My kids loved the “Toy Story” movies and today Ben Bernanke just became my favorite “Buzz Lightyear” or should it be “Ben Lightyear”. Today, not surprisingly and has been predicted over the last several months in both our weekly newsletter and blogs, the economy and the financial markets will now be saved by QE 3 as the “can is kicked” further down the road.
What does surprise me is how quickly the announcement came. I fully expected that Ben would at least wait to get 2nd quarters GDP and earnings numbers in and then start talking about QE 3 around the end of summer. However, today’s announcement of “QE3 – To Infinity and Beyond” really tells us a couple of things. The first is that the economy is MUCH weaker than even the numbers suggest; and secondly, the Administration is panicking to get something going in a positive direction headed into the upcoming election year.
“Federal Reserve Chairman Ben Bernanke told Congress Wednesday that a new stimulus program is in the works that will entail additional asset purchases, the clearest indication yet that the central bank is contemplating another round of monetary easing. Bernanke said in prepared remarks that the economy is growing more slowly than expected, and should that continue the central bank stands at the ready with more accommodative measures.”
“Once the temporary shocks that have been holding down economic activity pass, we expect to again see the effects of policy accommodation reflected in stronger economic activity and job creation,” he said
The Fed recently completed the second leg of its quantitative easing program, buying $600 billion worth of Treasurys in an effort to boost liquidity and get investors to purchase riskier assets. While the stock market rose about 6 percent through the course of the program, nicknamed QE2, economic progress has remained elusive with GDP growing at just 1.9 percent in the first three months of the year, and the second quarter will most likely fare worse. Unemployment is rising and housing is declining.
Among the options that Ben outlined: “More explicit guidance” regarding how long rates and the size of the Fed’s $2.6 trillion balance sheet will remain at current levels; more securities purchases to increase the average maturity; and cutting the interest paid to banks on reserves at the Fed, a move that would encourage the institutions to put more money to work.”
“Of course, our experience with these policies remains relatively limited, and employing them would entail potential risks and costs,” he said. “However, prudent planning requires that we evaluate the efficacy of these and other potential alternatives for deploying additional stimulus if conditions warrant.”
While QE 2 was an utter failure it is unlikely that QE 3 will fare much better. Yes, commodity prices will rise, stocks should fare reasonably well while the economy limps along during the period of QE 3. We have been stating that a recession would be in the works by the end of this year BARRING any further stimulus programs. That event has now been postponed as well.
The real problem is that, like Greece, Itally and Japan, we continue to push the inevitable conclusion down the road hoping that somehow things will magically get better. The problem is that the policies that are being implemented today are the same policies that got us here in the first place under the “Reign Of Greenspan”. It’s time to shelve this particular playbook as it is a receipe for economic malaise.