Understanding Both QE3 Conversations

by Nigel Bolton-Shaw on October 1, 2012

The well-known Capital Economics team has weighed in on the effectiveness of the QE3.

Capital Economics (CE) “supplies independent economic analysis to institutional and corporate clients across the globe for a fraction of the cost of providing it in-house.”

Not surprisingly, like many on the Street, they doubt it will work very well in terms of providing the services that it is supposed to offer.

Cleverly, the team points to the name itself, explaining that anything that has to be done three times in a row is not working very well to begin with.

FX Week see three ways in which QE3 can succeed:

“The first being the direct effect via the impact on the prices and liquidity of the assets purchased – in this case, mortgage-backed securities (MBS). But US mortgage rates are already very low and the housing market is recovering of its own accord.”

“The second route is the diffusion of the additional money through the economy.” However they add that simply swapping relatively liquid securities for cash doesn’t necessarily result in stronger growth in the broad money and credit aggregates which really matter.

“Finally there is the potential boost to confidence from the Fed’s open-ended commitment to buy more assets until the labour market improves.” However, they feel that it is debatable whether this is a ‘gamechanger’. They note that “Most people would surely already have expected the Fed to loosen policy further if unemployment remained high.”

So what does CE expect? “The focus to return to the deterioration in ‘underlying economic and financial conditions that made the additional stimulus necessary in the first place.’

OK … but perhaps this is beside the point. Perhaps the Fed is doing exactly what it was meant to do.

Admittedly, this involves some analytical cynicism. The Fed after all has a dual mandate, of providing “stable prices” and “maximum employment.”

In order to arrive at another feasible conclusion, one has to discard the idea that the Fed is entirely concerned with this twin goal and focus on other issues.

The US itself is in massive debt and the only feasible way to bring down this debt is to massively inflate the money supply – to degrade the value of the dollar.

There is another issue as well, one that has to do with what we might call the “financial-industrial” complex of the US. This group is massively invested in financial assets and one could certainly argue that the Fed represents this group at the larger industrial table.

In other words, Fed bankers will naturally do whatever they can to support those interests that are most closely aligned with the Fed itself.

In printing money and disbursing it in the somewhat labyrinthine manner that they have, Fed bankers almost guarantee that real-time economic benefits will be felt first and best by stock markets and investible assets generally (excluding bonds).

We can thus see – if we accept these conclusions – that the real reasons for these easings, at least primary ones, are to support the US Treasury by bringing down debt and to support US financial institutions that benefit greatly by high equity prices and asset prices in general.

There are other reasons, too, of course – including the ones stated in the Fed’s mandate. But to evaluate the Fed’s performance based on the supposed goals of QE3 may be to misread the “underground” conversation that is taking place.

People often have stated reasons for what they do as well as real ones, and institutions – being made up of people – are really no different.

But when it comes to these huge financial programs, our financial IQ is best supported by BOTH conversations – the unstated as well as stated one.


Leave a Comment

Previous post:

Next post: