By David William.
The quadrillion dollar question is what is motivating the Chairman of the Federal Reserve Bank, Ben Bernanke, to implement what is called QE3.
QE3 sounds like a new luxury cruise ship, and it does ironically bring to mind a metaphor of the un- sinkableTitanic coming out on the losing end of an iceberg. QE3 stands for the Federal Reserve Bank’s quantitative easing, round three. No one knows how many rounds there are going to be in this fight but so far it is a split decision.
The Federal Reserve normally tries to intervene in the economy by regulating the money supply and interest rates by buying and selling risk-free treasury bills. Quantitative easing is new for the U.S. since the Great Recession of 2008 and it now allows the Fed to buy other financial assets of whatever the banks want to unload, such as very risky sub-prime mortgages and derivative securities.
This brings to mind that just a few months ago the financial world was briefly shocked to learn that the bank ran by the golden boy of Wall Street, Jamie Dimon of J.P. Morgan had unexpectedly and shockingly suffered a multi-billion dollar loss on derivative securities trading. The public still does not know how big that loss was. It was front page news for a few weeks but has since been swept under the rug. It makes one wonder if those cats and dogs are some of the assets that the Fed is going to be buying using quantitative easing.
An even bigger worry is the fear that the J.P. Morgan multi-billion dollar trading loss is just the tip of a gigantic financial iceberg of a quadrillion dollar derivative market disaster that could easily bring down the U.S. banking system and the entire world economy again. Maybe QE3 is the appropriate name after all for a sinking cruise ship that has hit a financial iceberg that is going to sink the ship of state too. Chairman Bernanke may be getting the life boats ready while trying to use quantitative easing to keep the economy afloat at least until after the election.
Those that have a memory of the beginnings of the economic crash of 2008 recall that there were warning sounds of rumblings about sub-prime mortgages way down the train tracks in 2007, before the public even knew what a sub-prime mortgage is, let alone a leveraged ETF of credit default swaps. By the time we saw the light at the end of the tunnel it was too late to get out of the way of the freight train racing down the track. Most people still don’t know what hit them.
As President George W. Bush said: “Fool me once and shame on you; fool me again and…well you’re not going to fool me again”. So before we get fooled again, is Chairman Bernanke trying to tell us something with a distress flag of QE3, or is it just an election year politics-as-usual and financial favors to President Obama’s real base, the banks and Jamie Dimon in particular?
Forget Econ 101, here is the true story of the Fed. As with a lot of other powers of the Congress given to it by the United States Constitution, the Congress reneged on its responsibility to regulate the nation’s money. They gave that power away to a special interest group of bankers in 1913.
That banking cartel had profited and became wealthy by financing the industrial revolution and the largest industries of steel, railroads, oil companies and manufacturing. Some of the banks’ biggest profits though came from raising money for the U.S. government and foreign governments, mostly to fight wars. The banks did this by simply buying government issued bonds from governments and reselling some of them to the public, and keeping some of them for themselves, at very large profits.
Today the Federal Reserve continues to serve its real masters: The U.S. banking cartel. Whenever there is a conflict concerning the best interest of the people, the public will usually be sacrificed.
A simple example of putting banks ahead of people is that five years after the worst financial crisis of the U.S. since the 1930’s Great Depression, the banks “seem” to have returned to financial health and profitability, while the American people are still struggling with high unemployment, low wages, home foreclosures and a Great Recession that keeps dragging on and on. The operative word is “seem”…the banks seem by all outward appearances to be healthy and profitable again. But are they really?
The financial derivative market is a dangerous quadrillion dollar market. A slight fluctuation of a fraction-of-a-fraction of one percent can result in hundreds of billions of dollars and even trillions of dollars in losses. (See TRNN report: “Quadrillion Dollar Derivatives Market 20 Times Global GDP”)
The real question now is was the J.P. Morgan multi-billion dollar loss just an isolated fluke or is it the tip of the derivative iceberg that is still lurking to sink the banks and the worldwide economy again? Is QE3 a warning signal that the Fed fears a financial disaster is pending?
Publicly the Fed says that QE3 will bring down long-term interest rates instead of just short-term interest rates, which are already at zero. The Fed claims that bringing down long-term interest rates will help stimulate long-term investment and boost the economy and employment.
Many economist disagree with the ability of quantitative easing to help stimulate the economy and point to the fact that Japan has been using quantities easing since 1999 without the promised effect of economic recovery.
The evidence is that QE3 will do little to stimulate the economy and certainly not in time to give any bump in the polls for President Obama’s re-election. Another more likely suspicion is that QE3 is just an outright gift to the banks by allowing them to unload soured investments onto the Fed at highly inflated prices. It may just be a political payoff to the banks so they will be more supportive in financing President Obama’s campaign as the election comes down to the wire. Just recently the news reports have said that the banks have been massively tilting to Mitt Romney with their money. QE3 may be motivated to stem the money tide from Wall Street to Mitt Romney, and an attempt to even reverse the flow to President Obama. If Mitt Romney wins the presidential election not only will Barack Obama be out of a job but so will Ben Bernanke too.
That may sound too cynical but it is a lot better than the alternative. Political ethics aside, the most troubling concern is that the real motive behind QE3 is that the Fed sees either a giant financial iceberg or another freight train coming right at us again.
Whatever the case, QE3 is not a good sign for the economy, the political process or the vast majority of people who have been adversely affected by the Great Recession through no fault of their own. They are the ones that have been waiting for 5 years for trickle down relief. President Obama and Chairman Bernanke, please look out the window; it is not trickling down outside yet. It is way past time to give people some real bottom up financial recovery for a change we can all believe in.
David William is a political and economic commentator.