The Beginning Of The End
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QE4? The Big Wall Street Banks Are Already Complaining That QE3 Is Not Enough

QE3 has barely even started and some folks on Wall Street are already clamoring for QE4.  In fact, as you will read below, one equity strategist at Morgan Stanley says that he would not be “surprised” if the Federal Reserve announced another new round of money printing by the end of the year.  But this is what tends to happen when a financial system starts becoming addicted to easy money.  There is always a deep hunger for another “hit” of “currency meth”.  Federal Reserve Chairman Ben Bernanke was probably hoping that QE3 would satisfy the wolves on Wall Street for a while.  His promise to recklessly print 40 billion dollars a month and use it to buy mortgage-backed securities is being called “QEInfinity” by detractors.  During QE3, nearly half a trillion dollars a year will be added to the financial system until the Fed decides that it is time to stop.  This is so crazy that even former Federal Reserve officials are speaking out against it.  For example, former Federal Reserve chairman Paul Volcker says that QE3 is the “most extreme easing of monetary policy” that he could ever remember.  But the big Wall Street banks are never going to be satisfied.  If QE4 is announced, they will start calling for QE5.  As I noted in a previous article, quantitative easing tends to pump up the prices of financial assets such as stocks and commodities, and that is very good for Wall Street bankers.  So of course they want more quantitative easing.  They always want bigger profits and bigger bonus checks at the end of the year.

But at this point the Federal Reserve has already “jumped the shark”.  If you don’t know what “jumping the shark” means, you can find a definition on Wikipedia right here.  Whatever shreds of credibility the Fed had left are being washed away by a flood of newly printed money.

Those running the Fed have essentially used up all of their bullets and the next great financial crisis has not even fully erupted yet.

So what is the Fed going to do if the stock market crashes and the credit market freezes up like we saw back in 2008?

How much more extreme can the Fed go?

One can just picture “Helicopter Ben” strapping on a pair of water skis and making the following promise….

“We are going to print so much money that we’ll make Zimbabwe and the Weimar Republic look like wimps!”

Sadly, the truth is that money printing is not a “quick fix” and it never has been.  Just look at Japan.  The Bank of Japan is on round 8 of their quantitative easing strategy, and yet things in Japan continue to get even worse.

But that is not going to stop the folks on Wall Street from calling for even more quantitative easing.

For example, the top U.S. equity strategist for Morgan Stanley, Adam Parker, made headlines all over the world this week by writing the following….

“QE3 will likely be insufficient to significantly boost equity markets and we wouldn’t be at all surprised to see the Fed dramatically augment this program (i.e., QE4) before year-end, particularly if economic and corporate news continue to deteriorate as they have over the past few weeks.”

Did you get what he is saying there?

He says that QE3 is not going to be enough to boost equity markets (the stock market) so more money printing will be necessary.

But wasn’t QE3 supposed to be about creating jobs and helping the middle class?

I can almost hear many of you laughing out loud already.

As I have written about before, QE3 is unlikely to change the employment picture in any significant way, but what it will do is create more inflation which will squeeze the poor, the middle class and the elderly.

The truth is that quantitative easing has always been about bailing out the banks, and the hope is that this will trickle down to the folks on Main Street as well, but that never seems to happen.

Wall Street is not calling for even more quantitative easing because it would be good for you and I.  Rather, Wall Street is calling for even more quantitative easing because it would be good for them.

A CNBC article entitled “Fed May Need to Boost QE ‘Dramatically’ This Year: Pros” discussed Wall Street’s desire for even more money printing….

The Federal Reserve’s latest easing move has been nicknamed everything from “QE3″ to “QE Infinity” to “QEternal,” but some on Wall Street question whether the unprecedented move will be QEnough.

And of course everyone pretty much understands that QE3 is definitely not going to fix our economic problems.  Even most of those on Wall Street will admit as much.  In the CNBC article mentioned above, a couple of economists named Paul Ashworth and Paul Dales at Capital Economics were quoted as saying the following….

“The Fed can commit to deliver whatever economic outcome it likes, but the problem is that  the crisis in the euro-zone and/or a stand-off in negotiations to avert the fiscal cliff in the U.S. may well reveal it to be like the proverbial Emperor with no clothes”

An emperor with no clothes?

I think the analogy fits.

The Federal Reserve is going to keep printing and printing and printing and things are not going to get any better.

At this point, economists at Goldman Sachs are already projecting that QE3 will likely stretch into 2015….

The Federal Reserve’s QE3 bond buying program announced earlier this month could last until the middle of 2015 and eventually reach $2 trillion, according to an estimate from economists at Goldman Sachs.

The Goldman economists also wrote in a report that they believe the Fed will not raise the federal funds rate until 2016. This rate, which is used as a benchmark for a wide variety of consumer and business loans, has been near 0% since December 2008. The Fed said in its last statement that it expected rates would remain low until mid-2015.

So why is Wall Street whining and complaining so loudly right now?

Well, even with all of the bailouts and even with all of the help from the first two rounds of quantitative easing, things are still tough for them.

For example, Bank of America recently announced that they will be laying off 16,000 workers.

In addition, there are rumors that 100 highly paid partners at Goldman Sachs are going to be getting the axe.  It is said that Goldman will save 2 billion dollars with such a move.

We haven’t even reached the next great financial crisis and the pink slips are already flying on Wall Street.  Meredith Whitney says that she has never seen anything quite like this….

“The industry is as bad as I’ve seen it. So it’s certainly not a great time to be on Wall Street.”

But of course Wall Street is not going to get much sympathy from the rest of America.  The truth is that things have been far rougher for most of the rest of us than things have been for them.

When the last crisis hit, they got trillions of dollars in bailout money and we got nothing.

So most people are not really in a mood to shed any tears for Wall Street.

But of course the Federal Reserve is definitely hoping to help their friends on Wall Street out by printing lots of money.

You never know, by the time this is all over we may see QE4, QE5, QE Reloaded, QE With A Vengeance and QE The Return Of The Bernanke.

Meanwhile, Europe is gearing up to print money like crazy too.

A couple months ago, European Central Bank President  Mario Draghi made the following pledge….

“Within our mandate, the European Central Bank is ready to do whatever it takes to preserve the euro, and believe me, it will be enough.”

And of course the Bank of Japan has joined the money printing party too.  The following is from a recent article by David Kotok….

The recently announced additional program by the BOJ includes a fifty-percent allocation to the purchase of ten-year Japanese government bonds. The other fifty percent will buy shorter-term government securities. Thus, the BOJ is applying half of its additional QE stimulus to extracting long duration from the government bond market, denominated in Japanese yen.

All of the central banks seem to be getting on the QE bandwagon.

But will this fix anything?

Unfortunately it will not, at least according to Paul Volcker….

“Another round of QE is understandable – but it will fail to fix the problem. There is so much liquidity in the market that adding more is not going to change the economy.”

Sadly, most Americans have a ton of faith in the people running our system, but the truth is that they really do not know what they are doing.  Just check out what Dallas Fed President Richard Fisher said the other day….

“The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody – in fact, no central bank anywhere on the planet – has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank – not, at least, the Federal Reserve – has ever been on this cruise before.”

Can you imagine the head coach of a football team coming in at halftime and telling his players the following….

“Nobody on the coaching stuff really has any idea what will work.”

That sure would not inspire a lot of confidence, would it?

Perhaps the Fed should be open to some input from the rest of us.

Actually, back on September 14th the Federal Reserve Bank of San Francisco posted a poll on Facebook that asked the following question….

What effect do you think QE3 will have on the U.S. economy?

The following are the 5 answers that got the most votes….

-“Long term, disastrous”

-“Negative”

-“Thanks for $5 gas”

-“I can’t believe you think this will work!”

-“Fire Bernanke”

So what do you think about the quantitative easing that the Federal Reserve is doing?

Please feel free to post a comment with your thoughts below….

Bernanke Claims That The Fed Has Averted A Second Great Depression By Bailing Out The Too Big To Fail Banks

Federal Reserve Chairman Ben Bernanke claims that the Federal Reserve averted a second Great Depression by bailing out the big Wall Street banks during the last financial crisis, and he says that if a similar financial crisis comes along that the correct “policy response” will be to do the exact same thing again.  This was the theme of the lecture that Bernanke delivered to students at George Washington University on Tuesday.  In previous lectures Bernanke has defended the existence of the Fed and detailed the history of Fed activities, but on Tuesday he addressed things that have happened since he has been at the helm of the Fed.  And according to Bernanke, he has been doing a great job.  Bernanke told the students that the “threat of a second Great Depression was very real” and that the Federal Reserve did exactly what needed to be done to fix the financial system.  Unfortunately, the truth is that all Bernanke did was kick the can a bit farther down the road.  You can’t fix a debt problem with more debt, and the debt bubble we are living in today is far larger than it was in 2008.  Will Bernanke still be trying to portray himself as a hero when this house of cards finally falls apart?

During his lecture to the students on Tuesday, Bernanke stated the following….

“I think the view is increasingly gaining acceptance that without the forceful policy response that stabilized the financial system in 2008 and early 2009, we could have had a much worse outcome in the economy.”

So what did that “forceful policy response” entail?

Well, on slide 24 of his presentation to the students Bernanke tells us….

• On October 10, 2008, G‐7 countries agreed to
work together to stabilize the global financial
system. They agreed to
– prevent the failure of systemically important
financial institutions
– ensure financial institutions’ access to funding and
capital
– restore depositor confidence
– work to normalize credit markets

Please note that not all financial institutions got bailed out.

In fact, hundreds of small and mid-size U.S. banks failed during the financial crisis.

It was only the “systemically important financial institutions” that got bailed out.

So who decided which financial institutions were important enough to be bailed out?

The Federal Reserve made those decisions. There were no Congressional votes and no input from the public.  The Federal Reserve determined who the winners and the losers would be in secret and without any public debate.

Sure sounds “democratic”, eh?

But we are told to trust them because they are supposedly the experts.

So once the Federal Reserve bailed out the “too big to fail” banks, what was the outcome?

On page 25 of his presentation to the students Bernanke claimed that the bailouts successfully prevented the global financial system from collapsing….

• The international policy response averted the collapse of the global financial system.

But it wasn’t just big Wall Street banks that got bailed out.  Bernanke says that AIG was also bailed out because the insurance company was deemed to be too “interconnected with many other parts of the global financial system” to be allowed to fail….

Because AIG was interconnected with many other parts of the global financial system, its failure would have had a massive effect on other financial firms and markets.

Once again, we see that it is the Federal Reserve who picks the winners and the losers.

AIG got bailed out and was then able to pay 100 cents on the dollar of what it owed to Goldman Sachs.

That sure worked out well for Goldman Sachs.

In all, the Federal Reserve issued a grand total of more than 16 trillion dollars in secret loans during the financial crisis.

The big Wall Street banks got showered with cash while hundreds of smaller banks were allowed to die like dogs.

The fact that the Fed greatly favors the big Wall Street banks has allowed them to grow massively in size and in power.

Back in 1970, the 5 biggest U.S. banks held 17 percent of all U.S. banking industry assets.

Today, the 5 biggest U.S. banks hold 52 percent of all U.S. banking industry assets.

The “too big to fail” banks just keep getting bigger and bigger and bigger.

Yet during his presentation to the students, Bernanke tried to talk out of both sides of his mouth by claiming that it is not a good thing for some banks to be “too big to fail”….

“But clearly, it is something fundamentally wrong with a system in which some companies are ‘too big to fail.'”

So who is to blame for them being so big?

Well, the Federal Reserve is probably the biggest culprit.

Thanks Bernanke.

The big Wall Street banks are bigger than ever and they are also more unstable than ever.

According to the Comptroller of the Currency, the biggest U.S. banks have exposure to derivatives that is absolutely mind blowing.  Just check out these numbers which have just been released….

JPMorgan Chase – $70.1 Trillion

Citibank – $52.1 Trillion

Bank of America – $50.1 Trillion

Goldman Sachs – $44.2 Trillion

So what is going to happen when that bubble pops?

Is Bernanke going to zap tens of trillions of dollars into existence to bail out that gigantic mess?

Meanwhile, the debt bubble that we are all living in just keeps exploding in size.

Total student loan debt in the United States is over 1 trillion dollars at this point.  Consumer debt is rising.  Millions of mortgages are past due.

The American people are not in better financial condition than they were during the last financial crisis.  In fact, they are significantly worse off.

All over America, state and local governments are also drowning in debt.  In fact, there have been several very notable municipal bankruptcies lately.

And the U.S. government is racking up debt at a pace that is almost unimaginable.

When the last financial crisis began, the U.S. national debt was about 10 trillion dollars.

Today, it has risen to 15.5 trillion dollars.

So Bernanke did not fix anything.

The best that can be said is that he kicked the can down the road a little bit and made our long-term financial problems a lot worse at the same time.

Bernanke can create money out of thin air and loan it to his friends all he wants, but he is not going to be able to prevent this house of cards from crashing down indefinitely.

So grab a bucket of popcorn and get ready.  The next few years are going to be fascinating to watch.

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