QE’s Seeds are Already Sown The Federal Reserve has finally ended its quantitative easing programs. Since the financial crisis of 2008, the Fed has pursued what seemed like an endless policy of asset purchases. As recently as September 2008 the monetary base in the US was just a hair over $800 bn. Today this figure is just shy of $4.2 trillion, for a total increase of 425%. For its part Janet Yellen and her gang of Fed economists are probably pretty pleased with themselves. Unemployment is down, headline inflation remains muted, and the word on Wall Street is that a worse crisis has been averted. The stock market is at record highs, and banks (and bankers) are back to their pre-crisis eminence. One of the true marks of a great economist is an ability to see past the obvious outcomes and into the veiled results of policies. Friedrich Bastiat’s great essay on “that which is seen, and that which is not seen” provides a cautionary parable that disastrous analyses result when people don’t bother looking further than the immediate results of an action. Nowhere is this lesson more instructive than with the Fed’s QE policies of the past 6 years. Consider the Austrian business cycle theory. The nub of the theory is that changes in the money market have broader results on the greater economy. In its most succinct form, when a central bank pushes interest rates lower than they should be (by buying assets, for example), the greater economy gets distorted. Some of these distortions are immediately apparent, as consumers buy more goods and everyone takes on more debt as a result of lower interest rates. Some of the distortions are not immediately apparent. The investment decision of firms gets skewed as interest rates no longer reflect savings preferences, and the whole economy becomes fragile over time as erroneous investments add up (what Mises’ coined “malinvestments”). When a financial crisis or economic recession hits, it’s almost never because of some event that apparently happened at the same time. The crisis of 2008 did not occur because of the collapse of Lehman Brothers. It happened because the whole financial system and greater economy were fragile following years of cheap credit at the hands of the Greenspan Fed. If anything, Lehman was a result of this and a great (if unfortunate) example of the type of bad business decisions firms are lured into by loose money. It wasn’t the cause of the troubles but a result of them. And if Lehman didn’t go under to spark the credit crunch, some other fragile financial institution would have. The Great Depression is a similar case in point. It wasn’t the stock market crash in 1929 that “created” the Great Depression. It was a decade of loose money policies by the Fed that created a shaky economy. Again, if anything the stock market crash was the result of stock prices being too buoyant and in need of a repricing to reflect economic fundamentals. Just like today, stocks rose to such storied heights as a result of cheap credit, not because of the seemingly “great” investments funded by it. The Fed has lowered interest rates since July 2006. We have just come off the the period with the most rapid and extreme increase in the money supply ever recorded in American history. The seeds of the next Austrian business cycle have been sown. In fact, they are probably especially fertile seeds when one considers that the monetary policy has been so loose by historical standards. Just as cheap credit of the 1920s beget the Great Depression, that of the 1990s beget the dot-com bust and that of the mid-2000s beget the crisis of 2008, this most recent period will also give birth to a financial crisis. When the next crisis comes there will no doubt be economists and commentators who blame it on some proximal event, like the failure of a large important financial institution. Don’t be fooled. The seeds of the next crisis are already sown. Fed policy under Ben Bernanke and Janet Yellen has distorted the economy in a way that makes it precariously fragile, and susceptible to collapse.
"The Great Depression is a similar case in point. It wasn’t the stock market crash in 1929 that “created” the Great Depression. It was a decade of loose money policies by the Fed that created a shaky economy. Again, if anything the stock market crash was the result of stock prices being too buoyant and in need of a repricing to reflect economic fundamentals." Is a good reason why I'll like to buy LEAP puts on an index. Am wondering just how cooked are the books across America via our pals at the fed...
I believe I've mentioned collateral debt chains before. They often "print" far more money than governments do. It's all about trust (and mania). http://www.voxeu.org/article/other-...need-know-about-modern-money-creation-process
The way around it is to pursue, vigorously, lines of thinking that you have dismissed in the past because they don't conform with your manner of thinking - or what your education gave you. Many of those lines will lead to dead ends, which will validate your thesis. Some will lead to more questions, and eventually, somewhere, you might find that one shocks your whole core and you find yourself thinking John 9:25 whether you believe in the Bible or not. I know, because I once thought as you did. But you have to want to do this.
Yes, of course. That is what you would hope for if the recovery plan worked as anticipated. Some profits for the Treasury came from selling equities that were bought to rescue large companies. Much of the Tarp money has already been recovered.
I guess you missed the part where he explained that the Banks reserve accounts were credited in exchange for securities. This is hardly creating money out of "thin air". This was the method the Fed used to relieve banks of securities for which there was at the time no liquid market, so it became impossible for the banks to mark them to market. The Fed bought these at a discount of course to compensate the tax payer for risk. When the Fed eventually sells the securities they bought from the banks, most likely at a profit, they will recover the money they credited to the banks, any profit after expenses will flow back to Treasury. In this way the Fed served the important role of getting around the problem of bank assets becoming temporarily illiquid. Bernanke is a student of the Great Depression. He clearly did not want to see the mistakes repeated that led to the depression . Soros was not in favor of this approach to rescuing the banks and tried, to no avail, to get the Fed and Treasury to take a different approach and instead leave the "troubled assets" with the banks. He thought it better to instead have the treasury and Fed assist the Banks in replenishing their equity by issuing new shares and bonds. Some of which would presumably be bought up by the government, as necessary, and then sold off as the banks recovered, much as was done with GM and AIG -- at a profit for the tax payer, I might add.
I am almost laughing at your cognitive blockers Piezoe... You seem to refuse to get the most basic concept... where did the credited trillions come from... not what did they buy with it? The Fed created trillions of electronic dollars when it credited the member bank accounts. out of thin air. Tell me where the money to pay for the MBS and treasury purchases come from Piezoe? 850 billion to trillions... Then don't forget about the 9 trillion the FED lent out during the crisis. Piezoe... seriously... I know its hard for most to challenge what they have been brainwashed into believing... but the FED creates money, trillions of it... and its massive money creation is one of the biggest drivers of the massive inflation we experience. Inflation and taxes steal the wealth and real wages of the working class.
http://www.heritage.org/research/re...eds-balance-sheet-and-central-bank-insolvency Generally speaking, the typical balance-sheet insolvency faced by commercial banks is not one of these costs. For instance, its newly acquired risky assets could cause the Fed to experience a type of balance-sheet insolvency if those assets dropped in value. But this fact alone means virtually nothing. There is no regulator, for instance, that can step in and shut down the Fed because its net worth is negative. Even if the Fed were to suffer such large losses on its MBS holdings that it could no longer use those securities to meet its obligations, it could still create more base money to meet its obligations. The main limiting factor to this solution—printing more money to meet its obligations—is the (unknown) level of inflation the public will tolerate. Ultimately, if the Fed’s excessive money creation causes too much inflation, people would not want to use the U.S. dollar.
Well, we also had sequestration. You may have seen this today... if not, enjoy. http://www.businessweek.com/article...ss-theories-can-fix-the-world-economy#r=hp-ls