Monday, August 29, 2016

QE Infinity: Are We Heading 
Into The Unknown?
CNBC article & video highlights the challenges for central banks in trying to stimulate the economy & the financial markets .. Macro Strategist Albert Gallo: "The problem is rising debt and monetary easing comes with many collateral effects. One is the distortion of asset prices, leading to asset bubbles .. Asset price distortion also has a ripple effect on wealth distribution, increasing inequality by benefitting the already-wealthy who are more likely to hold financial assets. Over time, low rates and QE can also encourage misallocation of resources to leverage-sensitive sectors, including real estate and construction .. But many governments are reluctant to accept the need for these measures, often instead implementing policies that win votes but compound the distortions of easy monetary policy e.g. housing affordability programmes, mortgage subsidies .. This is the paradox of current monetary policy: On one hand, it is the best possible response available to central bankers. On the other, it has long-term collateral effects which need to be confronted eventually."
LINK HERE to the article

1 comment:

Anonymous said...


The Federal Reserve’s Politicians
Interest groups now lobby the central bank as if it’s a legislature.

Aug. 28, 2016 5:43 p.m. ET

That was some scene late last week in Jackson Hole, Wyoming.

And why not? The Fed these days has more power than Congress. So thoroughly has the central bank taken over regulating finance since Dodd-Frank, so completely does it preoccupy financial markets, and so broadly has it intruded into fiscal policy and the allocation of capital that Fed officials Janet Yellen, Stanley Fischer and Bill Dudley are the most important economic decision makers in government.

Fed Up activists are merely following the power, but why should Fed officials stop with them? If the Fed is going to be a political body, why not hold a hearing for savers whose retirement plans have been upset by seven and a half years of near-zero interest rates? Or what about pension trustees who have seen their funding shortfalls soar due to low interest rates? Once the political entreaties start, what is the standard for cutting them off?

We don’t mean to be spoilsports, but there is the minor detail that no one elects Fed Governors. The Constitution gives Congress control over money and “the Value thereof.” When Congress created the Fed a century ago, it included regional banks and presidents in part to insulate the central bank’s monetary decision-making from political pressure.

But as the decades have passed, and especially in the post-panic era since 2008, the Fed itself is doing the intruding on what ought to be decisions by elected authorities. Former Fed Chair Ben Bernanke became a public fixture at the side of Treasury Secretary Tim Geithner in selling Obama economic policy. The Fed also moved directly into allocating capital with its QE bond-buying, tilting its policy toward housing in particular.

Fed policies to raise asset prices have favored affluent stock owners over middle-class savers who have bank accounts or lower-yielding investments.

All of this has been largely ignored by the public and political class, and perhaps the Fed deserved the benefit of the doubt in the crisis aftermath. Yet the Fed now shows no signs that it wants to return to its narrower role, even eight years into an economic expansion. A Fed that wanted to reduce its political footprint would wind down its $4.5 trillion balance sheet as its bond holdings mature. The Yellen Fed instead is reinvesting the principal from maturing bonds to maintain its sway over long-term bond rates.

The biggest news out of Jackson Hole this year—other than the Fed Up parley—wasn’t that Ms. Yellen hinted at a possible rate increase in December. The Fed’s decision making is so ad hoc and arbitrary now that no one has any idea what the Fed will do in December—including Ms. Yellen.

The bigger news was her statement that the Fed now considers QE bond buying to be a routine part of its “toolkit” to keep unemployment low. Come the next recession, her implication is that the Fed won’t stop merely at buying Treasurys or mortgage securities. It will follow the European Central Bank in buying a board swath of corporate bonds. This will plunge the Fed even deeper into favoring some parts of the economy over others.

The Fed views its post-crisis policies as a great success, but the populist revolt this year shows that voters aren’t content with 1%-2% growth. The Fed has forecast faster growth every year since the recession ended, only to be wrong every time. Sooner or later the public and its representatives are going to demand that the Fed show economic benefits from its vast de facto political powers.

In a healthy democracy, no body can accumulate power as the Fed has without more accountability.