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Tuesday, March 06, 2012

That Morphine Problem

An excerpt from Richard Fisher's (Dallas Fed) speech yesterday:
I might add that I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.

Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why? I think it may be because they have become hooked on the monetary morphine we provided when we performed massive reconstructive surgery, rescuing the economy from the Financial Panic of 2008–09, and then kept the medication in the financial bloodstream to ensure recovery. I personally see no need to administer additional doses unless the patient goes into postoperative decline. I would suggest to you that, if the data continue to improve, however gradually, the markets should begin preparing themselves for the good Dr. Fed to wean them from their dependency rather than administer further dosage.
He then proceeds to make bitter remarks about investing based on trends in the real economy. I guess this is why Warren Buffett cancelled the press conference - Fisher did it for him.

The reason why WS wants QE3 is that it reliably does certain things so that they can turn in a short-term profit, and they need that profit. To return to Fisher:
As an official of the Federal Reserve charged with making monetary policy for the country as a whole, I am constantly mindful that investment and job-creating capital is free to roam not only within the United States, but to any place on earth where it will earn the best risk-adjusted return. If other countries with stable governments offer more attractive tax and regulatory environments, capital that would otherwise go to creating jobs in the U.S.A. will migrate abroad, just as intra-U.S. investment is migrating to Texas.

Thus, even if one were to somehow have 100 percent certainty about the future course of Federal Reserve policy and be completely comfortable with it, without greater clarity about the future course of fiscal and regulatory policy and whether that policy will be competitive in a globalized world, job-creating investment in the U.S. will remain restrained and our great economic potential will remain unrealized.
He really kicked some gonads with this one.

In the meantime, Treasury auctions are doing very well indeed and as the ECB updated its balance sheet, it looks like they will continue to do well. Money is flowing into India quite rapidly, and maybe it will start to move into China.

The longer term risks for certain Euro participants are real now. It's difficult to figure the exit strategy - at times I have wondered whether the ECB has one.


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