February 9, 2011
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With Fed Chairman Ben Bernanke testifying today before the house budget committee let’s take a look back at what has transpired since QE2 was first rumored.
Rumors of QE2 started last August at the Fed’s annual Jackson Hole meeting but didn’t officially start until November. Prior to the official announcement the New York Fed’s Brian Sack had the following to say about the intentions of QE2:
keep longer-term interest rates lower than otherwise by reducing the aggregate amount of risk that the private markets have to bear. In particular, by purchasing longer-term securities, the Federal Reserve removes duration risk from the market, which should help to reduce the term premium that investors demand for holding longer-term securities. That effect should in turn boost other asset prices, as those investors displaced by the Fed’s purchases would likely seek to hold alternative types of securities.
Basically the Fed was attempting to lower interest rates with the hope that this would boost the economy and boost other assets. As you can see in the chart below Read more of this post
December 29, 2010
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In the early 1990’s Sweden had a financial crisis not unlike the U.S. financial crisis of 2008/2009. With its banking system effectively insolvent Swedish officials pursued a different strategy than the U.S. bailout model. The equity holders in Swedish banks were for the most part wiped out and troubled assets were written down to current value. Only then did the government step in. Essentially the Swedish plan called for banks to take their lumps all at once and set the stage for future growth. Contrast this to the way Japan and the U.S. have handled their respective asset price inflation induced financial crises. Under these plans the government does assume some of the troubled assets but full writedowns were not taken in the hope that the banks earn their way out of danger over time. As can be seen from Japan’s experience this does not set the table for a robust recovery.
Now, according to Bloomberg, Sweden’s central bank is thinking about how to prevent the next asset price bubble. Instead of setting policy strictly based on traditional inflation measures they are beginning to incorporate asset prices and lending growth into the decisions. Read more of this post
November 8, 2010
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Hussman’s weekly market comment is a must read. He does not mince words in arguing that QE is utterly misguided and Bernanke’s leadership at the Fed has bordered on criminal. Excerpts below (emphasis mine) but please read the entire comment.
Given that interest rates are already quite depressed, Bernanke seems to be grasping at straws in justifying QE2 on the basis further slight reductions in yields. As for Bernanke’s case for creating wealth effects via the stock market, one might look at this logic and conclude that while it may or may not be valid, the argument is at least the subject of reasonable debate. But that would not be true. Rather, these are undoubtedly among the most ignorant remarks ever made by a central banker.
We will continue this cycle until we catch on. The problem isn’t only that the Fed is treating the symptoms instead of the disease. Rather, by irresponsibly promoting reckless speculation, misallocation of capital, moral hazard (careless lending without repercussions), and illusory “wealth effects,” the Fed has become the disease.
Source: Hussman Funds