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A Modest Proposal for the Fed

A Modest Proposal for the Fed

Quantitative easing, the program of asset buying initiated by the US Federal Reserve Bank in 2008, represents the most profound monetary experiment in the history of the world. Between fall of 2008 and fall of 2014, three successive rounds of QE quadrupled the monetary base of the world’s most-used and dominant currency, from less than $1 trillion to more than $4 trillion. The Fed literally created new money, bought Treasury debt and mortgage-backed debt (of dubious character) from commercial banks, and credited them with new reserves.

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It was a great trick. If QE can be done without adverse effects or with few adverse effects, it represents nothing short of monetary alchemy (h/t Nomi Prins). Everything we thought we knew about the Fed as backstop lender of last resort to commercial banks, as hallway monitor of inflation and unemployment, is out the window.

If QE works, then every government on earth must take notice of the opportunity to effectively recapitalize their own banks and industries free of charge. QE turns central banks into kings of capital markets, into active participants in the economy. As one twitterati put it, expansionary QE created the biggest untold American story of the last twenty years: the Fed can now inflate and deflate assets, devalue savings, influence wages and productivity, encourage corporate malfeasance, and engineer balance sheets—all the while creating economic winners and losers. 

What politician or central banker could resist?

Recall how defenders of QE not only argued it was necessary, but beneficial. Paul Krugman was among the worst offenders, insisting that low interest rates would mitigate any harms from such rapid monetary expansion. These defenders dismissed, and continue to dismiss, what is now obvious: since 2008 the US economy has experienced significant asset inflation in equity markets and certain housing markets, plus a creeping but steady rise in many consumer prices.  

 …click on the above link to read the rest of the article…

Bank of England Could ‘Trigger the Next Financial Crisis’

Bank of England Could ‘Trigger the Next Financial Crisis’

It’s not some wayward doom-and-gloomer who said it, but the Economic Research arm of Natixis, the investment bank of France’s second largest megabank, Groupe BPCE.

The analysis was talking about the Bank of England. But the Fed and other central banks, with their ingenious monetary policies, have created similar scenarios where only the nuances are different. And now these “triggers for the next Financial Crisis” are cluttering the future, enough to where an investment bank, an entity that has tremendously benefited from these monetary policies, is beginning to fret.

“We are concerned about the UK economy,” Natixis starts out, though the UK economy is currently the shining model in Europe, where a tsunami of money and government coddling of banks appear to have solved all problems.

The analysis goes through its logic step by relentless step. Since the Financial Crisis and the deep recession it brought to the UK, growth has largely been powered by the inflation of asset prices.

UK household demand “reacts strongly to changes in property wealth,” the report said. So soaring home prices entail a sharp rise in consumption, a phenomenon that appeared in 2003, then 2006, and most recently in 2013. This is followed by a tidal wave of home buying, which started in 2004 (three years before the Financial Crisis) and once again in 2013. It’s followed by a similar tidal wave of housing starts. All of which give a strong boost to economic growth.

That “wealth effect” for property-owning households is paralleled by similar effects on the corporate side. Soaring commercial real estate prices and skyrocketing share prices “helped kick-start corporate investment” from 2005 to 2008 – just before the Financial Crisis – and once again after 2010, when commercial property prices and share prices were re-soaring. Natixis:

It is clear that the expansionary monetary policy pushed up asset prices from 2002 to 2007, from 2010 and especially 2013.

So what’s the outlook? More of the same.

 

 

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