Notes From Underground: The Great Helmsman Held the Good Ship QE Steady

FED Chairman Ben Bernanke steered a steady course as he was questioned by the House of Representatives today. The release of the chairman’s prepared testimony 90 minutes early was a benefit as the markets had time to actually read the substance of the address and not just react to the ALGO-DRIVEN HEADLINES. Even with the extra time to read the release some talking heads still failed to understand the chairman’s efforts to remain balanced. I do agree with Mohamed El-Erian that the tone of the prepared statement was “dovish” and Bernanke wanted to appear very concerned about the lack of growth in the jobs market.

In his economic outlook Bernanke states: “Despite these gains, the jobs situation is far from satisfactory, as the unemployment rate remains well above its longer-run normal level, and rates of underemployment are still much too high.” Further, he adds, “… with the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated.”

These two references are certainly dovish in scope. The BONDS and STOCKS rallied on the softer tone but the U.S. DOLLAR rallied and the precious metals sold off with the DOLLAR strength. The dollar action was an enigma to the risk-on/risk-off crowd, but the negative news may be a greater factor going forward. One day is not a trend but it is something to be attentive to. Also, as the EURO was sold some of the emerging market currencies finally found a BID. Again, it may be a one-off event.

In what may have been the most important piece of Bernanke’s prepared text  was this: “… even after purchases end, the Federal Reserve will be holding its stock of Treasury and agency securities off the market and reinvesting proceeds from maturing securities, which will continue to put downward pressure on longer term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.” This is the most significant piece of FED policy going forward–far more important than tapering–WHAT WILL THE FED DO TO SLOW THE VELOCITY OF $3.5 TRILLION OF RESERVE IN THE SYSTEM? Tomorrow I will discuss (again) the possible role of macroprudential regulation in the FED‘s toolbox.

***I am reposting a letter to the Financial Times I wrote in August 2002 as a way to establish my credibility in the upcoming discussion of Glass-Steagall and the enhanced role of macroprudential regulation.

Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.

A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.

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9 Responses to “Notes From Underground: The Great Helmsman Held the Good Ship QE Steady”

  1. Manny Says:

    Thank you for your great insights. I am just a penny enny trader; but that statement you highlight struck me as well. I see the fed as being a black hole for all this stuff. Once it hits the feds event horizon we will never see it again. That can be the only way out of this mess?

  2. yra Says:

    Manny–they keep bringing this idea forward–about allowing all the QE purchases to just roll off and retire the vast pool of liquidity that was created to just be time decayed—as it keeps creeping into the discussion from the Bank of England to the FED —so it has to be considered;but in the light of massive fed regulation of large bank regulation.

  3. wlak Says:

    How prescient your 2002 letter to the Financial Times

  4. kevinwaspi Says:

    Your 2002 letter to FT was prophetic. I nominate you to be the next Fed Chair.

  5. yra harris Says:

    Prof–You know that it is not possible–for how can anybody west of the Hudson possibly know anything

  6. Chicken Says:

    That’s interesting, I have to admit although murky I’d come to the conclusion that post-crash, TBTF ultimately meant large banks had fully assumed the role of regulating the FED.

  7. Nate Says:

    Why has no one mentioned the US National Debt went above $17T?????

  8. yra Says:

    Nate—it is not a problem because in the world of tweets and algo readers ,the elephant in the room needs more then headline peanuts to sustain itself.But the sad fact is that when we discuss the need for financial repression we are discussing the debt from the top down analysis of its looming impact

  9. Nate Says:


    My shock is NOT that it makes any difference. $200+ Billion is a drop in the bucket considering the amount in derivatives and other vehicles, however, the fact that NO ONE (not even GOLD perma-bulls) have mentioned it is a shock. Also, when you go to the debt clock site AND the US treasury direct site, NEITHER one states the debt being over $17T. That I believe is relatively significant vis a vis the $200B difference.

    I also believe that any $1T increment carries with it a PSYCHOLOGICAL value. $18T, 19T, 20T and $25T will also carry PSYCHOLOGICAL consequences as well. QE to infinity is the battle cry?

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