There He Goes Again

We now have the announcement that Ben Bernanke’s Fed will buy $45 billion a month in treasuries, QE4, until unemployment reaches 6.5% or his version of inflation exceeds 2.5%. What a surprise!

Last September, when Bernanke announced the third phase of the government’s program of borrowing from itself by creating new money and using it to buy government bonds, I wrote:

Bernanke says that the new announced round of money printing (QE3 plus more Twist) is intended to reduce unemployment. Does he believe that? It is possible that Bernanke really drinks his own Cool Aid, but I doubt it. Does he think that stock market gains will boost confidence and somehow help employment indirectly? Perhaps. He has in the past claimed credit for spiking the stock market, although he must know that the empirical evidence does not show a link to employment gains.

Why then this dramatic move only two months before a presidential election?…

The most likely explanation is that Bernanke is worried about the treasury auction market. He wants to be able to use his printed money at will to support it…. Ostensibly the QE3 purchases will be mortgages…. The program can always shift into treasuries at any time….

Well, it does appear now that Bernanke was just easing his toe in by announcing the purchase of agency mortgages last September, and is really focused on treasuries. In all probability, he is afraid that the market for treasuries will falter. He can now support it anytime he wants without causing panic.

The next announcement may well remove the $45 billion monthly limit. Then he will be able to finance the government with as much fairy dust money as he likes.

There is always the chance that the foreign buyers will eventually be spooked and it will all come crashing down. But right now the foreign buyers do not have a lot of options and anyway Bernanke retires in a year.

It would be interesting ( and helpful) if Alan Greenspan suddenly had a Saul of Tarsus/ Paul experience and spoke out against his protege Bernanke. Or perhaps Paul Volcker, who admitted that the Fed might be violating the Fed statute in 2008 ( there was really no doubt about it) might speak up? Unfortunately none of this is likely. And we will continue on down the rabbit hole.

Comments

  1. Some interesting stuff here:

    http://www.counterpunch.org/2012/12/18/the-mysterious-new-housing-bubble/print

    The rebound in housing is now in full swing. Housing starts are up, existing home sales are gaining pace, inventory is down, and prices are on the rise. According to a recent report by Corelogic “House prices are up 6.3% year-over-year in October, the largest increase since 2006 and the eighth consecutive increase in home prices nationally on a year-over-year basis.” Many experts are now predicting that 2013 will be even better, in fact, J.P. Morgan thinks that prices could gain another 10 percent in the next 12 months. (…)

    So let’s keep things in perspective. Housing is still in the doldrums despite the hype, despite the low rates, despite the unprecedented meddling and intervention by the Fed, the banks and the USG. Just look at the data. Naturally, if the banks withhold distressed inventory, the government lends money to underwater homeowners, and the Fed slashes rates to record lows and buys whatever MBS the banks produce, then there’s going to be a surge in activity. But how long will it last?

    No one knows. But one thing is certain, the Fed’s loosy goosy policies never seem to work as planned. Case in point: Bernanke’s zero rates and QE4 have not revived interest in housing as much as they have touched off a surge of speculation which could generate another destabilizing asset-price bubble. Get a load of this from the SF Gate:

    ”There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”

    Repeat: “A tsunami of money coming into the market” from deep-pocket speculators. That’s your “recovery” in a nutshell.

  2. “There is always the chance that the foreign buyers will eventually be spooked and it will all come crashing down. But right now the foreign buyers do not have a lot of options and anyway Bernanke retires in a year.”

    Buyers do have an option: gold. The international gold market is large enough to accommodate many otherwise-would-be investors in T-bills and reluctant, nervous holders of dollars, although they’d probably nudge the price above $2500 per ounce.

    As for the rate of price inflation, gas is down below $3.00 (at long last) around here, but the savings barely puts a dent in the higher food, water, electric, and sundry other bills I’m paying. Bernanke’s “under 2%” inflation is pure pfedrul bullpuckey.

    If QE 3, 4, and 5 fail to adequately stimulate spending, perhaps Bernanke will borrow a page out of Silvio Gessel’s book and move to negative interest rates (he’s almost there anyway), so that holders of dollars and T-bills would have to pay a percentage of these “idle assets” to the Treasury on a monthly bases in order to maintain their face value. That should drive the final nail in the coffin of those traitors to America’s fiat economy: dem bums who want to save their money instead of spending it.

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