Monty Pelerin's World

The article below focuses on “the biggest flim-flam in the nation’s history.” Now that’s saying a lot, however in terms of the magnitude of dollars, it may well be. No, it’s not Bernie Madoff or any other private institution.

Mike Whitney refers to the Federal Reserve’s monetary policy in response to the economic crisis when he applies the term flim-flam. In addition to the points that Mr. Whitney made, I would like to bring out another one, at least more forcefully than he did. It is what I refer to as “back-door” Quantitative Easing.

Many think of QE as direct purchases by the Fed of Treasury securities. Actually, Treasuries are sold via primary dealers. The Fed actually buys directly from the primary dealers so that Wall Street gets a cut from all government financing, even though one defacto arm, the Fed, is funding another, the Treasury. This transaction is, in effect, an intergovernmental transaction (a flim-flam in itself). My concern goes beyond this unnecessary payoff to Wall Street to the definition of QE. There is a great deal of duplicity when measuring QE.

What government claims as QE is convenient but useless. They claim only immediate, direct purchases of Treasuries from primary dealers are QE. But QE is much more than that. I claim that most expansions in the Fed balance sheet represents QE. On this basis, QE is in the neighborhood of $1.9 trillion because Fed assets have increased from $800 billion to about $2.7 trillion. There are at least three ways that “back-door” QE occurs:

1. Fed purchase of “old” as opposed to newly issued Treasuries. If the Fed purchases newly issued Treasuries from primary dealers, it is considered QE. If the Fed purchases “old” or previously issued Treasuries it does not count as QE. There is no economic difference between the Fed buying old or new Treasuries from primary dealers if in fact the primary dealers use the increased liquidity to buy new Treasuries. The reality is exactly the same as if the Fed purchased the new and the PDs held on to the old. There is one difference – one is counted as QE and the other is not.
2. Purchasing Toxic Assets from Banks. The Fed has purchased overvalued assets from banks for generally face value. The banks receive cash or credit in exchange. It makes banks more solvent and much more liquid. These banks often then use the liquidity to purchase newly issued Treasuries. Sometimes this can be a condition of the Fed buying the toxic assets. If the Fed were to buy the newly-issued Treasuries and then exchange them for toxic assets in the banking system the underlying economic reality would be the same except in the latter case it would be recognized as QE.
3. Purchasing of Toxic Assets from Non-Banks. The simplest example might be sovereign wealth funds. Sovereign wealth funds, especially China, were holding a bunch of toxic waste assets that were misrepresented by Wall Street. They were not happy with the manner in which they were “cheated” by the US. Does anyone think that China did not apply economic leverage on the US to buy back these toxic assets? What better way to do it than to have the Fed buy them back with agreement that the sovereign wealth funds use the proceeds to buy newly issued Treasuries. Just more surreptitious Quantitative Easing which if had been done another way would have been recognized as such.

By MIKE WHITNEY ~ Counterpunch.com

It’s the biggest flim-flam in the nation’s history. But, thanks to the Congressional Research Service, the scam has been exposed and the public can now get a good look at the type of swindle that passes as monetary policy.

Here’s the scoop: When Fed chairman Ben Bernanke initiated the first round of Quantitative Easing (QE), the stated goal was to revive the flagging housing market by purchasing $1.25 trillion in mortgage-backed securities (MBS) from the country’s biggest banks. The policy was a ripoff from the get-go. No one Continue reading »

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