Quantitative Easing
Stocks fell today on Ben Bernanke’s testimony to Congress – he wasn’t optimistic at all. Interest rates fell in sympathy. All other markets went sideways except the Euro which fell today.
In the news today…..
Taxpayers sink another $700B – of aid into financial system. Taxpayer support for the financial system increased by $700B over the past year, bringing the total to around $3.7TRILLION, said TARP inspector general Neil Barofsky in a quarterly report to Congress. Most of the increase was due to government pledges to supply capital to Fannie Mae and Freddie Mac and to guarantee more mortgages to support the housing market.
Barofsky also criticized the Treasury’s housing relief efforts, pointing to “anemic” participation numbers that have failed to “put an appreciable dent in foreclosure filings.”
Separately, the Treasury said it plans to end a long-delayed and never-used $30B TARP program designed to boost small-business lending.
What does all this mean??? It means that the governments own people are saying that we are spending too much. It also means that Obama is spending more on TARP-like projects than TARP ever spent – and is doing it without the involvement of Congress. Who is in charge? Obama, of course. Congress is irrelevent right now when it comes to spending. Also, note that Barofsky had the audacity to criticize the efforts that Treasury was making to help homeowners. He went on to say that because Treasury never set any targets, it was impossible to say whether or not the program was working. As you can see, Treasury doesn’t have anyone inside it with an iota of real world experience, or common sense.
Remember to vote soon, and vote often.
FED Chairman Bernanke – in Congressional testimony today said that the future was “murky.” And, this did not do good things for the market – as markets like certainty, and not uncertainty. He said that government spending would be less than before as would inventory replenishment. He also said that consumer and business spending would offset those losses, so growth would continue. I am not sure what he smoked just before that statement.
Tonight’s Dinner Conversation……
Quantitative Easing – that is a great topic. Why talk about it? Well, the FED said that they think there is a 50/50 chance that the economy will falter (deflation), rather than rise. So, how does the FED fight deflation?
- Reduce interest rates – but they are zero now, so they can’t do any more.
- Buy US Debt – that’s another name for Quantitative Easing.
The last quantitative easing took place in late 2008, and amounted to $2 TRILLION of money being created and given to our BIG banks to save them from going bust (Too Big To Fail). But, I want you to better understand the insanity of quantitative easing. I will do that with an analogy.
Let’s assume you run a small company, and you’re worried that the customers just aren’t buying enough, and your income doesn’t meet your outgoings (hope this sounds like the Federal Government.) You have a lot of loans from the banks, and the interest is hurting – but you just want to ignore that side of the equation. So, you decide that the best way to go forward is to “buy your own debt.”
You go to another bank, and convince them that you have some great investment to make (buying your own debt), and they loan you a bit bundle of money. The bank agrees (reluctantly) and makes a small condition that you put up 100% of the money you want to borrow. You go to the first banks, and buy back your debt (pay off your loan) using the new bank’s loan money.
Now where do you stand?
- You have removed your old debt.
- You have added a new equal debt. We won’t get into the argument about a change in the interest rate.
- You have put up (printed) an equal amount of money to the new debt, as the new bank is holding this money as “security” on the new loan.
As a small business owner, are you better off, or worse off? This is not a trick question. You are worse off, of course. You no longer have the flexibility of using your own cash. I hope you get the “insanity” of anyone doing this type of transaction. The FED doesn’t get it, but they are just trying to survive – after all.
Here are the last numbers for today:
Dow Jones 30 Industrial – 10,121 (down 109)
10 Year Treasury Bond – 2.898% (down 0.04%)
Euro – $1.2769
Gold – $1192 (no change)
Oil – $77.44 (no change)
Gasoline – $2.07 (down $0.01)
