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Mostly lost down the page from Mitt Romney's foreign policy meltdown last week, the Federal Reserve announced their new 'stimulus' called 'QE3' (to distinguish it from QE1 and QE2). What's a QE3, you ask? Well, I'm not an economist, but here's what I understand:

For the past couple years, the Federal Reserve has been reaching into its 'magic piggy bank', printing a bunch of money and loaning it to banks for ZERO interest, in the hopes that they will turn around and lend this money to businesses and consumers, thereby stimulating the economy.

Instead, the banks have been beating feet to the Treasury to loan that FREE money to the US government for 2%. Why? Because consumers and businesses default on their loans, but the US government never does. So $1 billion earns you a 'Romney' each year (that's $20 million, btw), risk-free.

Free money, risk-free Romneys.... what bank could ask for more?

OK, so here's where QE3 comes in: Unhappy with the banks refusal to use their free money properly, the Federal Reserve goes back to its 'magic piggy bank', prints a another bunch of money (no, not in greenbacks you or I can use, but in special 'banks only' denominations, sorry) and uses it to buy up the US government debt held by the banks, so the banks will have lots of free cash.... in the hopes that they will lend this money to businesses and consumers, thereby stimulating the economy (where have you heard this before?).

Last question before the jump: What's different about QE3? Well, QE1 and QE2 had limits on them, but QE3 doesn't. The Federal Reserve said they will buy up to about $50 billion a month, for as long as it takes - neatly co-opting the neo-con concept of 'endless limited war'.

That's your quickie course on QE, on to the real questions..... hold your nose and jump!

So my first question is: If the Federal Reserve is loaning money to banks at 0% and they are loaning it to the US government at 2%, why can't the Fed just loan the money directly to the US government for 0%? (I know, there are 'rules', but it seems stupid, doesn't it?)

Next question: Since the banks aren't 'playing ball' with their free money to stimulate the economy, why can't the Federal Reserve just do the stimulating themselves.... maybe loan the money directly to the states to finance road and bridge repair, or to the utilities to upgrade the electrical distribution system, or for any of the myriad other massively job-creating projects that are out there?

It is OUR money, after all. And, after all of this insane 'magic piggy bank' stuff is done, WE are going to have to suffer the inevitable consequence of the Fed's drunken spree of printing money, which is inflation, lots of inflation. The banks will be fine, thank you for asking, because they will still be able to borrow and lend money to make a profit.

I could rant on this subject for quite a while, but I have a day job (for a few more months until I dive into retirement), so here's the answer:

This is all being done by the Federal Reserve BANK, which, despite its government-sounding name, isn't really an agency of the federal government, just a 'quasi-private' BANK. It is the 'banker's bank', of the banks, by the banks and for the banks.

And this 'banker's bank' has a 'magic piggy bank' chock full of OUR money, and the only thing they can do with it is give it to the banks to play with.

And you STILL believe the system isn't rigged against us?

Cheers.

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Comment Preferences

  •  Tip Jar (4+ / 0-)

    Against stupidity the gods themselves contend in vain. Friedrich Schiller

    by databob on Mon Sep 17, 2012 at 06:25:07 AM PDT

  •  Read Krugman and you will get a... (1+ / 0-)
    Recommended by:
    Andrew F Cockburn

    Better understanding of the system.

    Plato's " The Cave" taught me to question reality.

    by CTDemoFarmer on Mon Sep 17, 2012 at 06:28:49 AM PDT

    •  I read Krugman, and agree with him.. (1+ / 0-)
      Recommended by:
      phonegery

      and there's nothing in my diary that either argues with or contradicts anything I'm aware of in Paul Krugman's writings. If I'm wrong, please let me know, as I'm always eager to learn.

      The point of my diary - which I thought was clear - is that the Fed's actions primarily help banks and bankers - with our money, of course.

      And there is a bit of rage - and some lament - that if you're going to endlessly print money, which the Fed is doing (again, please correct me if I'm wrong), then that money should be used to benefit US (because it is our money) rather than the banks.

      But I understand that the Fed has rules it must operate under, and it is doing what it can under those rules, which are the 'system'.

      It's not that I don't understand the system, it's that I don't LIKE it, and if that point didn't come through loud and clear, I need to work a little harder on my writing.

      Cheers.

      Against stupidity the gods themselves contend in vain. Friedrich Schiller

      by databob on Mon Sep 17, 2012 at 07:52:23 AM PDT

      [ Parent ]

  •  You're right. (2+ / 0-)
    Recommended by:
    Andrew F Cockburn, VClib

    You are not an economist.

  •  Only the top 5% are protected. You're a drone (1+ / 0-)
    Recommended by:
    Deward Hastings

    and therefore expendable. Economics 101.

    Once your pockets are empty, your only true value to the government is for cannon fodder or experimentation.

    Buck up, Bippy! You're not alone if that helps.

    Hope has a hole in it when Republicans come, bringing shackles and sorrow; branding their greed on the backs of the poor. - Wendy Connors

    by Wendys Wink on Mon Sep 17, 2012 at 06:55:55 AM PDT

  •  Hint: (0+ / 0-)

    If Krugman and Obama think that this is good; and Romney, Ryan, and Paul think that it is bad; it probably is good for the average American.

    I don't pretend to understand the nuances of QE, but I do understand who has been on my side over the years and who hasn't.

  •  A few points (2+ / 0-)
    Recommended by:
    VClib, leftreborn

    1. No, the Fed doesn't routinely lend money to banks at near zero interest.  The Fed functions as a "lender of last resort" which means it steps in in emergency situations, such the financial crisis.  Currently, the Fed makes these short-term emergency overnight loans available at 0.75%, as part of it's primary credit lending throught the discount window, but it is fairly rare for banks to utlize this. A billion or two in these loans outstanding is a drop in the bucket for the macro-economy.  

    2.  Most Fed policy is conducted through targetting the Fed Funds rate.  This is the rate banks pay each other on loans of their Federal Reserve deposits.  Banks don't borrow directly from the Fed at this rate though, only from each other.  And banks themselves decide how much to charge each other.  But they will typically charge a little more than the rate being paid on short term US treasuries, so the Fed can easily influence this rate just by buying and selling US treasuries.

    2. It's simply wrong to say banks are borrowing from the Fed in order to buy treasuries.  The cost of borrowing would be higher than the return.  For one, treasuries aren't paying anywhere near 2% right now.  You would have to go to 5-year maturities to even get to 0.7%.  3-month bills are only at 0.1%.  That's a 0.65% loss if you are borrowing from the discout window at 0.75%, and still a 0.05% loss if you borrow at the Federal Funds rate.  

    3. No, this is not going to cause inflation.  Look around you, man.  Do you see inflation anywhere, other than oil (obviously a product of scarcity), and a few foods (ditto)?  Inflation can only be caused by excess demand.  If the economy spends too much, that might cause inflation.  Right now, we are spending too little (relative to our economic capacity).  

    4.  Of course it's an agency of the Federal Government.  All policy is decided by the Federal Reserve Board, a federal agency.  The banks help carry out the policy decisions, but are unable to profit in any way.  All profits are paid to the U.S. Treasury.  

    5.  What the Fed is actually doing, buying Treasury obligations (including Fannie and Freddie MBS which were already guaranteed by the Treasury in 2008) is basically helping push more private dollars into other long term investments, right now mainly housing and the stock market.  Supporting those asset values is helping consumer balance sheets and thus providing some support for consumer spending.  No bubbles to worry about in either right now, so this looks like good policy.

    6.  It's OUR money, but not really, because it's free, the government can print as much as it likes, so it costs US nothing at all.  And, these investments make US a profit.  So it's free profit; something the government should do as much as possible for us.  Is there a limit to how much of that they can do? Sure.  If the economy overheats, this can start to cause more harm than profit.  So when that starts to happen, they should then sell these investments, and cut government spending as well, both policies which will easily contain inflation if it does begin to occur.  

    •  Excellent! What a surprise! (0+ / 0-)

      I'm fascinated by the army of "End the Fed" advocates.  I didn't know they existed until about a year ago.  How so many people were brainwashed is a mystery to me.  I was about to respond to the diarist exactly as you did.  Glad to see you beat me to it.

      "Those who deny freedom to others, deserve it not for themselves." - Abraham Lincoln

      by leftreborn on Mon Sep 17, 2012 at 09:50:54 AM PDT

      [ Parent ]

    •  A couple of corrections, and a question (0+ / 0-)

      I'll concede that I overspoke about the Fed loaning money directly to banks, although with the 'Fed Funds' rate running at .16%, and 10 year Treasuries earning about 2%, there is a fine spread there, especially when you are investing OPM.

      As for inflation, I don't see how 'look around you right this instant' refutes my prediction of future inflation. Have you looked at the money supply data? M2 just ticked over $10 trillion, and the rest of the figures are just as high, and growing.

      The Fed is sitting on $1.6 trillion of US treasuries and $842 billion of mortgage-backed securities, and they bought every penny of that $2.5 trillion by printing money out of their 'magic piggy bank'. And the only way they can 'fix' this problem is by selling all those securities once the economy gets better - otherwise they have monetized the debt, whic IS inflationary.

      So when the Fed dumps $2.5 trillion of its securities onto the market, along with about $1 trillion in annual US government debt, how is THAT going to help anything? Yeah, you're right, that will control inflation really well... it will suck every available dollar out of the economy, kill any expansion, and leave us back in the crapper again.

      You can call the Fed an 'agency of the US government', but the US government has absolutely no control over it, other than to appoint its directors.

      And after all that, you still totally missed the point of my diary: it IS our money, and it IS in the hands of the banksters, and they are using it to benefit the BANKS, not us. The best argument you make is that it is '... providing some support for consumer spending'. That's pretty weak.

      Effectively, by your description, the Fed is engaging in 'trickle-down' economics, and we know how well that works, don't we?

      So if you're going to print $2.5 trillion of OUR money, I'd much rather see it put into a new stimulus program.

      I KNOW the Fed is prohibited from directly buying US government debt. Of COURSE the banksters have to be able to get in the middle and make money off our misfortune. But I don't have to like it, do I?

      Imagine what $2.5 trillion would do for our economy if it was put into fixing roads and bridges, updating our horribly antiquated electricity grid (which wastes up to 25% of the electricity it carries), and everything else this country needs.

      No, you've got a better idea.... let's just give it to Jamie Dimon and the rest of the banksters, and let them figure out how to make money off it.

      Cheers.

      Against stupidity the gods themselves contend in vain. Friedrich Schiller

      by databob on Mon Sep 17, 2012 at 10:39:26 AM PDT

      [ Parent ]

      •  Hold up. You got ahead of yourself. (0+ / 0-)
        The Fed is sitting on $1.6 trillion of US treasuries and $842 billion of mortgage-backed securities, and they bought every penny of that $2.5 trillion by printing money out of their 'magic piggy bank'. And the only way they can 'fix' this problem is by selling all those securities once the economy gets better - otherwise they have monetized the debt, whic IS inflationary.
        Those securities all have a maturity date.  Upon maturity the security position will be offset in the Reserve Account ledger.  I don't want to offend you by over explaining,  so disregard it if it's too elementary for you.

        Lets say there's a $1 billion position of a Treasury in the Reserve account that the Fed acquired in a prior QE.  The position looks like this:

        Debit.............................Credit
        ($1,000,000,000).......$1 billion US Treas

        Because the Fed didn't make actual payment for the securities, -$1,000,000,000 appears in the Debit column.  It's a placeholder for the amount owed to pay for the bonds.  (If the Fed ever made payment the amount in the Debit column would be adjusted accordingly.)

        Because the Fed owns the $1 billion US Treas, even without making payment, its position appears in the Credit column.  These entries remain in the ledger for the life of the bond till maturity.

        At maturity the Treasury must pay 100% of the principal or $1,000,000,000 and the Fed turns in the bonds as expired.  Here's what the ledger would show:

        Debit..................................Credit
        ($1,000,000,000)............$1 billion US Treas
        ($ 1 billion US Treas).......$1,000,000,000

        Just as the $1 billion the Fed owed from the purchase was noted in the Debit column as a placeholder, the principal payment upon maturity isn't actually paid by the US Treas either.  Instead the Treasury forgives the amount owed by the Fed.  It's a wash.  If you prefer, you could think of it as the Treasury paying the principal amount and the Fed immediately giving it back to cover what it owed.  The end result is the same. The money and the securities offset each other in the Debit and Credit column and the nothing remains.

        You inject the term 'printing money' to label the Fed's ownership of bonds without paying for them.  Do you have a term for the Fed's waiver of the principal payment upon maturity?   By allowing Treasury an exemption from paying the principal, isn't the Fed, in effect, unprinting money?

         

        "Those who deny freedom to others, deserve it not for themselves." - Abraham Lincoln

        by leftreborn on Mon Sep 17, 2012 at 11:22:58 AM PDT

        [ Parent ]

        •  Waitaminit! (0+ / 0-)

          I don't really want to get into an argument about Federal Reserve accounting procedures, but one thing you said bugs me:

          Lets say there's a $1 billion position of a Treasury in the Reserve account that the Fed acquired in a prior QE.  The position looks like this:

          Debit.............................Credit
           ($1,000,000,000).......$1 billion US Treas

          Because the Fed didn't make actual payment for the securities

          The problem is that the Fed DID make actual payment for those securities.... or did Goldman Sachs settle for a kiss instead of actual payment?

          Oh, and BTW, I do understand quite a bit about accounting.

          It looks like you're hypothesizing about some 'non-monetary' transaction between Treasury and the Fed, but when the US government sells securities, or when another holder of those securities sells them, real money changes hands.

          So if the Fed 'acquired' $1 billion of 10-year T-Notes (yielding 1.83% today) from Goldman Sachs, then they PAID GS $1 billion in REAL dollars. In my system, the money would go out as a debit on 11170 (bank account) and the securities in to another account, perhaps 11211 (A/R, and then to the resting place account).

          Now the Fed's balanced, but in your hypothetical, when the T-Note comes due, the Fed just writes it off? But that leaves a $1 billion hole in their balance sheet, because they DID pay out the $1 billion.

          So your whole hypothetical makes no sense, unless GS 'gave' the Fed $1 billion in T-Notes, and only got a kiss in return.

          But since they didn't, the only way for the Fed to avoid 'monetizing' that debt is for the US government to pay it off.... anything else leaves that $1 billion that the Fed paid GS out in circulation, courtesy of the Fed's 'magic piggy bank'.

          And the same thing holds true for mortgage-backed securities, all $850 billion of them..... nobody GAVE them to the Fed. The seller put the money in their pocket, and the Fed has an $850 billion hole in its balance sheet.

          So unless you can explain how the Fed somehow 'acquired' these securities they are buying off the street without paying for them, your whole explanation doesn't work.

          Maybe Goldman Sachs just likes to get kissed a lot?

          Cheers.

          Against stupidity the gods themselves contend in vain. Friedrich Schiller

          by databob on Mon Sep 17, 2012 at 11:58:52 AM PDT

          [ Parent ]

          •  I'll give you something and leave it up to you (0+ / 0-)

            whether you take advantage of it or not.   This is a time sink and I have work that needs doing right now.

            To recap, you have to accept redemption upon maturity as another way that the Fed can reduce its Treasury position besides selling them at the market, whether you're skeptical of the detail I provided or not.  
            1)  The securities have a maturity date and there's no way around it.  They redeem on that date.
            2)  One of the secondary reasons for conducting QE3 is to balance the Fed's portfolio by introducing some longer maturities.  That should tell you its present holdings are shorter term.  Thus they may mature, and are maturing with no need to sell at the market.  It would rather hold till maturity unless there's a need to raise interest rates and the Fed announcement was very specific and clear on that point.  It will not raise interest rates anytime soon.   Check the Fed's portfolio yourself.  You can, you know.  

            The Fed is only allowed to make purchases from certain designated sellers.  I don't know off the top of my head whether Goldman is one of them.  I can find out.  It's certainly not a free-for-all.   I want to be very precise and correct.  For that reason, I recommend a valuable resource:  the Pragmatic Capitalist website.  

            On the home page, you'll see an Education tab and if you click there you'll find some very recognizable topics like QE.  The Modern Monetary System is the first topic listed but I don't recommend starting there though you should look at it by all means.  It's very long and intimidating  as a starting place.  The QE section will take you very quickly to a series of short articles that will either be a revelation to you, or you'll bolt because leaving your comfort zone is scary.   You could always visit the Federal Reserve website too.  I've never understood why people would believe a third party and dismiss what the Fed has to say for itself.   It releases so much information about its operations for the sake of transparency.   Some people don't trust them.  I don't trust third parties who include information they like, exclude what doesn't fit their agenda, and spin it so people will believe what they want you to, instead of forming your own opinion.

            Good luck.

            "Those who deny freedom to others, deserve it not for themselves." - Abraham Lincoln

            by leftreborn on Mon Sep 17, 2012 at 01:22:15 PM PDT

            [ Parent ]

      •  Disagree (0+ / 0-)

        1. No, monetizing debt does not cause inflation.  Why would it?  You can monetize as much as you like.  You will only get inflation if spending is too high (thus an excess of demand over supply).

        2. The only problem I see with M2 currently is it's not growing fast enough.  You have $10.089T seasonally adjusted as of 9/3/12 vs $9.4698T as of 9/5/11, for a year over year increase of only 6.5%.  

        How fast should it grow?  Figure 2% for productivity, 1% for poulation growth, 3.5% for what I think is a reasonable inflation target and I would want 6.5% even if the economy were at full employment. Add another 2% per Okun's law for a modest 1% decline in unemployment per year, and we're at about 8.5%.  So in a tuly robust recovery I would want M2 growing at closer to 9% per year (in a rough back of the envelope type calcultion).  I likely wouldn't have any concern with M2 unless it were increasing at over 10% per year (which hasn't happened since about 1984).

        3.  No this is not putting money in the hands of banksters.  The only money they get is their own money back.  The fact is, some of this money actually was used for stimulus.  How do you think the $800B stimulus was done?  The treasury issued $800B in bonds, which were purchased by the banksters, and the Fed brought them back.  

        In short, what the Fed is doing is allowing the congress to spend without increasing the publicly held debt.  You can actually think of QE2 as essentially a Fed accomodation of the stimulus.  From 9/1/2010 to 9/1/2011 the Fed increased it's holdings of US Treasuries by over $860B.

  •  "US" means Congress (0+ / 0-)

    The Fed's been asking "US" (Congress) to help "US" (ourselves) with saner fiscal policy for a couple years. Republicans have blocked every attempt.

    There are a couple things the Fed could do better (higher inflation target to force capital to work, and stop negative interest payments for reserves), but basically the Fed works for the banks, and everything they do has to go through the banks before it gets to the real economy.

    Not worried about higher inflation, that's much easier to deal with than the urgent problems we face now.

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