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With advanced degrees in both economics and finance, I place great deal of importance upon macreconomic developments and fundamental analyses of industries and individual companies In typical markets, I seek out investment themes which offer compelling reasons to invest in a group of like... More
  • The Unspoken Truth of QE (FT) 2 comments
    Aug 29, 2009 5:07 PM
    The Deputy Governor’s remarks on ‘quantitative easing’ (QE) suggest the Bank of England has abandoned any hopes it might have had that its asset purchases would lead to a revival in bank lending.  Mr Bean said that ‘under normal circumstances’ (presumably circumstances in which the central bank would not be conducting QE anyway) a rise in commercial bank reserves consequent on central bank asset purchases would be expected to lead to increased lending.  But this did not happen in Japan earlier in this decade and, similarly, it was unlikely to happen in the UK now.  It is questionable whether Japan’s experience is relevant to the Bank’s QE, given the differences in money market structures in the two countries, but that is not the point.  Mr Bean is saying the banks are unlikely to respond to QE, given the overwhelming pressure they are under to de-leverage their balance sheets.  The benefits from QE will come, in his view, from lower long-term yields or, more accurately, from those yields not rising as far as they might.  He admitted it would take some years before firm conclusions could be drawn regarding the impact of QE on nominal spending in the economy.  We may observe that, if the effects are as difficult to determine as that, it is surely impossible to calibrate a QE policy-response to a deviation in nominal spending from the desired path, expected over the period to the forecasting horizon.  This makes QE a dangerous instrument for the authorities to use.  

    Further, Mr Bean appears to accept that QE works by distorting market valuations.  On his analysis, gilt yields would be higher without QE, presumably because the market would be sending negative signals about the fiscal outlook.  QE relaxes the constraints that rising yields would otherwise exercise over the fiscal deficit and might even allow the public debt to rise past the point where ending QE operations would trigger a crisis of confidence in the UK government’s credit.  In other words, there may be no viable exit from QE.  Mr Bean did not explore these possibilities. He did suggest, though, that the crisis had resulted in a permanent loss of output . . .  In any event, the difficulties of quantifying such effects render any monetary policy decisions based on the ‘output gap‘, such as those of the MPC, hard to justify. 
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  • Mark Bern, CFA
    , contributor
    Comments (7597) | Send Message
    It sure is reassuring to know that those employing QE around the world are not certain 1) how to reverse course, 2) when to reverse course, or 3) whether what they are doing will eventually work out for the best or not.


    If I recall what it seemed they were all saying at the time that decisions were made, their justification was something like, "Well, we have to try something." The current policies seem more like leaders were grasping at straws in hope of finding, by sheer chance, something that would work.


    On the other hand, the boyz at GS, MS, BoA, etc. were probably doing the advising and understood exactly what might happen. When one is preparing to manipulate markets on a grand scale it is helpful to have the "police" and "judges" in your pocket. The current market activities are the grandest scheme to pillage society ever deployed in the history of mankind (IMHO). The scary part is that they have been so blatant; not really trying to cover their tracks. I think we really need to do something about our elected officials in Washington. I no longer trust either party.


    Anyone who agree should check out
    29 Aug 2009, 10:04 PM Reply Like
  • CautiousInvestor
    , contributor
    Comments (3092) | Send Message
    Author’s reply » Well summarized Mark. We don't know if it will work and, if it should work, we don't know when it will kick-in and to what extent; it occurs to me this process might be just a bit difficult to calibrate as there are no benchmarks except in hindsight. Actually, that's no big deal because how they usually formulate and execute policy; that way they know what there mission is even if the economy has imploded. The mess on the fical side is covered in John's instablog on Johm Mauldin's last missive.
    29 Aug 2009, 10:37 PM Reply Like
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