CAN’T SELL MORE APPLES? JUST RESTOCK THE SHELVES
At least that’s what Ben Bernanke believes. His consistent tinkering with monetary policy has failed to generate a resurgence in demand for loans, yet he believes he can sell more loans if he gives the banks more reserves. This is as insane as the apple salesman convincing himself that he can sell more apples if he puts more on the shelves. Nonetheless, a lot of wise investors continue to cheer this non-event (via WSJ):
“The U.S. Federal Reserve could announce a new program of asset purchases to support a weak economy as early as November, according to Goldman Sachs Group Inc.
“We don’t expect this at the Sept. 21 meeting, but in November or December there’s certainly a possibility that it will be announced,” Jan Hatzius, chief economist at the bank, said Tuesday. He added the Fed is likely to buy U.S. Treasurys worth around $1.0 trillion to kick-start the economy.
To fight the financial crisis in 2008 and 2009, the Fed bought $1.7 trillion in mainly mortgage-backed securities, a move that helped to keep mortgage and other long-term borrowing rates low. That program ended in March. But with the recovery slowing, the Fed said Aug. 10 that it would reinvest the proceeds of mortgage bonds into U.S. Treasurys to prevent its portfolio of securities from shrinking. The question now is whether the central bank will start a new program of asset purchases that would increase the size of its $2.0 trillion balance sheet further.
Goldman Sachs expects this to happen soon given the weakness in the U.S. economy as a result of lower business inventory accumulation and a fading fiscal stimulus. The bank expects the U.S. unemployment rate to creep back up to 10% by early 2011 from 9.6% in August and to stay around that level for most of the year.”
Source: WSJ
TPC,
While adding reserves to the banks won’t cause any incremental demand for loans, or even supply for that matter, the Fed’s QE purchase of treasuries does put cash into the hands of primary dealers, who then speculate on risk assets, pushing up prices. Is this not Banana Ben’s strategy and a mechanism to get cash into the hands of individuals? higher stock prices gives people cash to spend on restaurant meals, clothes, gizmos, etc. Was not this Easy Al’s playbook for most of his tenure at the Fed? Bubbles is on record saying that (higher) equity prices are a critical driver of the economy.
I’m not arguing this is good policy, I’m just arguing this is their strategy. I would be very interested on your take on this, both the mechanism of the policy, its intent and whether or not it “adds value” to the economy.
I think the impact on assets is smaller than you assume. There is some effect in terms of “shaking hands with the government” as PIMCO did, but overall the Fed is targeting the lending market. The slight decline in interest rates might make risk assets slightly more attractive, but only marginally and not supported by any major change in fundamentals.
TPC?
Do you read your own posts?
Hey look, I know you don’t like Heli Ben. But would you consider the following hypothesis? Heli Ben (hey, I don’t like him either) is doing this NOT for the economy but for Big Bank.
Reason, HELOC’s are going upside-down (you posted on this last week), and the CRE re-sets are coming due 2010-2012. Big difference this time? CRE will take “strategic defaults” in a heartbeat! They don’t suffer the “moral hazard” that HHs do for walking away from being upside-down.
This is just another asset swap so that Big Bank can shore up capital requirements for the “2nd wave”.
I don’t think it has anything to do with the so-called published message of getting the economy going. It is about preventing the losers from losing as HELOCs/CRE goes through its death throes. It is about not losing the whole banking system to BK (which would really freeze stuff up).
Thoughts? I believe that this is (yet another) Heli Ben hoodwink…
You have no way to measure the effect fully …is it coincidence the mkt ran incredibly hard almost every month of QE1 and then stalled this spring almost within weeks of the end of QE1? The sp500 has literally gone nowhere since april.
Maybe it is all coincidence to you but I think you greatly underestimate the effect of pushing money into the hands of those who can either buy treasuries or lever up the money and speculate in house or hand to institutional clients.
The goal of QE is to lower interest rates and induce borrowing. It is not intended to drive up stocks or other such assets. On the lending front it has failed. The data doesn’t lie. It has had almost no impact.
As for driving assets higher – this is the old cash on the sidelines argument. Even if the banks were buying assets with this cash they would simply be swapping assets with someone else. Regardless, most of the banks are simply holding the reserves. We can see it in the data. They are not driving up anything so this misconception that the banks are going to get $1T and drive up stock prices is nonsense.
This report from Hatzius supports Dave Rosenberg position on the Economy and Bonds.
Have you given this a thought–
“Bubbles” is enhancing the wealth effect of millions of small investors in Bond Funds and Bond ETF –
I thought most MBSs that no one wanted are held by Fannie and Freddie or the Fed already. Is this just a way to keep Freddie and Frannie somewhat solvent?
No
That’s going to be another problem entirely – I suspect (fiscal means)
TPC,
In general I agree with you that more QE is a non-event because, like you, I doubt that it will lead to more borrowing. My concern is that more QE would occur at the same time as a massive federal government deficit. I don’t care what the Fed says, this would be debt monetization on a large scale. It still probably doesn’t matter that much now with a weak economy and continued deleveraging, but at some point it will. I have trouble seeing an exit strategy for either the Fed or the US government. If the economy remains weak, the budget deficit remains high, and the Fed will face continued pressure to do even more QE. Do you see a point at which QE stops being a non-event?
haha