Sailing QE2 or Titanic Stimulus?

Quantitative Easing is what The Fed does when it buys mortgages and Treasury Bonds and other assets. This puts a bucket of cash into “the banking system” by inflating The Fed balance sheet with assets and moving cash into banks around the country. That is what The Fed did when it bought $1 Trillion or so of poor mortgages from banks who had over levered themselves.

(h/t to Ross McKitrick for the Queen Elizabeth 2 Sailing metaphor)

So The Fed made comments that they don’t see any tightening needed any time soon, and could always buy up more assets.

At the same time, we have Obama advocating More Titanic Stimulus! $ 50 Billion just for roads, airports and trains. Somehow the notion of making all those paved surfaces for all the trucks, trains and planes who’s fuel he is working to eliminate and / or make hideously expensive is not seen as a schizo behaviour….

Never mind that the first Stimulus (who’s cost is about the same as the ENTIRE Iraq war from start to finish…) sank below the waves leaving nary a ripple on the economic sea…

What the Stimulus Giveth, the Sovereign Risk Taketh Away

So why have a $Trillion of Quantitative Easing, and a $Trillion of Titanic Stimulus done nothing? Several things, but they all fall under the heading of Sovereign Risk.

Companies are sitting on about $3 Trillion and not hiring or expanding. Banks are sitting on their $Trillion or so and not lending. For the simple reason that it’s too risky. In the case of the banks, the legislative risk was terminal. They were also faced with a regulatory burden change to require much more ‘reserves’. So if I’ve got money, I can leave it in the vault and call it reserves (meeting my regulatory burden – one that put several firms out of business and / or had merger committed on them…) or I can lend it out (and be mergered or have regulatory proctoscopy done by ham handed bureaucrats…) Decisions decisions.

So the banks sat on the cash in the face of the administrative actions that promised to ream them a new one if they did not get reserves up and promised to trash their profits anyway with new laws and promised to up-end their business models in unknown ways. Faced with that, it’s easiest to take 0% money from The Fed, put it in Treasuries at 1%, and show a guaranteed profit with no added risk. At least until the Sovereign Risk is off the table. Say in about 2.5 years…

The non-bank corporations, too, are faced with all sorts of new regulatory hurdles. At the same time they have been bitch slapped with a medical bill per employee that is a big cost item, with more such “gifts” promised for the future. And they don’t get any benefits from that cost for years to come, so the employee doesn’t see any benefit. Oh, and they have been promised that in just a few months when the Bush Tax Cuts expire, they will get shafted with higher taxes too. And then Obama and the Dimocrats are surprised that businesses would rather sit on the cash they have than put it at further risk; and especially so when faced with added costs per employee.

Gee, lets see, invest in an uncertain tax environment with a hostile government that has promised to increase my costs and confiscate my profits for “redistribution” while hiring terribly expensive folks; or move my money to China (or any of a hundred countries with no capital gains taxes and much lower labor costs). Decisions decisions. Maybe I’ll just sit on the cash until November 8th or so and see what makes the most sense on the P&L then…

In Conclusion

The mixed messages that have come from this government are the reason things are stagnant. They are “stimulating” business while whipping it and cutting off pounds of flesh. They are providing liquidity to the banks, while demanding they be whipped and punished. Then they are surprised that morale is not better. This is called incompetence.


About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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15 Responses to Sailing QE2 or Titanic Stimulus?

  1. Chuckles says:

    Nonetheless, the beatings will continue until morale improves.

  2. PhilJourdan says:

    There are no “mixed messages” coming from the government. They have been unanimous and clear in their message – distain for business and contempt for markets.

    The wolf is now trying to speak like a sheep, but only a fool believes the wolf after having been bitten numerous times. Business – for the most part – did not get big by being stupid and gulible. They sit on the cash and wait. for 2 things.

    1. A split of government. That will probably happen in November, but nothing in politics is a given.
    2. A tax cut – preferably the extension of the Bush cuts.

    Once these 2 things happen, money will move, but not before. If they do not happen, we will be getting the same empty rhetoric in 2 years from the administration as we are today.

  3. Ruhroh says:

    I think you meant ‘morale’ in that next-to-last sentence…


  4. pyromancer76 says:

    I don’t see many mixed messages either (PhilJourdan). I see “liberal” reforms and purposes redefined and transmogrified into marxist policies. Those who are in power today, either through misrepresenting themselves as liberals when they are socialists or marxists — think Pelosi for one — or through fraud — Obama is the best example — all are opposed to a free market and limited government with rational regulations (e.g., banks maintaining reasonable reserves and banks and financial institutions forbidden to market debt as equity). They also seem to be opposed to everything historically American, including our natural allies.

    Unfortunately neither President Bush seemed much committed to limited government with reasonable regulations either, and conservatives too frequently became behavior naziis and then dumbed-down the language by demonizing “liberalism”. American minds have had great difficulty in recognizing reasonable differences between friendly (and patriotic) rivals (conservatives and liberals) and enemies who will go to any length to destroy the free market, limited government, and competition (socialists, marxists, maoists, and now add islamists).

    I don’t exclude corporations from these (un-American) actions, either. Cornering the market, destroying competition “unfairly”, maneuvering for monopoly, hiding corporate business in holding companies, paying off politicians so there are no consequences to bad or malevolent business practices. When larger is always better rather than minding the business, corporations can take on authoritarian trappings, e.g., BP and GE.

    Sovereign risk is one of the greatest dangers that I have encountered in my lifetime. Fortunately, my parents survived The Great Depression by grit, imagination, and determination. They defeated totalitarian-fascist dictators by serving in the military or working on the home front during World War II. Then they worked long, long creative and productive hours to raise a family and expand the economy.

    Today’s Sovereign Risk of mindless indebtedness (or purposeful indebtedness — if you believe those in power want to erase this great economy) engaged in by the current government, and contributed to by the last one, puts all those contributions in great danger.

    I am grateful for the concise and trenchant summary you have given of this looming disaster, EM. More of these, widely published, are essential to educate Americans for the next election, and the next. I will be working for change — for a free market, reasonable taxation, reasonable regulations, reasonable indebtedness, and a limited government. Let the entrepreneurs, skilled individuals, and dedicated unskilled workers remake this country. Out with the academic-political-industrial elites who have failed. Out with the one-worlders. Out with the environmental fascists. Out with those who have no respect and reverence for all those hard-won contributions to Western civilization that enable individuals to strive toward their destinies.

  5. TGSG says:

    yes, more of this please

  6. Leon Brozyna says:

    Nothing quite as refreshing and informative as plain talk. And then there’s the latest rescue package that’s being touted as a tax cut for business. Puhleeeze! All it is is a plan for accelerated depreciation (write offs in a single year, rather than 3-20 yrs). And once the sugar rush wears off, then what?

  7. KevinM says:

    If the USG wants to see the economy react:

    1) put a ten year delay on the health care bill
    2) reduce payroll taxes
    3) liquidate the positions in companies it owns (GM,Citi,AIG,FNM/FRE)
    4) terminate HFT/flash trading and prop desks at any business (or group or subsidiary) that manages retirement accounts.

    This would cause the housing market and the stock market to crash, so it cant happen. Just my daydreams.

  8. Pascvaks says:

    You do so like beating around the bush and flowering the garden path with inuendo and prosey speech, when are you going to say what you mean in plane simple english and let the torpedos be damned?
    (Sarc Off;-)

  9. Larry Geiger says:

    “This is called incompetence.”

    Classic. Just classic!!

  10. E.M.Smith says:

    Had to work long and hard to develop an ‘indirection speech style’ for use in the workplace. I can talk a long time now while saying nothing, but have it sound pretty. Hate doing it. But you must do it at higher levels of corporations.

    My natural style is to look at what is happening and compress it, distill it, and reduce it to the most fundamental truths. Then say it. That has gotten me politely removed from some projects from time to time as some ‘powers that be’ wanted sweet lies instead of sour truths. (Thus the ‘learning’ in the first line… which I am quite good at now…)

    One of my highest scores on the GMAT was on the section where you look at the biz case and must pick out the distractors from the bits that matter. Got a startlingly high score on it. (Nearly 100% IIRC. Overall I was something like 1750? (90 something percentile) or so). Got an offer from Wharton to come, even though I’d not applied. Unfortunately I didn’t have the $50k / year they wanted, could not stomach the idea of a few hundred $K of debt on graduation, had a nice job paying me a lot (early Silicon Valley ;-) and a new lady friend that could not leave the west coast then… (now my wife). So with great reluctance I let it pass by. While I sometimes look back and wonder if that was the right choice, I also look at my children and have no doubts… Did some units at the local State University instead and got a teaching credential too.

    The point of that? I can do the BS Samba; but my real skill is in seeing the BS for what it is and saying “Pardon, but you are butt naked and a lier.” Makes for a good forensics guy ;-) and seems to translate well to “Climate Science”, at least on the skeptic side… Also handy for knowing when markets are blowing smoke up your skirts….

    So I have my niche. (niches?)

    FWIW, I do try to ‘mix it up’ with some of the naked fat truth and the occasional flowery poofta in a verbal girdle all slim and smelling nice… just to keep the skills in place. Who knows, I might someday get a job as the “right hand man” to an executive who actually wants to know the truth from a guy who can be political enough to go dig it up quietly. On my mothers side, the family has a fair number of surname Sumner. That is “Summoner To The Crown”. So it seems that the skill may be heritable. Polite and circumspect enough to rub elbows with The Crown but direct and ‘rough and tumble’ enough to drag in anybody who needs dragging, and no BS will mislead them.

    But I’m rambling now. (Not much sleep last night. Wife just out of hospital from a shoulder joint remodel, so I’m doing everything in the house and being nurse.) I probably ought to go check on the telco anyway…

    So now you know the rest of the story. Direct sharp and piercing; while being nurse and nanny… Life is a study in contrasts.

    OH! FWIW, it has just started raining in San Jose, California. This is a bit early. Looks like cold and wet is starting already. Usually we get through Halloween without rain. (At least, we have the last 25 years… )

  11. oMan says:

    Chiefio: I found you through Watts Up With That and I love your take on things. Very systematic and empirical. And you know how to call BS. Thanks.

  12. Pingback: Why stimulus is not working « Stlouisooz's Blog

  13. Riddi of England says:

    Eloquent Incisive and Illuminating as ever.

  14. Bird says:

    Euro target was 1. Now at 1.40. Aussie almost at parity. Gold 1362. US QE2 assumption driving this. What if actual Fed QE2 disappoints?… Euro used to be going to parity. Now at 1.40. Aussie almost at parity. Gold 1362. US QE2 assumption driving this. What if Fed doesn’t QE2?.

  15. E.M.Smith says:

    Well, The Fed has flat out telegraphed every way possible that they are going to ease until folks are back at work. So the odds they would not do it are about as close to nil as you can get. This weekend will be a big ‘tell’ though, as a bunch of bankers and minsters are meeting to discuss how to not have a currency war while still flooding the world with currency.

    But if they don’t do QE2, then we get the dollar recovering…

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