Skip to comments.Andrew Huszar: Confessions of a Quantitative Easer
Posted on 11/16/2013 9:04:08 PM PST by Lorianne
We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street. ___ I can only say: I'm sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system's free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.
The Fed said it wanted to helpthrough a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed's central motivation was to "affect credit conditions for households and businesses": to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative "credit easing."
(Excerpt) Read more at online.wsj.com ...
Next on Radio FR-AM....
“Quantitative Easer Lover”
“I want to be your QE Lover Boy”
“She’s an Man Easer”
“Don’t Let Your Babies Grow Up to be Easers”
“Easer Potion #9”
This is no excuse but there is some truth in what Bernanke says. Every policy and action the Obama Administration takes has been counter intuitive to U.S. economic health.
Where are all the Occupy Wall Streeters?
It’s never been about doing what is best for the economy. It’s always been about plundering the system while the getting’s good.
The question is..why would u except soiled piece paper when I can poop on a leaf and make it environmentally “sound”
“In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash. “
“But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
Yes, the 2008 Bailout never happened. And the Tapering is scheduled to begin with the Extortion-Care Workcamp.
time for bed
easer on down.... easer on down the road.....
While I have personally benefited from QE (until I sold because I was disgusted with the process), I have objected to it from the beginning. The purpose is to protect the rich from moderate losses, and that is is not a proper role for the federal government.
Goldman Sachs, among others, long ago infiltrated the Fed and the Treasury Department. Obama and Eric Holder have upheld their end of the bargain by allowing statutes of limitation to expire without going after anybody.
Thanks for posting this. It is worth the reading and SHARING.
While following the various QE’s has been interesting, wait until they finally are forced to either unwind the mess they’ve created, or live with the consequences.
That’s when we’ll find out how badly we’ve been served, and it could well spell the end of the Federal Reserve’s independence.
If the excess reserves currently in the system are ever allowed to circulate fully we’ll have a hyperinflation. Yet to keep them from circulating eventually the Fed will either be forced to: a) sell their long portfolio at huge losses to buy up the excess reserve position, or b) pay tens of billions to the banks each year to ensure that they don’t circulate the excess.
Hyperinflation, immediate losses, or the drip-drip-drip of smaller losses year after year will be the choices. There’s no good outcome.
“If the excess reserves currently in the system are ever allowed to circulate fully well have a hyperinflation. Yet to keep them from circulating eventually the Fed will either be forced to: a) sell their long portfolio at huge losses to buy up the excess reserve position, or b) pay tens of billions to the banks each year to ensure that they dont circulate the excess.”
They’ll do option ‘a’, sell their long portfolio. In fact I’m sure that that’s why they built that position up- with an eye to soaking up all of that excess liquidity.
The problem with option a) is that they’ll be selling long-term securities at a very significant loss, since most of them were purchased when interest rates were between 2 and 3 percent. If rates are at 6 or 7 when they sell them (and they could easily be that high or higher, especially with the Fed being a massive seller), the losses could be on the order of 25-40 percent.
Incidentally, they didn’t build the position with an eye to soaking up excess liquidity. They built it to bend the yield curve to ridiculously low levels in the long end, hoping that would generate economic activity. To the extent that housing prices have rebounded with exceptionally low mortgage rates, it worked. But at some point they’re going to have to unwind the process, and that’s going to prove difficult, in my opinion.
“Incidentally, they didnt build the position with an eye to soaking up excess liquidity. They built it to bend the yield curve to ridiculously low levels in the long end, hoping that would generate economic activity. “
Well the Fed built their large bond position in order to inject liquidity into the banking system, which is what results in the extremely low interest rates. But this large bond position also provides them with the very tool for soaking up that money when they decide to sell the bonds, and that will make interest rates rise.
As you say the Fed will take a huge loss when they sell those bonds at higher rates. But such losses have no impact on the Fed, it’s not an entity with a fixed amount of capital. They can always monetize new debt at will.
The Fed has a balance sheet like any other financial entity. If it loses enough money it will be in trouble, only with taxpayers and Congress, not shareholders.
As for the comment about always being able to monetize new debt at will, that’s what they’ve been doing, but we’re talking about unwinding what they’ve been doing.
It’s the unwinding that’s going to cut into the equivalent of their equity balance, either by having to pay a higher interest rate on over two trillion in excess reserves, or by having to sell long-term bonds at a significant loss.
Note that they’re now talking about ending QE again, but also about keeping short term rates low for an extended period. They need to keep short rates low or the game blows up on them.
The real question is will short rates stay at zero if inflation moves toward 5 or 6 percent? The Fed has the power to “convince” markets what the short term rate will be, but only if they do so within a rational range. If inflation heads significantly higher, zero to 1/2 percent will no longer be anywhere inside that rational range and the only way they’ll be able to sustain it is to flood the banking system with even more excess reserves, adding reserves every time the market attempts to move rates higher. That’s a fool’s game that’s unsustainable once inflation is underway. The longer the Fed tries to hold rates low in such an environment, the higher they will ultimately go, due to the inflation they’ll be building into the system.
I don’t know what’s going to happen, but the ending of the QE strategy is going to be interesting to watch. I’m really surprised at what appears to be a significant lack of interest in the possibilities, none of which appear to me to be favorable.
“The Fed has a balance sheet like any other financial entity. If it loses enough money it will be in trouble, only with taxpayers and Congress, not shareholders.”
I don’t think that is correct. The Fed is unique in this regard. The Fed could purchase the entire Treasury debt if it chose by exchanging newly created dollar balances for the bonds. No other financial entity has the ability to create its own dollar balances.
This is the reason that capital losses on its bond holdings don’t affect it. Losses are meaningless to an entity that can create new dollars at will.
The Fed isn’t holding its bonds as an investment. They are a tool for controlling monetary policy as much as that is possible. In the early 80s the Fed was a seller of bonds in order to fight inflation by drying up excess reserves. Interest rates spiked as high as 15%. Today their current policy is to fight deflation and so they are massive buyers of debt and we have near zero interest rates.
“The real question is will short rates stay at zero if inflation moves toward 5 or 6 percent? “
The Fed won’t be attempting to hold short rates low if there is such an inflation. They will be doing just the opposite, as Volcker did in 1980. Of course all bets are off if we get another Greenspan instead of a Volcker.
The fed doesn’t create “dollar balances,” i.e., money. It creates excess reserves in the banking system when it buys bonds. The problem is that this creates a situation where they then have to convince the banks not to circulate the excess they’ve created, for if the banks were to circulate 2 trillion in excess reserves we’d be in the middle of a true hyperinflation almost immediately.
You’ll find, as will the Fed, that the losses they take on their holdings are hardly meaningless if their equity balance ever approaches zero. Typically, the Fed turns over its profits to the Treasury, but if they have losses instead, they’ll have to go hat in hand to that same Treasury and ask for funding. At that point, Congress will finally be likely to want to better understand what the Fed has been up to the past few years.
In short, the Fed is taking a huge risk with our (taxpayer’s) money. They have taken a massive 2 trillion dollar position in long bonds at ridiculously low interest rates even while the Treasury has been attempting to lengthen the maturity of the public debt. But if the Fed is buying all the debt the Treasury issues, which they have recently been doing, the effect is to shorten, not lengthen, the maturity of the debt from the point of view of the taxpayer.
It’s important to realize that while the Fed is somewhat independent of the powers that be in DC, they are not independent of the taxpayer. If the Fed loses money, WE lose money, and vice versa. And, in my opinion, they are about to lose money on the scale of tens of billions of dollars in the near future, and possibly hundreds of billions. Losses of that magnitude are hardly meaningless; they come directly from the taxpayer’s pocketbook.
Also, the Fed isn’t fighting deflation currently. QE is an attempt, and a successful one, to lower long term rates by directly intervening in the long-term debt market in the hopes that lower long rates would influence economic activity. This is more or less a fool’s game although it has probably helped the housing market recover. In the end, long rates will reflect the inflation rate plus a small premium for risk, but in my experience long rates take a considerable period of time to reach a new equilibrium. If it turns out that the Fed is laying the groundwork for a double-digit inflation in the next few years, it will take long rates even years to acknowledge that.
As I think I said earlier, if short rates start to rise, the Fed will have to offer the banks a commensurately higher rate to entice them to continue to hold onto their excess reserves. Otherwise, they will certainly circulate them and we’ll be in a hyperinflation in no time. But offering that higher rate on over 2 trillion dollars will quickly erode the Fed’s equity position. For example, if they have to pay just 3 percent, that would be 60 billion dollars per year coming directly out of the Fed’s balance sheet.
In my opinion, the entire QE process has been a ridiculous exercise and it will be shown to be exactly that in due time. We’ll see. In any case, I can assure you that the Fed would not consider losses of the magnitude they are likely to have to take as “meaningless.” This isn’t play money; it’s real, taxpayer-provided, money that they’re using to manipulate the bond markets.
“If the Fed loses money, WE lose money, and vice versa. “
I don’t know how you figure that. The Treasury has a connection to the taxpayer, the Fed has none.
Typically, the Fed makes money every year because typically they take very little risk and earn interest on their short-term portfolio, which is funded by bank reserves.
The Fed has annually remitted its profits from its operations to the U.S. Treasury, which means that the taxpayer benefits.
Now, the Fed has a long-term portfolio and thus has taken on a significant risk. Should that risk work out badly, and I believe it will, the Fed will have no profits to remit, and will possibly be required to go to the U.S. Treasury for money to finance normal operations and to cover losses incurred by the operations required to reverse their present policy course.
Frankly, you don’t understand the situation very well. I don’t mean the policy implications. You really don’t understand the basic structure of the Federal Reserve and how they operate, and how those operations translate through to the rest of the government. You seem to think that they can lose as many billions as they want without any impact on the rest of the government. They can’t.
Furthermore, as a government entity, they have been shortening the effective treasury debt outstanding even faster than the treasury has been lengthening it. So, in a time when any logical entity would be financing as long term as possible, the Fed has contravened that policy by its actions. That, too, will come home to roost when rates move significantly higher someday.
“You really dont understand the basic structure of the Federal Reserve and how they operate, and how those operations translate through to the rest of the government.”
Oh, I understand well how the Fed operates.
“You seem to think that they can lose as many billions as they want without any impact on the rest of the government. They cant.”
Actually they can. They aren’t PIMCO. Their bond holdings aren’t investments. They are tools for adjusting high powered money in the banking system. The Fed isn’t relying on them for income. A capital loss on their bond holdings is irrelevant, they aren’t an investment house.
“Furthermore, as a government entity, they have been shortening the effective treasury debt outstanding even faster than the treasury has been lengthening it. “
That’s an interesting theory but the Treasury has the sole ability to determine what length of debt gets auctioned. I can’t imagine what mechanism you envision that would enable the Fed to adjust the length of outstanding Treasury debt.
You don’t seem to understand that the Federal Reserve is an entity of the federal government. Until that’s cleared up, you are able to keep making the sort of statements you did in your last reply, i.e., what the Fed does has no impact on the rest of the government, nor on the effective maturity of federal debt held by the public.
At this point, I think we’ll have to just agree to disagree and await the outcome.
We’ll see if all the Fed’s shenanigans turn out as benign as you imply in the end.
“You dont seem to understand that the Federal Reserve is an entity of the federal government. “
I used to subscribe the St Louis Fed’s Research Letter and and New York Fed’s Quarterly Review. I read Friedman and Schwartz’s ‘A Monetary History of the United States’. I think I know something about how the Fed operates and how it has changed since its founding but I’m always interested in learning more.
One interesting fact is that the FRB originally featured two members from the Treasury Department, a practice that ended very early on because it was felt that this led to undue Government influence on monetary policy- an odd concern if we are to accept your idea that the Fed is purely an entity of the federal government- in fact it is a hybrid of the government and the private banks that belong to the Fed system. The Fed was created to give legitimacy and government oversight to some gray area practices that banks and their Clearinghouse Associations were doing during panics- such as suspending specie payments and issuing “warehouse receipts” in lieu of specie. Perhaps this is well known to you.
However I have never before encountered anyone making the claim that the Fed can alter the effective maturity date of Treasury debt. I’m curious to learn what mechanism is used to make this happen. Please elaborate.
You might indeed know far more esoteric detail about the operations, and history, of the Federal Reserve System than me.
However, the Fed is hardly an entity independent of the federal government, although it is structured in a manner that creates some semblance of independence when it comes to making policy. Nevertheless, Congress can, with one act, abolish the Federal Reserve should it decide to do so. They could not, however, abolish Goldman Sachs or Citibank, which are in fact private, not public, entities.
Furthermore, despite your description of the two Treasury positions on the Fed board being eliminated, the fact that the Fed has traditionally remitted its annual profits to that same Treasury makes it clear that the Fed is a federal entity in the end, despite its independent status when it comes to policymaking. Furthermore, even that independence is somewhat illusory when you consider that the Fed Chairman is picked by the President. Almost certainly a Ronald Reagan would choose differently than a Barack Obama, so the Chairman we get tends to reflect the politics of the party in power at the time.
As to the Fed altering the “effective maturity of the Treasury debt”, the key word in that description is “effective.” Obviously the Fed can’t alter the actual maturity of the debt as they have no say over the issuance. However, since the Fed’s profits and losses are, in the end, borne by the taxpayer, it’s current decision to purchase more long debt than the Treasury is issuing has the direct effect of shortening the effective maturity of the debt held by the public even while the Treasury is trying to lengthen the maturity.
This is, in my opinion, insane, and will cost the taxpayers tens of billions, if not hundreds of billions, in the long run when interest rates inevitably once again begin to reflect reality. 1/4% is not reality, but rather is a fed-induced mania that is not likely to last much longer despite the Fed’s assurances that they will not raise short rates for a significant time. How will this affect the taxpayers? When there are no profits to remit, that costs the taxpayers, and if the losses exceed the Fed’s equity capital balance, Congress will be called upon eventually to restore equity to the Fed, creating another call on the taxpayer.
“However, since the Feds profits and losses are, in the end, borne by the taxpayer, “
This is where your idea of what the Fed is goes off the rails. The Fed’s losses are not born by the taxpayer. In fact the Fed’s losses on its bond portfolio are ultimately ephemeral. There’s no “equity capital balance” at the Fed.
The purpose of the Fed’s holdings of Treasury bonds is for controlling monetary policy and nothing more. When they want to reduce high powered money in the banking system they sell bonds. When they want to inject money into the banking system they buy bonds.
And since they have the unique ability to create money out of thin air they aren’t going to run out of money for buying bonds no matter what the market value of their bond portfolio becomes. They have no reason, ever, to come to the taxpayer for money. They can invent all that they want on their own.
You make a stronger case when you worry about our current artificially low interest rates- but the culprits here are the Treasury and Congress. Congress authorized the vast increase in Treasury debt and the Treasury decides the maturity date of what it auctions. Ironically the large holdings of the Fed cost the taxpayer nothing since the interest paid goes back to the Treasury. When the Fed sells that paper to soak up high powered money then the interest payments will be real.
I believe that records and history show that the Federal Reserve is a pseudo USA entity owned by foreign interests who are of Rothchild persuasion. They are free to do whatever suits their wealth and government desires are at any given time or events. JFK tried to go around the cabal to have USA money and I believe this was part of his demise.
That rates right up there with the “we didn’t land on the Moon” theory but thanks for playing.
The ‘USA’ money you mention with regard to JFK was the ‘United States Notes’ issue- these were nothing more than the Greenback notes first issued during the Lincoln administration to finance the Civil War. These notes were still issued as $5 bills as late as the 1963 Series, a Series which still included Silver Certificates.
But when US coinage had its silver removed both US Notes and Silver Certificates were absorbed into the larger Federal Reserve Note issue, since the distinction had ceased to have any meaning.
We’re going in circles now, I’m afraid. Nevertheless...
How can you say that the purpose of the Fe holding long bonds is for nothing more than controlling monetary policy when they have expressly said that the purpose of buying long bonds (instead of the usual t-bills and short notes) was to drop the yield curve in the long end? That’s not monetary policy, that’s direct manipulation of the bond markets. They could have used the same justification for buying up stocks in the stock market.
Say they wanted “green companies” to get easy financing. All they’d have to do is state a policy of buying $85 billion of green company stock every month. Companies would be issuing stock like crazy, building capital, and investors would be buying it and re-selling it to the Fed at higher prices.
Okay, if you consider bond market manipulation to be “monetary policy” then you’re right. I don’t. I consider it bond market manipulation, period. It’s far from traditional monetary management, so far that it’s never been attempted before. The only reason it’s being done now is because the Fed funds rate hit an effective rate of zero percent, so they couldn’t use their traditional monetary policy tool, lowering short rates.
As for my idea going “off the rails,” we’ll see about that when the Fed attempts to drain 2 trillion dollars and suffers a few hundred billion dollars in losses doing so. It’s really hard to create more money when you’re trying, simultaneously, to stop it from being created, no? I’m saying they will suffer losses of a significant magnitude, sufficient to impair all of their equity capital and then some, most likely. You’re saying that they can stop that by buying more bonds. How do they do that in the middle of an aggressive campaing of selling bonds, exactly?
Please explain. Or else just tell me how you envision the Fed eventually neutralizing 2+ trillion in excess reserves without it costing them billions of dollars?
Incidentally, your argument that the Fed’s losses don’t matter, apparently either because no one ever measures them, or because they can always get more money by creating it, reminds me of the stock analysts in the 1970’s who used to routinely ignore the reality of a company’s massive unfunded pension liability by using the argument that traditional accounting standards didn’t require those unfunded liabilities to be reflected on the balance sheets.
They were real, of course, as the eventual bankruptcies of many companies later proved, but as long as they weren’t required to be reflected on the books, analysts argued that they could be ignored.
I was a bond pension manager during that time and, regardless of the analysts’ near-universal agreement at that time (as evidenced by repeated phone calls during which they made their case), I sold the bonds of every company that had an excessive unfunded pension liability.
And if the Fed actually had stocks or bonds of its own outstanding, I’d liquidate those today. Unfortunately, the taxpayers don’t have that option, and the current Fed mess is going to cost us a lot in the end. As I’ve said a few times now, let’s wait and see....
I agree with the use of ‘absorbed’ Because that was how it was played out to keep the USA locked to Foreign controlled Fed Reserve notes, not real USA coins but paper printed at the leisure/desires of European banker powers.
The Fed’s member banks are American. The US government appoints the members of the Federal Reserve Board. I don’t know who is telling you that the Fed is “Foreign controlled” but whoever it is is nuts.
“Its really hard to create more money when youre trying, simultaneously, to stop it from being created, no?”
For one thing they won’t try to do both at the same time. When the Fed decides to drain money from the banking system they will start selling off their hoard of bonds. This will remove high powered money from the banking system by replacing it with illiquid bonds. Banks can loan high powered money, they cannot loan bonds. The Fed can do this until they run out of bonds to sell.
Now let’s assume that they sell every single bond that they have- bonds that will sell far below the price that the Fed initially paid- will the Fed lose a trillion dollars and have to run to the taxpayer to be made whole?
No. Not at all. Because they can replace the money they ‘lost’ at will. They can turn around and purchase a trillion dollars of bonds by simply crediting the bond holders with newly created money. It’s hard to go broke when you have the ability to create new money.
>>For one thing they wont try to do both at the same time.<<
No kidding. Because they can’t.
You’re trying to argue that unwinding the Fed’s current excess reserve problem (what you’re calling high-powered money) will not result in a catastrophic loss situation because the Fed can always unwind the losses by rewinding the excess reserve problem, i.e., by creating more “high-powered money” (excess reserves.)
So, what then? Rinse and repeat?
And besides, the losses themselves won’t be wiped out by creating more excess reserves. They will just have managed to re-create the excess reserve problem that they currently face.
You don’t seem to appreciate the fact that the Fed has a balance sheet, one that the current regime just might have managed to set up for destruction. If that balance sheet incurs losses that result in negative equity, they can’t restore that equity by creating more excess reserves. All that transaction would accomplish is increasing their exposure to additional losses in the future.
>>When the Fed decides to drain money from the banking system they will start selling off their hoard of bonds. This will remove high powered money from the banking system by replacing it with illiquid bonds. Banks can loan high powered money, they cannot loan bonds.<<
Just for clarification, when you say “high-powered money” you just mean “bank reserves,” right? And to the extent that the Fed supplies more reserves than are required by the banking system as a whole, that amount (the excess reserves) can then be circulated (loaned) resulting in an eventual increase in the overall size of the banking system.
Are we on the same page to this extent at least?
Incidentally, the bonds are hardly “illiquid.” They can easily be bought and sold. Instead, what they are is simply an asset similar to other bank assets like cash and business loans. If a bank sells a bond and makes a business loan with the proceeds all they’re doing is replacing one asset with another. Such a transaction won’t increase the size of the banking system unless the Fed supplies additional reserves to support an expansion. Instead, somewhere else in the system a different bank will be reducing its exposure to business loans while increasing its position in treasury bonds.
Yes the Fed Reserve Bank in the USA is made up of satellite banks with centralized control ostensibly under a chair person which used to be Bernanke. However ‘our’ Fed Reserve is subject to the banking powers and whims of European bankers. The USA government has no authority over the Fed Reserve as demonstrated by recent USA politicians calling for an open house look at the Federal Reserve and Pres. Kennedy’s attempt for a breakaway. For more understanding of the banking system in the USA one needs to study how the Fed Reserve came into existence under Pres. Wilson. European banking history is fascinating.