Fed Panic

On September 13, the Fed announced QE 3. Pimco head Bill Gross tweeted Bernanke plans to buy mortgages “till the cows come home.”

It’s open-ended along with near zero short-term rates. His move suggests desperation. What does he know, we don’t, and why now?

Things aren’t as they seem. They’re worse.

Troubled Eurozone countries are imploding. Obama practically begged Angela Merkel to keep things intact until post-election. Greece is bankrupt. Only its obituary remains to be written.

Portugal and Ireland are sinking. So is Italy. Spain is practically coming apart. It’s been deteriorating for years. In August alone, depositors withdrew 70 billion euros from its banks. Their combined market cap is 114 billion euros.

They need 20 billion more euros monthly to keep operating. Fund outflows cause enormous pressure. Collapse may be impossible to prevent. Nationalization hasn’t helped.

Bankia was taken over. Its problems persist. It just needed another 5.4 billion rescue package. For sure it’ll need lots more.

Spain’s regions are cratering. Andalusia, Valencia, Murcia and Catalonia requested federal help without conditions. Major problems across the country look intractable. Spain asked the ECB for 100 billion euros for its banks.

It needs sovereign debt help. It won’t accept conditions. Its economy is too weak. It also rejects external interference in its internal affairs. It’s got plenty on its hands dealing with public outrage.
For example, half of all working aged youths are unemployed. Conditions are combustible, and not just in Spain. One wrong-headed move too many could ignite things far more than already. People take only so much pain before they explode.

Germany is Europe’s strongest economy. At the same time, it’s weakening. George Soros said it’s heading for depression in six months because of wrongheaded policies. It’s bearing too much of the burden for other troubled EU countries.

Its debt to GDP ratio is 90%. It’s already committed over 2.1 trillion euros in bailout help. It’s spending itself to oblivion if this doesn’t stop. At the same time, it’s force-feeding austerity when stimulus is needed.

Perhaps QE 3 funds are earmarked for Europe. Call it backdoor bailout help. ECB money creation is limited. Bernanke can print all he wants. It’s no secret that if Europe collapses, America and the global economy follows at a time China’s heading for a hard landing.

Coordinated central bank intervention on top of everything done so far suggests panic. Things are worse than they seem. Bernanke, Draghi, and BoE’s Mervyn King are scared stiff. Policy appears to be do something, anything, no matter how long the odds. Hail Mary attempts usually fail.

Few expected an open-ended Fed pledge to buy $40 billion worth of mortgage bonds monthly and continue Operation Twist. Officially it’s called the Maturity Extension Program.

It exchanges short-term debt for longer maturities. In theory, it’s to lower interest rates on 10-year Treasuries. It also represents QE without printing more money and thereby dampens inflationary pressures.

For how long in an environment of money madness. Official numbers mask its high level. Based on 1980s model, Shadowstats estimates around 9%.

Everyone who eats, drives a car, heats and/or air conditions a home, has health insurance and other medical expenses, and/or pays tuition bills knows inflation is high and rising. Household budgets are sorely stressed.

Lloyds TSB Bank analyst said Bernanke was true to his “Helicopter Ben” reputation. Pimco’s Mohamed headlined his Financial Times op-ed “QE 3 is a sign of the Fed’s policy purgatory,” saying:

“(T)he Federal Reserve confirmed on Thursday that it is operating in policy purgatory: incapable of delivering the good economic outcomes it desires, yet unable to exit from an experimental policy stance that risks a widening array of collateral damage and unintended consequences.”

Previous actions failed. Economic conditions may be worse than most think. On August 31, Bernanke cited “daunting economic challenges.”

He expressed “grave concern” about high unemployment. He knows headline U 3 deception masks its severity. Youth unemployment is dangerously high. Workers leaving the labor force in huge numbers shows how bad things are.

Monetary policy is the only game in town. Political Washington force feeds austerity with much more coming. Conditions aren’t uncertain. They’re awful and heading south.
Fed policy suggests panic mode. Will anything it does help?

“History and detailed analyses of the problems underpinning America’s prolonged economic malaise suggest these well-intentioned measures will again fail to secure a much better economic situation.”
“This is also behind the widening gap between economists urging the Fed to do even more and those favoring less.”

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