Sept 25, 2012
QE3 has barely even started and some folks on Wall Street are already clamoring for QE4. In fact, as you will read below, one equity strategist at Morgan Stanley says that he would not be “surprised” if the Federal Reserve announced another new round of money printing by the end of the year.
But this is what tends to happen when a financial system starts becoming addicted to easy money. There is always a deep hunger for another “hit” of “currency meth”. Federal Reserve Chairman Ben Bernanke was probably hoping that QE3 would satisfy the wolves on Wall Street for a while. His promise to recklessly print 40 billion dollars a month and use it to buy mortgage-backed securities is being called “QEInfinity” by detractors. During QE3, nearly half a trillion dollars a year will be added to the financial system until the Fed decides that it is time to stop. This is so crazy that even former Federal Reserve officials are speaking out against it. For example, former Federal Reserve chairman Paul Volcker says that QE3 is the “most extreme easing of monetary policy” that he could ever remember. But the big Wall Street banks are never going to be satisfied. If QE4 is announced, they will start calling for QE5. As I noted in a previous article, quantitative easing tends to pump up the prices of financial assets such as stocks and commodities, and that is very good for Wall Street bankers. So of course they want more quantitative easing. They always want bigger profits and bigger bonus checks at the end of the year.
But at this point the Federal Reserve has already “jumped the shark”. If you don’t know what “jumping the shark” means, you can find a definition on Wikipedia right here. Whatever shreds of credibility the Fed had left are being washed away by a flood of newly printed money.
Those running the Fed have essentially used up all of their bullets and the next great financial crisis has not even fully erupted yet.
So what is the Fed going to do if the stock market crashes and the credit market freezes up like we saw back in 2008?
How much more extreme can the Fed go?
One can just picture “Helicopter Ben” strapping on a pair of water skis and making the following promise….
“We are going to print so much money that we’ll make Zimbabwe and the Weimar Republic look like wimps!”
Sadly, the truth is that money printing is not a “quick fix” and it never has been. Just look at Japan. The Bank of Japan is on round 8 of their quantitative easing strategy, and yet things in Japan continue to get even worse.
But that is not going to stop the folks on Wall Street from calling for even more quantitative easing.
For example, the top U.S. equity strategist for Morgan Stanley, Adam Parker, made headlines all over the world this week by writing the following….
“QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks.”
Did you get what he is saying there?
He says that QE3 is not going to be enough to boost equity markets (the stock market) so more money printing will be necessary.
But wasn’t QE3 supposed to be about creating jobs and helping the middle class?
I can almost hear many of you laughing out loud already.
As I have written about before, QE3 is unlikely to change the employment picture in any significant way, but what itwill do is create more inflation which will squeeze the poor, the middle class and the elderly.
The truth is that quantitative easing has always been about bailing out the banks, and the hope is that this will trickle down to the folks on Main Street as well, but that never seems to happen.
Wall Street is not calling for even more quantitative easing because it would be good for you and I. Rather, Wall Street is calling for even more quantitative easing because it would be good for them.
A CNBC article entitled “Fed May Need to Boost QE ‘Dramatically’ This Year: Pros” discussed Wall Street’s desire for even more money printing….
The Federal Reserve’s latest easing move has been nicknamed everything from “QE3” to “QE Infinity” to “QEternal,” but some on Wall Street question whether the unprecedented move will be QEnough.
And of course everyone pretty much understands that QE3 is definitely not going to fix our economic problems. Even most of those on Wall Street will admit as much. In the CNBC article mentioned above, a couple of economists named Paul Ashworth and Paul Dales at Capital Economics were quoted as saying the following….
“The Fed can commit to deliver whatever economic outcome it likes, but the problem is that the crisis in the euro-zone and/or a stand-off in negotiations to avert the fiscal cliff in the U.S. may well reveal it to be like the proverbial Emperor with no clothes”
An emperor with no clothes?
I think the analogy fits.
The Federal Reserve is going to keep printing and printing and printing and things are not going to get any better.
At this point, economists at Goldman Sachs are already projecting that QE3 will likely stretch into 2015….
The Federal Reserve’s QE3 bond buying program announced earlier this month could last until the middle of 2015 and eventually reach $2 trillion, according to an estimate from economists at Goldman Sachs.
The Goldman economists also wrote in a report that they believe the Fed will not raise the federal funds rate until 2016. This rate, which is used as a benchmark for a wide variety of consumer and business loans, has been near 0% since December 2008. The Fed said in its last statement that it expected rates would remain low until mid-2015.
So why is Wall Street whining and complaining so loudly right now?
Well, even with all of the bailouts and even with all of the help from the first two rounds of quantitative easing, things are still tough for them.
For example, Bank of America recently announced that they will be laying off 16,000 workers.
In addition, there are rumors that 100 highly paid partners at Goldman Sachs are going to be getting the axe. It is said that Goldman will save 2 billion dollars with such a move.
We haven’t even reached the next great financial crisis and the pink slips are already flying on Wall Street. Meredith Whitney says that she has never seen anything quite like this….
“The industry is as bad as I’ve seen it. So it’s certainly not a great time to be on Wall Street.”
But of course Wall Street is not going to get much sympathy from the rest of America. The truth is that things have been far rougher for most of the rest of us than things have been for them.
When the last crisis hit, they got trillions of dollars in bailout money and we got nothing.
So most people are not really in a mood to shed any tears for Wall Street.
But of course the Federal Reserve is definitely hoping to help their friends on Wall Street out by printing lots of money.
You never know, by the time this is all over we may see QE4, QE5, QE Reloaded, QE With A Vengeance and QE The Return Of The Bernanke.
Meanwhile, Europe is gearing up to print money like crazy too.
A couple months ago, European Central Bank President Mario Draghi made the following pledge….
“Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.”
And of course the Bank of Japan has joined the money printing party too. The following is from a recent article by David Kotok….
The recently announced additional program by the BOJ includes a fifty-percent allocation to the purchase of ten-year Japanese government bonds. The other fifty percent will buy shorter-term government securities. Thus, the BOJ is applying half of its additional QE stimulus to extracting long duration from the government bond market, denominated in Japanese yen.
All of the central banks seem to be getting on the QE bandwagon.
But will this fix anything?
Unfortunately it will not, at least according to Paul Volcker….
“Another round of QE is understandable – but it will fail to fix the problem. There is so much liquidity in the market that adding more is not going to change the economy.”
Sadly, most Americans have a ton of faith in the people running our system, but the truth is that they really do not know what they are doing. Just check out what Dallas Fed President Richard Fisher said the other day….
“The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.”
Can you imagine the head coach of a football team coming in at halftime and telling his players the following….
“Nobody on the coaching stuff really has any idea what will work.”
That sure would not inspire a lot of confidence, would it?
Perhaps the Fed should be open to some input from the rest of us.
Actually, back on September 14th the Federal Reserve Bank of San Francisco posted a poll on Facebook that asked the following question….
The following are the 5 answers that got the most votes….
-“Long term, disastrous”
-“Thanks for $5 gas”
-“I can’t believe you think this will work!”
So what do you think about the quantitative easing that the Federal Reserve is doing?
Please feel free to post a comment with your thoughts below….