FED TO BUY $300 BILLION OF TREASURIES - QUANTITATIVE EASING ALERT!

[© tweed]

gold way up again today

[Sam Spade]

In the GD, we used the same mechanisms that we're using today, just not in such great amount. 

huh?!  How can you say that?   The Hoover administration did next to nothing from Oct 1929 to early 1933 - Hoover believed the market would sort it all out.  The market did sort it all out - and the vast majority of Americans were huge losers.

You believe that?  Seriously?  Well, it's no wonder we disagree on the solution when we don't agree on the history.

I'd advise you to go and read up some books on GD1 and then we can talk.

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So how come everything that's been done so far in his "thesis" has failed?  I don't see things getting better, rather I see things slightly less bad than they would have been otherwise BUT with none of the underlying problems fixed. 

At some point, I submit that the underlying problems will be fixed through the "flush" that would have happened before.  Moreover, the "flush" will be much worse than it would have been in the past.  Anyway, I believe our question here is "when", not "whether".  I do think that the "flush" can be mitigated *a bit* through government regulation and re-regulation (it's a question of *what* not *how much*) and punishment of the fraudsters.

I would also submit that BB's thesis "fails" because you can't solve a "debt-deflation" with more "debt".  QE is just the last step in the game.

As before, I hope not to be right, but I'm not going to bet against myself. 

[Sam Spade]

Sam,

Were you in agreement of the original $700B "bailout" last Sept-Oct? 

No - once I realized who the beneficiaries were going to be.

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Instant depression then, worse and longer one now...  Perhaps even complete economic collapse.

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Government could have intervened to deleverage in much more useful ways than just pumping money into banks and now deadbeat homeowners, lenders and loan servicers.

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Government has its place in the markets.  Fundamentally, that role is to regulate the markets so that fraudsters cannot function and if they do function, that they are punished when found out.  (in other words, provide the rules and punish those who flaunt them).

When private entities make bad bets, government's role is not to paper over the losses.  Rather, it is to ensure the pieces are broken up properly (that's why we have a Bankruptcy Code) and sold to the highest bidder. 

More importantly, it should ensure that those entities who have made good bets are protected from the destruction AND that those who depend on the private market for the livelihood (i.e. the masses) are protected, no matter how bad things get.

Tell me exactly, how any actions made in the past two years of this mess have been made according to the principles above?  Seems like to me that the past two years have been devoted to doing everything exactly the opposite of this.  In fact, one may argue legitimately that everything has been done wrong in this sense since the Mexico debt crisis of 1995.

Food for thought.

[Swing low, sweet chariot. Comin' for to carry me home.]

Because, the way I see it, we were headed for an instant depression last fall,

Instant depression then, worse and longer one now...  Perhaps even complete economic collapse.

As of right now (short term) we are MUCH better off than if the Fed had done nothing last fall.  That's a certainty.

In the long run, we may still go into a depression and maybe even a worse one.

When the next war comes, we may be better off surrendering than fighting, but I rather go down fighting.  At least then we have a chance to "win" even though victory will come at a high price.

Same thing in this economic situation.

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When private entities make bad bets, government's role is not to paper over the losses.  Rather, it is to ensure the pieces are broken up properly (that's why we have a Bankruptcy Code) and sold to the highest bidder. 

More importantly, it should ensure that those entities who have made good bets are protected from the destruction AND that those who depend on the private market for the livelihood (i.e. the masses) are protected, no matter how bad things get.

That's just it - government can NOT do that, it's not that powerful.  The economy is too big and too intertwined to isolate pain.

Our economy is based upon debt.  Debt requires confidence.  We allowed too much leverage.  We allowed insurance in the form of credit default swaps to be sold without regulation, now they total $55T (fifty-five trillion USD).  That kind of leverage creates an unstopable domino effect.  We can NOT sit on our hands and let it unwind on its own, doing so would put us in a >99% chance of another great depression.

And I'm not sure, with the current structure of our society (very few living on farms), that we could survive that as a nation.

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And I am not pleased that with the crisis we are facing, Congress is persuing AIG bonuses that were paid under legal and binding contracts.  It may very well be an outrage, but we have bigger fish to fry.

[opebo]

I would also submit that BB's thesis "fails" because you can't solve a "debt-deflation" with more "debt".  QE is just the last step in the game.

Printing cancells the debt, Sam Spade.

[ag]

They are playing w/ fire. I hope they know what they are doing (I don't know), but it is still fire. Oy-vey.

[Sam Spade]

The purchase starts tomorrow. 

http://www.newyorkfed.org/newsevents/news/markets/2009/ma090324.html

Yields on the 10-year note had already regained half of what they had lost since the QE announcement and 30-year bonds were all the way back to where they were.

So, well put two and two together....

Yields did fall again after this announcement but nowhere near as much as before.

[opebo]

Yields don't matter much.  In a depression, people's borrowing or lending/investing behaviour will not be effected by a difference of a couple percentage points.  Their behaviour is entirely controlled by fear.

The purpose of quantitative easing, it seems to me, is to create large amounts of new demand out of nothing (in other words replace the demand that is lost by depression psychology), thus putting idle capacity to work.  Interest rates have little to do with this.

[Gustaf]

Yields don't matter much.  In a depression, people's borrowing or lending/investing behaviour will not be effected by a difference of a couple percentage points.  Their behaviour is entirely controlled by fear.

The purpose of quantitative easing, it seems to me, is to create large amounts of new demand out of nothing (in other words replace the demand that is lost by depression psychology), thus putting idle capacity to work.  Interest rates have little to do with this.

Changes in yields reflect people's willingness to save, rather than cause them. So I think Sam's point is rather the old monetarist interpretation of Lincoln: you can fool all of the people some of the time and some of the people all of the time but not all of the people all of the time.

[opebo]

Changes in yields reflect people's willingness to save, rather than cause them. So I think Sam's point is rather the old monetarist interpretation of Lincoln: you can fool all of the people some of the time and some of the people all of the time but not all of the people all of the time.

Yes, there is certainly no shortage of savings in a depression.

I like that old Keynesian chestnut 'pushing on a string' myself.

[Beet]

Regardless, Bernanke's stated goal is keeping long term interest rates low in order to stimulate things such as the housing market, and the quantitative easing effect had a much more lasting impact on the dollar than it seems to be having on interest rates.

Corporate yields are way higher than they were earlier in the year, too, although they're still falling. I expect that to end soon.

Interest rates are always a tough nut to crack. It's not like stocks, where the higher the price the better it means expectations are. Nor is it like commodities, where you know higher price reflects higher economic activity, because short and medium term demand is more elastic than supply.

With bonds, there are really three components: the risk premium (of default) of the bond itself, the inflation expectation, and the opportunity cost (or the risk premium on alternative investments.) Any one of these factors may be driving any movement in bonds, but almost never is any one factor totally determinant.

One imagines 19th century physicists trying to break down an element into its protons, neutrons, or electrons, or Renaissance astronomists trying to break down the movement of the planets into gravitational pull, velocity, rate of change of velocity, and mass. You really need to look at things other than the rate itself to find out what is going on.