Tuesday, May 12, 2009

Amateur Night with Joe Weisenthal

I really didn't plan to make the errors of Joe Weisenthal (see here) a regular feature. But his errors are so fundamental to the understanding of the economy that they must be discussed.

His latest gem:

...despite so-called quantitative easing, the long end of the yield curve is shooting higher
Joe, in other words, is surprised by climbing rates at the long end of the yield curve despite "quantitative easing". Ah Joe, despite some Fed noisemaking about buying securities at the long end of the yield curve, and despite some minor Fed action there, the Fed has no interest, zero, in shrinking the yield curve at this time. As I have previously pointed out, they want short-term rates much lower than long rates. The wider the spread the more banks earn. Given the hesitancy banks have in lending at the current time, the wider the Fed can keep that spread, the greater the opportunity cost for banks when they don't put the money to work by making loans.

The Fed, Joe, is doing billions in quantitative easing but it is all at the short end. Given, the huge amount of debt being raised by the Treasury and the private sector, there should be little surprise why the long end of the curve is higher.

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