Thank Ghu It’s Freitag

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‘Quantitative Easing’: The Hidden Government Subsidy for Banks

This video went up on Zero Hedge yesterday, I believe. In the first minute you will want to throw both of these little bears in a sack and drown them, but by the end they win you over. There are so many things about QE that are crazy, but there’s one thing that I’d like to point out in particular. Yes, this is a huge money-printing program with potentially disastrous inflationary consequences. And yes, the influx of all this money could easily distort markets and prices far beyond the extreme distortions we’ve already been dealing with (commodities prices shot through the roof after this latest QE round was announced). But the thing I want to focus on is the subsidy aspect of QE, pointed out in the video. QE is designed to buy Treasuries and other assets, but the Fed does not simply go out and buy Treasuries itself; it does it through its primary dealers, who include of course banks like Goldman, Sachs. The Fed all but announces when it’s going to be doing this buying and in what quantity, which allows the banks to buy up this stuff at lower prices ahead of time and then sell it to the Fed at inflated cost.

Even forgetting about the obvious insider trading aspect to all of this, the official middleman status of the banks is a direct government subsidy and it is little remarked upon, even by the Tea Party crowd, which is otherwise so opposed to “welfare.” But these sorts of subsidies exist all throughout the financial services industry.

You want to take out a mortgage or a credit card; you obviously can’t get your credit from the government at 0% interest. What you do instead is you get a mortgage from a private bank at 4.7% or 5%, and that bank in turn has borrowed from the Fed at 0%. This would almost make sense if indeed these banks were legitimately providing a service for that 5% cut, i.e. if they were carefully and judiciously weighing the credit risk of applicants. But if anything these banks have been even more irresponsible (more irresponsible by far, actually) with their money than the masses of people who are now in trouble with their credit cards, mortgages, student loans, etc. They not only don’t deserve this subsidy any more than ordinary people do, they’re actually the worst possible destination for an appropriation of emergency funding, which is what this Fed money is supposed to be.

Take seven minutes and watch the video. Plan on being irate afterward. Seriously.

After you watch it, read this:

In Defense of Ben Bernanke

All in all, it looks like the nation and the world need an Economics 101 refresher. So let’s start with the basics.

The Fed’s plan is to purchase about $600 billion of additional U.S. government securities over about eight months, creating more bank reserves (“printing money”) to do so. This policy is one version of quantitative easing, or “QE” for short. And since the Fed has done QE before, this episode has been branded “QE2.”

Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, “by lowering short-term interest rates,” you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money.

But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.

That sounds pretty similar to garden-variety monetary policy. Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment.

Now here’s a letter to the editor of the Wall Street Journal:

While on a United Airlines flight from New York City to Los Angeles this week, a fellow passenger handed me a copy of the The Wall Street Journal Nov. 15 op-ed by Alan Blinder—”In Defense of Ben Bernanke”—and suggested that I write a letter to the editor if I disagreed with the Princeton University professor’s claims. Having read the piece, I told the passenger over my shoulder, “You bet I will.”

Prof. Blinder seems blind to the clear and present dangers of QE2. Instead of seriously discussing these dangers, he takes us on an excursion to a Keynesian utopia, a mythical land in which endless government spending is an amazingly effective job creator and investors’ confidence in U.S. Treasury bonds somehow increases as we sink ever deeper into debt while the Fed has its printing presses working overtime.

Here are some cold, hard facts from the real world: The first is the 8.7% 2012 unemployment rate predicted by the Survey of Professional Forecasters of the Federal Reserve Bank of Philadelphia. It seems the Obama administration’s record spending binge won’t result in job creation, but in unacceptably high long-term unemployment. The second fact is that long-term interest rates have actually gone up following the Fed’s recent QE2 announcement. The markets took one look at the Fed’s pump-priming plans and decided they had to increase interest rates—probably in order to compensate for the expected rise in inflation.

None of this should come as a surprise. Blinders off, common sense engaged, it’s time for us to “refudiate” the notion that this dangerous experiment in printing $600 billion out of thin air, with nothing to back it up, will magically fix economic problems that were caused in large part by the government’s interfering with our free market system in the first place, and then made worse by the government’s reckless spending experiments with our children’s fiscal future. Instead of the tired, old Keynesian ideas behind Obamanomics, we need to turn to time-tested practices that are pro-free market rather than pro-big government. Some call this “free-market populism.” It’s based on the realization that the best way to get the economy moving again is to get government out of the way, let the free market dictate winners and losers, and allow the private sector to grow our economy one job, one paycheck and one American dream at a time. It’s the only way we can restore much needed confidence and certainty in our economy. This is the only way we will all be able to soar from New York to Los Angeles and throughout the heartland.

Sarah Palin
Wasilla, Alaska

I’ll be the first to admit I don’t know shit about economics. I can’t even balance my checkbook. With all this conflicting information flying around I really wish I knew an economist I could trust. Even Paul Krugman is unreliable these days. Some days he’s shrill, and other days he’s a shill.

I studied history and I do remember something about a “Weimar Republic” that tried to solve it’s financial problems by printing money:

Since striking workers were paid benefits by the state, much additional currency was printed, fueling a period of hyperinflation. The 1920s German inflation started when Germany had no goods with which to trade. The government printed money to deal with the crisis; this allowed Germany to pay war loans and reparations with worthless marks, and helped formerly great industrialists to pay back their own loans. This also led to pay raises for workers and for businessmen who wanted to profit from it. Circulation of money rocketed, and soon the Germans discovered their money was worthless. The value of the Papiermark had declined from 4.2 per US dollar at the outbreak of World War I to 1 million per dollar by August 1923.

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If you’re not depressed enough yet, this story just plain sucks:

Afghan Hero Dog Is Euthanized by Mistake in U.S.

When a suicide bomber entered an American military barracks in Afghanistan in February, it was not American soldiers but Afghan stray dogs that confronted him. Target and two other dogs snarled, barked and snapped at the man, who detonated his bomb at the entrance to the facility but did not kill anyone.

The dogs were from the Dand Aw Patan district, in the eastern Paktia Province near the Pakistani border. One died of wounds suffered in the blast, and months later, Target and the other dog, Rufus, were flown to the United States by a charity and adopted by families. Target — who received a hero’s welcome, including an appearance on “The Oprah Winfrey Show” — went to live with the family of Sgt. Terry Young, 37, an Army medic who witnessed the animals’ bravery that night and helped treat the dogs and several American soldiers who were wounded.

The glory, though, was short-lived. Target, after learning to get along with the Young family’s other dog in Arizona, becoming accustomed to dog food and to using a doggie door to relieve herself, escaped from her yard. She was captured last week and euthanized by mistake.

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Here is a list of important events that took place in history on November 19th. A partial list:

1980 CBS TV bans Calvin Klein’s jean ad featuring Brooke Shields
1965 Kellogg’s Pop Tarts pastries created
1959 “Rocky and His Friends” debuts on ABC
1895 Frederick E. Blaisdell patents the pencil

Today is the birthday of:

Kerri Strug (1977) Jodie Foster (1962) Meg Ryan (1961) Kathleen Quinlan (1954) Calvin Klein (1942) Dick Cavett (1936) Jeane J. Kirkpatrick (1926)

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If you’ve been wondering what happened to Joseph Cannon of Cannonfire:

The Cannon mystery: All is revealed!

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If you’re looking for something to do this weekend, this movie opens today:

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