Quantitative Easing

[SkydiveJonathan 0]

Beyond a gloomy assessment of the economy, Mr Bernanke used the majority of the eagerly-anticipated address to defend the more than $2trillion of quantitative easing (QE) that the Fed has done since the US plunged into recession in 2009.

Those programmes, which saw the Fed buy US government bonds as well as mortgage-backed debt, helped save jobs and drive down interest rates, said Mr Bernanke.

[SkydiveJonathan 0]

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As opposed to QE, which we can agree is money creation, why not just take those credits and distribute to all citizens?

Or a substantial increase in the minimum wage.

[SkydiveJonathan 0]

The euro rose on the foreign exchanges on Wednesday after the Bloomberg financial news service reported that the European Central Bank was preparing to announce plans to buy unlimited quantities of government debt from troubled members of the single currency.

Quoting central bank officials, the agency said the ECB was ready to take action to bring down the interest rates on borrowing paid by countries such as Italy and Spain.

[SkydiveJonathan 0]

America's central bank said it will purchase $40bn (£25bn) of mortgage-backed bonds a month to stimulate the housing market and keep long-term interest rates low.

In a major departure from the two previous rounds of stimulus, the Fed said it will persist with the policy until the outlook for the job market improves "substantially".

The Dow Jones Industrial Average and the Standard & Poor's 500 both climbed after one of the most-eagerly awaited decisons from the Fed's rate-setters in months.

"They are targeting mortgage bonds in an effort to drive rates lower," said Stewart Cowley, head of fixed-income at Old Mutual Asset Management. "But they are writing a blank cheque."

Economists at Capital Economics estimate that the new round of QE could see the Fed buy more almost $1.5 trillion of debt, assuming the unemployment rate stays close to current levels for the next three years.

[beowulf 1]

I am unconvinced that QE3 will fix any of the problems or even help.

I think it's just going to make things worse in the long run.

[kallend 2,027]

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I am unconvinced that QE3 will fix any of the problems or even help.

It must be going to help. Senator Cornyn (R) complained that by helping the economy the Fed was benefitting Obama in the election.

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The only sure way to survive a canopy collision is not to have one.

[StreetScooby 5]

$40B/month in the MBS space is not a lot of money, in a short term context.

Previous 12 Months Volume for Mortgage-Backed Securities

Here's the corresponding DTCC chart for govt bonds:

Previous 12 Months Volume for Government Securities

We are all engines of karma

[beowulf 1]

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I am unconvinced that QE3 will fix any of the problems or even help.

It must be going to help. Senator Cornyn (R) complained that by helping the economy the Fed was benefitting Obama in the election.

I just read an argument that essentially said one reason for QE3 was to prop up the stock market which would help Obama stay in office and keep Bernanke from losing his job.

Not sure that opinion is valid, but it's similar to what Senator Cornyn is saying if you were to equate the stock market with the economy.

I don't know what the real reasons were for doing QE3 but I don't think Bernanke was being honest.

[StreetScooby 5]

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I just read an argument that essentially said one reason for QE3 was to prop up the stock market which would help Obama stay in office and keep Bernanke from losing his job.

Stocks react favorably to the QEs. That's about it, though. Most people don't realize that the stock market really isn't sh-t. It's the bond market that makes the world go around. Bond volumes historically dwarf stock volumes.

Bernanke himself really doesn't believe QE3 is going to do anything. He has been reduced to managing expectations of a mostly illiterate populace.

We are all engines of karma

[beowulf 1]

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I just read an argument that essentially said one reason for QE3 was to prop up the stock market which would help Obama stay in office and keep Bernanke from losing his job.

Stocks react favorably to the QEs. That's about it, though. Most people don't realize that the stock market really isn't sh-t. It's the bond market that makes the world go around. Bond volumes historically dwarf stock volumes.

Bernanke himself really doesn't believe QE3 is going to do anything. He has been reduced to managing expectations of a mostly illiterate populace.

Gold and silver reacted favorably also. I don't think Bernanke likes that.

[Icon134 0]

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I am unconvinced that QE3 will fix any of the problems or even help.

I think it's just going to make things worse in the long run.

I couldn't agree more...

Livin' on the Edge... sleeping with my rigger's wife...

[StreetScooby 5]

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Gold and silver reacted favorably also.

Good point, but the feds/etc. have that market tamped down as best they can. Definite cabal going on there.

We are all engines of karma

[beowulf 1]

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Gold and silver reacted favorably also.

Good point, but the feds/etc. have that market tamped down as best they can. Definite cabal going on there.

That hasn't been much of a secret.

[SkydiveJonathan 0]

Mr Bernanke’s main eye is on America’s intractable jobs blight – “a grave concern, not only because of the enormous suffering and waste of human talent it entails, but also because high levels of unemployment will wreak structural damage on our economy that could last for many years”, he said. The Fed has switched to targeting jobs – not prices – sure that the headwinds of debt-deleveraging will check inflation.

[beowulf 1]

To reiterate what I said earlier. I think what the Fed is doing won't accomplish their stated goals that you quoted.

[StreetScooby 5]

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To reiterate what I said earlier. I think what the Fed is doing won't accomplish their stated goals that you quoted.

Maybe Bernanke is targeting unemployed MBS traders. These guys tend to have a large marginal propensity to consume, when employed.

We are all engines of karma

[diverborg 0]

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A very narrow view of QE.
One of the goal of QE is to discourage savings; who would tend to "save the most". The rich. It also helps erode previous debts (who has the most debts? the poor).

One thing I've never understood is how often times liberals claim they are the champions for the middle class and conservatives are for wealthy.

IMO Obama's goals have been most destructive on the middle class specifically when we are talking QE, not to mention his very deceptive selling tactics on his tax propositions. I wish more people would realize this. Will QE hurt the uber wealthy? Prob not. Their wealth is usually tied up in other investments less affected by the value of currency, and when you're worth billions, whats the big deal when you retire and your 2 billion in todays money is only worth 1 billion 20 years from now.

Although I don't think the responsible poor benefit from this either (or anybody of any class making an attempt to save for the future), the irresponsible most certainly do. If you have negative 50,000 in net worth, anything you can do to devalue that number is a good thing for you, (bad of course for anybody being responsible).

But what about the rest of us stuck in the middle, who are responsibly trying to save a good portion of our income so we can reach a number that we can modestly retire on without leaching off of taxpayer money when we runout. I'm going to struggle my whole working life to get that magical number of what would be prob 1.2 million in todays money to survive the last 10-15 years of my life. What happens when that number is no longer sufficient, because 1.2 mil has now been so devalued its the new annual middle class income 30 years from now. We are creating a financial nightmare for our future, and any shortterm boost in wall-street will be meaningless to us middle classers. I'm sure the investors will be having a hay-day with it though.

I'm not going to claim the right is the champion for the middle-class either, but in my observance, liberal economic policies will be and have been much more destructive on the resonsible working class in this country.

[DrewEckhardt 0]

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A very narrow view of QE.
One of the goal of QE is to discourage savings; who would tend to "save the most". The rich. It also helps erode previous debts (who has the most debts? the poor).

One thing I've never understood is how often times liberals claim they are the champions for the middle class and conservatives are for wealthy.


The "liberal" and "conservative" labels are mostly marketing. Once in office both parties act about the same, passing laws to benefit industries which are large sources of campaign funds like the banks.

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IMO Obama's goals have been most destructive on the middle class specifically when we are talking QE, not to mention his very deceptive selling tactics on his tax propositions.

You have to be more specific.

In theory the Fed's low interest rates hurt the middle class more because we have a disproportionate fraction of our wealth in cash for upcoming major expenses (like kids in school or a new roof).

In practice the average family has has just $4000 in savings and the difference between 0 and 5% interest of $200 is lost in the noise at 0.5% of the $43,000 household income so it's not a middle class issue. Obama's tax cuts more than outweigh that, with the 2% FICA cut saving the average family $860 a year.

As responsible middle class people with a year's wage's set aside we're merely a screwed minority.

Artificially propping up house prices through the GSEs and the fed buying $40 billion worth of mortgage backed securities each month hurts household formation; although with 2/3 of us owning homes the young people affected by this are another screwed minority.

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But what about the rest of us stuck in the middle, who are responsibly trying to save a good portion of our income so we can reach a number that we can modestly retire on without leaching off of taxpayer money when we runout. I'm going to struggle my whole working life to get that magical number of what would be prob 1.2 million in todays money to survive the last 10-15 years of my life. What happens when that number is no longer sufficient, because 1.2 mil has now been so devalued its the new annual middle class income 30 years from now.

The stocks which make up the majority of your portfolio when working and saving go up with inflation (where the fed's goal is 30% a decade).

You're only screwed when they continue the shenanigans as you approach and enter retirement where yields on low risk investments aren't high enough to support you.

Of course, this is irrelevant to the middle class as a whole due to abysmal savings rates. Half of workers aged 55 and over have less than $50,000 saved for retirement. As of 2009 the median income for Americans 65 and over was just $18,001 including Social Security.

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[diverborg 0]

I don't think I really disagree with anything you've said.

The one thing I question is the "Obama's tax cuts" part. I've seen so many different ways this has been skewed I don't know what to believe honestly. I had one calculator showing that I would pay about an extra $4500 next year with Obama's propositions which was a combination of FICA and Income Tax.

Unless those numbers are completely bogus, spread by a bunch of lies, thats a lot of money for my income level. I'm not entirely opposed to paying more taxes to get us out of this debacle, if I thought there was even a remote chance that spending would be curbed enough to even make a dent in the budget.

[DrewEckhardt 0]

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I don't think I really disagree with anything you've said.

The one thing I question is the "Obama's tax cuts" part. I've seen so many different ways this has been skewed I don't know what to believe honestly. I had one calculator showing that I would pay about an extra $4500 next year with Obama's propositions which was a combination of FICA and Income Tax.

Assuming you're not raking in $30,000 a year as capital gains or qualified dividends (assuming a 28% tax bracket) or making over $300,000 a year that's not his plan.

That number sounds like what you'd be paying without any of the Bush tax cuts that were enough to make America's income tax system the most progressive out of the OECD-24 (including Australia, Austria, Belgium, Canada, The Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, The Netherlands, New Zealand, Norway, Poland, The Slovak Republic, Sweden, Switzerland, and The United Kingdom).

Obama wants the Bush rate cuts extended for those of us making under $200,000 a year as single people (AGI) and $250,000 as married couples.

He calls for capital gains to be treated as ordinary income, as opposed to being taxed at 15% under the expiring Bush cuts or the 20% they'll return to without them. Assuming the Republicans would continue the 15% rate and that you're in the 28% bracket, the 13% rate increase would require you to gross $30,769 in long term capital gains to pay $4000 more.

He calls for splitting the second highest bracket at $200K for single people and $250K (after deductions for state taxes, mortgage interest, etc.) for married couples creating a new 36% bracket that's 3% higher. He's also already passed a 0.9% Medicare surtax starting at those thresholds. To pay $4000 more under that plan you'd need an extra $102,564 in income above the bracket start meaning $302,564 as a single person or $352,564 as a married couple. He also wants to allow the 35% top bracket to revert to the 39.6% it was under Clinton; although you're only paying that with an adjusted gross income of $390,050 or more. There's also the 2.9% Medicare surcharge on unearned income when you're earning more than the $200/$250K thresholds.

The Republicans will keep passing tax-cut extensions that cover all brackets, and Obama could theoretically play hard-ball and refuse to sign any bill which includes the top two bracket Bush cuts (the situation referred to as Taxmageddon) thus landing us the rates we had under Clinton although he seems politically astute enough to avoid that sort of mistake.

Obama's 2% employee share of FICA "tax holiday" is scheduled to disappear too ($2274 assuming you earn the $113,700 wage base or more) although he remains undecided on whether it should be extended, the Republicans aren't making an issue of the matter, and it's premature to speculate.

[URL]http://www.taxpolicycenter.org/taxtopics/2013-Allow-top-two-rates-to-rise.cfm[/URL]
[URL]http://www.gklaw.com/news.cfm?action=pub_detail&publication_id=1190[/URL]

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Unless those numbers are completely bogus, spread by a bunch of lies, thats a lot of money for my income level. I'm not entirely opposed to paying more taxes to get us out of this debacle, if I thought there was even a remote chance that spending would be curbed enough to even make a dent in the budget.

They're possible, not Obama's plan, and useful politically.

We'll see what happens approaching November. If the Republicans offer an extension again Obama will have to sign because that will cost him fewer votes (most of us care more about getting our tax breaks than denying the "wealthy" theirs and accepting a big tax increase for us). They could also wait to keep the tax increases hanging over us until later when as a lame duck Obama has less to gain from compromise although it'll count against the Democrats in the next election.

Obama signing with the top rates unchanged wouldn't be unprecedented - he signed a 2 year extension in 2010. Of course, vocal opposition before doing so is a useful marketing tool for him "I'm against the wealthy like me and my campaign donors and for you common people."

[SkydiveJonathan 0]

The Bank of Japan (BoJ) is to buy a further 10 trillion yen (£79bn) of bonds, bringing the total accumulated so far in its battle against deflation to 80 trillion yen, or 20pc of Japanese GDP.

(Over 20 years).