QE2 is Fooling You

SUBHEAD: This is nothing but another move by the Fed to bail out the lethally wounded banks long enough for insiders to get out.

 By Raul Ilargi Meijer on 5 November 2010 in The Automatic Earth -

Image above: Last chance to get the money out of banks. Still from "Public Enemies". From (http://www.aintitcool.com/node/36106). 

 Let's start off by repeating once again what I still don't think everyone acknowledges: in essence, quantitative easing is a measure that is entirely experimental at best. If there is any proof regarding its effectiveness, that proof is negative. Japan's early millennium QE didn't revive its economy. Far from it. The Fed's QE1, initiated in early 2009 and subsequently vastly expanded, never solved the problems it was alleged to be able to solve.

 One may argue that it kept the economy from sliding downward even further, but one can claim that, and many of those with skin in the various games do, for a litany of stimulus measures such as TARP and the "Obama stimulus" as well. The success of all these measures added together surely can't be seen as anything but ephemeral (re: unemployment and foreclosures), and the claim, if one were indeed made, that QE1 all by itself even just managed to keep the US economy in its present prolonged and drawn-out Wile E. Coyote moment, has no substance at all that is based on actual fact.

Or, to put it another way, if QE1 achieved such a thing, which we don’t and can't know, the TARP and other stimulus measures were even grosser failures than we already recognize them to be. Still, this week brought another round of QE in the US. Why is that? Are we to believe that Bernanke et al perhaps can't read or do simple calculus? Are they desperate enough to throw the nation's financial future to the sharks, come what may? Has their faith in their particular sect of economics blinded them to such a degree that they can shake off all the evidence to the contrary and goose march ahead believing that even though all they did before has failed, "this will be the one"? Of course not.

You may think by now that Geithner and Bernanke and Larry Summers and Bob Rubin and all the rest of the pack are miserable failures and two sheets to the wind and all that, but you'd do better to give them a lot more credit than that. QE2 is here, despite the gigantic failures and behemoth losses of its predecessors, because QE works like a Mother Mary statue in tears' bleeding charm. Of course these guys all know that no proof of a QE ever reviving an economy exists.

But they can pretend it does, and so they do: $900 billion, even for them, is real money. Thing is, they never meant QE2 to do what they publicly claim they intended it for. This is nothing but another move to bail out lethally wounded banks. A full additional $900 billion and counting was announced this week. Basically nothing but a swap of long term for short term paper, and therefore necessarily a -very- short term measure. What does it achieve, apart from a knee-jerk market reaction? Wall Street banks get another injection of short term breathing space. That's all. And what was that last number on insider selling vs buying again? 3000 to 1?!

Look, these people can't sell all their hygienic paper all at once, there's silly market regulations that prevent it, they need a time window to do it. Hey, Bank of America rose 2% today, and Citi was up 3.7%. Now, if all is that rosy, why are William K. Black and L. Randall Wray calling for BofA's books to be opened and the entire firm to be nationalized? Well, BofA shares are at $12, an 80% loss from 3 years ago, and Citi's at $4, a well over 90% loss over the same time period. These are America's largest financial institutions, and finance over the past 10-20 years has become a disproportionally huge chunk of the US economy.

And its politics. And that's where the crux is. I don’t know about you, but I have completely lost interest in trying to figure out which candidate in the midterm elections got how much from Wall Street. They all need their campaign contributions from bankrupt institutions such as BofA and Citi if they want to have a shot at being elected. It's a closed system, it really is. Putting a few guys behind bars wouldn't change that. And besides, none of them paid that kind of money just to be put behind bars to begin with. But let's not try and solve it all in one go.

For now, please understand that QE2 was never intended to jump-start the American economy. It was meant to prolong Wile E.'s 15 minutes of fame, to keep banks like BofA and Citi above water long enough to allow anyone who has some skin in it to get the hell out without triggering any alarm bells. I mean, I see people triumphantly proclaim that stock prices are almost back to where they were.

But look at those two banks! They're barely alive anymore, even in the markets. Citi's $4 a share is gutter territory, if not penny. Yes, sure, Goldman Sachs and JPMorgan have lost much less, percentage wise. And you know why? Because their links to Main Street are much less pronounced than those of consumer banks like BofA and Citi. That’s the difference. And Main Street is vanishing altogether. There is money being handed out in QE2, which in the end is awfully simply yours, and which is thrown overboard in a way that makes you believe it's in your best interest. Some people see it as a hidden tax, but that's a far too gentle view.

Daylight stand-and-deliver robbery or Grand Theft Auto are much more accurate denominations. After all, if this were a tax, it's clear to anyone and their pet parrot that it will never ever be paid off. QE1, by the way, was to a large extent about the Fed buying up mortgage backed securities. Which, so it turns out, are based on, to put it mildly, highly disputable underlying "assets". What was it, $1.7 trillion?! And what would you think that's worth today? Or rather, what will it be worth once mark-to-miracle accounting can no longer "do the Wile E."?

Between the Fed and Fannie Mae and Freddie Mac, the American people own very very many trillions of dollars in silly paper. It's hard to say what its true value is, but once them whips and chips come down, it’ll be safely below double digits. Which will add up to much more than any hidden tax could ever hope to pay back. Fannie just asked for another $2.5 billion of your cash, and they will get it too, and there's nothing you can do about it. And you're right, what's $2.5 billion in the grand scheme of things? Then again, what's 1 in 7 Americans relying on food stamps?

What does any of it mean anymore? 17% U6 unemployment? 4 million 2010 foreclosures, many of which are based on at least shaky, and pretty likely illegal, papers? If that doesn't have enough meaning to move media attention away from rallies to restore whatever it is that apparently needs restoration, what will? 1 in 3 on food stamps? 40% jobless? Tent cities around every major city? $25 trillion in quantitative easing? Yeah, the markets had a knee-jerk upward reaction. And that, or so it seems, is all anybody needs. Hyperinflation is sure to follow, or so they say. Then again, they said the same when QE1 occurred.

Didn't happen, though. Will it this time? Will gold rise to the stratosphere? If so, who will buy? Bank of America? With your QE2 billions? Not very likely, they need that free cash to cover up increasing losses. Is it that hard to understand, simple calculus? That every dollar spent ostensibly "on your behalf" will have to be paid back by you, even if not a penny of this, your own, money, went towards making your life better? If that is really so, then QE2 works exactly the way it was meant to work. They're not all that dumb, and they're not making the grand mistakes some folks claim they do. They're robbing you blind in plain daylight, and, as they go along, make you believe that's in your best interest.

 It’s all nothing but a high-stakes game of pick-pocketing. Just never even try to tell me again that it's not successful. And i don’t mean delivering economic growth; the US economy won’t see real growth for more years than you care to know. No, QE2 is very simply successful in fooling you.


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