QE2 big topic for upcoming G20

Forget the window dressing for the "why" of QE2 (rationales like "stimulate the economy" and "spur exports" and "fight the rigged yuan which is hurting us").

Real reason is that spending is out of control, debt needs to be issued to cover the spending, and purchasers of the debt are starting to say "no thanks, we'll pass" about buying it especially at the interest rates that make it unattractive. China has been diversifying into other reserve currencies for awhile and cutting back on purchases of Treasury offerings. Honcho of World Bank even came out today with a statement that maybe some kind of international reserve currency tied to a gold standard of some kind might be a good idea. (Pigs are truly flying when that suggestion comes from that source.)

Fed is the buyer of last resort on this stuff and increasingly, it seems, the buyer of first resort. $600B - what a problem that's going to set off. There was something like $9 trillion in hot money around the globe during the timeframe of the meltdown and now there's $10 trillion in hot money. Chinese official who spoke out to lambaste Fed and Obama says he is afraid it's going to swamp emerging economies and set off asset bubbles in those.

There is a fundamental flaw in your posts guys. I suspect it is due to your "playa hata" feelings about the President as indicted by your condescending references to the "great unifier" and his timing reflecting a FU to the ROW.

The flaw is very basic and frankly I am rather astonished that two guys such as yourselves would not know this. The FED is an independent organization that is NOT controlled by the Treasury Department or the President. This is not new. It was not controlled by Bush II, Clinton, Bush I, Reagan or Carter... etc. The decision for QE2 and the timing and everything else associated with it are under Bernanake's control, not the President. If you think it is an FU move to the ROW, then Ben is the one raising his finger.

The Fed has always been independent. The only control the President has is naming the Fed Chairman - when his four year term is up. Jimmy Carter did name Paul Volcker to a four year term as Fed President toward the end of his presidency. Reagan inherited him, then re-appointed him when his four year term was up. Volcker is generally given the lion's share of the credit for reversing the "stagflation" of the late '70s.

Bernanke was appointed by Bush II and re-appointed by Obama. Some fault him for not having the foresight to head off the Global Financial Crisis of 2008. There is some truth in that. But his actions since then, decisive, dramatic, unprecedented... have done much to avoid the catastrophic potential of the 2008 crisis to be far, far worse. Treasury Secretaries Paulson (Bush II) and Geithner (Obama) also deserve a TON of credit for initiating unpopular but critically important steps -- like TARP -- without which we would be reliving the '30s right now.

The Chinese are not going to suddenly stop buying US Treasuries because they have nowhere else to stash all the $$ they are earning with their huge trade imbalance with the USA. And, by the way, they don't want to cause a US recession because it would kill their exports/economy.

Finally, their concerns are not just about QE2, they are also about our mounting budget deficits. How the Tea Party/Republicans can come in and with a straight face say that is their priority - to reduce our deficit -- and the first thing they want to do about it is make permanent $4 TRILLION dollars of additional tax cuts is beyond my comprehension. Unfortunately, Obama now wants to do nearly the same.

For the US to get its budget together, we will need Cuts/modifications to entitlements AND tax increases. One party won't consider Part A, the other Party won't consider Part B. That is the dilemma we face and no one from either party has a solution. Also, no one seems to notice that if we had not enacted the Budget busting Bush tax cuts in the first place, we'd be in far better fiscal shape.

Oh, I was wondering what the G20 had to do with an old ship now resting in Dubai.

No offense, but I think the inflationary fears are a bit overwrought at this point. Currently we're *barely* having any inflation whatsoever -- and that's with the Fed rate being at 0% for at least 2 years. At this point, the Fed is trying to use any tools in its toolbox to try and get the US out of the recession, and frankly, if we have 4% inflation as a result for a few years, that's not a huge deal in my mind.

Moreover, I welcome the fact that we're giving a huge FU to the rest of the world on this. Not only do I think it's mere posturing with a healthy dose of double standard, but the rest of the world can't afford a wary American consumer.

Finally, keep in mind that the only reason they're even considering it is because getting anything through Congress is like pulling teeth out of an unanesthitized llama that's woken up on the wrong side of the bed. If Congress could show that they actually had something resembling a plan to get us out of this malaise (and the votes to get it passed), I'm sure the Fed would back off in a millisecond.

You are now getting back to my original point - Do you think the risk of deflation is that real? While i haven't seen growth anywhere near where I want it and understand the importance of jobs (whether it is the feds focus or not is debatable), but I haven't seen evidence of real deflation ala Japan in any of the numbers I see.

Like you I wouldn't mind 4% inflation. Whether this program will cause us to get to 4% or wildly overshoot that is the issue. I take the later position but I also expect/hope to see some renewed growth. If you do believe in a double dip recession is coming then there is a rational for this move. Doesn't do much for confidence though

I agree that inflation at the moment is low. Whether it will stay that way with a defacto devaluation of the dollar is to be seen. And while I admit I also have an attraction to the FU part of this, I see that as much more of a political function and not really the role of the Fed to execute on. Just my perspective.

I do have a quibble with your last part though. As far as Tarp, bailouts and stimulus bills this past congress has been about as compliant and consistent on a spend our way out of this plan as could be imagined. I don't think it has worked and a look around the ROW would show a mixed record at best. And really a rejection of it in reality. I would agree that going forward spending levels will be significantly reduced.

Deflation doesn't have to look like Japan. Do you really think there's a risk of housing prices, salaries, or assets like cars, ipods, or phones going up in price right now?

I bought a phone with Bluetooth the other day for $7. No contract.

RB -- I looked over my post to see if I wrote anything to suggest Obama does not support QE2, but I couldn't find anything. I don't know how you came to that conclusion.

But suggesting QE2 and the timing of its announcement were Obama’s ideas is, frankly, absurd. Ben Bernanke signaled this move last summer, after which stocks when on to their best Sept/Oct performance in 70 years. The FED meeting the first week of Nov had been scheduled eons earlier and everyone knew that was when the final decision would be made and announced. The market was expecting something in the neighborhood of $500 Billion. Ben announced $600 billion as a loose target over the next 6-8 months. And yes, the FED does require a vote of the board.

TARP has been an enormous, unprecedented success. Most of the money has been repaid. The Govt earned a healthy profit. and, most importantly, Tarp saved the banking industry -- and the US and Global economies. It was instituted by a Republican Admin, endorsed by a Democratic Congress, and implemented by a Dem admin. Remarkable teamwork in the face of a huge crisis... especially remarkable in the current Ultra-partisan environment. And remember, it was instituted in the midst of enormous crisis and it was imperfect. The implementation improved it. If we had it to do over again with 20/20 hindsight and plenty of time -- yes, we could do better.

I totally get -- and share -- your frustration and feeling that things aren't fair. But TARP was a huge success and the stimulus was successful, it just wasn't big enough.

When Obama became president, the US was losing a NET of 750,000 jobs per month. October 2010 saw a net gain of 150K jobs and was the 10th consecutive month of private sector job gains. So we went from a net loss of 750K/month in early 2009 to a net gain of 150K jobs in October 2010. That is a positive change of 900,000 jobs/month.. So yes, I would say the Stimulus... which was 40% tax cuts and a big percentage of one-time transfer payments to cities and states to keep Cops, firefighers and teachers employed... was successful. But we still have a LONG way to go to dig out of the greatest financial crisis of our lifetimes.

The political climate precludes any consideration of additional stimulus. The FED’s job is to ensure a strong economy – specifically, low inflation and high employment. QE2 is intended to assure investors that interest rates will stay low for a long time… so you are better off putting your money to work -- businesses and individuals to make investments, banks to make loans. Increase the money supply. Indirectly lead to higher stock and commodity prices thereby improving the wealth effect so people (at least those with 401-Ks and such) feel like they have more money.... so they will be more willing to spend.

QE2 is not the ideal way to stimulate the economy, but it is the only way available to the FED at this time. If it works, we will ALL benefit from it.

Noted conservative economist Nouriel Roubini said the following on CNBC:

Excerpts
“To me QE2 was a necessary evil because with growth so below potential and with inflation following a risk of deflation, if we had not done QE2, the risk of a double-dip recession and of deflation would become more significant.“
“A lot of that critique of QE2 is somehow misplaced … If anything, you could criticize the ECB for not doing QE2,” he said.

“The Fed believes we need to do (a second round of asset buying) while the ECB and the Germans are dead against it. On that particular issue I think the Germans have it wrong,” he said.

Monetary Easing a ‘Necessary Evil’: Roubini

I should add, the US also needs to work on a long range plan to control spending... not right now when it is desperately needed, but longer term. AND to raise taxes, again, not right now... but establish the changes and a multi-year timetable for implementation.

But that will require REALLY tough choices and I don't have confidence our political system, as it stands currently, is capable of dealing with this issue.

Finally, once again I encourage EVERYONE to go see Inside Job, the excellent documentary about our financial crisis.

Dick Bove -- perhaps Wall Street's leading Banking Industry analyst -- had this to say about TARP in his comments today:

TARP 'Most Successful US Program Ever': Bove

Excerpts
“In short this may have been the most successful United States program ever,” he wrote. “Moreover, it was bipartisan in the sense that both the Republican Administration that created it and the Democratic Administration that fostered it were unified in their beliefs as to what should have been done—and they did it.”

More than half the TARP banks have repaid the money and the Treasury Department has netted a $28 billion profit so far. The Federal Deposit Insurance Corp also has brought in $12 billion on its guarantee program while the Federal Reserve “may have made” an additional $20 billion, Bove said.

Quantitative Easing explained

I actually got a chuckle out of this.