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.