Farewell QE, you have been a magnificent success:

The moral contours of QE depend on your angle of vision. But would you rather be surrounded by mass unemployment?

-Ambrose Evans-Pritchard, the Telegraph, Dec. 18.

 

Outgoing Federal Reserve Chairman Ben Bernanke managed to thread the needle yesterday, announcing a modest monthly taper in quantitative easing of “only” $10 billion dollars, while leaving the remaining $75 billion in monthly bond purchases untouched. He also suggested the Fed will keep rates accommodative — read very low — for even longer than previously promised.

Rather than crash (as was so widely predicted), the markets took off: The Dow industrials up 1.84 percent (292.71 points), while the S&P 500 gained 1.66 percent.

While we do live in interesting, even fascinating times, these many disparities raise this interesting question: Why do so many people hate QE?

Here are the six best answers to that question I can muster . . .

 

Continues here

Category: Federal Reserve

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

39 Responses to “Why Do So Many People Hate QE?”

  1. lburgler says:

    I tried to login via Bloomberg to help with your well-deserved hype, but social media is blocked at my office, so I’ll comment here. It’s been a long time. I miss y’all over at TBP!

    I don’t understand why people hate the Fed so much–but I can’t decide whether history will look at the Fed as a grotesque brutal innovation, like using radiation for hair removal, or any number of medical atrocities of the 19th century; or a step into the 21st century.

    It seems clear to me that you can’t sell short term debt to buy long term debt forever, unless you find a way to unwind that in the future. Being a procastinator has sort of ruined my life. I was on track to be Valedictorian with very little effort, but then life got harder, and I wound up in a top 20 instead of top 5 school. I’ll be paying for those small sins for the rest of my life. So anechdotally I don’t think putting things off ever ends well.

    The point is one of power and class struggle. When powerful people royally mess up, they find creative ways to save themselves. When little people mess up, they crash and burn in unimaginable despair. That sucks, and it’s wrong, and the feeling that we will one day pay for it is probably sublimated guilt.

    Would it have been better for failing companies to fail piecemeal, for the good ones to excel, for there to have been a severe depression starting in the financial industry, and for the government to use bailout money to pluck engineers and philosophers from the banking industry, and put them to work in well-planned public works and public relations projects? Probably. That’s the country I would rather live in.

    As it is, we live in an ever shabbier and unequal place, where CEOs and presidents don’t admit fault, and are treated ever more delicately, while the little people suffer more and more, and that is facillitated through the Fed. Latin America is beautiful and soulful, but I don’t want to live there because it’s dangerous and dirty. That is where we are headed, and largely because of the Fed.

    • f says:

      Barry, full respect and honour (yes it’s the Canadian spelling), I read you everyday and value your opinion but….

      You always look at things from a traders/insiders perspective. Where I think you can improve is by rather a) citing your viewpoint upfront so people know where you’re coming from or b) occasionally take a ‘big picture’ view and take the little man’s point of view into account

      Does QE help the little guy as much as it helps the upper crust? I have an idea but would love your opinion.

      • No, it definitely doesn’t — but I have said that repeatedly over the years

        QE is a backdoor bailout for the banks.

        As I note, my job is to navigate the waters as I find them

      • MinskyMinded says:

        There are far more little guys than upper crusts, and that is why QE is hated.

        As they say on Wall Street, “do you want to be right, or make money”.

        The answer seems clear.

      • I am not sure the little guy knows, understands or hates QE.

        I do think they dislike an unresponsive government that doesnt seem to care of they live or die . . .

  2. flocktard says:

    I have been battling this out on-line for some time. We also have this new character, Andrew Huszar, who is attempting to become a media star by going on an “apology tour” for QE. It’s not working, as I still have more followers than he does on Twitter, and no one knows who the f*ck I am.

    1) QE allowed US consumers to deleverage, which was an important goal if we’re ever going to get out of this mess.

    http://research.stlouisfed.org/fred2/graph/?s1id=TDSP

    2) Corporate balance sheets improved dramatically. I don’t know how many companies with CCC ratings and 12% coupon bonds were enabled to go back into the market and slash their debt service. No one will ever know how many companies and jobs were saved

    3) According to Mortgage News, between 2009 and the end of 2012, over $4.6 TRILLION in residential mortgages were refinanced, which saves, by my estimation, U.S. homeowners over $6 billion a month. Take THAT Kudlow! NOT included in this figure are 2-4 family dwellings.

    4) Don’t have the numbers, but someone can do that math on the commercial real estate side. Again, massive savings beyond any RWNJ’s biggest mastabatory “tax cut” fantasy. Grover Norquist’s wet dream.

    5) Tax revenues went up without raising taxes. Yes, kiddies, since our tax code rewards leverage, the less interest you pay, the less you deduct. So while you’re pocketing your mortgage savings, there is a lower number to take off Line 1 on the old 1040. Neat trick, another thing the financial press never picks up.

    The program was a success. No matter how you slice it.

    • crabman says:

      1) Lower interest rates do allow people to pay off debt faster. Of course, this is a zero-sum game. Every dollar in savings for debtors is also one dollar less going to savers.

      2) Corporations have never been in better shape, after-tax corporate profits were already at unsustainably high levels. If anything, QE has made that situation worse.

      3) Again, that $6 billion a month savings is also $6 billion a month less for savers.

      4) See #1 above.

      5) Less deductions on the borrower side is matched by less income on the lender side. The net effect was probably negative for revenue, since not all mortgage interest is actually deductible from income (due to standard deduction) but all interest income is taxable.

      The only real “success” of QE has been slightly higher stock and bond prices.

      • flocktard says:

        I take issue with the “savers getting hurt meme.” First, I have to admit my business is chiefly based around fixed income, so I have some strong feelings about this. So, savers have not “been hurt” but those who invest in Bank CDs may have been hurt.

        For those who needed income, a golden age has just past. Thanks to the slovenliness of our rating agencies, it was possible to buy Ford Corporates, for example, with very attractive yields. It was also possible to buy GMAC (Ally) bonds, at discount, WITH fat coupons, which were rated “Junk” by the NRSROs, while the Federal government owned 70% of the firm. As I am preparing my year end summary for my clients, I noted:

        ” In November, with auto sales hitting record highs, with the firm having simply been handed all of Chrysler Financial after the bailout for no money, it’s Subprime mortgage issues finally spun off, and all legal issues settled, with billions of their high coupon debt either retired or replaced at less than half the debt service cost, Moody’s has deigned to put the firm on Credit Watch “Positive,” but holding at their “B1″ rating.”

        We had a party with these things. And NEW Ally paper? This week’s issue will pay you 2.5% with a 12/16 maturity. I routinely obtained double digits and didn’t sweat the possibility of a default with government ownwership.

        Dodd Frank also provided a HUGE gift. It undid the asset class known as “Trust Preferred Securities” for banks, which, thanks to the genius of Alan Greenspan, allowed major TBTF and other banks to issue debt and STILL count it as “Tier 1″ capital. (Shrewd, huh?) D-F gave the banks until January 1, 2016. We cheerfully boought as many of these at Par, a great many below, all with coupons from 6.5% to 7.875%, and all ostensibly Investment Grade.

        I could give plenty of other examples. But every time I hear that “savers got hurt” crap, I just laugh. I’m a Fixed Income professional. I’m proud of the job I did for my clients. And now that yields are going up, and all of this High Yield paper has been rolled over? I won’t be able to match that performance. How’s THAT for a kick in the b&lls?

  3. dougc says:

    All well and good for the investor class, my concern is whether QE will help form a base for a sustainable economy or simply create a cycle of larger deficits and larger QE.
    If trillion dollar QE and nearly trillion dollar deficts only create 2 % growth, can we ever exit QE?

    • Let me remind you that teachers cops and firemen all have oensions heavily invested in markets.

      • S Brennan says:

        Yes Barry, but…

        “As recently as 1998, 52 percent of Americans over age 60 received income from a defined benefit pension…By 2010, that figure had fallen to 43 percent. In the private sector, the decline has been more dramatic – down from 38 percent in 1979 to 15 percent in 2010.”

        So again, we are talking of a small minority benefiting.

        I think I would praise QE this way: It’s better than a sharp stick in the eye.

        The reality is the “Democrat” in the White House and Republicans in Congress called for austerity rather than using the historic occasion of labor surplus, low interest rates, low inflation, deferred maintenance and rebuilding to INVEST in the national infrastructure* and in so doing stimulate the flaccid economy.

        * By infrastructure, I mean that in the broadest sense, from roads and bridges to NIH, NOAH & NASA.

      • LeftCoastIndependent says:

        Sure do, and us IRA/401 investors are neck deep in it too. But it’s the bond market that now needs to be resurrected. Those civil servants make $ in bonds also, and SS entirely so. You wonder why so many dollars are sitting idle in cash. Nobody is going to put all their eggs in the equity market, and why risk money for a pathetic % return in bonds. QE is a necessary evil, but the sooner we all get back to reality, the better.

  4. The Scarecrow says:

    It exposes the circus of a fiat currency by which so many people measure their success.

  5. Moopheus says:

    Because, like most things the Fed does, it benefits the wealthy more than the non-investor class. No, I don’t want to see more unemployment, but I would like to see evidence that QE has actually had an impact on unemployment.

  6. FNG says:

    While I worry about the long term direction of our society (representative democracies are outside the mean historically) and wonder if Q.E. and other policies are hastening a reversion. The reality is we live in the now. So your words, “but rather, to manage cash in the environment that is — the world that exists presently, and is likely to exist in the near future. It is not their (or our own) role to manage money based on the way things ought to be.” are spot on!

  7. supercorm says:

    The only reason for QE is to inflat assets (in order to avoid the collapse of the financial market).

    However, keeping QE for too long -thinking you can use the same tool to prevent a financial market collapse into a tool to jump start the economy-, you are creating many issues that will impact the economy in the long run.

    First, in inflating assets, you are merely transfering assets to the 0.1% of the population who has a very low propensity to consume rate, while imposing risks to the entire system. Not allowing the market to “correct” means you are just borrowing future GDP growth to plug into the present, and you are starting the economy from a higher and less healthy base. ZIRP means you are forcing the excess cash into bad investments, or, simply put, missallocations of capital.

    QE, and ZIRP, means you are creating a economy where the stock market is the only game in town. Benefit a few, good for the aggregate consumer sentiment, but is in no way improving the top line as the whole economy is still swiming in excess capacity. QE means you are trying to eradicate the economic cycle while downside/correction are necessary evil to restart from a healthy base (Greenspan heritage).

    If success is measured by the stock market level, yes, QE is a success. In the meantime, the rich/poor inegality in the used to be land of opportunity is at the steepest ever, the corporate profits to GDP ratio is at its highest since 1929, wage growth for 99% of the population is stagnating -so is corporate revenues, profits are on the back of higher margins-, and overall tailrisk events are still well alive (ie NPL in Spain at its highest ever, Japan’s importing (bad) inflation and will print a 10% deficit (again), China cant control its credit growth and bad loans (nominal, not % of total as credit is growing and bad loans get diluted) and still hasn’t address Wealth Management Products issues, and the US is experiencing good economic numbers on the surface but weak underlying (ie job growth on the back of ACA related part time jobs and the end of the Emergency Unemployment Compensation act will not help the Fed’s job either, GDP on the back of inventories while final sales are trending lower -Xmas sales better be good …).

    Unfortunately, politicians always promote short term solutions at the peril weakening the whole system in the long term. In other words, yes, I would have prefer a tough 2009-2011 era of high unemployment and long soup lines in order to have rebuilt the economy on solid grood for sustain and healthy growth in the long run.

  8. constantnormal says:

    To answer the question posed by Mr Ambrose-Pierce, I believe that the teeming hordes of the unwashed Fed-haters would say YES, never imagining that it might be themselves on the breadlines (or dumpster-diving for dinner) … and if it turned out that way, THAT would be the fault of the Fed as well.

  9. ancientone says:

    Barry, I’m glad you admitted that QE benefited upper income people more than the lower and middle class…what would have been the effect on the economy if the $85 billion a month had gone directly to them, instead of the wealthy owners of bonds?

  10. scone says:

    I think it’s fair to say that most people in the financial industry, and many American economists, are center right to far right. So they interpret events in terms of their politics. I think we can take that as read. But there’s little point in beating that horse– these people are not going to change. In fact the True Believers will double down on the doom, because that’s what they do in the face of disconfirming evidence. It’s a “test of faith.” So they are always going to hate QE, but arguing with them is pointless.

    But ultra-low interest rates, I would submit, are not healthy, and not just because of the asset bubble problem. This “granny” age girl, for example, would dearly love to get a decent real return on her Treasuries, thank you very much, because I can’t take more stock risk so close to retirement. As you know, it’s the sequence of returns problem– a crash on the cusp of retirement means an increased chance of plan failure.

    If I don’t get a decent real return from Treasuries, and I can’t take on more stock risk, then ironically I have no choice but to save more– a lot more, rather than spend it. This has got to ripple through the system, somehow. And low interest rates have got to affect the millions of small savers who can’t afford to lose anything in the stock market– for them, the QE rally might as well have been on another planet. And then there are the millions who don’t have any savings, who need people like me to spend so they can keep some miserable minimum wage job. How does QE help them?

    O.K., there’s real estate. While QE may have reinflated the price of my house, I can’t “spend” that without taking on HELOC debt. There has been a good amount of refinancing, but that hasn’t unleashed a massive amount of spending, it’s mostly gone into repairing balance sheets. Instead, there has been a lot of cash buying of real estate by speculators, which isn’t terribly helpful.

    So I think some people might hate QE for ideological reasons, but the rest of us have cause to dislike it because it hasn’t worked to help the great majority of the people. Maybe QE is as much defaltionary as inflationary, so nets out to roughly zero. In any case, it seems to me that QE money has gone into the pockets of those who already had money and access to credit. Show me something that gets the velocity of money moving upward again, or helps get real incomes up, and maybe I’ll be more enthusiastic.

  11. Molesworth says:

    Great article and interesting perspective from flocktard. Never read those thoughts and will ponder. I’ve tried to wrap my head around the consequences of QE and have not managed to get all worked up over it. Yeah it sucks that I can’t believe earn 4-5 percent in a savings account but my invest portfolio has done fine. But your Bloomberg commentors. Zowey. Rick Santelli is screaming in their heads.

  12. Keith R says:

    I have several reasons for disagreeing with QE–

    1. I believe in capitalism. Except in extraordinary circumstances, government interference in market pricing leads to a less productive economy in the long run.

    2. QE gives the impression that the price of assets is important in the long run. They aren’t. We should be focused on productivity.

    3. Low rates encourage debt when our society has too much of it. The Low cost of debt enables sections of the economy to ignore their solvency problems.

    4. Inflating asset prices, like housing, is unfair to 20-somethings.

    5. We don’t know the impact of QE across the business cycle. Will we have inflation if the economy picks up speed? I don’t know and neither does the Fed.

    6. The Fed performed poorly in the run up to the crisis. Pre-crisis transcripts of Fed meetings are illuminating–the Fed seemed to be largely unaware of what was happening. I don’t believe that we should give additional powers to an organization that can’t perform its existing role. The focus should be on fixing the Fed first or else they will continue to make costly mistakes. QE might be one such costly mistake.

    7. If QE increases GDP by 1%, then that would be ~$170B per year. The Fed was buying $1,000B per year in bonds. The numbers seem out of whack.

  13. Molesworth says:

    Dougc – Yes. We will be able to exit QE. Growth will not always be low. This too shall pass.

  14. KJMClark says:

    “Why do so many people hate QE?”

    Um:
    - Faux News.
    - Kenyan Socialist (or whatever) in the Whitehouse.

    If McCain or Romney had won, there would be a new-found appreciation for the wonderful efforts of the Fed (or something like that).

  15. digistar says:

    I hate the FED because “He also suggested the Fed will keep rates accommodative — read very low — for even longer than previously promised.”

    That doesn’t work for the elderly and the older boomers with modest wealth and no safe way to make that wealth grow (thanks to 0% interest). The FED is throwing them on the junk pile of history.

  16. jankynoname says:

    Ahh yes… who are these peasants who criticize the omniscient, omnipotent Federal Reserve Board? Making inflammatory statements about people who criticize a dramatic, unprecedented and unproven policy doesn’t do much to advance our understanding of what the potential costs and consequences might be. But whatever, they are just “Fed haters” and should be marginalized like racists or communists.

  17. Livermore Shimervore says:

    Our economy is not weak. The U.S. worker’s role in the economy is simply much less important. Unions are no longer there to influence “wealth sharing” by corporations.

    Meanwhile we consume without regard to which corporations pay their workers well and which pay them to be whisker above the lower middle class. And then you have the corporations who have no interest in U.S. workers at all and these go on to become the most valuable American corporation. We are a consumer class not a builder class.
    Can you show me a single consumer-based economy where wages outpace the cost of living? Where unemployment is below 5%? We would have been in weak economy a decade ago if we hadn’t duct taped over the problem with exotic debt securitization — a thing that is inherently prone to destabilizing the confidence of the consumer class.

  18. Lyle says:

    Of course Fed hating is as american as apple pie. It is very much in the Jacksonian tradition, as Andrew Jackson hated its predecessor the second bank of the United States (which was basically a lot of what a central bank was at the time) with a purple passion. Of course Andrew also hated bankers that much since he felt in younger years they had taken advantage of him. Thomas Jefferson and Madison also did not approve of central banks, and opposed Hamiltons creation of the first bank of the United States.
    In a way it is ironic that the two parties have switched positions in that the republicans are taking a very democratic position on these issues (Jackson founded the modern democratic party). Or should we say the southern parties position, as the party that dominates the south tends to these positions.

  19. Farcaster

    Top 10 Reasons Conservatives Hate the Fed:

    10. The Fed relies on fact and reason to arrive at a conclusion.
    9. They missed the memo on the Panic of 1907.
    8. They were OK with letting the system reboot in 2008.
    7. The record stock market run makes Obama look good.
    6. Printing money might cause inflation (but hasn’t).
    5. Inflation would hurt rich bondholders and creditors, which they aspire to be someday. Hence they vote against their interests in the interim.
    4. The Fed is not accountable to them.
    3. Monetary stimulus helped Obama get re-elected.
    2. They can’t believe that some lunches are free.
    1. Ayn Rand told them to.

  20. Chris Turner says:

    BR,

    I think most of your reasons regarding hating QE do not represent the best
    arguments, those are mostly spouted continuously on CNBC & Bloomberg.

    But as an avid fan of yours (even though I disagree sometimes) and have a
    couple posts on your site (below), I have a couple alternative views not
    listed in your reasons but perhaps shared by many.
    http://www.ritholtz.com/blog/2012/05/rebutting-krugman-invictus-the-rest-of-the-story/
    http://www.ritholtz.com/blog/2010/02/what-is-the-cyclically-adjusted-pe-ratio/

    1) The market never “clears” under QE.
    If the cost of money goes to historical norm of 4.5% and companies borrow at
    5.5% – equities/bonds will reprice; ergo, managed. Jim Grant opined best
    when he asked the simple question “Do markets work?” The answer right now is
    no – companies, especially financial, that should have been extinct and
    current MBA students reading about them have transferred all the bad debt into
    the FED via mortgage purchases. Systemically – large banks have more control
    now than before crisis. QE is now and always has been a bank recapitalization
    plan, the rise in equities (from the bottom) are an added bonus. Just because
    an equity account rises does not mean it is “right.” E

    2) QE has failed on every measure (even equities – the S&P went from 1450 to
    1800 in 6 years).
    I did a study comparing all the fed chairman – in over 33 different
    measurements (condensed down to nine for the post) – Bernanke’s use of QE did
    not “improve” anything economically – See the study below (I would be happy to
    share the excel version also).
    http://advisorperspectives.com/dshort/guest/Chris-Turner-131112-Ranking-Bernanke.php
    Rather, QE simply saved the banks.

    3) QE picks winners.
    Your number 6. Has validity and I have updated this study several times over
    the last couple years showing the impact and loss of interest paid to savers.
    Your “grannie’s weak fixed income yield” represents 2 Trillion (per year) in
    lost interest that went from savers to the large banks. This is one reason
    the bottom 4 quintiles have not participated in any wealth gain in the last
    decade.
    http://www.zerohedge.com/news/2013-07-17/savers-and-real-108-trillion-cost-zirp

    Though these are quick counters – I 100% respect that as a manager of money -
    you operate in the environment you are given! Doesn’t matter WHY QE is
    there – use due diligence and invest appropriately while it is around. I
    dislike the managed part the most – I would rather have companies make money
    based on business cycles rather than hanging onto every word a FED chair
    says… Let rates float or set 4.5% as permanent rate. Businesses would then
    succeed or fail (weird concept) based on rules everyone understands.

    So glad for your Bloomberg success and enjoy your posts!

    All the best from Kansas.

    //SIGNED//
    Chris Turner, Lt Col, KSANG

  21. Robert M says:

    As to the professional class (?) that hate’s QE, there is nothing to be said.
    To the median man on the street, it is a failure. It is a failure because the ongoing decline in income since the 70′s has continued and it has hit almost all classes really hard when large financial institutions blew up most of the owrld. They can’t make out the difference between the secular change that is occuring because of low wage high education entrance of other economies into the world economy and the FED’s second mandate to increase employment during the tiime period of QE. Add in the failure of the political classes to alleviate some of the secular changes(see BR”s article on MCD and WAL) and an inability/refusal to accept help either through proto secular insitutions like OCCUPY to focus more of QE’s benefits to wage earners you have the underlying simmering conditions for resentment Evans-Pritchard believes have been avoided. So all in all it has been a failure for the wage earner.

  22. DiggidyDan says:

    It has nothing to do with the market for most of the haters. Most haters see QE for what it is, an artificial distortion of the markets that favors the “haves” much more than the “have nots.” Banks and corporations and rich investors reap the benefits. Average citizens struggling to get by do not, especially those as you noted who rely upon fixed income. The only tangible benefit of QE I can see for the little guy is lower mortgage rates, but that isn’t all that great considering banks can choose their terms and limit who they lend to. With ZIRP, they still win by taking our tax money and lending it back to us at 4%! The rich and corporate interest complain about “wealth transfer” any time someone talks about increased taxes and social programs or higher minimum wage to help the poor, but this is exactly what QE is to them, only going the other way.

    Everyday citizens aren’t as dumb on the whole as the ruling class make out to be. We know the whole system is corrupt. The smarter among us take a “if you can’t beat ‘em, join ‘em” view and try to invest as much as we can to ride the wave of higher asset prices associated with the transfer. The dumber among us stubbornly wail against the corruption, while not participating, and lose even more.

    Adapt to survive!