Helicopter Ben Is At It Again

Ben Bernanke, Chairman of the Federal Reserve, has just put his virtual money printing presses in fourth gear. The only gear left is ¨overdrive¨.

Remember when QE 3 was announced a couple of months ago? Some were calling it QE Infinity because there was no expiration date. QE 3 was a continuance of Operation Twist, buying long-term bonds and selling short-term bonds to drive down interest rates on the log-term bonds, and a commitment from the Fed to buy $45 billion per month of mortgage-backed securities from Fannie and Freddie. The goal of QE 3, Bernanke explained at the time, was to juice the sluggish economy, help get the housing market going again, and to reduce unemployment. Apparently it was not enough to get the job done. Welcome to QE 4.

Forbes explains in their article yesterday that QE 4 has some surprises in it.

Ben Bernanke continues to make history at the Federal Reserve.  On Wednesday, the FOMC announced more quantitative easing at a rate of $85 billion a month for an extended period of time.  The Bernanke Fed has also modified its guidance, noting its ultra-accommodative stance will remain in place until the unemployment rate falls below 6.5% and inflation projections remain no more than half a percentage point above 2% two years out.

It does seem that Mr. Bernanke is making a place for himself in the history books. For the first time, the Fed is setting policy that is tied to goals for their dual mandate, inflation and employment, instead of being tied to some date in the future.

So, I have a question for you, dear friends. After four years of President Obama’s stimulus package and after four years of Mr. Bernanke’s stimulating the economy with Quantitative Easing have any of you been stimulated? Unless you are a big wheeler-dealer on Wall Street, probably not. What was it Einstein said about doing the same thing over and over and expecting different results?

Maybe I shouldn’t be so hard on Ben, After all, inflation, the way the government measures it, is really low. And, who knows, he just might make his unemployment goal. If about a million unemployed Americans will cooperate and quit looking for work, Ben could very well meet his goal of below 6.5%. Then Bernanke can take his finger off the “enter key”.

So, The Bernanke is going to create $85 billion per month out of thin air and use it all to buy US Bonds. Wow! That is getting very close to all of America’s borrowing for a year. For all practical purposes, the Federal Reserve is now THE MARKET for US Bonds. Think about it. America doesn’t have to borrow from China or Japan anymore or even from pension funds. When the clowns in Washington want to spend even more, the Fed will put more money in the Treasury’s account. How cool is that? And, if our government decides to go to war somewhere, the Fed can finance it for us. The Federal Reserve has become the lender of last resort to the United States government. So why do I have this queasy feeling in the pit of my stomach? Is it because this looks very  much like a last resort?

Please click on the Forbes link and scroll down and look at an ad on the left side of the page of a man playing golf. The man supposedly is the well known CEO of PIMCO, Bill Gross. The caption underneath say “Sub 2% growth and unemployment above 7% for a decade.” Really” Are we going to become another Japan, which has had twenty plus years of stagflation? A lot of smart people think so, but a lot of smart people think not. I happen to agree with the think not group.

Jim Jubak at MSN Money wrote an opinion piece a couple of days before Bernanke made his announcement. He anticipated very closely what the Fed was planning to do. He is concerned that QE 4 is going to have an adverse affect on the bond market when the Fed has to unwind their balance sheet. Ben Bernanke has said many times when questioned about this that the Fed would be able to unwind its balance sheet when the time comes. ” The time comes” means when inflation begins to get out of control. “Unwind” means selling the assets that the Fed has been buying and recording on their balance sheet. Mr. Jubak, and he is not alone in this opinion, thinks that when the Fed tries to sell its assets, in  particular the bonds that the Fed is accunulating, the bond market is going to demand higher interest rates and that, of course, is the last thing the Fed wants.

The new plan would resume the rapid growth of the Fed’s balance sheet and push it to $3 trillion sometime in 2013.

And that would make the big problem facing the Federal Reserve and the U.S. economy even bigger. After expanding its balance sheet by buying what will soon be an additional $2 trillion in debt to help stave off the worst effects of the global financial crisis and then to support a stumbling U.S. economy, how does the Fed shrink its balance sheet back to something like normal size without crashing the U.S. and global economies?

Yup! That is what this nobody is worried about, too.

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


18 thoughts on “Helicopter Ben Is At It Again

  1. Jubak is right that when time comes to sell its bonds the Fed is going to be pressured by lower prices – thus higher interest rates. But the Fed and the Treasury have – as “Silverfiddle said – a “shell game”. This type of operation (free money) is like drugs, the governments gets addicted to it because they are successful on the short run. That will prolong the day when the Fed has to sell in considerable volumes.

    That is the supply side. I am more concerned with the demand side. The day when foreign holders decide that they will sell their Treasury’s – or start by “not buying” them or revolving them.

    Japan in not suffering from “stagflation”; It is suffering from deflation. Interest rates in Japan remain extremely low. We are also suffering from a mild deflation. Deflation can change to stagflation when the “demand” side I mentioned above fails; pushing interest rates up. Japan has a special domestic structural advantage that has allow it to escape such an event. The US does not have the same domestic structural advantage and it is more dependent on the judgment of its foreign demand – the Fed is not enough and this dependency is growing both in size and relativity.

    I will be more clear and explicit as soon as I can explain it correctly on a full blog post.

    PD. After the election I am not too gung-ho anymore in trying to teach the masses economics, it is a waste of time. Even many conservative bloggers have disappointed in their fickleness, One day they criticize Boehner for being weak and give Obama too much, and the next they take the side of whatever favorite weak senator they have at home that wants to give up and give away tax increases. Boehner is the Rock of Gibraltar compared to many conservative bloggers.

    1. Add now the ECB will be able to do much the same thing.

      Borhner a Rock of Gibraltar??? Maybe not. The Republicans should of had a detailed package ready to go before the elections and when they learned that they lost, they could have given a small tax rate hike on the rich because Obama won on that message whether we like it or not. Now he looks like a bunmbling idiot.

      1. One. I need to be taken in context – “Boehner is the rock of Gibraltar” . . . .”compared to many conservative bloggers”.
        Two. The “small tax rate” (8.4% total) marginal, plus 8.3% capital gains, + 28.8% dividends) on the rich, once pre-given we could say goodbye to any cuts in entitlement spending later.
        Three. No, the election was a continuation of the “status quo”. Nothing changed; not the executive, not the Senate, not the House. The people elected the House who “campaigned” against tax increases and who is in charge of the purse.

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