Thursday, March 19, 2009

Quantitative Easing — Print the Money and Run

On Wednesday, March 17, the Federal Reserve (home of the should-be disgraced Ben Bernanke) "stunned investors by announcing plans to buy $300bn of US government debt, triggering a plunge in bond yields and the dollar," as the Financial Times put it.

This is the Big One — in modern newspeak "quantitative easing".
The term quantitative easing refers to the creation of a pre-determined quantity of new money 'out of thin air through open market operations by a central bank as the start of a process to increase the money supply. It can, more simply, be understood as an indirect method of printing money. This new money is injected into the private banking system when the accounts of the vendors of the securities purchased by the central bank through the open market operations are credited.
As many have noted, the comedy here is that, until recently, US government officials and others were complaining that We the People were not saving enough. Now, they're desperate to get everybody spend spend spending, witness President Obama's and Larry Summers's recent shilling for Wall Street.

Mike Whitney, writing on Counterpunch, wrote of this a full year ago:
If the Fed can't bring Libor down with interest rate cuts, then it will have to develop a back-up plan. The next step would be “quantitative easing”; a monetary policy that was implemented by the Bank of Japan in 2001 “to revive that country's economy that was stagnant for a decade. Quantitative easing entails flooding the banking system with excess reserves, resulting in pushing the benchmark overnight bank lending to zero.” (Reuters) There are indications that Bernanke is already preparing for this radical option, but there's little chance that it will succeed. Whether the banks are able to lend or not is irrelevant. Public attitudes towards indebtedness have changed dramatically in the past few months. Overextended consumers are looking for ways to pay off their debts. This will make it more difficult for Bernanke to reflate the equity bubble through credit expansion. When people are frightened or pessimistic about the future, they naturally curtail their spending.
As the Financial Times reported, "Goldman Sachs said the Fed was throwing the 'kitchen sink' at the problem. The plan to buy Treasuries caught investors off guard. 'It appears that they wanted to give the market a jolt,' said Peter Hooper, an economist at Deutsche Bank."

The last time the central bank attempted to bring down yields on long-term securities through direct intervention came during the ill-fated Operation Twist in the 1960s. Recent comments by Ben Bernanke, Federal Reserve chairman, and William Dudley, New York Fed president, did not suggest that Treasury purchases were imminent.

But the deterioration in the US outlook, problems rolling out the US financial rescue plan and the Bank of England’s success in buying UK government gilts seem to have persuaded the Fed to act.

Alan Ruskin, a strategist at RBS, said it was a “flip-flop” that “could be cast as a sign of desperation” but “confirmed that Bernanke will do whatever it takes to get some hold of the problem”.


Wednesday’s Fed announcement will increase the size of its balance sheet by another $1,150bn to about $3,000bn even before the roll-out of a $1,000bn scheme to finance credit markets. Once this scheme is fully implemented, its balance sheet could approach $4,000bn – nearly a third the size of the US economy.

A swollen Fed balance sheet runs the risk that the US central bank may find it difficult to manage down the money supply when the economy turns, raising the possibility of inflation.

So, the Fed is just plain printing money. The FT has an 'interactive feature' to explain (woo hoo!). (Actually, the only thing that's interactive is that you hit 'play'.)

As the world suffers its worst recession since the second world war, policy makers are searching for the best tools to limit the downturn. Central banks have rapidly lowered interest rates in order to reduce the cost of borrowing. The hope is to stimulate spending in the economy now.

So far, it has been to no avail. Confidence disappeared from banks, companies and households in the autumn of 2008 and unemployment is rising fast in 2009. Without an obvious source of fresh demand, central banks are moving to open the way to more unorthodox approaches to address the crisis. . . . One of those is quantitative easing.

The rich are getting the asses out of Dodge, putting their money in gold or in currencies that look like they might remain stable. As for the rest of us, we're boned.

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