How Ben Bernanke Saved the World

“It became necessary to destroy the town to save it.”

                    U.S. major talking about Bến Tre, Vietnam

The Wall Street Journal doesn’t have a humor section, so “How the Fed Saved the Economy” appeared on the op-ed pages under the byline of Ben Bernanke, former chair of the Federal Reserve Board.

In his commentary, Bernanke takes credit for saving the economy – rather than responsibility for the most dismal recovery in history.Bernanke

Anyone who has read even one of our blog posts knows that we would disagree with any claim about the Fed saving the world, especially given that the economy continues its slow-motion deterioration after nearly eight years and several trillion dollars’ worth of “saving” by the Fed.

However, Mr. Bernanke has a book to sell.  And while it will likely appear in the non-fiction section, we’re guessing by its title that it is even more self-congratulatory and less fact-filled (if that’s possible) than his op-ed piece.

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Bazooka or Blunderbuss?

Any day now, it seems that European Central Bank President Mario Draghi’s full head of hair will migrate to his chin and turn gray, as the central banker morphs into former Fed Chair Ben Bernanke.Bazooka 2

Last week, the ECB began its purchase of €60 billion ($64.2 billion) a month in Eurozone government bonds, with total purchases expected to eventually exceed €1 trillion.

He’s called the purchase his “big bazooka,” but it could turn out to be a blunderbuss, an antiquated weapon that’s prone to misfiring.

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The United States of Europe

The U.S. has been imitating Europe for years, boosting government spending and racking up debt, creating a healthcare system that doesn’t work and adding costly new social benefits.

Now it’s Europe’s turn to imitate the U.S.  As expected, European Central Bank head Mario Draghi announced a quantitative easing (QE) program for Europe last week.

Over the past six years, the U.S. Federal Reserve Board’s three QE programs boosted the Fed’s balance sheet from less than $1 trillion to $4.48 trillion.  In comparison, the ECB’s QE program is modest; the ECB will purchase $1.24 trillion of existing sovereign bonds and debt securities over the next 18 months.

But any QE program would be modest in comparison with the Fed’s.  And, long term, maybe the first round of QE doesn’t work, the ECB will continue to imitate the U.S. and follow with additional rounds of bond buying.

The ECB’s action raises a few questions:

If Draghi believes that bond buying is going to help Europe, why hasn’t he tried it before now?  The ECB has tried everything but QE, but primarily relied on forward guidance, which amounts to talking about the economy.  Forward guidance would be an absurd economic policy anywhere, but in a central bank – but not as absurd as QE.  Forward guidance also doesn’t require the purchase of trillions of dollars’ worth of assets.

Will QE have an impact on interest rates if they are already near zero?  How much lower can they possibly go?  And if interest rates that low have not stimulated spending and investment, what difference will a few basis points make?  QE is enacted to lower interest rates, because – in theory, anyway – the lower rates go, the more they will stimulate spending and investment.  However, European interest rates are already near zero and the interest rate on bank deposits is negative.

Why is the ECB worried about lower

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Satan Is a High-Frequency Trader

Satan is now firmly in control of the markets.

No, we’re not talking about Ben Bernanke, aka Edward Quince.  His time has passed.  We’re talking about a high-frequency trader who also happens to be hell’s CEO.

satanAs evidence, consider Thursday’s market plunge.  The Dow Jones Industrial Average (DJIA) fell 334.97 points, its largest loss of the year.  The drop took place, as Zerohedge noted, after “ ‘someone’ canceled-and-replaced orders for 666 contracts 26 times in the 1130ET to 1200ET period,” after which “selling accelerated lower, no reversal, to close at the lows on heavy volume.”

The number 666 is, of course, the winning number in hell’s lottery.  To trade 666 contracts 26 times, you need a lot of capital in your account.  Most traders would avoid using the devil’s number, but someone – or, more likely, some firm – was trying to make a statement.

What could it mean?  That Satan is in charge, of course.

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Mario the Magnificent

It will take more than higher prices to cure what ails the European economy, but Wall Street reacted to the European Central Bank’s inflation-boosting efforts by setting new records yesterday.

Action by the ECB has been widely anticipated since last month, when ECB President Mario Draghi announced that the ECB would be “comfortable acting” at this month’s meeting.  With a report this week that Eurozone inflation was just 0.5%, action by the ECB was all but certain.  The ECB’s target rate of inflation is just under 2%.

Anticipation of ECB action has been helping to prop up the U.S. market at a time when the Federal Reserve Board is winding down its quantitative easing program by reducing its purchase of bonds by $10 billion per month.  Apparently, as long as someone is following easy money policies, the markets are happy.

The actions announced by ECB President Mario Draghi did not include bond buying (although there are no Eurozone bonds).  That’s in keeping with previous actions by Draghi, who previously relied on “forward guidance” to boost European markets and achieve monetary goals.

Forward guidance, as we’ve previously explained, is simply the act of talking about what the central bank will do in the future.  Keeping interest rates low, for example, by saying that the ECB will keep interest rates low.

Banks to Pay for Deposits

The most significant action announced by the ECB was to lower the interest rate on bank deposits, including reserve holdings in excess of the minimum reserve requirements, from zero to -0.10%.

In other words, banks will pay a fee on money they fail to lend out.  Whether or not that stimul

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Talking the Talk

When’s the last time you’ve heard anything about the sovereign debt crisis?

We’ve seen more activity in a tortoise than we’ve seen in Europe of late.  Maybe Vladimir Putin needs to invade Europe just to see if the cultured continent is still functioning.

Europe, though, has been quietly going about its business in much the same way as the U.S.  Bond yields have been at record lows and stock prices have been near record highs across the continent.  But, as in the U.S., just because the market is performing well, it doesn’t mean the economy is performing well.

The jobless rate in Greece is 26.7% and Spain is not far behind at 25.3%.  Overall, unemployment is at 11.8%.  In comparison, the U.S. rate is 6.3% … although the U-6 rate remains at 12.3%.Europe

Forward Guidance in Europe

Seemingly, the difference between Europe’s approach and the U.S. approach has been Europe’s reliance on forward guidance, which to date has propped up Europe’s markets.

There was talk about relying on forward guidance in the U.S. last year, but instead the Federal Reserve Board continued to buy bonds.  Talk about forward guidance is ironic, given that forward guidance is simply the act of talking … saying what you expect to do without actually doing much of anything.

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Economic Stagnation of Olympic Proportions

Russian President Vladimir Putin is a busy man.  He’s found time to prop up Syrian dictator Bashar Assad, negotiate a face-saving chemical weapons deal with President Obama and support violence against Ukrainians, all while overseeing the construction of the most expensive Olympic Village in the history of the games.

The Olympic Village at Sochi had a projected cost of $12 billion.  The actual cost was $50 billion.  So no more complaining about The Big Dig.  It could have been worst.

PutinAnd, like The Big Dig, all that money failed to buy quality construction.  Stories abound of shoddy construction and faulty work.  The Olympic Village is more like a Potemkin Village.

At the Olympics, color, pageantry and the world’s best athletes draw the television cameras, while a few hundred kilometers away, the Ukrainian government, with help from the Russian government, is killing its people.  This week, violence in Ukraine was the worst it’s been since the breakup of the Soviet Union.

As with Syria, the U.S. is leading from behind.  While the European Union has at least announced sanctions, the U.S. is only considering sanctions.  President Obama denounced Ukraine violence “in the strongest terms,” but talking is the weakest action.

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