Confessions of a Quantitative Easer

Interesting opinion piece by a gentleman named Andrew Huszar.  Mr. Huszar is a former Fed official who was actually responsible for the $1.25 trillion dollar QE bond buying that occurred in 2009.

As Mr. Huszar states in his piece:

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed's trading floor? The job: managing what was at the heart of QE's bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

 This was a dream job, but I hesitated. And it wasn't just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank's credibility, and I had come to believe that the Fed's independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

It didn't take long for Mr. Huszar to see that nothing changed as he states:

 It wasn't long before my old doubts resurfaced. Despite the Fed's rhetoric, my program wasn't helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn't getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

As for the results:

 And the impact? Even by the Fed's sunniest calculations, aggressive QE over five years has generated only a few percentage points of U.S. growth. By contrast, experts outside the Fed, such as Mohammed El Erian at the Pimco investment firm, suggest that the Fed may have created and spent over $4 trillion for a total return of as little as 0.25% of GDP (i.e., a mere $40 billion bump in U.S. economic output). Both of those estimates indicate that QE isn't really working.

The most interesting part of the article is towards the end of the piece where he states:

 As for the rest of America, good luck. Because QE was relentlessly pumping money into the financial markets during the past five years, it killed the urgency for Washington to confront a real crisis: that of a structurally unsound U.S. economy. Yes, those financial markets have rallied spectacularly, breathing much-needed life back into 401(k)s, but for how long? Experts like Larry Fink at the BlackRock investment firm are suggesting that conditions are again "bubble-like." Meanwhile, the country remains overly dependent on Wall Street to drive economic growth.

I for one am still on the fence trying to figure out which side of the argument is valid.  Did QE help our economy or  has it put us in quite a bind right now.  My suspicion is that it could be a bit of both.  there is no question in my mind that as rates bumped against the zero lower bound the Fed was forced to try something a lot more exotic in order to try to help the economy.  Many people say that the best thing the Fed could have done would have been to significantly increase inflation rate targets in order to show that the Fed would not be getting in the way of a recovering economy even if it hit that 2% target but since that wasn't on the table QE was a valid option.

The big problems with QE are threefold:

1. Since the big winners in the QE extravaganza are the banks that caused this mess in the first place has the Fed placed it's credibility in doubt with the general public?
2. Will the Fed be able to time the "taper" correctly and allow market forces the necessary time to adjust?
3. How ugly will the market adjustment be when the Fed tries to mop up the liquidity?

All good questions.  I keep searching for answers.

What I Want to Hear in the State of the Union Tonight

The president will be making his State of the Union address tonight and there are a few things that I would like to hear him propose in an effort to improve the economy both in the short term and long term. 

• Propose a way for homeowners who are on time with their mortgage payments but are currently sitting with negative equity in their homes to refinance and take advantage of these once in a lifetime low rates.
• Propose a deal where the infrastructure of this country will be improved and brought up to date with the rest of the developed world thus improving our efficiency.  It is very important that this be proposed as an investment in the long term success of this country.  Paying for it with a rise in taxes to the top .1% is also something the president should mention while taking advantage of the sentiment in the country that the rich are being catered to.
• Propose a deal where education in this country will again be a priority which will allow our kids to compete with the rest of the world.  The future of this country lies with our children and it's about time the government starts cleaning things up.  This can be done by proposing the end to tenure among teachers (unions hate this) and holding schools accountable for the results of their students in a way that involves more than just test scores.
• Improve and continue pushing federal spending in R&D.  This is so important to the innovation that comes out of this country.  There are many things that have been developed within our borders which originated with federal money.  This is because corporations are about the bottom line and will not always invest money in projects that have potential but can take years to come to fruition.  This is again an investment in the future of this country.
• Balancing the budget must be emphasized as an important step which needs to be made over the long term.  This will involve a rise in taxes along with a cut in spending.  It should also be emphasized that the best way to balance a budget is by improving the economy.  By helping homeowners, along with investing in infrastructure, education, and R&D we are taking advantage of the low rates the country is being afforded to borrow at right now and making an investment that with proper nurturing will blossom over the long term.

What we need to do right now is take advantage of the low rates with which we are borrowing money at just like any good corporation would.  The key however is what we plan on doing with the money.  If we are just going to continue funding tax cuts which redistributes wealth and offers returns to very few people then the effort is a waste of time and money.  If, on the other hand, we decide to invest it in the country in ways that the return will be greater than the amount spent to pay off the debt then its worth while. 

We need to understand that there is a huge difference between spending and investing.  Spending money on tax cuts is a waste of money.  Investing money in this country and its people is the sure way of keeping the country prosperous well into the 21st century.

What did the IMF Say?

Christine Lagarde, the chief of the IMF, said the following according to WSJ:

Political agreement on a joint bond to underpin risk-sharing would help convince markets of the future viability of European economic and monetary union.

I couldn't agree more.  I hope Germany is listening?

Steve Rattner on Debt

Great piece by Steve Rattner on the National debt levels and what we should do with the money we borrow.  Investing borrowed funds on infrastructure, and research and development are great investments which will offer a great rate of return for the country especially with the rate to borrow being so low. 

If we're going to borrow to help the economy, lets not waste the money on tax cuts but rather focus the money on things which will improve the country's depleted infrastructure system, will add funds to research that no public company will want to take a part in because of cost but which could contribute greatly to the betterment of our country if allowed to blossom, and finally to the education system of this country which has fallen behind the rest of the developed world but is responsible for creating the future leaders of this country.  These are all things that we have focused on in the past and which have been proven to work. Don't focus efforts on giving tax cuts which do nothing more than redistribute wealth to a small amount of people in hopes that they will throw crumbs to the rest of the public. Take advantage of the most valuable resource that this country has to offer, it's citizens.  By investing in the people of this country we will realize returns in great excess to the amounts borrowed.

A Little More Clarity on Germany vs. Greece

Looks like Germany's plan all along has been to kick it's irresponsible little brother out of the party all along.

In an article in Bloomberg today, two politicians from Germany announced that they have no problem if Greece leaves the EU now.

“The whole reason why we jumped into action wasn’t necessarily out of sympathy with Greece, but rather because we said that there could be a shockwave to the financial system,” Michael Meister, deputy parliamentary caucus leader for Merkel’s Christian Democratic Union, said in a phone interview today. “I think the scale of the threat from Greece has diminished.”

So after 2 years of forcing their people to make incredible sacrifices all in the name of bowing to the mercy of the EU, all the Greeks have to show for it is a complete loss of interest from the leader of the union.  As a matter of fact, what the Germans are saying is that nobody wants to deal with Greece anyways.   As long as we keep the other more wealthier members of the EU intact all is good.

For Greece, “the problem is not whether they are capable of paying their loans -- they will not, not at all, never,” Fuchs said by phone from his Berlin office. Greece is still a “special case” and the other 16 euro members will resolve their debt problems and retain the currency, he said. 

and

Fuchs dismissed the prospect that letting Greece go would trigger speculative attacks against indebted countries such as Spain or Italy. Italy is a “rich” country and banks would be able to withstand any contagion effect, said Fuchs, who also coordinates economic policy for the CDU caucus in the lower house of parliament, or Bundestag. Talk of contagion from Greece would be “right if we’re talking about two years ago.”

I can't place the blame for this completely on the Germans.  Greece took their acceptance into the EU, along with the subsequent low interest rates that came along with it, as a license to spend other peoples money.  They spent it to build some roads, and to fund some worthy social programs but most of it was spent blindly by politicians first in starting social programs which would help them buy elections and secondly by lining their pockets.  No real investment in infrastructure, no real investment in manufacturing, no real investment on anything that would actually provide some sort of return on investment.  A complete disaster for which the average citizen is now paying the price for.  

In spite of all this, what type of signal is Germany sending by telling Greece to fuck off in their time of need.  To sit there and turn their backs on Greece implies that Germany has never messed up before and that they are immune to economic cycles. 

Greece made the sacrifice of forfeiting it's currency when it entered the EU all for the sake of unity.  Many benefits came along with this forfeiture, however there was a huge sacrifice that was made as well.  By giving up it's currency, Greece lost control over prices within it's borders and implicitly signed over it's fate to the big powers of the EU such as Germany under the assumption that there would be aid if there were problems.  After two years of half-assed solutions that every economist worth his weight had stated would not work, the Germans are now starting to say this is not our problem anymore. 

The next question that should be asked is who will be next if this precedent is set? 

Hungary Gone Rogue?

There is a troubling scene which is taking place in Hungary.  It has occurred ever since Viktor Orban and his Fidesz party won a 2/3 majority in Hungarian Parliament.  Since his rise to power, Orban has done everything he could to force out judges, eliminate the independence of the central bank, and to eliminate any notion of a free press.  This has forced the EU to spend time focusing on a rogue state which no longer wants to abide by it's rules.  How the EU handles this situation will be of great importance as it needs to show solidarity in its leadership ranks during a time when it is trying to strong-arm it's southern members into more fiscal responsibility..  If this solidarity breaks, it could set precedent for other member states to do similar things to Hungary, especially now that many member states are being forced to suffer through austerity measures which are pushing voting citizens further and further into hardship.

There is only so much pain that people will be willing to take before they decide that enough is enough and once they get to this point of desperation people make rash decisions such as electing rogue leaders which can set the country and the world back many years.

Read this and this.

Corporate Governance

The lotto ticket which is becoming a CEO is amazing.  How shareholders refuse to hold board members accountable for this mess is an indication that governance from the private sector is never a good option.  My big beef is with CEOs' who come in, destroy a company, ruin shareholder value, and then when terminated get a reward which may not even be deserving for a human being who has added value for shareholders instead of destroying it.  A perfect case in point is what has been happening at HP. Leo Apotheker was hired in November of 2010 after Mark Hurd got canned.  Apotheker then proceeded to destroy close to half of the equity value of the compnay due to some terrible decisions in his short reign.  HP proceeded to do the right thing and fire him but also gave him over $25M in severance for his efforts. 

WTF?

I wish I can say that this is the exception to the rule but it is not.  In a day where the income gap between the super rich CEOs' and that of average workers is greater than ever one has to wonder why these people get away with such things.  The outrage gets even worse when one considers that these people make all of this money and when it is time to cut spending their first item of business is to cut workers.  This is a travesty that needs to be addressed by government (can anyone say clawback).  Everyone should pay for a company's demise, for employees it is obvious that if the decisions from above backfire they will lose their jobs, but for those decision makers that fail shouldn't they pay a much steeper price for their failures?

Thoughts on Calls for Deregulation

It is of vital importance that the calls from the right to deregulate industries be ignored.  It is completely preposterous to say that companies are being hogtied by the government thus keeping the economy from growing.  What is keeping the economy from growing is the trillions of dollars in value lost by citizens of this country and around the world because of lax regulation of the banking industry.  In the housing sector alone since 2006 there has been a whopping loss of $7 trillion which has affected the middle class and the poor the most.

So instead of screaming about the budget deficit that has ballooned recently in an effort to keep the economy from self destructing under the weight of the deregulation that has occurred in this country over the last 30 years under the watch of both parties maybe we should be pushing our elected representatives to look for ways to keep tabs on companies in a cost effective way.

We need to come to grips with the fact that this country will collapse under the weight of its own greed if we don't address these issues expeditiously. If we care about the country then lets make the sacrifices necessary in order to protect the most important asset that it has, it's people.

US Government Continues To Fail Citizens

The brilliant idea  from Washington that we will put together a "supercommittee" with members selected evenly along party lines that will solve the budget problems was a huge joke from the very beginning.  The fact that our elected officials can't come to a resolution seems to be a surprise to nobody.  The committee was due to fail from its inception and again shows how bad things are in Washington.  There is no leadership among the ranks starting from the president and going all the way through the corrupted Congress who seem more concerned with serving the interests of their rich providers as opposed to the interests of the people that elected them. 

Over the last 30 years this country has witnessed a changing of the guard.  What was once the land of opportunity has become the land of the wealthy.  The income gap has been steadily widening as taxes on the upper class have been dropping.  Health care costs have been rising while pensions are becoming a thing of the past.  Regulation has been eliminated while the identity of what a person is has been blurred.  The results are nothing short of catastrophic on the middle class as we deal with falling home prices, rising healthcare costs, a greater need to put aside funds for retirement, and a threat from Washington to cut the social safety net from under us under the disguise of cutting spending.  The burden that the middle class has been carrying for the past 30 years is strange considering that the rich have done so well in this country during that time. Now that the country is in a time of need, it almost seems like a no brainer that the solution to the budget problem would be to demand more from the people that have reaped the benefits of Washington's generosity.  A no brainer however it isn't as these are the same people who fund our politicians reelection campaigns.

We are once again witnessing an interesting yet very destructive phenomenon which is occurring in Washington.  One which if not corrected soon will be directly responsible for the demise of this country.  The founding fathers of this country created our democracy to be run "for the people by the people (and no they didn't mean that business entities are people)."  By doing this they gave the citizens of this country a great responsibility.  A responsibility that everyone of us needs to stand up and exercise next year in an effort to find the right people who can carry the interests of the nation as a whole forward.  Not the interests of an ideology or a wealthy donor at the expense of the rest of us. 

It's time to take our country back and it should start by getting rid of some of the people in Congress who can't help but help themselves at the expense of the nation but then are smart enough of spin things in order to convince citizens that what they are doing is for the best of the country.  Can anybody say supercommittee?