Big Mistake: the Fed’s Quantitative Teasing

It’s a big mistake. Maybe some might say that the Fed altogether is a mistake itself. But, it’s made some big, ugly mistakes that don’t bare thinking about and yet there’s no understanding why they took those decisions.

It’s all very well to have attempted to make the US economy improve and turn things around. You can’t knock people for that, can you? But, what you can criticize them for is the dismal attempt and shoddy decisions that have been taken.

If President Obama is still perusing over who will take over at the Federal Reserve, maybe (just maybe) it’s because he has at last realized that anyone that closely resembles Ben Bernanke will just carry on making things worse. They are already pretty bad right now and any worse than $85 billion a month in Quantitative Easing will mean the tide will never turn.

The Fed was under the belief that buying up long-term Treasury bonds would keep bond yields down and that this would accelerate growth in the economy. In particular, the Fed had the impression that by doing this anything and everything that was sensitive to fluctuations in interest rates would see a positive impact on such sectors as housing and mortgages as well as consumption of US households. The second reason why the Fed decided to use the bond-buying scheme as a solution was because interest rates that had been at nearly zero since December 2008 were not doing anything much to revamp the economic activity and consumption was in the doldrums (apparently).

But, why on earth did they come up with that idea and think that it was going to work? At the time that they took the decision to start playing around in 2011 the economy was doing better than it looks at the present time.

  • Gross Domestic Product was at an average of 1.7% then.
  • Retail sales were at 3.3%.
  • Investment in the residential sector was at an average of 5%.

Things were apparently bad back then. They were so bad that the Fed took the decision to start printing money and using unconventional means to boost the economy. But, it looked pretty much as if they had only one possible result that was coming their way with such a target as that. The only thing that could happen with Quantitative Easing was Quantitative Teasing. It was just a teaser to get a few strings pulled and relax the people a little worrying about the economy. But, it relaxed them so much that they ended up dropping off to sleep in the middle of it. Things, they thought, were bad back then. But they are worse today.

  • Consumption growth stands at 1.8% today in the US on average this year.
  • Gross Domestic Product was at 1.3% for the first half year 2013.

The proof of the pudding? Well this pudding is a great big stodgy mess right now. If Quantitative Teasing was put in place to bring us out into the shops and start buying, it really hasn’t worked. If it was the Fed’s idea to use it because the times were hard, then today things look pretty damn rough, don’t they? Dismally abysmal stodgy mess. But, it’s not just the Fed that has ended up with custard on its face. The Japanese have too, as the Fed’s decision triggered attempts in other central banks around the world.

But things have gotten out of control of the Fed as Quantitative Tease has whisked up residential investment. The thirty-year mortgage rate was at 3.35% at the end of 2012. By May 2013 it had risen to 3.51%. Just a few days ago it was at 4.78%. The Fed has no way of controlling that today with the policies that it has put in place for the economy.

It looks as if the tease will be here to stay with Quantitative Easing. The only saving grace is that we have to wait (or thank our lucky stars if we are already there) to get to 65 years old and the chance of getting Alzheimer’s will double every five years and it can all become part of history, forgotten.

Managing Director of the International Monetary Fund Christine Lagarde believes that any exit from easy money will be ‘arduous’.  She also believes that there needs to be greater coordination between economies in the world if the Federal Reserve does go ahead and taper in the near future and she openly backs swapping agreements between central banks to ride out the storm. But the banks are hardly going to agree to swaps when they don’t have the legs to carry them on it; or they would only be able to do so if the Fed continued printing more money.

In a statement issued by the IMF she speaks of the fact that some economies will not be able to weather the instability in the markets that exiting unconventional monetary policies will result in. But, it’s not just some economies in the world, it will be the Federal Reserve and the Bank of Japan too that won’t be able to get over this one. Emerging markets have seen their currencies drop in the past few months as tapering and QE have been on the agenda with Ben Bernanke on a regular basis. Since June 2013, 20 of the most-commonly traded currencies from emerging markets have dropped by an average of nearly 4.5%. The money is being pulled out and the cash is going elsewhere in anticipation of the collapse when tapering begins. But, that is the big question: when?

Lagarde spoke of the need for ‘clarity’ with regard to what the Fed was going to do and when that was going to happen. But, Bernanke is decidedly lacking in clarity and has been for a while on this one. But, as Lagarde stated in an interview on Bloomberg Television: “Yet even with the best of efforts, the dam might leak”.

Don’t you just love imagery and metaphors? They are so ambiguously fitting. So, the dam might leak. Anyone want to stick their finger somewhere to block the leakage? Suggestions even? There is almost certainly the benefit of going down in the annals of history also like Hans Brinker, the little boy the poked his finger in the dyke and saved Holland:

Not a leak can show itself anywhere either in its politics, honor, or public safety, that a million fingers are not ready to stop it, at any cost”. So very true, isn’t it?

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

Comment on Facebook

Leave A Response

* Denotes Required Field