Ok, let’s buckle up the tool kit and look under the hood of what our Federal Reserve has been doing lately and indeed for the last few years. A little historical review is necessary to put matters in a proper perspective. It wasn’t but a few years ago that most of us would have had a really hard time naming the Fed Chairman and we certainly didn’t see many news items about the Fed meetings or the actions of the Fed. They were few and far between and there sure weren’t any press conferences given by any of the Fed Chairmen. About the only time the Chairman made any public announcements was twice a year when he testified to Congress and maybe a really short time answering a couple of questions from the press afterward and even then the new items were buried somewhere on page 9 of the paper. Today we have a celebrity Fed Chairman who talks all the time and when he isn’t the various Fed Committee members are holding forth with interviews and news conferences constantly. Back when those Federal Open Market Committee members were never heard from and they went about their work without notice or comment.
In ’08 the Fed had a balance sheet with a bit over 800 billion in assets. Now that balance sheet has ballooned to almost 3 trillion. The Fed has worked with the Government to pump huge sums into our economy and allow deficits to exist and rise and for the national debt to increase exponentially. In very late ’08 we had the TARP program which was Congress but it had the enthusiastic support of the Fed. That was about 700 billion and was sold as a fund to buy mortgages and mortgage-backed securities to shore up the collapsing housing market. In fact the TARP money was used to buy positions in the various banks deemed to big to fail and for the bailouts of AIG and those darn car companies. Then we had the first real QE which was over 1 trillion in Treasury purchases and other government paper and other mortgage securities; that lasted over a year. Overlapping that was the roughly 800 billion stimulus program under BO for all those “shovel-ready” jobs but which in fact went mostly to favored special interest groups in the electorate such as “activist” groups and unions and those public sector employees. Then along came QE2 which was another 600 billion bond buying program by the Fed for more bonds of various sorts and right on the heels of that came the Operation Twist program to exchange the long-term Treasuries for short-term Treasuries to the tune of about another 600 billion but that didn’t really add to the balance sheet significantly because they were selling as they bought. Now before Operation Twist has concluded they have announced the new QE3 which will run at least 40 billion per month to buy–they say they will start with more mortgage securities but the field is open for anything else they set their hearts on. There is no commitment that the purchases will only be 40 billion per month, it could be more, and there is no time limit and thus no monetary limit on how much money will be spent. They will continue QE 3 they say until there is “substantial” improvement in the unemployment figures. They don’t say exactly which figures–the rate, the participation rate, rate of employed to population, etc. Hope you have been trying add some of this up. You can double-check my figures all you want, I ain’t off but a rounding error.
Now let’s review what we got for this and what these programs in concert with the Administration have gotten us. The Administration of course promised a 5.6% unemployment rate if the Stimulus package was passed and Biden even went so far as to state in the summer of ’10 that that was the summer of recovery. Those claims were false. Also we were told that the food stamps and other welfare payments had a multiplier effect and would produce something like 1.72 in economic activity for every dollar spent for those programs. You can believe that one if you want. If that were really true then why don’t we just all go on welfare, spend the money with that tremendous mark-up in economic activity and I guess we would all be very well-to-do. AIG is being wound down and the Government is going to make a profit from its takeover. I never liked Greenberg or AIG but it sure makes one wonder if he wasn’t right back in ’08 when he said the Feds were making a mistake and that the company didn’t need to be confiscated and nationalized. I hope he and the other shareholders existing at that time of the takeover sue the pants off the Government and win. Are we really better off having bailed out the big banks? A few might have gone under and their shareholders and investors would have been banged but that is the risk all investors take. Our banking system as a system would have survived and might have thrived. Remember there were over 7000 banks then and only a handful were in trouble. The car companies could have done a regular and legal Chapter 11 and come out still in business; it would be owned by some one other than the unions however. That was the whole point of the BO bailout, to foster union loyalty forever and give them a bonus. The various QE’s have certainly added to our national debt. It has gone from about 11 trillion to 16 trillion. Those QEs have allowed the Government to run deficits. Remember that in the last couple of years the Fed has purchased more that 70% of all the Treasuries sold. That is monetizing the debt. Who else would have bought those Treasuries? All investors around the world have cut back on them. Yes, there still would have been buyers but what rate of interest would they have demanded for their loan? The Fed bought 1.7 trillion of all that debt in the last couple of years.
QE has driven down interest rates. That has some benefit but also the unintended consequences and outright harm to some. The savers and prudent people that lived carefully for the last few decades are getting hammered. They saved their money and get virtually nothing for it if they put it in the bank. Will sales of homes really go up significantly if the mortgage rates drop a little more? That rates are already about 3.5% for a 30 year, that is historically very, very low. So what if it drops to 2.8%? Will that really spur more buyers and the banks have all tightened their mortgages requirements greatly under duress and threat from the regulators. Will more debt get us out of debt? Any way you cut if the Fed is simply printing money to buy those Treasuries and other securities. It doesn’t have any money really, it literally just creates or prints more money with a computer stroke to buy those. That diminishes the value of the dollar and will lead to inflation. We will have inflation because of what they have already done. Barring a complete collapse of the economy, the only question is when and how bad the inflation will be. You already see the price of gold moving up and so will all other commodities over time.
We will examine more another day. Please ponder these thoughts. You might disagree with the analysis but the facts are not in doubt. The outcome can’t be good. Let the market work. The Fed IS the speculator and market manipulator-in-chief and we all are watching it happen right before our eyes. The wisdom of millions of us in a non-manipulated market will coalesce into a far better place if allowed to happen.
“the human fancy can paint with more energy the misery than the bliss of a future life”, from the Decline and Fall Of the Roman Empire. E. Gibbon, English historian extraordinaire. http://www.olcranky.wordpress.com