I wanted to include some reaction from around the internet to the latest Fed announcement, but there doesn’t seem to be much. Krugman (aware the announcement would happen this morning) called in sick last night and my other favorite “wonk” (I hate that word) Ezra Klein hasn’t put any opinion up on his “Wonkblog.”
So I’ll just tell you what I think, and refute them after they’ve made their requisite Rachel Maddow appearances.
This is a disaster.
Don’t get me wrong - it’s great for the 1% and politicians. The DJIA was up 1.55% to close at 13,539. Not bad considering there’s absolutely no underlying fundamental economic reason for that near-record close except QE3 - which is an open-ended commitment by the Fed to buy $40 billion worth of mortgage-backed securities (MBS) each month.
And, what is QE? According to “Wonkblog” (is there a more pretentious word, really?):
Short answer: It’s an unconventional monetary tool used by central banks to stimulate the economy.
Short answer: It’s printing money.
Long answer: It’s printing money for the purchase of MBS.
Longer answer: It’s printing money, which is “inflation,” to bail banks out of bad mortgage investments while trying to stimulate a housing market which is collapsing despite already record-low mortgage rates.
Even longer answer: It’s a multi-trillion dollar conflict of interest for the Federal Reserve. As the value of MBS are inherently linked to prevailing interest rates, if the Fed raises rates, they will crash the value of their own assets. (Keep in mind that The Federal Reserve is the most powerful “regulatory” body in the banking system.)
Longest answer: It’s printing money to bail out banks and this policy - which has amazingly already failed twice - will eventually crash bond prices once investors wake up to the strangely esoteric reality that inflation is inflationary. When that happens, it is “game over” for the U.S. Treasury, taxpayers, and, well, the economy.
This is a complete disaster. And I’m saying this as someone who’s been investing to take advantage of it for years. Despite a huge market rally, my portfolio still trounced the Dow Jones today - but I’d rather not have had QE because it’s so obvious the program is only buying a few more months (weeks?) of fake growth at the expense of already weak economic fundamentals.
Neil Irwin, who represents the typical level of intellectual inquiry found in economics reporting, chimes in on Twitter with:
Whatever you think of the substance of decision, it makes me respect Bernanke & FOMC more that they were willing to shrug off politics.
Yep. Throwing the dollar under the bus to boost stock prices and temporarily lower bond yields just two months before an election is about as “apolitical” as it gets…
There’s a lot of fancy, “wonkish” words going around about what the Fed is doing. But you need to understand: they are just printing money and giving it to banks in exchange for junk assets. That’s it. It’s not going to help unemployment. It’s not going to fix anything except bank balance sheets. It’s certainly not going to help the self-styled martyrs in “the middle class.”
The ways it WILL affect you are - immediately - through higher gas prices; and - long term - with higher prices for everything else.
When Ezra and Krugman get around to commenting on how this program is great (albeit too small!) for the Average America, they will certainly try to reassure you that there’s no risk of inflation. Make sure to pass that on to the cashier at Sunoco.
THIS is what Occupy Wall Street should be protesting. But after months of stewing over not getting free stuff for themselves, they seem to have all moved back onto their friends’ couches.
Just consider the very real possibility that investors may, one day, no longer want to lose money in bonds with negative real returns. Then what is the Fed gonna do? They can’t stop asset purchases because our fake economy now depends on it. Will they keep expanding QE? Buy stocks? Buy things off ebay?
Maybe they’ll buy us all an iPhone 5! That should keep the progressive activists off the streets, anyway.
This is a big win for:
Stockholders - especially guys like Warren Buffett.
Bankers - who get to offload bad assets AND continue middle-manning T-bill sales to The Fed.
and “Liberal Economists” - who will trumpet their influence on the “free market”(!) while hedging against QE’s inevitable failure by saying it’s “not enough.” Without irony, they’ll praise this as a step in the right direction - despite QE being the most egregious implementation possible of “trickle-down economics.”
The news is all reruns.