Maybe QE2 Is No Big Deal

11/02/2010 12:55 pm EST


Igor Greenwald

Chief Investment Strategist, MLP Profits

Updated Thursday, November 4, 2010

Igor Greenwald,’s Global Investing editor, wonders what would happen if the Fed gave a money-printing party and nobody came—that is, if QEII had little effect on the nation’s wheezing economy.

I refuse to be the only financial commentator in the Milky Way to pass up a chance to rag on Ben Bernanke. The chairman of the Federal Reserve may have a lifetime of highly relevant scholarship going for him, but if the people who offer unsolicited opinions for a living are to be believed, he lacks the virtue of common sense when it comes to money.

That’s an unfair charge to lodge against a man who did most of the heavy lifting required to dodge a depression. But lodged it’s been, over and over and over again.

Many ridicule the notion that printing extra money is an answer to anything. But the real problem isn’t the Fed’s money-printing bent so much as its plans for all that extra green. It’s time to fire up those helicopters and drop the newly minted currency on Main Street.

Why? Because Main Street would spend the money, whereas Wall Street has already had its fill. That’s one reason Bernanke remains popular with investors. With friends like that, no wonder the general public is leery. Bernanke’s job approval rating has slipped this year in The Harris Poll, along with the economy’s momentum, before recovering a bit recently.

But even erstwhile supporters, including some of the chairman’s friends and former colleagues, doubt the ultimate efficacy of the bond purchases the Fed announced Wednesday. With corporate credit as easy as it gets and private loan demand lacking, how will marginally lower long-term rates boost aggregate demand or economic output?

One of the main proponents of another round of bond purchases, New York Fed President William Dudley, argues that the resulting lower rates “would support the value of assets, including housing and equities,” in addition to cutting housing costs for the homeowners able to refinance, thereby increasing “income left over for other spending.”

Unless, of course, one’s home is worth less than the mortgage (some 25% of consumers) or he or she is unemployed or underemployed (a partially overlapping 17%), or has already refinanced or rents.

More to the point, additional bond purchases by the Fed may not lower rates as policy makers expect. The first round of such purchases last year coincided with a steady run-up in rates as growth indicators and risk appetites perked up.

A lot of this round of buying likewise seems to have been priced in to the markets before the fact. And much of the money the Fed is likely to free up by buying bonds will ultimately leave the country for warmer climes and headier returns in hardier currencies.

It’s possible, evidently, to crank up the paranoia to 11 and concoct a scenario in which quantitative easing turns an inflation rate near 1% into a hyperinflationary spiral in a matter of months. The more probable outcome is a slow but persistent leak out of the bond market as commodities and emerging markets extend their runs. Stocks around the world were valued at some $50 trillion in September—and debt and currency markets are much larger. If the Fed throws a $500-billion pebble into this ocean, expect ripples rather than a tsunami.

It would have been better for the Fed to send a check to every American, putting newly created money into the hands of people who would spend at least some of it quickly. That would have been truly unconventional and far more stimulative than the current plan, which will tend to lift the higher-yielding, mostly foreign, assets.

Sure there’s nothing about such giveaways in the Federal Reserve Act, and some might argue that anything not specified is prohibited. But I’d bet that banks would have honored the Fed’s checks, and other alternatives have been suggested for getting the Fed’s money spent, instead of invested overseas. A prompt and progressive stimulus that didn’t increase the national debt and put money directly into people’s pockets would have been effective economic remedy and a crowd pleaser.

Instead, we got the all-but-promised bond purchases, and must pray that the economy picks up before the Fed exhausts its credibility.

Perhaps the biggest service such a program could perform would be to fade from the headlines as quickly as possible. If the Fed prints more money and the world as we know it doesn’t end, the many pessimists might finally notice the abundant and inexpensively valued corporate profits, backed by broadly diversified global growth.

There’s no telling how all the naysayers might react if they realized the Fed’s not an omnipotent voodoo cult. But the bandwagon could get crowded in a hurry.

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