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Suppose you go home tonight and find a gold mine in your back yard worth $600 billion. That gold mine is an asset to you and increases your net worth by $600 billion, since there is no liability associated with your new discovery.
The Fed's $600 billion quantitative easing program, known as QE2, is the equivalent of a new gold mine for the U.S., since there is nothing to pay back.
QE2 is the Fed electronically printing enough money to buy $600 billion in U.S. Treasury bonds. That $600 billion increase amounts to roughly 50% of the federal deficit, so the Fed is effectively monetizing half the deficit this year. QE2 also acts as a tail wind for equity prices and, in general, higher prices across the spectrum.
QE2 was likely cobbled together by policymakers to boost the asset side of the household balance sheet. But QE2 may easily backfire if inflationary expectations increase enough to push mortgage rates significantly higher and act to delay any housing recovery for several more years.
Bernanke Returns Favor
In terms of timing, it looks a lot like Chairman Bernanke and Treasury Secretary Geithner may have hatched QE2 in the midst of the public's apprehension in the summer of 2010. The public had major concerns about the regulatory overhaul of 16% of the U.S. economy in the form of ObamaCare and out-of-control federal government spending. The handwriting was already on the wall in the summer of 2010 for what the November 2010 elections might produce.
Administration officials knew that President Obama would need an improving economy in 2011 to recover from a potential worst case in the November 2010 elections. The president also needed a running start for the 2012 election with a better economy.
Obama reappointed Bernanke in August 2009. Administration officials may have figured that it was time for the chairman to pay back the president. Chairman Bernanke made the case for QE2 from August 2010 up until its rollout in November 2010. That just happened to be a month after the start of the 2011 federal fiscal year that runs from October 2010 to September 2011. It also coincided with the beating the Democrats took in last fall's election.
Homeowners Shocked Twice
Administration officials may have panicked over the magnitude of that deficit and, along with the regulatory overkill of ObamaCare, what it might mean for the economy in 2011. One will never know what, if any, pressure was used on Bernanke, but the timing of QE2 makes it a question.
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Posted By: Ellman(670) on 2/3/2011 | 12:51 AM ET
Under our Federal Reserve System the Fed creates money out of debt. The more debt the more money it can create. We cannot reduce our public debt without reducing the money supply. Budget deficits and QEs are Siamese twins. Bernanke is sitting at a Black Jack table. He has wagered our fate and fortune. Both will disappear if he loses.
Posted By: jpdwn(1770) on 2/2/2011 | 11:02 PM ET
QE2 kicks the can down the road in two ways. 1) it provides demand for the treasury auctions that delay the inevitable rise in rates when borrowers see the drop in debt quality as the Fed prints money. 2) it funds the continued government stimulus in the form of continued unemployment benefit programs which should start running out for most midyear. There's no way the private sector will recover in time for Bernanke's gamble to pay off.
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