back into recession or worse.

I would like to go on and explain what I would like to see a Romney administration do to minimize the length of time we will have to put up with high inflation; but this post is already way too long. Maybe another day.

Well, now you know what I’m thinking. What are your thoughts?

40 thoughts on “(QE 1)+(QE 2) +(QE 3) = ??? Do Three Negatives Make A Positive?

  1. Wow, Jim! It appears that the easy way out would be to stick with Obama, but if you are an “adult”, you will take a bit of the bitter stuff for awhile and weather it out and hopefully we will come out of this crap. Bernanke lies, plain and simple. Now, as to who will do what? I think we know, nothing good ever seems to come easy, but if Obama promises enough and lies enough, we know who will pull the lever for him. Let’s hope the adults step up to the plate and take over, or we are finished as a nation. Yep, it was a “bit” long, but needed to be said and absorbed, thanks for the post.

    1. What we have going for us, Linda, is that this planned help for Obama may in fact backfire. Gasoline and commodity prices; such as food, are already moving higher due to Bernankes’s announcement. That will not make the voters happy.

      1. When you start having problems because you don’t have enough money to purchase beer, cigs, food and gas that is when the problems will start out on the street. Depending where you live, you may be subject to break-ins, car-jacking, well, there is a second line of things that will happen when a person starts having problems paying for something they want. Obama can try and make the general public feel all warm and fuzzy, but they will know they are being scammed when all that free stuff is not available and they get a cut in what they receive. Funny how not getting what you are used to makes a person sit up and listen. Maybe then, Obama will not look so good. For too long he has had the public believing him, doubt it continues….however we do have ones that will never change their vote.

      2. That is the way I see it, Linda. You are right. The die hard Kool-Aid drinkers will not change. It is the 5% or 10% that are maybe listening that we must focus on; especially in the swing States.

  2. Good comprehensive post on Bernanke’s QE3 action, Jim.
    Thank you for the mention. On that specific piece we put emphasis in the likely rise in prices of commodities and energy, that translate in price hikes in food and gasoline at the pump – rather than in the inflation index as reported by the government. In fact, we predict that these price rises will be effective before the election. (Oil has already started).
    Krugman can hide behind the fantasy of the CPI, which doesn’t include food and energy, all he wants, but he is not fooling anybody, . . . wait, I take that back, . . . he is fooling 50% of the population as of today.
    Today we deal with the price of oil specifically (part of my promised “October surprise”). Events were getting ahead.

    1. I agree, John, that high oil (gasoline) prices and high food prices (even though in part due to the drought this past summer) will work against Obama. Let’s hope it is enough to bring him down. So many mush heads! Sigh!

    2. John, when do you think we will get around to supplying our own oil and gas (we have plenty of oil and the refineries, too)? How many years will go by before then? How many years has it been when they said, “if we did it now, it would be 10 years before we would see the benefits?” Aren’t we there now? If we HAD started becoming independent, we could be pulling out of all these horrible countries and let them fight it out amongst themselves…BUT, we have to protect our interest in THEIR oil. Seriously!!! Where are those adults?

  3. Strictly speaking, Quantitative Easing (QE) is not printing money. It is the purchase of securities OTHER than treasury securities to meet its dual mandate of price stability and maximum employment.

    As you pointed out…
    QE3 is the indefinite purchase of $40B/month in mortgage-backed securities until an unspecified improvement in employment occurs. It is to meet the “maximum employment” part of the dual mandate The Fed operates under.

    Also, as you very correctly pointed out…
    There is good reason to think that QE3 may not work.

    The idea of any QE is to turn a tangible asset into a liquid asset that can be spent by the private-sector to stimulate a sluggish economy. The difference is that now The Fed owns the tangible asset, not the private sector.

    In essence, in QE3, The Fed is assuming the ultimate ownership of more properties should their loans go unpaid. It already owns something like $1.6T in “toxic” mortgage-backed securities from QE1 and QE2.

    It is a radical policy with significant downside risks, for sure. It is a far cry from The Fed’s usual strategy of raising or lowering interest rates to meet its dual mandate.

    But these are desperate times and The Fed blew through normal means to meet the dual mandate back in 2008.

    1. I would argue that it is printing money, AZ. The Fed is buying assets, as you say, but the Fed has no money to buy those assets. They can buy by creating digital dollars out of thin air. The same as printing money.
      I would also argue that the only full employment Bernanke is worried about is his own.

      I agree with you that the Fed dug itself into a hole in 2008 and 2009 and now their only choice is to dig the hole deeper. Some day the piper must be paid.

    2. az said, “Quantitative Easing (QE) is not printing money”. That is “correctisimo”, (in the very, very, very literal sense), unless the people at the Fed hit the “print” key in their computer, otherwise it stays “un-printed”, but in circulation on the Fed’s balance sheet and in the accounts of the recipients.
      Indeed, it is “funny” digital money – it is all 0’s and 1”s, trillions of little 0’s and little 1’s, all representing monetary obligations.
      That is what we mean by “printing money”, az.

  4. Nice summary. Isn’t it convenient how they keep fuel and food prices out of the CPI?

    A big reason gas prices are up is because of the devaluation of the dollar, since oil is a dollar-denominated commodity.

  5. Jim,

    I was surprised you didn’t touch on the ‘Bernanke save my job’ angle. Romney has already made public that he would replace Bernanke. The timing of QE3 is suspect as it is just in time to create a ‘bump’ for Obama.

    Of course, QE3 will also fail where QE1 and QE2 failed before it. Artificially manipulating the free market always fails.

    It is also unclear if Bernanke can even deliver on QE3. The MBS market has been running around $140 billion a month, so finding $40 billion for the Fed to buy may not be so easy.

      1. Sorry my friend, I see that now. I should’ve known nothing was going to get by you. I would also note the irony of the banks not lending due to tightened lending standards. They were excoriated for inflating the housing bubble and now that they excercise a little responsibility they are again excoriated for not lending irresponsibly. Just can’t win when it comes to government intervention.

      2. No worries, mate.

        The banks don’t want to lend into this nightmare of uncertainty and the public doesn’t want to borrow for the same reason. There is no rational reason for anyone to vote for Obama again. Unforyunately, the Obama base is totally irrational.

  6. OK. Let take me take a cut at this.

    The Government has two primary ways to influence the economy, fiscal policy and monetary policy. Obama has screwed the fiscal pooch, and now they are looking at the monetary side for salvation.

    There are a number of ways for our central bank, The Federal Reserve, to pump money into the economy. They all consist of accounting entries wherein the Federal Government will purchase bonds or other assets with the stroke of a pen. In other words there doesn’t need to be money in the bank to do this. It happens in all banks, like when you get a car loan. The bank never had the money, but they created it with an accounting entry.

    This is what government does. When they don’t have money, they create it. It is equivalent to printing money. The results are the same.

    With Quantitative Easing, instead of buying government treasuries, the central bank will buy the bogus assets the banks are carrying on their balance sheets, thereby giving the regular banks tons and tons of newly created account entries that are effectively real money. They hope that all this funny money will get banks lending, and creating positive economic action.

    The reason they are going with the QE route is that nothing else seems to be stimulating the economy. It’s election season and the gang that can’t shoot straight is down to their last stand. That’s what QE is all about.

    So, after all that, I agree with Jim. All the QE’s add up to one big negative.

    Wikwpedia On QE

      1. Uh, Jim. I finally got around to checking out he Akismet spam cue, and seven of yours were in that cue. I apologize. I thought I had that fixed.

      1. Book smart? Hmmmm! What about the common sense side of things? You know it helps if you have a bit of both. I have friends that have “credentials” but are just plain “stupid” when it comes to having any common sense…most those friends are “liberals”….I have made some of them actually open up and consider what I have to say, so they are not a total loss, guess they can’t help where they went to school.

    1. Elizibeth “Cherokee” Warren, the Senate cndidate running against Scott Brown in massachusettes, is also a part of the Consumer Prtection Commission set up under Dodd-Frank, which by the way is funded by the Federal Reserve and, therefore, haas no Congressional oversight, recent put out a twenty page reort that says if banks turn clients down for mortgages because it is likely the client won’t be able to payback the loan, those banls will be quilty of racial discrimination if the clients are black or Hispanic. They never learn, rjjrdq.

    2. But, shouldn’t those people also get loans, even if they can’t pay for them. That should have nothing to do with it, they deserve a home of their own as well. Let’s bring back Frank and Dodd on this one. That would be like me walking into a store, getting something I can’t pay for and never intend to pay for, how far would I get on that? Last time I checked, you had to prove you could make the payments with enough income, am I missing something here? Is it because of my “color” that I have to prove that? Isn’t that discriminating against ME? Things are so ass backwards it is pitiful. If I didn’t make my payments when we had them, it would be MY fault if they took the house back, has something changed since then? Crazy!

  7. If they counted food and energy in figuring the inflation index it would have been in double digits for a long time now. Fill up your car, buy groceries for a family of 4 at Wal-Mart, say good-bye to $$220.

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