While China is lowering interest rates and easing reserve requirements for banks, Federal Reserve chairman Ben Bernanke reinforced his wait-and-see approach before reassuring banks, and Wall Streeters, that he was ready to act if necessary. "We have a number of different options" he told a Congressional panel – should the cancer in Europe spread to
But hasn’t it already hit America? I’ve blogged about this several times previously, (see: Dimon is no Diamond, for example). It can’t miss America. It’s here now. There's no need to beat that drum again here. The purpose of this blog is to highlight the most popular "option" Mr. Bernanke is referring to, called quantitative easing.
Quantitative easing (QE) is when the Federal Reserve prints new money to purchase financial assets from banks (like subprime mortgage securities). They do this for three main reasons: to increase bank cash on hand (a.k.a. liquidity), to encourage bank lending (because they have more cash and less risky assets), and/or to manipulate interest rates for the underlying bonds (i.e. bundled mortgage debt.)
For the purpose of this blog, let’s forget about the third reason because interest rates aren’t the Market’s problem right now. In other words, another round of QE wouldn’t be employed to lower interest rates, as interest rates are already at historic lows. Instead, the next round of QE would be directed to loosen up bank lending by flooding them with more cash.
It is important to note that QE helps banks, Wall Streeters, and politicians alike – for as long as the monetary steward keeps printing easy money, twisting rates, and manipulating yields to unprofitable levels, fiscal governance has less incentive to fix the real fiscal problem that is causing lackluster economic output. (see my: Fixing the Market series, which can be found in the right rail.)
Step #1: Begin solving the obvious – the financial industry has become way too consolidated.—It’s too big, they do too much, and as such, operate under way too many regulatory burdens. They don’t know what to do; how to do it; and question everything in between. They look scared to refinance loans and mortgages, yet more than willing to make multi-billion dollars bets on "synthetic" European derivatives. Why?
The job of all corporate CEO’s is to maximize shareholder value through growth and profit. Profit, as we know, is the return on investment earned by corporate management. And in today’s banking system, the bank CEO is faced with the dilemma:
- Do I lend QE money received from the Fed to John Q. Public to refinance their mortgages at 4.25% -- because that’s what I do, I’m a bank; or,
- Do I seek higher profits in high risk derivatives to make the most money possible – because that’s what I do, I’m an investment company. Besides, that's where the big money is, and the best return on investment. That’s the CEO’s job.
Add to this confusion that a bank CEO must then consider Dodd-Frank, the Volker Rule, Sarbanes-Oxley, etc. etc. – and then, of course, there’s the Dimon Rule. End result: there’s too much confusion and too many conflicts of interest to operate efficiently and effectively. The system is log-jammed and misguided. That’s a big part of the money problem.
Until systemic Market problems are addressed and major fiscal problems with central government are corrected, the U.S. economy can never recover (see: Management Deficit Disorder.) More monetary games won’t do anything but prolong the agony and escalate future debt and deficits. QE is a band-aid – but one that banks and Wall Streeters love. It's easy money for them.
But not for us, We the People. It's hard time for us.