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…
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.