The QE Infinity program of Quantitative Easing launched by the US Federal Reserve has left even the most cynical Fed watcher shocked by the quantum of easing that the US Fed has unleashed. Here are some of the intelligent reactions to the QE by the Fed from some of the most astute market analysts.
What the Fed did was actually much more than QE3. Call it QE3-plus… a gift that will now keep on giving. No maximum. No time limit. The Fed also lowered the bar on what it will take, going forward, for even more intervention.
The Fed announced that it will buy $40 billion per month in MBS (together with the on-going Operation Twist program, this brings total asset purchases to around $85 billion monthly through year-end), but the press statement contained an open-ended commitment to QE until labour market conditions not only improve, but do so ‘substantially”. This is a radical shift.
I don’t think this latest Fed action does anything more for the economy than the previous rounds did. It’s just an added reminder of how screwed up the economy really is and that the U.S. is much closer to resembling Japan of the past two decades than is generally recognized.. QE has done squat for the economy and I don’t expect that to change.
It would seem as though the Fed’s macro models have a massive coefficient for the ‘wealth effect’ factor. The wealth effect may well stimulate economic activity at the bottom of an inventory or a normal business cycle. But this factor is really irrelevant at the trough of a balance sheet/delivering recession. The economy is suffering from a shortage of aggregate demand. Full stop.
To the extent that the Fed is at least temporarily successful in nurturing a risk-on trade for portfolio managers, the reality is that changing the relative prices of assets does not create demand.
It just perpetuates the inequality that is building up in the country, and while this is not a headline maker, it is a real long term risk for the health of the country, from a social stability perspective as well.
The fallacy of monetary policy in the U.S. is to believe this money will go to the man on the street. It won’t. It goes to the Mayfair economy of the well-to-do people and boosts asset prices of Warhols…Very happy. Very good for the Fed. Congratulations, Mr. Bernanke. I’m happy. My asset values go up but as a responsible citizen I have to say the monetary policies of the U.S. will destroy the world.”
“I think there is a huge misconception and fallacy that money printing can actually improve the rate of employment because the money flows down into the system. It goes first into the banking system and into financial institutions, into the pockets of well-to-do people. If you drop money into my pockets and you have at the same time increased government involvement in the economy and we have the government growing with its regulation and legislation that stifles economic development. I don’t want to build a new business. But what I may do is look around the world, where are the distressed assets. So I will go and buy existing assets, takeovers. But takeovers don’t add to employment. They destroy employment. Secondly, I would just like to mention one thing. This money printing business, they have been saying that for the last 15 years that bailing out LTCM were necessary. Then they say the NASDAQ collapsed after March of 2000. We need to create another bubble, print money. They created a gigantic credit bubble and the misery that we have today.”
Bottom line: Bernanke gave us what many should have expected after his Jackson Hole speech where he defended previous QE and gave his ‘grave’ concerns with the labor market comment. This policy will do nothing for economic growth, raise commodity prices, further clog their balance sheet with longer term securities and make the process of an eventual and inevitable exit highly disruptive and messy. The Fed did little to convince me that the benefits of this new policy comes anywhere near the costs. Also, the Fed again is showing no faith in the regenerative powers of American capitalism where growth naturally happens as long as markets remain free.”
As someone who has been earning a living in the financial industry for 21 years, I will offer that this will not end well, and it has nothing to do with the next 5%. From here to there, I’ll remind myself that the path we take is more important than the destination we arrive at, and if we take care of the minutes, the hours will take care of themselves.
Also read how QE by Fed will badly affect Indian Stocks.