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There He Goes Again

December 12, 2012
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.

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