November 9

Bernanke: Chumps! Bruce Krasting.

I got a laugh out of the $600b number. The dealers were polled on their expectations last week. The response was an even half trillion. So with that as a bogie the Fed does 600 large. They wanted to do just a bit more than was actually expected. So they added on an extra 100b. They gave the market what it wanted and a little bit of extra cream on the top.

Understanding the mechanics of a QE transaction. Pragmatic Capitalism.

Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity? Richard Fisher, FRB of Dallas.

I agree that we are indeed in what is referred to in economic parlance as a liquidity trap. Yet, I think it worth noting that we already have low interest rates, and spreads against risk-free instruments are historically narrow. Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand. Loans are desirable when business see an opportunity for tapping credit markets to earn a return on investment that significantly outpaces the cost of credit and other risk factors. Even with the low rates that already prevail, businesses lack confidence that they will earn a superior ROI by investing so as to expand their domestic workforce, in comparison to what they might earn from alternative investments abroad or by buying in their stock or cleaning up their balance sheets. For their part, consumers will borrow when they believe it makes sense to shift consumption forward. But after the sobering experience of the past
three years, they are restrained by a lack of confidence that their future income streams will be sufficient to cover their payment obligations.
On the supply side, we know that businesses are floating on a sea of liquidity. Banks already hold over $1 trillion in excess reserves; holdings of government securities as a percentage of total assets on bank balance sheets are growing; loans as a percentage of assets are declining.
If we had a level of bank reserves or liquidity in the marketplace that was binding or inhibiting loan growth, I could understand the impulse to relieve that stricture. Further quantitative easing through additional asset purchases will surely increase the level of bank reserves, lower rates marginally and add more liquidity to markets while weakening the dollar. The more germane question is whether this works to the benefit of job creation and wards off financial excess....
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

Bubble, Crash, Bubble, Crash, Bubble... John Hussman.

The Japan syndrome goes global. Stephen Roach, Morgan Stanley.

Warning: retirement disaster ahead. Brett Arends, WSJ.

Bank of America edges closer to tipping point. Jonathan Weil.