This weekend’s shocking admittal that the Fed is hoping QE will keep asset prices “higher than they otherwise would be” did not surprise David Rosenberg one bit.  In this morning’s note he said:

Brian Sack, a senior official at the New York Fed, had this to say about the powers of quantitative easing in a speech he just delivered:

“Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken. This point is overstated in my view. It is true that certain aspects of the transmission mechanism are clogged because of the credit constraints facing some households and businesses, and it is true that monetary policy cannot directly target those parties that are the most constrained. Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by  keeping asset prices higher than they otherwise would be. It seems highly unlikely that the economy is completely insensitive to borrowing costs and wealth, or to other changes in broad financial conditions.  ”

I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.”  When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation?  As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.

Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission.  Then again, this is what the Fed has been all about since the LTCM bailout of 1998.  We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success.  There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means, is irresponsible at best, dangerous at worst.

I am honestly still trying to grasp the fact that the Fed has admitted to trying to run what is really nothing more than a ponzi scheme….That is our great American growth strategy.   Unbelievable.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Check out this interesting commentary beginning with an excerpt from Greenspan’s 1966 essay “Gold and Economic Freedom”
    “Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale”
    Read “Who is John Galt” here http://www.gata.org/files/QBAMCO_Who_is_John_Galt.pdf

  2. I caught an interview of former US Treasury Secretary John Snow. The reporter was asking Snow about the anticipated effect of Quantitative Easing II. I suspect that QE I caused the stock market rally during that time, and it looks like QE II is fueling the current rally.

    Here is the meat of the interview:
    Source: http://www.pbs.org/nbr/site/onair/transcripts/former_treasury_secretary_john_snow_101011/

    Washington bureau chief Darren Gersh talked with Snow and began by asking why the Fed is considering this unusual step. JOHN SNOW, FORMER TREASURY SECRETARY: Well, the U.S. economy is way, way under performing. We have slow growth. We have high unemployment, we have output levels that are far short of our potential output levels. And we have just come through the biggest financial catastrophe, cataclysmic event of the last 70 years. So the Fed`s worried about, properly so, about the future path of the U.S. economy and quantitative easing. In simple terms, it`s simply the Fed`s applying more credit to the markets by buying paper of one kind or another.

    DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: And will it work? What specifically does the Fed want to do and will it work?

    SNOW: Well, what the Fed wants to do is to get the economy on a better growth path. The idea behind quantitative easing is you buy paper, government paper that`s now held by financial institutions or individuals. And then they have the money. And then they go out and buy some other financial assets, stocks. And they drive up the value of those other financial assets so we get an increase in the value of financial assets which means an increase in the value of lots of peoples` household wealth. And the idea is if household wealth goes up, then that will be a spur to spending.

    GERSH: But if people are afraid to spend, will giving them more money solve that problem?

    SNOW: If their assets go up in value, if the stocks and bonds they hold go up in value, they will be inclined to feel wealthier and more confident about the world. That`s the theory.

    If you are so inclined, you can see the actual video here. http://www.pbs.org/nbr/info/video.html

    Queue up to about 6:41 into the video: Nightly Business Report for Oct 11, 2010.