When the Fed initiated QE2 they had visions of lower interest rates in mind. This would result from “portfolio rebalancing” and these lower borrowing costs would lead to higher economic activity as businesses took advantage of the low rates to invest in their businesses. The St Louis Fed recently described this as one of the primary goals of QE:
“As prices increase, interest rates fall. As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.”
Of course, that’s not exactly how things played out. While the academics like to point to real interest rates as proof of success of QE, the real proof is in the pudding. And the pudding doesn’t taste so good. Total borrowing at commercial banks has continued its steady descent downward. There has been a net decline in total borrowing since QE2 began!
But what QE2 has done is spark a mania in speculation. And according to the NYSE’s margin data there is near record borrowing occurring. According to the March data margin debt is quickly approaching its all-time highs. As I noted last week, this surge in borrowing is not a sign that QE is “working”, but rather, a sign that it is only fueling the very same sort of imbalances and unproductive economic activity that got us into this crisis in the first place.
the culture of socializing losses while the speculative classes prosper continues. but Cullen doesn’t that mean they can never take their foot off the pedal? Because even if QE3 ends, they will maintain the size of their balance sheet by reinvesting prepayments and interest on the MBS/ABS part of their portfolio. get this, i bet they start the rate hike cycle before they shrink their balance sheet. cos if not, since the duration of their holdings has increased, the DV01 of those assets would be with the Primary Dealers… and they can’t have those losses…
i’d rather they create a biz lending authority much like fannie/freddie was for home lending. at least if that becomes bloated like fannie/freddie, main street would have at least gotten some love by then….
QE actually accelerates the decline in bank lending! Few (including MMTers!) seem to recognize this point, but I’ve seen the theory confirmed in circuitist Marc Lavoie’s writing after I blogged about it. There is similar suggestive evidence from during Japan’s past QE.
In brief, QE *does* increase the broad money supply as a direct consequence of the Fed’s operations (money as traditionally defined, excluding treasuries), but the private sector still gets to choose the size of the money supply (i.e., money supply is endogenous). And one way it sheds the excess money is to favor funding via non-bank lending (bonds, etc) over bank loan funding. The former type of lending expands the money supply, the latter doesn’t. The mix is as much a determinant of the money supply size as is the amount of total borrowing.
The margin debt expansion is interesting (and a bit scary!), and without it, bank lending overall would probably be contracting faster.
exactly. not inflation, but massive speculation, on margin, in commodities.
I think you’re the only person i read who actually understands what QE is doing. Thanks for clarifying in a world of mass confusion.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
When the Fed initiated QE2 they had visions of lower interest rates in mind. This would result from “portfolio rebalancing” and these lower borrowing costs would lead to higher economic activity as businesses took advantage of the low rates to invest in their businesses. The St Louis Fed recently described this as one of the primary goals of QE:
“As prices increase, interest rates fall. As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.”
Of course, that’s not exactly how things played out. While the academics like to point to real interest rates as proof of success of QE, the real proof is in the pudding. And the pudding doesn’t taste so good. Total borrowing at commercial banks has continued its steady descent downward. There has been a net decline in total borrowing since QE2 began!
But what QE2 has done is spark a mania in speculation. And according to the NYSE’s margin data there is near record borrowing occurring. According to the March data margin debt is quickly approaching its all-time highs. As I noted last week, this surge in borrowing is not a sign that QE is “working”, but rather, a sign that it is only fueling the very same sort of imbalances and unproductive economic activity that got us into this crisis in the first place.
the culture of socializing losses while the speculative classes prosper continues. but Cullen doesn’t that mean they can never take their foot off the pedal? Because even if QE3 ends, they will maintain the size of their balance sheet by reinvesting prepayments and interest on the MBS/ABS part of their portfolio. get this, i bet they start the rate hike cycle before they shrink their balance sheet. cos if not, since the duration of their holdings has increased, the DV01 of those assets would be with the Primary Dealers… and they can’t have those losses…
i’d rather they create a biz lending authority much like fannie/freddie was for home lending. at least if that becomes bloated like fannie/freddie, main street would have at least gotten some love by then….
QE actually accelerates the decline in bank lending! Few (including MMTers!) seem to recognize this point, but I’ve seen the theory confirmed in circuitist Marc Lavoie’s writing after I blogged about it. There is similar suggestive evidence from during Japan’s past QE.
In brief, QE *does* increase the broad money supply as a direct consequence of the Fed’s operations (money as traditionally defined, excluding treasuries), but the private sector still gets to choose the size of the money supply (i.e., money supply is endogenous). And one way it sheds the excess money is to favor funding via non-bank lending (bonds, etc) over bank loan funding. The former type of lending expands the money supply, the latter doesn’t. The mix is as much a determinant of the money supply size as is the amount of total borrowing.
The margin debt expansion is interesting (and a bit scary!), and without it, bank lending overall would probably be contracting faster.
exactly. not inflation, but massive speculation, on margin, in commodities.
I think you’re the only person i read who actually understands what QE is doing. Thanks for clarifying in a world of mass confusion.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
When the Fed initiated QE2 they had visions of lower interest rates in mind. This would result from “portfolio rebalancing” and these lower borrowing costs would lead to higher economic activity as businesses took advantage of the low rates to invest in their businesses. The St Louis Fed recently described this as one of the primary goals of QE:
“As prices increase, interest rates fall. As interest rates fall, the cost to businesses for financing capital investments, such as new equipment, decreases. Over time, new business investments should bolster economic activity, create new jobs, and reduce the unemployment rate.”
Of course, that’s not exactly how things played out. While the academics like to point to real interest rates as proof of success of QE, the real proof is in the pudding. And the pudding doesn’t taste so good. Total borrowing at commercial banks has continued its steady descent downward. There has been a net decline in total borrowing since QE2 began!
But what QE2 has done is spark a mania in speculation. And according to the NYSE’s margin data there is near record borrowing occurring. According to the March data margin debt is quickly approaching its all-time highs. As I noted last week, this surge in borrowing is not a sign that QE is “working”, but rather, a sign that it is only fueling the very same sort of imbalances and unproductive economic activity that got us into this crisis in the first place.
the culture of socializing losses while the speculative classes prosper continues. but Cullen doesn’t that mean they can never take their foot off the pedal? Because even if QE3 ends, they will maintain the size of their balance sheet by reinvesting prepayments and interest on the MBS/ABS part of their portfolio. get this, i bet they start the rate hike cycle before they shrink their balance sheet. cos if not, since the duration of their holdings has increased, the DV01 of those assets would be with the Primary Dealers… and they can’t have those losses…
i’d rather they create a biz lending authority much like fannie/freddie was for home lending. at least if that becomes bloated like fannie/freddie, main street would have at least gotten some love by then….
QE actually accelerates the decline in bank lending! Few (including MMTers!) seem to recognize this point, but I’ve seen the theory confirmed in circuitist Marc Lavoie’s writing after I blogged about it. There is similar suggestive evidence from during Japan’s past QE.
In brief, QE *does* increase the broad money supply as a direct consequence of the Fed’s operations (money as traditionally defined, excluding treasuries), but the private sector still gets to choose the size of the money supply (i.e., money supply is endogenous). And one way it sheds the excess money is to favor funding via non-bank lending (bonds, etc) over bank loan funding. The former type of lending expands the money supply, the latter doesn’t. The mix is as much a determinant of the money supply size as is the amount of total borrowing.
The margin debt expansion is interesting (and a bit scary!), and without it, bank lending overall would probably be contracting faster.
exactly. not inflation, but massive speculation, on margin, in commodities.
I think you’re the only person i read who actually understands what QE is doing. Thanks for clarifying in a world of mass confusion.
Notify me of follow-up comments via e-mail
© 2009 pragcap.com · Register for PC
Read Full Article »