Did QE2 Cause the (Present) Recession?
Randall Forsyth of Barron’s asks this rather intriguing question:
While the Fed mulls more ambitious plans to tell the public how it will steer the economy in the future, perhaps the monetary authorities should reflect on the results of their recent efforts. As notes long-time Fed watcher Lacy Hunt of Hoisington Investment Management in Austin, Texas, the unintended consequences of its policies have all but superseded their professed aims. For instance, QE2—the Fed’s purchase of $600 billion of Treasury securities completed in June—caused the current slowdown instead of giving the economy a boost, he writes in Hoisington’s Quarterly Review and Outlook. Real disposable income was lower in August than in December, in part because of the jump in commodity costs. “While rising equity values helped a few consumers, inflation in necessities, such as food and fuel, decimated real incomes for the average family. Thus, the emergent cyclical weakness that lies ahead can be directly related to the unintended consequences of quantitative easing,” Hunt says.
The Fed’s current policy of attempting to flatten the yield curve by buying long-term Treasury securities and offsetting it with sales of shorter-dated paper—Operation Twist 2.0, after a similar gambit in the early 1960s—also could backfire. The FOMC minutes said the policy was expected “to help make broader financial conditions more accommodative.” Translated from Fed speak, lower long-term rates will make borrowers more willing to borrow while lenders will be more eager to lend.
But, Hunt points out, ultra-low interest rates could have the opposite effect. To earn a profit, banks have to cover their costs, from payroll, overhead, taxes and “elevated” fees to the Federal Deposit Insurance Corp. Then they have to earn a spread to compensate for the risk the borrower could default. At very low interest rates, there aren’t enough basis points left to lend profitably. The historical precedent is Japan, where banks would rather buy government bonds than make loans . . .”
Pretty ugly stuff, and I fear all too accurate.
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Source:
Preoccupied by Wall Street
RANDALL W. FORSYTH
Barron’s OCTOBER 15, 2011
http://online.barrons.com/article/SB50001424052748703492704576622992970964046.html
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October 18th, 2011 at 11:27 am
Excellent analysis…this just helps dispel the myth that Bernanke has a clue.
October 18th, 2011 at 11:29 am
Excellent analysis. Wonder if this will help dispel the myth that Bernanke has the slightest clue what he is doing?
October 18th, 2011 at 11:43 am
I agree they have to make sure banks do not buy government bonds. The idea that we allow them to get free money from the Fed and then use it to purchase interest bearing bonds from government is absurd in any situation. There should be some serious restrictions on what banks are allowed to do if they get money from the Fed.
October 18th, 2011 at 11:44 am
Thanks for jumping on board with this. I have been ranting these themes for a long time. Now, we need to take it to the next level and realize that commodity related ETFs influence the price of oil significantly so that rapid rises in equity markets, and rapid falls, cause a correlated effect with oil prices. Anyone with a pair of eyes can see the tight relationship between oil prices and equity market levels, while the actual demand for oil remains static to declining.
Also, remember the good old days when oil prices were inversely related to stock prices. Since oil and oil derived materials are input costs to corporate income statements, when prices rise, income falls, so stock prices should fall. Rising commodity prices were once a negative to stock prices due to the negative effect on profits. Today, it’s just the opposite. Higher input prices somehow became stock positives to the point that BR used to rave that high commodity prices were a good thing because demand was rising (never mind personal income was held constant at lower levels).
Thus, financial innovation has helped crush the world economy due to it’s clever effect on commodity prices and how high costs independent of demand are perceived ad a world wide positive.
October 18th, 2011 at 11:46 am
Left unmentioned by Randall Forsyth is the Rape of the Savers engendered by the Fed’s financial repression.
Doug Short estimates that the Fed’s effort to mash down the yield curve has cost savers (including pension funds) an astounding $7.4 trillion in the past decade.
http://advisorperspectives.com/dshort/guest/Chris-Turner-Savings-Lost.php
But being an ineducable Ivy League PhD moron, Benny Bubbles only doubles down in his epic Greenspandian folly. Benny’s an unedifying example of a statist commissar slinging around trillions, who couldn’t run a frickin’ lemonade stand.
October 18th, 2011 at 11:50 am
Becoming an expert in celestial mechanics was a profession central to maintaining PTB control over the believers in the Century before Galileo Galilei.
Lucifers ruin everything.
October 18th, 2011 at 11:51 am
Also, re operation twist:
This is also a good time to remind everyone that selling intermediate term bonds will raise interest rates in that time spectrum. This will probably cause loans for working capital to cost more since their rates are going to be more closely tied to shorter term levels than any other period. Thus, business costs will rise, thanks to the Fed’s idiotic operation twist.
October 18th, 2011 at 12:08 pm
Operation twist is an evil joke As far as I can tell via quotes from my mortgage lender – refi 30 fixed rates were lowest a few days before twist was announced. Only up since then.
So Operation twist = FAIL
AND it’s causing my fixed income parents to have conversations like “Gee- our CD is rolling over to 0.5% interest. Maybe we should buy gold.”
It’s hard to understand that cash is king if you are eating dogfood while waiting for MM/savings/CD rates to go back up…
October 18th, 2011 at 12:29 pm
Lacy Hunt is quoted as saying: “While rising equity values helped a few consumers, inflation in necessities, such as food and fuel, decimated real incomes for the average family. Thus, the emergent cyclical weakness that lies ahead can be directly related to the unintended consequences of quantitative easing,”
Unintended consequences? The Fed has been repeating for three years that in its first goal is to protect assets from deflation, and that general inflation is a good thing.
Why is it a surprise that the Fed would protect its shareholders’ interest in maintaining asset values while throwing the citizens under the bus with high inflation?
October 18th, 2011 at 12:49 pm
Actually, the last 30 years caused the ‘depression’ we’re in. I don’t know anything about a recession.
All QE2 did was most likely make it worse and guarantee we have brutal inflation when we come out on the other side.
October 18th, 2011 at 12:57 pm
The cost of debt is the problem?
I don’t think so. Not at any interest rate.
The lack of income, or growing incomes, is the problem.
The tree that is our economy is dead because the roots (consumer incomes, based on capitalizing on one’s skills, a.k.a: having a job), have been cut from the trunk.
You can’t fix that by adding or withholding fertilizer.
A debt/credit economy — based solely on the chosen being able to issue fiat currency and to lend it out in order to keep the economy growing — is equivalent to trying to grow an oak tree from the leaves down.
Fed policy (ANY Fed policy), doesn’t work because it is based on false assumptions from the get go.
October 18th, 2011 at 1:00 pm
How do you blame Bernanke? He’s trying to use monetary policy to bail out fiscal policy, at this point. Lacy Hunt might have a point about ‘pushing on a string’, but trying to do something seems like a better idea than doing nothing — which is where the Austerians are marching.
October 18th, 2011 at 1:01 pm
“The historical precedent is Japan, where banks would rather buy government bonds than make loans .”
Q) Why loan to somebody who can default when you can lend to somebody who cannot default?
A) The riskier loan pays a higher return.
It looks like the banks think almost every risk is too risky compared to a near zero return.
October 18th, 2011 at 1:01 pm
I’m on the same train of thought as you all are, regarding oil and commodity prices. Take note of every significant jump in oil prices since 2000. Recessions or economic downturns soon follow. High oil prices are a tax on everyone, but yet they are trading lock step with equities right now. Oil has in and of itself become an exchange/index. And while stock prices indirectly, if remotely, affect every American, oil prices DIRECTLY impact anyone who drives, eats, takes a taxi, bus, etc everyday. It’s an unavoidable tax. Having oil futures trade so violently is a scourge on the way we live, and it impacts working Americans more than anyone. The wealthy don’t notice it as much, and may benefit due to the ownership relation. Poor Americans MIGHT take mass transit which doesn’t increase it’s fares as quickly or as often. But that’s a generalization.
EVERYONE is hurt by high commodity prices, namely oil. This seems like one of those golden tickets that no politician really wants to mess with. It might be the one place where risk takers feel they will always be rewarded for their risk. After all, we will need energy forever, and those who would change energy policy or innovate won’t do so until they see a monetary reward for doing so.
High oil prices driven by federal reserve actions and excessive risk taking will keep America at or near zero growth as long as we are held hostage.
October 18th, 2011 at 1:08 pm
While bank margins are getting squeezed that is nothing compred to earnings and lending capacity if asset problems didn’t abate. Low rates are helping to heal bank’s balance sheets and since bank earnings are far more sensitive to credit quality than margin, low rates are a net plus. That said, many healthy banks are getting screwed and margins are now at record lows.
October 18th, 2011 at 1:09 pm
Dead Hobo
Hit the nail on the head. I can’t count the number of stupid financial headlines that hilariously state that falling commodities means things are bad. They always neglect to mention that wages weren’t rising along with input prices…ergo the whole run up in prices was simply a speculative inflation mania that was seized on by banks and hedgies.
October 18th, 2011 at 1:13 pm
I don’t you need to get so involved in looking for explanations. Construction has never picked up since 2007-2008 so we cannot expect that we will have had a full recovery, if any, because of one complete industry not participating. The fact that we had some recovery can be attributed to stimulus programs and, when those faded out, we are simply back at the level of a long recession. No mystery needed, no Fed blame needed.
When construction begins to pick up, which I believe is happening now and will be obvious next spring, then we’ll be in the first real recovery since the initial crash.
October 18th, 2011 at 1:25 pm
wally:
If the entire stimulus had been directed at the “construction” (a broad enough term to be almost useless) industry, your point might be valid. Q: Will all of our debt-laden recent college graduates turn to construction jobs in order to pay their bills? Q: Will construction incomes pay off our national debt and continue funding our wars? Q: Will construction workers buy up the overhang of rotting houses AND all of the new housing they will supposedly be constructing? Q: Will private industry rebuild our infrastructure, with no promise of ROI? Q: Will the construction jobs go to US citizens and be subject to US compensation laws this time around?
Nothing but banker and war monger incomes has picked up since 2007-2008.
October 18th, 2011 at 1:57 pm
Petey,
Construction is not everything, but you cannot expect economic recovery with one cylinder not firing. If construction had returned to normal levels in 2010, we’d all be whistling a different tune today.
October 18th, 2011 at 1:57 pm
At the same time from BR’s “10 Am reads” comes this:
“Jan Hatzius And Sven Jari Stehn Of Goldman Sachs Call For NGDP Level Targeting And Monetary Stimulus”
http://thinkprogress.org/yglesias/2011/10/17/345207/jan-hatzius-ngdp/
or, in plain English, Goldman wants more QE. And what Goldman wants, Goldman usually gets…. at least as long as Geithner and Dudley occupy their present posts.
So, get ready for QE3 and the “triple dip” once QE3 runs its curse.
October 18th, 2011 at 2:15 pm
Since the end of QEII, it’s been dollar up, markets/commodities/foreign currencies down. The inverse is also true. The economy is being propped up.
We are currently in the midst of QE.x (x = Shhhhhhh . . . ).
October 18th, 2011 at 2:45 pm
If the problem is that there are no businesses that need or want to borrow then no amount of incentivizing banks to make loans can fix it. What if the reason for a lack of borrowers is that businesses have no need to expand. Then you cannot increase borrowing much at all by lower rates.
October 18th, 2011 at 2:58 pm
Ritholtz, you are way off. There is no “recession”, nor “QE”.
Why has there been no QE? What you call QE 1 and QE 2 were so small, they were more like confidence tricks. They had no impact on the economy, because they were never intended to “impact” the economy by themselves.
I don’t get the problem people have. Until debt levels among consumers fall back, you aren’t going to a return to trend growth in the current growth model(globalism). Period. As I said earlier, Bernanke is no big fan of “QE” or he would have neutralized the debt as Steve Keen pointed out in tune to a 5-6 trillion “QE”, but instead, hopes for fiscal expansion. Heck, the Hayek/Friedman rule calls for it.
Posts like these and poor analysis is why the blogosphere doesn’t get alot of respect. If you want a different growth model and dissolve globalism…………amen. But don’t make up stuff to appease the “flock” who fly around you.
~~~
BR: As you might imagine, I could not disagree with you more
October 18th, 2011 at 2:58 pm
fffffffff
October 18th, 2011 at 3:01 pm
Welcome to the party Randall:
Point being it’s got a lot less to do with the manner of reflating/printing/easing, in this case QE, than the ramifications of having gone to this particular well once too often. That
As effed up as our world and discourse are, I’m still amazed at how little recognition Doug Noland ever got for being right about the world for a decade when practically everyone else was so very wrong.
October 18th, 2011 at 3:06 pm
Sorry about that………..
Sorry, but this post doesn’t seem to get several things Barry:
1.Bernanke and the FED aren’t big monetarists. Alot of people do not seem to understand that. A true monetarist in the Hayek/Friedman rule, would have QE’d to a tune of 5-6 trillion. Period. QE 1 and 2 had no impact on the economy. Because they weren’t big enough to even register. They prefer fiscal expansion rather than use of monetary tools. I think bizzare alliance between traditional keynesian and Rothbard/Rand wing of market liberalism is bizzare. One is obsessed with capital owners while the other obsessed with labor supply. Hence, the mechanisms he complains about, aren’t the FEDS fault because the FED doesn’t run them. It is the weakness from the binge that is the problem.
2.The economy is growing and creating jobs. Not enough to fill in the output gap, but growing it is. If you didn’t think after the 2003-7 binge, that we wouldn’t have a long term stagnation for awhile while debt levels caught up, I am like FUBAR!!!!
October 18th, 2011 at 3:32 pm
Welcome to the party Randall/Barry:
“Over the short run, there are some obvious benefits to inflationary negative real interest rates. Mortgage borrowing costs have fallen sharply, creating a more conducive environment for home sales while inciting yet another refi boom. Stocks benefit from the paltry yields of competing assets, including bonds, deposits, and money market funds. Many top-tier companies will see their cost of funds decline. Markets in general receive a boost of confidence from the belief that the Fed is now attentive and aggressively on the path of supporting higher asset prices.
…Importantly, we’re now in the midst of the first “Wall Street finance Post-Crash” Reflation attempt. It is analytically imperative to recognize that – because of the newfound impotence of “structured finance” – the current Reflation will be Different in Kind from those that preceded it. Wall Street-backed finance was predominately in the business of lending, securitizing, leveraging and “hedging” in asset markets (especially real estate, stocks and debt securities). Therefore, Reflations operating within a backdrop of a Bubbling Wall Street Credit Apparatus demonstrated a very powerful asset market Inflationary Bias. With abundant Reflationary liquidity flowing predictably to U.S. housing and securities markets, inflationary forces were contained with minimal impact on general consumer prices.
…For years, the “buy the dip” crowd enjoyed a huge if unappreciated advantage: Wall Street finance was itself a major inflating Bubble. And with each bursting “mini” Bubble – bonds 1994, Mexico, SE Asia, LTCM, Tech, Enron, etc. – was garnered a coveted Reflationary response from the Fed. And, in each instance, monetary accommodation and the resulting Easier Monetary Conditions significantly bolstered Wall Street Credit creation. Over and over again, betting with the Fed – buying stocks, homes, junk bonds or other risk assets – was handsomely rewarded. And while the Fed received Credit for successful Reflations, each recovery owed a greater degree of thanks to booming Wall Street finance.
…today’s prominent “fledgling” Bubbles and Inflationary Biases [by contrast] encompass global markets for energy, food, minerals and other commodities. The Bric (Brazil, Russia, India and China) and “emerging market” Bubbles are historic in nature and will be only further destabilized by the Fed’s actions and resulting dollar weakness. It is worth noting that there is as of yet little indication that the bursting of the U.S. Credit Bubble has had meaningful restraining influence on overheated Bric (and, for that matter, global) Credit systems. And it is this unappreciative 20% or so annualized Bric Credit growth that will continue to foment very powerful inflationary effects on energy, food, and commodities prices. In concert with the weak dollar, the U.S. consumer will be hit even harder by rising prices for an increasing array of products.
…the current Reflation will disappoint on the asset inflation front, while undermining the fragile household sector with a double-whammy of reduced income and higher costs. Indeed – and despite the overwhelming view otherwise – rising consumer prices will likely prove a prevailing consequence of the current monetary and fiscal Reflation, only worsening the backdrop and compounding the policy predicament over time. At this stage, the finance-driven U.S. Bubble economy is notably unbalanced, inefficient and dependent on Credit, imports, and foreign finance. Throwing large quantities on inflationary purchasing power at it today will have much different consequences than such efforts would have had during previous asset and investment booms.”
- Doug Noland, “Reflation Contemplation”, 2/1/2008
Few things. First, this was written on our way to ZIRP but prior to arrival. So, the dynamics of concern relate not to the method of reflation/easing/helicopter dropping, but the legacy of years of managing the business cycle by unleashing torrents of liquidity through banks and capital markets out into the paper economy (minus more than a few bps for the bankers of course), and doing so against the idiosyncratic global backdrop that is the world as it is (USD as reserve currency, Asian mercantilism, etc.).
Second, the non-commodity piece of the Fed’s busted lever gets a lot less attention than the commodity piece. It should be the other way around (which of course follows directly from the way the press works).
Lastly, even allowing for the way the press works, I still marvel that Doug Noland, who got so much for so right for so many years, is utterly anonymous, when nearly everyone else was so very very wrong, in many circumstances even those that are credited for getting it right.
October 18th, 2011 at 6:26 pm
was an interesting perspective
Bill Gross among others has wondered for months now what the costs of Oper. Twist would be considering the impact it would have on repo markets and short term financed based lending, which aren’t exactly small
it’s just like, my opinion, but from where I’m sitting the Fed policies help result in a two steps forward three steps back pattern…
October 18th, 2011 at 9:08 pm
Things are getting more expensive and crappier. I have been raising rents, but it is more than eaten up by skyrocketing prices. Its like I am on a hamster wheel to hell.
October 19th, 2011 at 12:22 am
@DrungoHazewood
Which skyrocketing prices?
At the consumer level, prttt, not much. I’m not seeing anyone getting killed or eaten right now.
The Producer Price Index has been going up big time this year. +6.9% y/y. But that’s after spending the best of 2009 in deeply negative territory (nobody was whining) and 2010 pretty oh-hum in the 3 or 4% y/y range.
And given the latest stats from the LA Port Authority, inbound loaded container traffic flat to down -0.16% y/y in September after -5.75% y/y in August, -3.17% y/y In July and -10.22% y/y in June, I don’t think that spike in PPI is going to last for very long.
If there is inflation in the 3 to 4% range, good. It will give the Fed some margin of action on the rates side and it will put a fire under investors’ rear-ends to get their assets back in the real economy. And I say this as someone who’s 100% cash at this time.
But right now, yawn.
October 19th, 2011 at 1:00 am
It’s amazing how people are quick to jump on board with statist policies such as income redistribution, massive debt financed government spending and ridicilous regulations, but dare to suggest that the Fed is not doing its job and printing enough money to meet the overwhelming demand for the medium of exchange.
This was one of the dumbest articles I’ve read and rather than going into it, I just want people to stop believing in the ridicilous fallacy that low long term rates are indicative of a loose monetary policy. In fact, the complete opposite is true.
The loosest monetary policy in recent memory was in the 1970s and interest rates were sky high. The tightest monetary policy was my life time is going on right now and interest rates are super low.
Milton Friedman himself wrote:
” Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
. . .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.”
This is so hard for people to understand that…well…they don’t.