Thursday, June 30, 2011

Alan Greenspan Explains the Phoniness of QE1 and QE2

As I have pointed out before, as has former Fed Chairman Greenspan, most of the "quantitative easing" that has pumped money into the system has resulted in the money going right back out of the system and ending up back at the Fed as excess reserves. Greenspan explained this to Maria Bartiromo, today, on CNBC. Here's CNBC's transcript of that discussion:
NOT ONLY QE-2 BUT QE-1 HAS NOT BEEN SPENT. A TRILLION AND A HALF DOLLARS, WHICH IS EXCESS RESERVES HAVE, TO MY ESTIMATION, NOT BEEN SPENT. THE WAY YOU CAN TELL THAT IS THAT THE MONEY MULTIPLIER, A RATIO OF THE EXPANSION OF CREDIT IN THE COMMERCIAL BANKS AND THE MONETARY BASE, WHICH REFLECTS THE EXPANSION OF THE FEDERAL RESERVE BALANCE SHEET, THAT HAS CHANGED NOT AT ALL. YOU CAN SEE IT IN THE FACT CNI LOANS ARE RARELY MOVING. MORTGAGES, IF ANYTHING, ARE WEAKENING IN NUMBERS AND CONSUMER CREDIT IS VERY DULL, SO THAT THERE IS NO EVIDENCE THAT HUGE INFLOW OF MONEY INTO THE SYSTEM BASICALLY WORKED. IF YOU TAKE A LOOK AT WHERE IT WENT, IT IS VERY INTERESTING, ALL GONE TO EFFECTIVELY THE COMMERCIAL BANKS, WHO HOLD THOSE MONIES AS RESERVES, AT THE FEDERAL RESERVE BANK, THE 12 FEDERAL RESERVE BANKS AT 25 BASIS POINTS. THE BANKS COULD VERY READILY RECEIVE 125 BASIS POINTS MORE IN THE TYPES OF ASSETS THE FEDERAL RESERVE CALLS MINIMUM RISK. THEY CHOOSE NOT TO DO THAT. THAT BASICALLY THE CAUSE OF THEIR CONCERNS ABOUT THEIR CAPITAL ACCOUNT AND VARIOUS OTHER ASPECTS OF LENDING. BUT THE POINT OF THE MATTER IS THEY HAVE NOT MOVED.
Bottom line: Quantitative easing has planted a $1.6 trillion IED inside the banking system that has ended up as excess reserves. If that money starts to enter the system, it is not clear at all that Bernanke can sop it up without having to raise interest rates dramatically, by hundreds of basis points.

1 comment:

  1. Correct, Bernanke's only real tool is interest rates, but I don't think that even he could really control them once they go up. I would like to say that his (Bernenke) statement that could could sop up liquidity if he needed to is patently absurd. Not only is about a trillion dollars of the Fed balance sheet useless junk that nobody in their right mind would buy, but the rest is primarily made up of treasuries which would be a hard sell if such a situation such as is being discussed were to happen. The money is either going to sit there for a long time or it is going to get out in the medium-long term. It's quite a pickle.

    By the way, the Federal Reserve .gov sight is extremely slow right now, I wonder why?

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