The immediate aftermath of the QE2 announcement has not gone well: mortgages rose to their two-month highs near 4.25%, and the yield of 30-year T-bonds exploded from 3.93% to 4.32%. QE2 has an immediate problem: Treasury yields are stone low because the whole world ran to our paper for safety, and now the Fed proposes to make that paper unsafe by printing cash to finance it. However, it is early: the Fed has yet to buy the first QE2 Treasurys, and the event will go better than the news.
Economic data… during my Irish mother’s long-ago visit to the Emerald Isle, the best forecast for weather called for a “bright interval,” and our economy had the same in October. Even the grumpy NFIB survey of small business improved, though more reconciled to lousy conditions than truly better. New unemployment filings touched a 2010 low at 435,000 last week, more running out of people to lay off than hiring.
QE is incomprehensible to the average citizen, and misunderstood by many finance people; even more do not want to understand. A common-sense guidepost: Sarah Palin said this week that she just knows that QE2 is the wrong thing to do.
We could engrave her total knowledge of monetary policy on the head of a pin and not mar its shiny surface.
The policy errors that made the Great Depression great have been the life’s work of Ben Bernanke: during the financial collapse from 1930-1932 the authorities tried to balance the Federal budget, and maintained a tightwad Fed. This time we mobilized fiscal stimulus and active central banks, but the underlying hazards — asset deflation, capital shortage, and credit freeze — are still in place, and sovereign borrowing capacity is exhausted, not the case in the ’30s. This emergency is not over, maybe not by half. And from here to Europe fiscal support is turning to deep austerity, and suicidal disciplinarians are trying to shut down the central banks.
One Fed governor who voted for QE2 waited five whole days before shoving Perfesser Bernanke under the bus. Kevin Warsh lauded “reallocation” of capital and labor (the benefits of foreclosure and unemployment), and deleveraging as “prudence to be celebrated” (credit is bad for all of you). Instead of QE2, he advocated “pro-growth policies,” reform of the tax code and regulation, presumably to be achieved in time to help this crisis by the arrival of little green men on the White House lawn.
For a splendid tale of successful QE in 1933, and longer sidebar, visit certified no-illusions old-timer Paul Kasriel at www.northerntrust.com, “The Econtrarian.”
At the G-20 meetings, China and Germany decried QE2 as an unfair manipulation of the dollar to weakness, and intervention in free trade. John Dillinger and Pretty Boy Floyd might have had similar objections to giving pistols to bank guards.
Perfesser Bernanke needs help to explain QE — ordinarily the job of the Treasury Secretary, and Timid Timmy is not up to it, all-think and no-hit. Or the President, but he is still trying to get the plate number of last Tuesday’s dump truck.
The Perfesser is about to get help from the same quarter as last spring: Europe is coming unglued (again), now Ireland’s turn, and US Treasurys will be safe harbor.
Ireland did a brave thing when its real estate bubble blew: it guaranteed all bank claims. However, a 32% of GDP budget deficit this year, bank losses deepening as real estate dominoes fall under the weight of austerity, and Ireland has had it. It has some cash, but its bonds are wastepaper (see Morgan Kelly, University College Dublin).
Europe says aid is available, but Germany sets the conditions: loans that would save Germany’s banks from Irish default, but crushing balances and high rates that would prevent Irish recovery. Indentured servitude. Until you learn to behave like proper Germans, you will be an object lesson to the others not to misbehave again.
The others may draw unintended conclusions from this offer of serfdom. Tough Ireland might lead the way: better to default, issue New Irish Pounds; go back to spuds, cabbage and Guinness, and independence.