# Fed's Bill Dudley:The Fed Doesn't Fully Understand How QE Works



## alingva (Aug 17, 2013)

Very interesting. They have been doing this for years and they do not understand how it works

_ "We don't understand fully how large-scale asset purchase programs work to ease financial market conditions"_

http://www.ny.frb.org/newsevents/speeches/2014/dud140104.html


----------



## lb71 (Apr 3, 2009)

Not a surprise either.


----------



## alingva (Aug 17, 2013)

In Fed we trust...


----------



## james4beach (Nov 15, 2012)

Of course they don't understand it, it's an experiment. All of this is an experiment because the entire modern financial system basically collapsed in 2008 and doing this was believed to be better than the alternatives. Same with Japan, it's absolutely _nuts_ what they're doing over there. The term is "going for broke". Either it works, or you're all going broke anyway.

Countless experts have been observing, for years now, that the Fed is in uncharted territory and doing things they have never done before.

Like for example now we're deep into the "strong economic growth" yet American interest rates are still 0%. So, um, they have no ability to drop rates in response to a new crisis or economic slowdown. Bye-bye traditional thinking of slashing rates to help stabilize markets.

The Federal Reserve has also completely warped (through direct manipulation) asset valuations and risk versus reward. This is no longer "Mr. Market" pricing and valuing things rationally... you can't trust market prices for things. There's no free market forces at work. There's Fed force, ECB force, BoJ force, etc. They determine asset prices. Are the prices "right"? You sure as heck better hope so... but I doubt it


----------



## alingva (Aug 17, 2013)

Agree


----------



## andrewf (Mar 1, 2010)

In both the US and Japan, aggressive QE is better than the alternative. I think the Fed has done a decent job, if anything they were too slow to ease as far as they did (most likely for political reasons). BoJ has been dragged kicking and screaming toward real monetary easing after 20 years of disastrous monetary policy.

I'm starting to feel lonely as a QE cheerleader. So many seem to think it is terrible, but the argument usually boils down to handwaving about government manipulation. Sorry folks, but that's exactly the point of monetary policy. You're all suffering from anchoring when you operate on the belief that setting interest rates is good and right and natural, and QE is bad and harmful and unnatural.


----------



## james4beach (Nov 15, 2012)

I'll agree that QE has been successful in the short term, but this experiment has only just begun. We'll see in 10 or 20 years what the impact really is... right in the prime of my working life, by the way -- "I can't wait to find out". I'm the guinea pig.

With just 5 years of QE, here's what's already happened: the market has become addicted to this drug. It's now taken for granted... the _oomph_ has worn off. There are diminishing (economic) returns of stimulus, just like a drug that hits you hard at first, but requires increasing doses over time.

I strongly suspect that we're going to end up with a perpetually poor economy that trudges along with near 0% real growth, for many years. Even today, with the stock market soaring, look at what companies are really doing: cutting costs, being stingy about employment, and totally failing to invest capital.


----------



## Rusty O'Toole (Feb 1, 2012)

It doesn't matter. That is why they never bothered to "understand" it.

The point of QE is to bail out, and prop up their criminal friends at the big banks and to make the richest .1% even richer. What it does to the economy as a whole is way down the list of things they are concerned about. I know that isn't how they justified it, but now the truth is coming out.


----------



## andrewf (Mar 1, 2010)

No, that was the point of TARP. I think you're getting confused.


----------



## james4beach (Nov 15, 2012)

I'm with Rusty on that one. Yes TARP was directly for that, but QE is also just a gift to the banks.

The money all flows through the large banks. JPM directly benefits as they are a primary UST dealer. JPM also directly benefits from all the derivative trading directly resulting from that treasuries activity (it's a fixed market, and they are connected right to the source). Same with Citi, BAC and all the other major players in this... QE money flows through them, they directly benefit, and very little gets through to the real economy. And the average worker? None gets through to him.

Just look at the stats on changes in wages in the QE years. Incomes of the wealthiest segment of society skyrocketed. But incomes of average and lower wage people hasn't increased at all. The benefits of QE only go to the wealthiest/top, with little left for everyone else. Financial institutions have benefited tremendously too.

So QE has been very good at making the rich even richer.
It's been sub-par at restoring the real economy and average wages.


----------



## fatcat (Nov 11, 2009)

churchill said that democracy was the worst form of government except all the the others
the same is true of central banks
a small group of unelected people wield immense power
but there are no good alternatives
we aren't going back to a gold standard

james, your idea of a "mr. market" is a fantasy
capitalism has been twisting and manipulating markets for 500 years
politicians have been bribed and paid for, governments have been chaotic and stupid

it may well come crashing down and hard

my advice ? (unasked for i realize )

own what the politicians own
when it comes crashing down they will all vote to protect their asses

and they all own stocks and bonds and virtually no gold or cd/gic's

https://www.opensecrets.org/pfds/


----------



## james4beach (Nov 15, 2012)

fatcat said:


> james, your idea of a "mr. market" is a fantasy
> capitalism has been twisting and manipulating markets for 500 years
> politicians have been bribed and paid for, governments have been chaotic and stupid


Well said... it has always been rigged... but it's important for average investors (like us here) to be aware of this so that we don't get silly ideas like that markets are fair, or that we are just as likely as the market-makers to take home profits, etc.



> own what the politicians own
> when it comes crashing down they will all vote to protect their asses
> and they all own stocks and bonds and virtually no gold or cd/gic's


I'm not sure about that. The wealthiest and most influential canadians that I know, a rich family with ties to the crown, only ever held GICs and real estate. No stocks, no mutual funds.


----------



## fatcat (Nov 11, 2009)

james4beach said:


> I'm not sure about that. The wealthiest and most influential canadians that I know, a rich family with ties to the crown, only ever held GICs and real estate. No stocks, no mutual funds.


fair enough, it may have worked for them, they are outliers ... the vast majority own stocks ... https://www.opensecrets.org/pfds/overview.php?type=P&year=2011 ... don't place your bets on the exception to the rule ... if this thing goes south, the politicians will be the ones deciding what to do ... and i think they will act to protect their assets (assuming that it doesn't go so far south it isn't fixable in which case i will be stocking up on cat food)


----------



## andrewf (Mar 1, 2010)

james, to say QE is 'just' (as in solely) a gift to the banks is just wrong. That or whether it benefits banks is not really the central goal of the policy (to prevent deflation when the zero lower bound has been reached for policy interest rates).


----------



## richard (Jun 20, 2013)

Given that the fed's past actions include things like making the Great Depression worse, I'm perfectly fine with the fact that they are doing things they haven't tried before. The only thing worse would be if they kept doing the same thing all the time!


----------



## SpIcEz (Jan 8, 2013)

richard said:


> Given that the fed's past actions include things like making the Great Depression worse, I'm perfectly fine with the fact that they are doing things they haven't tried before. The only thing worse would be if they kept doing the same thing all the time!


The best thing would be to get rid of the fed.

Their charter, their WHOLE point of being is to keep the economy stable. However, since 1913, there has been on average one major economic recession in the USA at least every 10 years or less. In all honesty, I dont think they actually know what they are doing and never have, but they do make allot of money for the member banks.


----------



## andrewf (Mar 1, 2010)

We had recessions before the fed existed, too. The Fed's job is not to eliminate recessions. No one has accomplished that before, there's no reason to expect the fed to accomplish it either.


----------



## richard (Jun 20, 2013)

SpIcEz said:


> The best thing would be to get rid of the fed.
> 
> Their charter, their WHOLE point of being is to keep the economy stable. However, since 1913, there has been on average one major economic recession in the USA at least every 10 years or less. In all honesty, I dont think they actually know what they are doing and never have, but they do make allot of money for the member banks.


It seems that before the Fed and deposit insurance, there were depressions and banking crashes every 10 years or so. I wouldn't be too quick to throw out what we have now just because it's not perfect. Their actions will benefit a lot of people, but obviously not everyone since there's always someone who can profit from the misery of others. Maybe one day technology will allow better regulation of the economy with real-time information.


----------



## HaroldCrump (Jun 10, 2009)

andrewf said:


> No, that was the point of TARP.


It was TARP, if anything, that stabilized the financial system and put a bottom under it.
Not Q/E.
TARP ensured that all the major money center banks and insurance companies stayed solvent on paper, although they were all insolvent on a mark-to-market basis during the credit freeze.
Q/E has not achieved its purpose of increasing retail and commercial lending at all i.e. has not increased money velocity.

Perhaps Q/E-I could be considered an understandable move.
At least a forgivable move, considering that this was a brand new experiment never tried before, perhaps never even modeled before.

But QE-II and QE-III are nothing more than bailouts for the corrupt, decadent banks and financial institutions like JP Morgan, Citibank, Goldman, etc.
They are simply transferring MBS and its various derivatives from the balance sheets of the banks onto the balance sheet of the Fed at full face valuations.
It is also protecting the huge amounts of interest rate swaps sold by the investment banks in the years prior to the credit crisis.
The liquidity thus created is not being transferred on to Main Street.

It has also facilitated a huge transfer of productivity and jobs to emerging markets instead of the domestic market.

Q/E has another - very important - objective, that is, to keep borrowing costs low for various levels of the US government.
The US cannot afford to service its crushing $17T of debt if 10 year treasury rates were to be at 10% instead of the current < 3%.
The interest payments on those debts will send the US into a debt spiral.

Q/E is required not to stimulate the economy, but to facilitate and sustain govt. borrowing.

So whatever may be the objectives of Q/E on paper, it is not working.
It is intended to do something else entirely - and in that, it has worked perfectly.


----------



## andrewf (Mar 1, 2010)

Harold, you don't know the result of the counterfactual. Would we have been better off with less monetary stimulus? If the Eurozone disintegrated and the US fell back into recession?


----------

