Understand Quantitative Easing (currently at 85 billion a month) does 2 things:
First it kepts interest rates low. That allows the government to keep the house of cards afloat as higher interest rates would mean government would have to spend much more money servicing debt obligations. We cant even manage the budget now so a uptick in the interest rates by a couple percentages would cause our govt to have to cut lots of spending to service debt.
Second its a back door bailout for banks. 40 billion a month goes to bank owned mortgage securities. So basically the Federal Reserve pays top dollar for bank owned debt that in reality should be sold at considerable discount because most of it is bad debt. Think of it as paying 100 dollars for something only worth 1 dollar at fair value. Then the banks turn around and buy federal reserve tresuary notes with the money they get from the federal reserve. The banks then collect interest rate payments for their treasury notes, interest rate payments which are made by the US tax payers.
Hard to beleive this got published the Wall Street Journal Op ed but its very telling how this all works and how fucked our financial system is here are some choice quotes:
Also its not just the US the European Central Banks yesterday discussed the possibilty of also doing quantitative easing, so expect that to follow soon.
First it kepts interest rates low. That allows the government to keep the house of cards afloat as higher interest rates would mean government would have to spend much more money servicing debt obligations. We cant even manage the budget now so a uptick in the interest rates by a couple percentages would cause our govt to have to cut lots of spending to service debt.
Second its a back door bailout for banks. 40 billion a month goes to bank owned mortgage securities. So basically the Federal Reserve pays top dollar for bank owned debt that in reality should be sold at considerable discount because most of it is bad debt. Think of it as paying 100 dollars for something only worth 1 dollar at fair value. Then the banks turn around and buy federal reserve tresuary notes with the money they get from the federal reserve. The banks then collect interest rate payments for their treasury notes, interest rate payments which are made by the US tax payers.
Hard to beleive this got published the Wall Street Journal Op ed but its very telling how this all works and how fucked our financial system is here are some choice quotes:
Quote:Quote:
As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed's first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I've come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.
...
In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.
...
my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.
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Trading for the first round of QE ended on March 31, 2010. The final results confirmed that, while there had been only trivial relief for Main Street, the U.S. central bank's bond purchases had been an absolute coup for Wall Street. The banks hadn't just benefited from the lower cost of making loans. They'd also enjoyed huge capital gains on the rising values of their securities holdings and fat commissions from brokering most of the Fed's QE transactions. Wall Street had experienced its most profitable year ever in 2009, and 2010 was starting off in much the same way.
You'd think the Fed would have finally stopped to question the wisdom of QE. Think again. Only a few months later—after a 14% drop in the U.S. stock market and renewed weakening in the banking sector—the Fed announced a new round of bond buying: QE2. Germany's finance minister, Wolfgang Schäuble, immediately called the decision "clueless."
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experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output).
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U.S. banks have seen their collective stock price triple since March 2009. The biggest ones have only become more of a cartel: 0.2% of them now control more than 70% of the U.S. bank assets.
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Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.
Also its not just the US the European Central Banks yesterday discussed the possibilty of also doing quantitative easing, so expect that to follow soon.
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