Federal Reserve Chairman Ben Bernanke has maintained a subtle drumbeat of pessimism towards the U.S. economy and the increasing likeliness of another round of federal stimulus. Unfortunately, every time the Fed injects stimulus to artificially boost our economy the returns are diminishing, and while another round may temporarily avoid a double dip recession, it does not solve our long term fiscal problems and would continue to dig a hole that America may not be able to get out of if federal lawmakers are unable to revive our economy through revenue and job creation.
Your average person probably hadn’t even heard the phrase “quantitative easing” until recently.
Quantitative Easing (QE) is a very unconventional monetary policy that was used by the Federal Reserve to, theoretically, stimulate the economy when conventional monetary policy had ultimately failed. The purchase, or monetization, of debt from private institutions, has been both praised and maligned.
The praise has mostly come from Wall Street and from the major banks that were able to profit wildly on the back of massive monetary injections. Main Street, however, suffered from the side effects of rising commodity price pressures that caused food and energy to consume over 20 percent of wages and salaries.
The march of QE began in March of 2009, as the financial markets stared at the abyss; the Federal Reserve, having lowered the overnight lending rate to near zero, mainlined the first injection of QE into the system in an attempt to stabilize a financial system on the verge of theoretical collapse.
It seemed to work.
Almost immediately, markets began to rocket higher as billions of dollars of liquidity were pushed into the system. The proprietary trading desks of banks, hedge funds and institutions quickly understood that the best place to be positioned were in the riskiest asset classes, such as commodities, junk bonds and small capitalization companies, as the Federal Reserve was now providing a floor, referred to as the “Bernanke Put,” for the markets.
As the markets recovered and fear of an outright “Depression” subsided; the economy also began to recover somewhat. Unfortunately, that recovery ended as June of 2010 approached and the first round of QE came to an end.
As the regular hits of liquidity for proprietary trading desks, banks and hedge funds dried up, so did the rally in the markets. As the economy slowed and the market declined during the summer of 2010, the Fed came to the stunning conclusion that without further support the economy would be in a recession by the end of the year.
In late August, at the Jackson Hole Economic Summit, Ben Bernanke took action and began to drop hints of a second round of QE. Immediately the markets began to recover and the slide in economic output began to stabilize as the second hit of financial “heroin” was anxiously awaited by market participants.
However, this time, the effects were much less muted as the “law of diminishing returns” began to set in.
When the first round of QE was introduced into the system the market was in a full blown panic, valuations were suppressed and there was a massive dearth of buyers.
The second round of QE was not matched with the same ingredients and really only fed the stimulus addicted traders on Wall Street. The markets once again responded between September of 2010 and June of 2011, rising sharply into March but then began to waiver as economic tensions escalated with the Japanese earthquake and tsunami, riots in Egypt and a debt crisis in Greece. This economic uncertainty combined with political infighting and sustained high unemployment and rising commodity prices caused the consumer to retrench weighing heavily on economic growth.
Today, the markets are once again feeling the effects of withdrawal and are coming to the realization that the economy is now on the brink of a certain recession. Wall Street, now heavily addicted to Fed “heroin,” is looking eagerly for the next injection and their “dealer” has been dropping subtle hints over the past six weeks.
Will we get QE3? My best guess is that with the economy weakening rapidly, unemployment at above 9 percent, markets declining and with the current administration facing re-election next year, Fed Chairman Bernanke should be showing up soon with a “dime bag” for Wall Street to tide them over until the election is done. Unfortunately, the people that suffer the most will be you and me.
Lance Roberts is CEO of Streettalk Advisors, a money management company in Houston, Texas.