Posts Tagged ‘federal reserve’

May 28th, 2012


Drowning in Debt? QE making you Queasy? Try Monetary Dialysis

As Spain heads to debtors prison, questions are being asked about the viability of the whole Euro project. It’s become clear that a large scale monetary union without fiscal integration, is not a viable long-term structure. Distortions in interest rates and currency levels are good for some but not for others. Add in the corruption of the entire financial system and you have a recipe for disaster that impacts everyone.

Quantitative easing is also not working. Why not?

Quantitative Easing first entered popular language during the 2008 Global Financial Crisis. Central banks, specifically the US Federal Reserve (FED) and the Bank of England (BoE), tried to provide stimulus to their economies by buying securities from banks, with a goal to reduce monetary conditions and, thereby, hoping to induce an increase in lending and hopefully, as a result, new economic activity.

As interest rates fell to zero, the Fed began QE1 in November 2008 with a $600 billion purchase of Mortgage-backed securities (MBS). It did this by creating new credit in its own account and then exchanging this for the MBS held by the banks. The purpose of this was threefold: to improve bank balance sheets, raise the price of securities (and therefore reduce interest rates along the yield curve) and stimulate new borrowing. This was not an entirely new policy, as Japan had been engaged in the same process for over 10 years, though with limited success. The Bank of England followed suit in March 2009 and started buying UK Government bonds and a limited amount of other high-grade assets.

The initial impact was felt in the asset markets with the price of stocks, bonds and commodities all rising. In fact, rising commodity prices were seen as an unwelcome side effect of QE, given that QE was supposed to boost lending and, therefore, economic activity, specifically new jobs. Banks were supposed to be lending these excess reserves, not speculating in financial markets. The reality was that banks had no interest in lending and businesses and consumers had little interest in borrowing. The central bankers had failed to note that they were in the middle of a huge debt bubble and that `trying to offer new debt into a market saturated with the stuff was hardly going to be a winner.

There is no doubt QE helped restore confidence to the financial markets and, as a side effect, helped steady the general economy. Whether it actually worked in the manner it was supposed to, is highly debatable. As Bank of England governor, Mervyn King, stated when giving evidence to the UK Treasury Committee on QE,

“I can’t guarantee that it (QE) means that bank lending will rise, but what I do believe is that it won’t fall as far as it might otherwise have done”.

In terms of impact, the US bailout of the auto industry had more success with over 1m jobs saved. Whilst the financing aspects were contentious, the outcome has been positive. As Obama aides noted, direct government funding enabled the auto industry to survive and this would not have happened if it had been left to the market. Setting aside the merits of saving the US auto industry, what was crucial and different about this policy was that it involved direct stimulus into the real economy, where people are employed to make products.

As Nouriel Roubini noted, the US Government would have been better off just spending the new credit used for QE directly into the economy. He suggested, in a co-authored 2011 paper, that there should be a massive infrastructure rebuild ($1.2 trillion) in the US, which would create jobs and lay the foundation for “a more efficient and cost-effective economy”. He further noted that the crisis had been exacerbated by “inadequate action” by policymakers who had an “inadequate understanding of what ails us”.

It’s clear that policymakers have not stepped back and tried to understand both the causes and outcomes of the crisis. In a debt deflating environment, no amount of new debt is going to help the problem. Until the bad debt has been cleared, new investment is unlikely to happen and the economy dies a slow death. One option that hasn’t been considered, as Roubini alludes to, is to actually stimulate the real economy directly i.e. the economy that produces real goods and services. Governments can actually print new money and spend it directly into the economy through infrastructure projects. That way the money directly enters the economy and supports real economic activity, in a way that QE was supposed to do but never did.

We actually proposed this type of policy in 2011, immediately after the devastating February 22nd Christchurch Earthquake. A direct injection of $5 billion of new money was suggested, as a way of financing new and necessary infrastructure for the rebuild of the city. At that time, this was calculated to save around $200 million a year in financing costs and avoid further increases in government debt.

Ironically, the Minister of Finance rejected this, on the grounds that it may cause “an adverse combination of high inflation, arbitrary wealth transfers and a loss of confidence in the creditworthiness of New Zealand”. This response supports Roubini’s position that policymakers simply do not understand the problem. In the case of New Zealand, the Minister of Finance seems to be quite happy to keep borrowing money and worsening the financial position of the country.

As has been seen, inflation is non-existent in a debt deflating economy. Of course, any new injections of new money must be carefully monitored and be at a level which is not likely to cause over stimulation of the economy. As Willem Buiter, a former external member of the Bank of England’s Monetary Policy Committee notes, an injection of base money “even in huge amounts, need not become inflationary ever”. Buiter goes on to state that “any inflationary increase impact of the enlarged stock of base money on the stock of bank credit or broad money can be neutralized by either raising bank reserve requirements, or by raising the remuneration rate on excess reserves held by banks”.

Thus, inflationary concerns can be set aside when this double-sided process is undertaken. This type of intervention has been called “Monetary Dialysis”, where clean money comes into the system (newly minted e-notes) and replaces or causes a reduction in debt money (bank credit) in order to keep the money supply at a prescribed level. The key is that the process is managed within the same framework that current monetary conditions are dealt with. No new legislation is required and the process can begin immediately. The RBNZ is already developing a new suite of macro-prudential tools and will be well placed to manage this policy shift.

In this process, all the objections raised by the Minister of Finance are dealt with. Infrastructure is rebuilt, people are employed, goods and services are provided, inflation is stable and money is saved, as there are no financing costs incurred. This really is the ultimate point: its is not about not having enough money, it is whether you have surplus labour (unemployment) and resources (capacity in the economy). This was the stark lesson of the Great Depression and it’s incredible that it still hasn’t been properly understood.

As to the creditworthiness of New Zealand, it is more likely that this will improve, as the overall level of debt falls and the productive economy recovers. What’s not to like about that?


January 29th, 2011

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Feel The Zeitgeist: Moving Forward

Thank you to Jason for alerting me to the new Zeitgeist movie: Moving Forward  (ZMF) which was showing in odd spots around the world recently. It’s now available online and is highly recommended (if not compulsory viewing). I would advise you to see Zeitgeist Addendum (ZA) first (I have posted that up in a previous blog) as that is more focused on the monetary aspects of our societal dysfunction. So here’s the promised review of the film.

The film follows the theme of the previous two movies, namely the issue of debt slavery and the monetary system that underpins it as well as the Venus Project (TVP) which envisions a different societal structure. What is different to ZA is the structure of the film: it splits into four parts: human nature, the market, inequality and the resource based economy. This gives the film, and ultimately the proposition, more depth and more connection for viewers. I know some people still grapple with the explanation of the money system (though my 16 year old son saw the logical answer as quite obvious: why doesn’t the government create the money. doh!) so a look at our innate and determined nature helps to provide some context to the discussion.

Why do we behave the way we do? Does poverty, racism, inequality drive our behaviours? Is our society sick from its institutions and structures? Why does the monetary-market structure treat the well-being of society as irrelevant. Going back to Locke and Smith we see that racism and inequality within the market system was well anticipated. The drive to individual success at all cost (especially social and environmental) was paramount as a system based on cyclical consumption and demand for product was created.

The film posits, quite correctly, that we are stuck on a spin cycle of consuming to be happy even though we must work like slaves to be in this position, that slavery defined by the debt we must accrue in order to enjoy the products paraded before us. That the production process is almost anti-economy, building in obsolescence and focusing on the short term simply puts my pressure on both resources and available money. In essence product sustainability is inverse to economic growth. Yet politicians keep saying they will speed up economic growth. They never say we will build a more healthy society. Perhaps that is because they have swallowed too many blue pills.

So if efficiency, sustainability and preservation are enemies of the current economic system the we have a problem. Crime, war, terror are positives for the economy. Does any of this make sense? Certainly it feels like the US has been gutted by the corporatocracy and inequality is at an all time high. ZMF draws a picture showing how our monetary-market system and socio-economic structure has raised inequality to never before seen levels. The rise of the super-elite is complete.

So far so good. I don’t disagree with anything in this film. In fact I’ve been aware of it for many years now….so whilst I appreciate the diligent work that Peter Joseph has done on these films, what do we do about it? The answer, as alluded to in ZA, is The Venus Project. TVP lays out a move to a resource based economy with no institutions, laws, money and a world based on abundance for all based around the very smartest of technology. Think of it as a techno-utopia. It’s certainly visionary and I leave it to the individual viewer to imagine it and see for themselves. It’s certainly not unachievable.

My main question would be “how do we get there?” This isn’t dealt with in the film but the general suggestion is to somehow opt out of the current system and to move to a more localized and transition based economy. This is all good stuff but the most important message of the film for me is still that we must take back control of our money supply and issue it interest free.

That is the first and most important step on the road to a people centered world.

January 25th, 2011

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2011…..695 days to go.

Greetings earthlings……i was wondering how to kick off 2011 but was a bit stumped. I mean what’s new? Same old, same old. So i had a look back at my first post of 2010 and figured I’d say the same thing again but maybe add some colour this time. So here was my conclusion a year ago:

When I look back over the last decade and forward to the next, it seems as if the same themes will recur:

– Financialisation of Economies: Can we remove the yoke of derivative financial instruments from the real economy?

– Technology: Will social media enable the development of a networked based economy?

– Global Politics: Can we move to a multi-polar world without the necessity of the United Nations as a de facto world government?

– Climate change: How do we manage the change in our climate and the resulting shifts in population and its attendant baggage?”

So we saw the Fed continue to print new money and hand it to the banks so they could pay out decent bonuses again. All that new cash managed to pump up the stock markets to new highs and generate hot money flows into commodities and emerging markets thus creating quite nicely the set up for new bubbles. What could the Fed have done? Just directly credited the bank accounts of every citizen thus boosting bank deposits and giving people money to actually spend into the economy or pay down debt.

Oh well, maybe next time.

2010 has seen China flex its international muscles and appear more focused on international relations. And of course Vladimir Putin has been flexing his too but that’s more for Russian domestic consumption. But clearly there’s been an acknowledged shift in influence with the BRIC countries all putting their hands up. Europe has been a huge mess with Auntie Angela having to clear up after the  big party. 2011 will see more shifts as power moves from the USA and spreads all over the globe. I guess it doesn’t help when you national debt is $14trln and rising (great site by the way). How this all plays out will be very interesting but I imagine we will see another crisis within the US insurance market and more derivative catastrophes. There will be huge write offs and if someone owes you a lot of money you may be collecting thin air…..that’s the problem with land…you can’t take it away.

And 2010 was officially rather hot. Well tied with 2005 and 1998. Weather was quite unpleasant all around and the severe flooding in Pakistan, China and now Australia and Brazil. Don’t mention the big freeze in the US and Europe. There’s no answer to this really. Either we bite the bullet now and take action or we’ll just have to adapt and buy a Sealegs amphibious boat (dec: I am a shareholder in Sealegs).

So I think really it’s more of the same for 2011. It’s going to be a year of adjustment before the big one in 2012. We have an election here in NZ in November which might be interesting if we can get financial reform into the debate. Maybe all the politicians should have to watch this film and then discuss (more on this in my next post). Buckle up!

June 21st, 2010


The Big Short and The Big Fraud

Time for a book review.

I’ve just finished Michael Lewis’s “The Big Short”. It’s an amazing book, not just because it informs us of the road to the subprime mess but he creates a story around the protagonists. He also manages to expose the whole wretched mess, the fictionalisation of risk and yield laid bare. He introduces us to the main players in the debacle through the eyes of a few weird and wonderful players who worked out that something was terribly wrong and bet against it. These colourful characters expose the whole damn scheme as nothing more than a paper pyramid.

As Lewis sums up the Collateralized Debt Obligation (CDO) on page 73:

“The CDO was, in effect, a credit laundering service for the residents of Lower Middle Class America. For Wall Street it was a machine that turned lead into gold”.

Simply put a CDO was a collection (a tower) of subprime loans that had miraculously transformed from junk status to triple A (AAA) credit and therefore it was investible by major funds (referred to in the book as dopey Germans).

So what was the short? Well on one hand you had investors who sold insurance on these debts defaulting. They believed (incorrectly) that it could never happen and therefore they were picking up free money. The shorters realised the were getting amazing odds on the loans defaulting and piled in.

At the bottom of this was an average person with no money and a big mortgage, usually 100% or more. Any fall in the price of their property would immediately put them in a default position. Yes it was a giant pyramid scheme. The real laugh is that even the guys going short didn’t really understand what it was they were shorting so opaque was the structure and process.

I recommend the book very highly. It’s a gripping read and manageable for the layperson.

You’re left wondering how the bankers got away with it. The answer given by the bankers (well laid out in Sorkin’s book) was that they were too big to fail.

This sets us up nicely for the next round.


Today the SEC is launching a case against ICP Asset management for their role in handling CDO investments. Along with the case against Goldman Sachs we can expect more companies to be investigated for their role in this financial fraud. It will also be interesting to see when the rating agencies themselves will come under review. They were the ones who gave the AAA blessing to these products they really knew very little about. Makes you wonder about the whole darn shooting match!

August 13th, 2009

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Central Bank Chant: I’m Forever Blowing Bubbles……

Pretty bubbles in the air.
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.
Fortune’s always hiding,
I’ve looked everywhere,
I’m forever blowing bubbles,
Pretty bubbles in the air.
Never did I believe the mighty Hammers would have understood the machinations of central banking so well. Maybe they knew?
Reading the recent Fed statement, one may feel that the lessons of the recent crisis have not been fully understood or learnt. That’s the problem with the ability to print new money to replace old. It gives a feeling of relief and so help the markets to recover, in fact recover strongly. But there is nothing here that suggests the policymakers know what they are doing.
Crisis dealt with? For now.

October 11th, 2008

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The Crash of ’08: The End of Days

As banks continue to go down and credit default swaps unwind it has become clear that we have experienced a crash. Not a one day cataclysm a la 1987 but a more sustained and painful ratcheting down of markets. It’s like being stuck in a falling elevator which shudders to a halt every 10 floors before lurching further down.

Each stop feels like the last but it never is.

After a horrendous week G7 has responded with a new pledge to do whatever it takes.

The question is will they? Do they know what it’s going to take?

They already said this back in April.

It seems to me that the numbers are no long relevant.The game has been up for some time now.

Everywhere you look monetary authorities are looking to buy something whether its banks or stocks.

Forget it…..some banks arent worth it. Deposits in major banks should be guaranteed. That is people’s money not an investment (well it is sort of but not for most).

Stocks should go down to wherever they go down to. The US via the Plunge Protection Team has supported the equity markets for too long.

They should let it act like the market it is supposed to be. Once leveraged trading is stripped out out the market we can go back to buying stocks in a normal investment manner.

As i keep stressing the financial system has been nationalised in all but name. Psycholigically that is hard to take for many because nationalisation is a dirty word to many in the markets, just as priviatisation is to others.

Money is a national tool. Regardless of the shennanigans around the BIS and the Fed and their accountability to government and citizens, we can assume that governments will reassert their sovereign right to coin.

What is interesting in the G7 communique is Point 3:

“3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”

I like the inclusion of “public” sources.

I think we can expect more and more public money flowing into banks coffers.

Part nationalisation is already here. Depending on how the markets fare from here will determine how far this goes.The margin calls are coming thick and fast and the only place to get cash is from equities. Given the lack of concrete proposals (let’s face it all they are saying is that they’ll bring loads of ambulances) markets will continue to tremble.

The timing has never been better for a sovereign reassertion of the right to create money.

On the US the AMI continues to work on its American Monetary Act and in the UK the Forum for Stable Currencies promotes its series of EDMs on Public Money. More and more we need constructive proposals that can be presented to Government for debate.

There is no time to waste.


"I’m a Londoner who moved to Christchurch, New Zealand in 2002. After studying economics and finance at Manchester University and a couple of years of backpacking, I ended up working in the financial markets in London. I traded the global financial markets on behalf of investment banks for 11 years. Since moving to NZ, I have been an angel investor, budget advisor, director, trustee, mentor and business consultant. I'm currently a Councillor at Christchurch City Council and a Trustee of the Volunteer Army Foundation and the Christchurch Arts Festival Trust. I write about the intersection of economic, social and environmental issues."

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