OK!
QE2 is in the books as of June 30th. Its pretty obvious that this whole experiment didn't generate any growth in the economy, assist in adding jobs, or help alleviate the housing pain. The only thing it did was succeed in ushering in animal spirits within speculators who then bid up and piled into risk assets. Bernanke and his acolytes wanted risk assets to get a bid and wanted to stoke the speculative juices of traders everywhere. In that case QE2 worked brilliantly. In essence QE2 really is not money printing nor is it monetizing the debt of the Treasury. What it ultimately ended up was an asset swap. The Federal Reserve took out interest baring securities from the banking sector and replaced it with money funds that are depreciating on a daily basis. How in the world this was to jump start the economy I don't know. Its the reverse Robin Hood way of conducting monetary policy. Steal from the poor and give it to the Wall Street speculators. The grand scheme of QE2 was for the banks to take the money from the Fed and lend it out. Basically conduct the same absurd lending policy that got us in this mess in the first place. Bubbles Bubbles Bubbles. The Fed wanted to re inflate the housing bubble with a serial influx of cheap dollars. What they re inflated was every risk asset most importantly commodities.They couldn't stop the bleeding in the housing market as that is in a long term secular bear market. There is too much excess supply, not enough worthy homeowners, and not enough jobs being filled to justify 15-30 year housing commitments.
Fortunately for the banks and their shareholders and unfortunately for the Fed and poor home owners, the banks have kept the excess reserves in house. Why? Not even the banks are that stupid. They need the excess reserves in house to soak up potential losses in their MBS portfolios. Granted that all of their loans (1st and 2nd lien) have not been properly market down and that a gutted FASB has allowed then to mark to their imagination, this is still a serious problem that will ultimately pose billions more in capital raises and future mark downs. The excess reserves proved to be a great boon for the banks as those reserves padded the books as well as give the banks another added subsidy via Interest On Excess Reserves. The banks would borrow money overnight at the General Collateral rate and park them at the Fed gaining an easy profit. This trade is no longer a feasible option however since the FDIC has instituted a higher deposit insurance rate. The banks got away with ripping off the tax payer for a good two years as they had cheap financing and a built in arbitrage profit center. They still have cheap financing but the arbitrage trade is gone. What will they do? So far we have seen some loan growth this year but FNM/FRE/GNM have all greatly made getting approved for a mortgage loan very difficult.
What does this mean for housing?
We won't see increasing home prices until we get higher wages and much lower unemployment. Which at the moment have their own structural problems. The Obama administration has so far been totally clueless in the jobs area. Given the Obama governing style which is Talk Big - Then Fold Early & Often, I don't think we will see any type of real job creation. You need to spend money on job programs most notably the crumbling infrastructure of our country, but Obama has no stomach to deal with this fight in Congress. It always seems like Obama looks at these fights as major nuisance. Instead of spending trillions on wars and defense build up why don't we actually try to fix the roads, bridges, and tunnels? This will put people to work. But Alas Barack doesn't want to fight the good fight for the general public. Not withstanding last months surprising rise in the Case Shiller Home Price Index, housing is still in despair. Foreclosures are still abnormally high and don't get me started on employment.
Back To QE2 for the moment. The media keeps getting this wrong when they all say that QE2 was a failure. This is just not understanding the current monetary plight of America. America is in a balance sheet recession. No matter how much free money is out there people will not take it as many are still trying to deleverage and pay off debt. This was the primary problem in Japan during the 90's. No matter how expansionary the monetary policy is for a sovereign nation if the private sector is over leveraged with debt its not going to make a difference. We end up with a liquidity trap. It happened in Japan and its happening here. The debt and obligations are being put on to the backs of the public sector from the private sector. 20 Years later Japanese public sector debt is reaching 200% of GDP and the USA is already at 90% of GDP.
As I said QE2 wasn't money printing in the classic sense. It was an asset swap. No net money was added to the banking sector. QE2 wasn't monetizing the debt either. This would actually be good for the economy and or national deficit. Think of it this way. The Fed reports to the Treasury. The Treasury pays interest on Treasuries to the Fed. The accounting cancels out. Why doesn't the Fed/Treasury just monetize the debt? In this way some $2 Trillion in US Government Debt gets retired right off the bat, this alleviates the current debt ceiling problems as the national debt gets reduced by that nominal $2Trillion. The Treasury can just credit the Fed electronically or just retire the treasuries as they already been paid for in the open market.
