In May, when Fed Chairman Ben Bernanke said that quantitative easing could not continue forever, the stock market tanked and the word “tapering” became the most feared word on Wall Street.
This past week, during her Congressional hearing as President Obama’s nominee to become the next chair of the Federal Reserve Board, Janet Yellen said, “QE cannot continue forever.” The market moved higher.
Is it Ben morphing into Janet or Janet morphing into Ben?
Both the current Fed chair and his assumed successor assured us that the party’s not over, that there are still plenty of bonds to be bought.
But “forever” seems farther away now that it was back in May.
Ms. Yellen made it clear during her hearing that there’s still plenty of work for QE to do. Citing high unemployment, she said, “It is important not to remove support, especially when the recovery is fragile and the tools available to monetary policy, should the economy falter, are limited.”
In other words, even though quantitative easing isn’t working, it’s all we’ve got, so we’re going to keep on buying bonds.
And so, meet the new boss, same as the old boss. The prescription for our economic ills is more of the same. As with the debt ceiling, the $17 trillion debt itself, the nearly $100 trillion in unfunded liabilities and other financial problems that are endangering our future, QE tapering is being kicked down the road until we run out of bonds to buy. The longer it continues, the more damaging it will be to stop, but let’s keep going anyway.
Curiously, Ms. Yellen conceded that the unemployment rate is about 10%, not the official 7.3% rate. So, if the goal is still to keep on easing until unemployment falls to 6.5%, we apparently do have a lot of bond buying ahead of us.
Who’s Benefiting From QE?
QE’s fifth anniversary is this month. As we’ve argued before, if QE hasn’t worked after trying it for five years, it’s not going to work now. And, Ms. Yellen’s statements to the contrary, it may be causing great long-term harm to the economy.
According to Zerohedge, “We are living through a historic period of global currency debasement. The neo-Keynesian money-printers who dominate the world’s central banks have ‘won’ the debate, but are now scratching their heads, looking in vain for the economic recovery that they were expecting all those trillions to have bought. They will continue to look in vain, because money creation and true wealth creation are polar opposites. As portfolio manager Tony Deden has asked, ‘If cheaper currency is the source of wealth, where has Bangladesh gone wrong? If cheaper money means economic prosperity, why not just print as much as we can and give it out to everyone?’ ”
Then there’s Andrew Huszar, who managed the purchase of bonds during the first round of QE. In a commentary entitled, “Confessions of a Quantitative Easer,” he wrote in The Wall Street Journal this week, “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.”
The idea behind QE was to stimulate the economy by driving down the cost of credit for both consumers and businesses. It didn’t.
After the first round of QE ended, “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 security holdings and fat commissions from brokering most of the Fed’s QE transactions.”
So QE hasn’t accomplished its goals and it never will. One thing it did do, though, was to create a disconnect between financial markets and the economy (see chart).
As Zerohedge put it, “It encourages misallocation of capital out of the real economy, it encourages poor risk management, it increases the danger of financial asset inflation/bubbles, and it emboldens fiscal irresponsibility.”
At least it takes our mind off of Obamacare, the next debt ceiling debate and Iran’s coming nuclear capability.