Ben Bernanke

Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)

by The Wall Street Geek on June 4, 2012 · 1 comment

Star Wars Episode VI Return Of The Jedi Darth Vader darth vader Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)The summer has barely begun, yet it’s already clear that the US economy will be a hot topic.

To stimulate a weakening enterprise, an old standby may be brought out yet again. No, not Billy Crystal. But Quantitative Easing.

If Bernanke announces in the June 19-20, 2012 Federal Open Market Committee (FOMC) meeting that another round of Quantitative Easing is a go, you have to wonder this: will this third round be an optimistic tale of the defeat of downward market “forces”, or a dark tale about succumbing to the force?

Hopefully, it’ll be an optimistic sequel. Because unless you’re the producer of the Matrix trilogy, why would you try something again unless the previous versions made complete sense?

What is Quantitative Easing?

It’s definitely not something that I’m a fan of. When I hear about QE, in my head — in the Seinfeld/Kramer/Moviefone voice — I always think: “Why don’t you you just GIVE me the money?”.

Quantitative Easing, in a nutshell, involves the Fed printing new money and purchasing primarily bond (e.g., fixed-income) securities from banks and other related businesses in order to provide those institutions with excess reserves that can be lent to consumers.

This artificial demand for bonds (including mortgaged-backed securities and treasuries) also drives up bond prices, which in turn forces the interest rates of existing bonds to decline since bond prices and interest rates are inversely related. As a result, the loan that a lucky consumer is able to get will ideally have a lower interest rate after quantitative easing.  Which means more money in that person’s’ pockets to spend, not only from the loan itself but also from the lower interest rate on their loan.

In other words: a QE program begins, then magic happens, and then we have increased economic activity and (ideally) more jobs since consumers are spending more money at businesses.

Did QE 1 and QE 2 Work?

It depends on how you look at it.

From the interest rates/monetary policy point of view:

QE 1 worked, but QE 2…eh, not so much but not a failure either. Rates dropped significantly after the QE 1 bond-buying program started in Nov 2008, and continued to drop after the QE 1 bond-buying program ended in March 2010. And while rates spiked at the beginning of QE 2 in Nov 2010, rates fell by the time QE 2 ended at the end of June 2011 and continued to fall thereafter.

From the Main Street/My Wallet/My Job point of view:

While QE 1 occurred, the employment continued to fall.  However when QE 1 ended (and whether this is causal is still a debate), employment rose despite the fact that loans to consumers were falling.

During QE 2, the net change in employment continued to rise, but didn’t stick and fell during and after the program ended.

Bank Deposits Consumer Loans During QE Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)Net Change in Employment During QE Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)

 Data Sources:  US Bureau of Labor Statistics and Federal Reserve Board of Governors

The conclusion here is that there’s not a heck of a lot of correlation between consumer loans and economic activity/employment (which makes sense because anyone who got a loan likely used it to pay off bills and not to buy cars and homes, which stimulates economic activity and ideally jobs).  So why is QE 3 being discussed with people as an economic/employment stimulus tool when the cause and effect relationship doesn’t appear to be there?  Bernanke?

Will QE 3 Happen?

The majority of economists and analysts at this point say yes — especially after the hit that consumer confidence took last week when the monthly jobs report showed an uptick in unemployment.

Noone’s arguing that righting the US economic ship is difficult and complex, and 2008 was unlike anything our country has ever seen.  But these rounds of QE have turned into more of a PR attempt to boost consumer confidence instead of a policy that provides tangible results for the citizens that do the hiring in our government.

Let’s see how this story ends. Or goes on, and on again, until the force either cries uncle or asks “who’s your daddy?”.

 

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Dissecting Bernanke’s June 22nd News Conference

by The Wall Street Geek on June 23, 2011 · 0 comments

Ben Bernanke2 Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)Federal Reserve Chairman Ben Bernanke held a news conference on June 22nd shortly after 2 pm, following the Fed’s policy meeting. As usual, the market vividly showed it’s opinion of Mr. Bernanke’s comments:

BenTalkedToday Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)

Oh Ben. In fairness, there hasn’t been a heck of a lot of happy news for him to share. Nevertheless, why can’t an aide of Ben Bernanke’s set his watch 2 hours behind so that he delivers his comments after the market closes?

Ben spoke to several salient points. Let’s take a deep dive into each:

Inflation: “I have been a longtime proponent of an inflation target…[snip] There’s nothing imminent, but again we will continue to discuss this and as appropriate we will be consulting about it.”

Interest rates have been kept extremely low for several years now to not only enable banks to lend to each other cheaply, but to also encourage growth in the stock market (and as a side effect, business growth). Nevertheless, it’s been unnatural to keep interests rates low for such an extended period of time. So whether it’s irrational or not, many are concerned over what may happen to the inflation rate and economic growth once the Fed beings to raise rates again. The market doesn’t like uncertainty over inflation, so -1 for Ben.

The Pace of Economic Growth: “Part of the slowdown is temporary and part of it may be longer-lasting. We do believe that growth is going to pick up into 2012 but at a somewhat slower pace from what we had anticipated in April. We don’t have a precise read on why this slower pace of growth is persisting.”

I do, and so does most of America: jobs. Or even more accurately: household debt, which keeps consumers from spending, which keeps businesses from hiring because the demand isn’t there. I agree to expect growth in the latter half of 2012 — in particular, since banks appear to be using IPO’s to make money this year which may help discourage a double dip this year. Nevertheless, institutional investments may not have the power to keep the market growing. It’s steady investments by individuals over the long term, yet individuals are increasingly lacking the money to invest. -1 for Ben.

The Labor Market: “As of last August…inflation was low and falling, and unemployment looked like it might be even beginning to rise again. [snip] I think we are in a different position today, certainly not where we would like to be but closer to the dual mandate objectives than we were at that time.”

The Fed started talking about QE2 in August 2010, and implemented that strategy by buying assets (government debt, mortgages, commercial loans, etc.) a few months later. Last August in terms of jobs was more bleak than this August may be. So while it’s frustrating and demoralizing to many Americans to not be able to find a job nor to be able to afford to train themselves for a job in a new industry, and while job growth is slower than many feel it would be than if the issue of household debt were directly addressed, prospects are better than last year. +1 for Ben.

On QE3: “With respect to additional asset purchases, we haven’t taken any action, obviously, today. [snip] I think the point I would make, though, in terms of where we are today versus where we were in August of last year when I began to talk about asset purchases is that at that time…many objective indicators suggested that deflation was a nontrivial risk and I think that (QE2) has been very successful in eliminating deflation risks.”

I would agree that the cash infusion helped ward off deflation, yet was a very nonsensical policy to hardworking individuals who watched banks’ coffers fill with cash. Deflation during a period like this is like putting a nail in the coffin when it comes to job creation. Deflation is usually associated with a decrease in prices, and if companies aren’t earning what they used to from consumer purchases they certainly won’t hire additional staff (nor be able to provide pay raises). While deflation pressures subsided, it may have been sensible at that time to direct part of QE2 to Main Street to purchase debt on household books as well. So Ben is even here.

The Greek Crisis: “(The Federal Reserve) did discuss it, and it is one of several potential financial risks that we are facing now.”

We’re going to witness more crises in the future as municipalities run out of money. So it’s smart for Ben to monitor the situation in Greece, yet not overreact. So +1 for Ben.

The Slow Recovery: “The reduced pace of the recovery partly reflects factors that are likely to be temporary. In particular, consumers’ purchasing power has been damaged by higher food and energy prices and the aftermath of the tragic earthquake and tsunami in Japan has been associated with disruptions in local supply chains, especially in the auto sector. However some moderation in gasoline prices is now a prospect and the effects of the Japanese disaster and manufacturing output are likely to dissipate in coming months. Consequently…the committee expects that the pace of economic recovery will pick up overcoming quarters.”

I think that Ben started to grow weary at this point and could have used a shot of espresso. This quote reiterates clearly than Ben Bernanke thinks more like an economist than someone with down home common sense. Consumer purchasing power has been damaged, but it’s not as correlated to higher food and energy prices as it is to household debt caused by decreasing wages and the lack of jobs. I think Mr. Bernanke is a smart and thoughtful person, but desperately needs an Elizabeth Warren or even a real business owner in his orbit versus textbooks and other economists. -1 for Ben.

It’s not easy to right a ship that exploded just over 3 years ago, but the right words would have made a much better effect on confidence. While I feel he and the Fed have done a good job in preventing deflation and an unemployment spiral, it’s clear that the administration needs fresh perspectives to help spur the country into a new phase of real growth fueled by middle class jobs and individual investors.

View on The Wall Street Geek’s business website Price Capital.

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Quantitative Easing May Not Be Pleasing

by The Wall Street Geek on October 4, 2010 · 2 comments

kid math Quantitative Easing Pt. 3: Return of the Jedi (or Revenge of the Sith depending on how you look at it)Whenever I hear the phrase “quantitative easing”, I get a flashback to this statistics class that I took in graduate school. I’m sitting there with my stomach in knots, befuddled as to what the heck is going on.

It’s pretty accurate to apply that same reaction to the latest buzz of a second round of quantitative easing potentially occurring this fall.

The government has several tools in its belt when it comes to impacting the economy. Some tools fall under the “Fiscal Policy” category (including government spending to spur economic growth, and tax collection to provide revenue to the government). Other tools may fall under “Monetary Policy”, such as tweaking the money supply or interest rates to increase demand, encourage business lending and potentially a reduction in unemployment.

Like the dials of an Etch A Sketch, the government uses these tools in a delicate dance towards creating a rosy picture out of the US economy. One flinch in the wrong direction, and you’ve got a mistake that’s tough to fix without shaking it all up and starting over again (which some say describes how this last recession reset our economy to lower levels).

These dials have to go a particular way according to theory in order to get a certain result. However, with interest rates already low, government spending and debt already high, and the tax cut debate predicting dubious results; what’s left to do?

Like Superman, in swoops the idea of “Quantitative Easing” (also known as “QE”). If this sounds familiar, this monetary policy tool was last attempted in 2008 as one of the last acts of the Federal Reserve under the Bush Administration. The Fed injected money into the financial system by buying assets such as debt issued by private banks (such as bad mortgages packaged into mortgage-backed securities).

The Fed “eased” the burden on banks by providing them a “quantity” of liquidity in the form of cold hard cash, providing the banks with more capital to theoretically lend.

But the desired result of increasing in private sector loans, spurring commerce and reducing unemployment didn’t exactly happen. So why is the Federal Reserve trying it again? Haven’t you heard of the saying “Fool me once, shame on you. So fool me again”?

We’ll hear about the decision to try Quantitative Easing again (e.g., “QE2″) when the Federal Reserve has its November 3rd Federal Open Market Committee (FOMC) meeting. So there’s time for the government to reconsider, although at this point it sounds unlikely.

I say reconsider this form of trickle-down economics for two reasons:

1. Today’s financial system is far too complex and interwoven for traditional public finance tools to work predictably. For example, as far back as before the 1930′s it was fairly clear that lowering interest rates had upside potential. But now, we’ve got seniors without guaranteed pensions living off of savings often invested in bonds that may or may not produce the income that they need when monetary policy changes interest rates.

2. These traditional tools are Rube Goldberg machines for solving the issue in my opinion. There is unemployment because businesses aren’t hiring, because demand isn’t there, because people don’t have money to spend. And even if people had money to spend, nine times out of ten it would go towards paying down household debt.

Our government has very smart people at the top. But on this issue of improving the US economy, they’re thinking way too hard.

Rather than apply quantitative easing and giving money to banks towards encouraging lending towards entrepreneurs creating jobs towards putting money into people’s pockets which will produce spending–just cut out all of these middle men, put that same money in an envelope and mail one to every US household.

In the age where millions of people donated $25 to produce millions each month for our current president’s campaign, why not have the same faith in millions of people–when directly given the tools to feel secure to spend–to produce a “Trickle Up” economic recovery?

$1.7 trillion dollars were given to the banks in 2008 for the last attempt at QE. With the 2009 US population estimate at 310M, a Main Street QE would equal a check of almost $5500 to each person in the US.

If we narrowed the recipients to individuals over the age of 18, using 2009 census number the check would increase to just over $7200 per person.

And if we went by household, approximately 105M households by the 2009 census ups the check to $16K per household.

In order to increase the likelihood of having a return on their investment, the Federal Reserve could provide the following three choices to individuals on how to spend the money–and more than one could be chosen:

Choice 1: Enroll and pay for a local corporate or public sector provided educational program to learn competitive skills–skills that would give people the tools to build things such as software, electronics, and other sellable products.

Choice 2: Use the money to pay down household debt, and deposit a percentage in a local bank (which would provide local banks with deposits towards providing loans to the community).

Choice 3: Save a percentage, and spend a percentage in local businesses.

It’s definitely not easy to solve the problem of spurring the US economy. But if QE2 is implemented and doesn’t work, just don’t try to fool us a third time.

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