QE = Another Banker Bailout

Now that QE2 is officially 2 days away, I am pondering and scratching my head trying to figure out why the Fed is implementing such a policy when all of the evidence points to the fact that QE does nothing for the Real Economy and Main Street?

We all know that QE doesn't lower interest rates. Just look at the UK, where bond yields are up since QE was put into effect there. Our bond yields went up after QE1 was announced. In fact, the whole point of QE is for investors to flee safe assets and park money in risk assets, isn't it? The Fed will come out and lie because that is what they do, apart from printing money. They tell the ignorant that QE lowers long term interest rates. This is a blatant lie that goes against the whole point of QE in the first place. If long term interest rates going down is the desired effect, then one can't be invested in risk assets. When long term interest rates go down it is a omen of slower growth and a non inflationary environment. This is the opposite of what the Fed wants. When rates head down, people hunker down and move out of risk assets into safe liquid assets that can be liquidated at a moments notice. This is why ultra short rates are near zero, in fact the Treasury auctioned off ultra short term securities with negative real yields.

On top of all this, QE failed in Japan. The BOJ even admits this.Rates in Japan plummeted not because of QE, even though many started to front run the BOJ, but investors lost all hope and confidence in Japanese risk assets. Millions lost everything and they did not want to hear the words Nikkei 225 ever again. What you saw in Japan was a massive real estate bubble that popped. The ensuing bank crisis quickly spread through out the Japanese corporate sector. This slowed down the entire Japanese economy. Long term rates went lower as the printing presses started to churn out trillions upon trillions of Yen. Japanese investors, public pension plans, Japanese corporate sector, and most importantly individual investors fled equity risk assets for the relative safeness of JGB's. QE came after rates had already gone lower. Rates went even lower as all investors started to front run the BOJ. This is normal human behavior. Read and React. Fear and Greed. Rinse and Repeat. The BOJ have been trying to reignite inflation for 20 years and have failed to do so at every turn.

The Nikkei has had some major up moves over the last 20 years, but it currently stands at or near 9000, which is almost 80% off its peak.

http://tradersutra.blogspot.com/2010/08/bizarro-market-nikkei-redux.html

This always gets the media excited but if the BOJ follies have any merit, this is what the US has to look to forward to for the next 15 years. Huge cyclical bull markets within a giant secular bear market. Some money will be made but most money will be lost.

QE did manage to ease the strains in the credit markets and did improve bank balance sheets. I give props to the Fed for there quick action, but another round of QE is just another bank bailout.

The US has a demand side economic problem. QE is a supply side solution. QE thus cant increase aggregate demand. There is no wealth effect in regards to QE, as any and all attempts to keep risk asset prices above where they normally would be always fail.

QE has no long term value for the real economy because it doesn't create jobs or increase demand. There is zero economic rationale for higher stock prices.

This leaves me to my original question. Why is the Fed implementing this policy? QUITE SIMPLY! They are owned by the banks, run by the banks, and every policy implemented by the Fed only benefits the banks.

QE doesn't add any financial assets to the system. It just moves them around. Its an asset swap scheme. Its just rearranging the deck chairs on the Titanic. The Fed has expanded their balance sheet and the monetary base without actually adding any new net money to the system. This is evidence by the roughly trillion dollars sitting with the banks in excess reserve mode. This money is not going back into the real economy. It sloshing around the banking sector running up risk assets and equities all around the world via High Frequency Trading.

The Fed, Treasury, and ultimately the Obama Administrations prime motive for QE is to get the Banking Sector re-liquefied. They want to rebuild bank balance sheets. An asset swap and massive transfer of risk from private to the public sector. This was the primary goal of the government. It worked brilliantly! One problem, politically 9.6% unemployment is problematic for the Obama Administration. Even though Bernanke and Geithner were successful in clearing toxic sludge from bank balance sheets so they can sleep a fine death at the hands of the taxpayer, they made two mistakes.

1- The Banks even in a slightly better financial position were in no financial shape to re lend to stimulate the economy. This is two fold. The banks like Fed and Treasury, lie for a living. Even as they have transferred trillions of bad mortgage paper, they still have trillions they need to offload. This is why we are having another round of QE. Secondly, most importantly, the US consumer is tapped out. We are in a balance sheet recession just like Japan. Housing prices are still over valued, bankruptcies are still rising, and the economy is stuck in quick sand because employment is going through structural changes.

2-Both the Treasury and Fed were caught off guard with regards to Foreclosure gate. One of the reasons why we are getting another round of QE is that the banks are a lot worse off than even the banks know. We have heard many lurid stories of flat out fraud being conducted by the banks. One big problem for the banks is that we still live in some sort of Democracy where the rule of law still stands. The banks are going to have to raise hundreds of billions of fresh capital just buying back all of the bad loan paper they stuffed into CDO's and the such.

As the real economy suffers, the financial economy gets more bloated. I can't figure out how and why the banks would re lend after this next round of QE? They didn't do it after QE1! Bernanke added $1T to bank balance sheets and the economy ex inventory build up went no where. You don't need a Nobel Prize to figure out where this is headed. Demand side problems aren't fixed with supply side solutions. Tax cuts won't fix our economy. QE won't fix our economy. We need demand side solutions. We need to clear excess housing inventory. We need trillions in  private sector bad loans to be restructured. We need to get home owners out of houses they cant afford. We need to get Fannie and Freddie out of the housing finance industry.

http://tradersutra.blogspot.com/2010/08/price-discovery-in-housing-is-soarly.html

Somehow I already know how this is going to end. Bernanke also knows all of this. What is Ben going to say? What is Ben seeing at this moment? A weak economy, a weaker job market, a housing market that is already rolling over, and a fraudulent banking sector all wrapped up into one giant SH&^&T sandwich. But as long as extend and pretend and money printing are the official US policy responses, a zombie economy will just trance along making Wall Street bankers more wealthier at Main Street's expense.

What we are seeing at the moment is another bank bailout. Another TARP. There is no way Congress would ever vote yes for another bank bailout, but with the Wall Street owned Fed, we don't need Congressional support. We have Ben Bernanke who is overtly creating his own version of TARP.

The Fed has already embarrassingly failed in its mandate of full employment, they have only partially been successful in their other mandate.

The MSM along with the Fed and Treasury has tried to sell this QE policy as a main street solution. What a farce. These are the same guys who are fighting a demand problem with supply side solutions.

What do they say?
Don't bring a knife to a gun fight. The Fed thinks it has guns, but they are wrong.

I think what we will see on Wednesday is a measured QE over the next few months. The Fed will start off small, kind of like what the hucksters do on the corner with their shell games. Bernanke doesn't want to go all in even though he is already there. He has already taken the country over the cliff but he doesn't know it. Wednesday will be a solemn day for Main Street, but of course if you are a banker. Its all good in the hood.