Quantitative Easing: the Opiate of the Banks

Much is being made of Bernanke's program of quantitative easing, which is nothing more than an extreme form of artificially low rates of interest with direct monetization of debt in the aftermath of a financial crisis.

The current program of quantitative easing is not only no miracle cure, it will not work at all, will not 'fix' the problems that are plaguing the American economy in any substantial manner. It is a misguided subsidy and reinforcement of reckless behaviour, and a corrupt distribution of wealth.

Quantitative easing would only be a cure if the crisis had been caused by an exogenous credit shock, a sudden withdrawal of liquidity due to an event unrelated to the workings of the domestic economy like a war or an act of nature.

But this is clearly not the case. For the cause of the financial crisis was in fact a lengthy period of artificially low interest rates under the chairmanship of Alan Greenspan, which allowed all manner of financial excess and malinvestment and even fraud to fester in the real economy for a protracted period of time until it became embedded, and one might even say a dominant force, in the economy. It warped and distorted the productive economy.

Applying quantitative easing may relieve the symptoms of the credit crisis but it is merely a palliative, not a cure. It is similar to the case of a debilitated addict who, being denied his marcotics, goes into shock and suffers a heart attack. Yes, a 'fix' of the drug of choice will relieve the short term symptoms perhaps, but will do nothing for the underlying state of health which will continue to worsen.

The very low rates of interest have 'cured' the short term credit seizure in the financial markets, thereby providing time and opportunity to engage in genuine systemic reform and rebalancing to repair the distortions that caused the crisis in the first place: an outsized and corrupt financial sector, and a system of global trade that is freakishly imbalanced and manipulated by command economies and multinational corporations. That, and a lapse of western governance overcome by greed.

Until those reforms are made, the US economy will experience a series of bubbles and crises that, through the US dollar reserve currency system, will shake the governments of the world to their foundations.

Third Quarter US GDP Comes In Significantly Lower Than Original Estimates

Could we have expected anything else from the Madoff nation, a country whose major export is fraud, and predominant industry a large scale variation of Liar's Poker?

GDP in the third quarter is significantly weaker than the results reported in late October. And even the positive value that remains is probably overstated by a chain deflator that underestimates the monetary expansion by the Fed.

Ironically it is ineffective because it is so heavily applied to a broken and outsized banking model rather than to the real economy.

Look for another cycle of exaggerated improvement for the 4th quarter, with later revisions bringing the number well back to earth.

Oh look here, the second quarter was bad indeed, but the third quarter is a miracle of growth. Thanks to the stimulus and automotive programs of the government disaster is averted and all is well....

Oh wait, the third quarter was not so good after all, but the indications are that the fourth quarter is a miracle of growth. Thanks to the housing programs of the government disaster is averted and all is well.

What, you deny this? Do you not wish things to be better? Are you a dollar basher? (repeat as necessary until the fraud collapses completely.)

This is the campaign of perception management by the financial engineers in the Federal Reserve and the US government, and cynical statists of both the left and the right.

"The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth." George Orwell

“Through clever and constant application of propaganda, people can be made to see paradise as hell, or to consider the most wretched sort of life as a paradise.” Adolf Hitler

"Print is the sharpest and the strongest weapon of our party. The writer is the engineer of the human mind." Josef Stalin

NY Times
Third-Quarter Growth Weaker Than First Thought
By JAVIER C. HERNANDEZ
December 23, 2009

The nascent economic recovery was weaker than expected in the third quarter, the government said Tuesday, held back by slow business construction and dwindling inventories.

The Commerce Department said the economy expanded at an annual rate of 2.2 percent from July through September, down from the original forecast of 3.5 percent, tempering some of the enthusiasm about the speed of economic renewal. The downward revision was well above average, but analysts still foresee stronger growth in the fourth quarter, as exports rise and an improved jobs market encourages consumer spending.

“We did get off to a slightly slower start than we had thought,” said Nigel Gault, chief United States economist for IHS Global Insight. “That would be very worrying if we didn’t have evidence that we had done well in the fourth quarter.” (The same evidence that will be significantly marked down after the fact, just like the original overstated estimates of 3rd quarter GDP - Jesse)

....Analysts were caught off guard by the magnitude of the decline in the rate of expansion, measured in terms of gross domestic product — the total value of goods and services in the economy. Last month, the government revised the rate to 2.8 percent in the third quarter, down from 3.5 percent in October, and economists surveyed by Bloomberg News expected it to remain steady.

A revival of exports and consumer spending in the last part of 2009 is expected to bring the rate of growth to about 5 percent for the fourth quarter. The momentum will probably continue into 2010, economists say, though high levels of unemployment and a skittish business climate may curb consumer spending, hiring and production.

The Commerce Department’s revisions were based on smaller-than-expected business inventories, which fell by $139.2 billion. Spending by businesses on items like software and equipment was also weaker than expected, rising by 5 percent rather than the 8.4 percent originally predicted.

Paul Dales, chief economist for Toronto-based Capital Economics, said the overall drop was “nothing to worry about,” but he expressed concern about the decrease in investment by businesses.

“It may suggest that a lot of the demand pent up during the recession has already been released,” Mr. Dales wrote in a research note on Tuesday. “High uncertainty and lots of spare capacity are limiting capital spending.”

Construction of business facilities like malls and office buildings fell more than previously thought, by 18.4 percent rather than 15.1 percent. Economists attribute that drop to a frail commercial real estate market, which is confronting high vacancy rates and banks that are reluctant to finance business expansions.

Spending by state and local governments was also weaker than expected, falling 0.6 percent, compared with the 0.1 percent originally forecast. Consumer spending was revised slightly, growing 2.8 percent in the quarter rather than 2.9 percent.

As the New Year approaches, investors are optimistic that the economy will build on its earlier gains rather than fall into another downturn. Retail sales were higher than expected in November, and the trade deficit unexpectedly narrowed in October. In addition, a weak dollar is making American products overseas cheaper, contributing to hope that exports will rise.

Why Is Obama Failing?

"What's costing the president are three things: a laissez faire style of leadership that appears weak and removed to everyday Americans, a failure to articulate and defend any coherent ideological position on virtually anything, and a widespread perception that he cares more about special interests like bank, credit card, oil and coal, and health and pharmaceutical companies than he does about the people they are shafting." Drew Westen, Leadership Obama Style

I think it is more that last of the three than anything else, and explains the others. Obama is captive to special interests, as are many of the key members of the Congress, and the Obama Administration, and the Federal Reserve. And I should add his two predecessors.

It explains why he cannot articulate a coherent ideological position and make it stick. Make no mistake, he is a smart and verbally adept individual, a gifted person intellectually. But he cannot adhere to principles because he has abandoned whatever principles he may have had to serve a variety of corrupting interests. And he appears laissez faire and distant because he is a figurehead, a household servant, and not in control.

What makes Obama a greater failure than either Bush or Clinton is that he was elected on the promise of reform, a promised change, a political renewal in a country sickened by the erosion if not betrayal of its republic by men who view the Constitution as 'just a goddam piece of paper.'

"Somehow the president has managed to turn a base of new and progressive voters he himself energized like no one else could in 2008 into the likely stay-at-home voters of 2010, souring an entire generation of young people to the political process. It isn't hard for them to see that the winners seem to be the same no matter who the voters select (Wall Street, big oil, big Pharma, the insurance industry). In fact, the president's leadership style, combined with the Democratic Congress's penchant for making its sausage in public and producing new and usually more tasteless recipes every day, has had a very high toll far from the left: smack in the center of the political spectrum.

What's costing the president and courting danger for Democrats in 2010 isn't a question of left or right, because the president has accomplished the remarkable feat of both demoralizing the base and completely turning off voters in the center. If this were an ideological issue, that would not be the case. He would be holding either the middle or the left, not losing both."

The American people and what passes for their thought leaders in a captive media and a craven academy are a significant part of the problem. Rather than engaging in serious critical thought, most political reactions are cartoon-like, an emotional and visceral red vs. blue mentality that is so painfully evident in their Sunday morning television programs, that is more appropriate to the elementary school playing fields than serious political discussion or the work of running a country. What is held out as the alternative to Obama by the opposition? A brainless Bimbette, or some other servile hack of the machine, who in turn will serve the special interests of the corporations all too well, but will give a different portion of the voting public a sense of 'victory' as their slavery is made complete.

"The government consists of a gang of men exactly like you and me. They have no special talent for the business of government; they have only a talent for getting and holding office. Their principal device to that end is to search out groups who pant and pine for something they can't get and to promise to give it to them. In other words, government is a broker in pillage, and every election is sort of an advance auction sale of stolen goods." H. L. Mencken

Mencken is of course directionally correct, but I am not so cynical as he was. The American people had done better in conducting an idealistic revolution and the founding of a republic, and tempered it with the blood of patriots. And so it was the light of the world. And they can do better than this again.

The Bernanke Fed

As the maestro, Greenspan, was ultimately shown to be greatly mistaken, perhaps even a fraud, so eventually Ben Bernanke also will be shown to be cut from the same cloth, with less verbal acuity. His approach to the US banking system is naive, as one might expect from an eager student with little or no practical experience.

"Mr. Bernanke, an academic who has never worked a single day in his life. He will take anything off a cliff: a business, a McDonald's stand, the Federal Reserve. And I have to say I have a certain sympathy for him as a character. He's ok, but completely useless. I would not even hire him as my butler...Mr Bernanke is a madman, a destroyer of the value of money. And he is a wealth destroyer and an economic criminal. It is the duty of a central bank to keep the value of money. I believe today for ninety percent of Americans life is harder than it was in 1999. Basically I think they are a bunch of crooks."
Marc Faber on King World News

"There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002. (He had a brief stint in 2005 as chair of President Bush’s Council of Economic Advisors.) At a point when at least some economists recognized the housing bubble and began to warn of the damage that would result from its collapse, Bernanke insisted that everything was fine and that nothing should be done to rein in the bubble."
Bernanke and the Corruption of Washington Culture - Dean Baker