Tag Archives: Federal Reserve

Quantitative Easing (QE3): An Analysis

By Alabama Policy Institute

Quantitative easing (QE) is a monetary policy tool employed by central banks in many countries; the Federal Reserve (the Fed) is the central bank of the United States. QE is designed to stimulate the economy by injecting a predetermined amount of cash into the monetary market. Through QE, the Fed electronically creates new money and uses it to purchase financial assets from banks and deposits this new money on the banks’ balance sheets.1 Although many refer to this as “printing money,” new, physical money is rarely created as a result of the Fed’s actions. Because this new virtual money is created by the Federal Reserve, the only approved source of currency in the country, it is accepted as legal tender. However, the responsibility of printing physical money is still in the hands of the Treasury Department.2

By significantly increasing the volume of available dollars, the Fed anticipates that banks will increase the number of loans they make and consequently move more money into the market, prompting economic growth.

The Fed has already implemented QE twice since the beginning of the financial collapse in 2007. QE1 lasted from November 2008 to the first quarter of 2010. During this period, the Fed initiated purchases of $1.25 trillion of mortgage-backed securities, and $175 billion of government agency debt.3 In November of 2010, the Fed announced QE2, during which the Fed began the purchase of $600 billion of longer-term Treasury securities in addition to continuing to reinvest payments on securities purchased during QE1.4

The Fed announced on September 13th that it was dissatisfied with the economy’s rate of recovery, specifically the slow rate at which unemployment levels are returning to a more normal range5, and would attempt to remedy the stagnated growth by beginning QE3. In this round of quantitative easing, the Fed will purchase $40 billion a month in Mortgage Backed Securities, as well as continue the program dubbed “Operation Twist,” with the purchase of longer-termed securities.6 QE3 is open-ended. In a press release, the Fed stated that it would continue to purchase securities at this rate until it saw the desired results.7

Policy Considerations

Under the right circumstances, increasing the supply of money can spur economic growth, but it can also introduce the risk of devaluation of the currency8. QE can mean higher commodity prices and higher inflation. Esther George, president of the Kansas City Federal Reserve Bank, has raised concerns that QE3 has “the potential for igniting inflation.”9 Inflation essentially makes each dollar worth less, and in an economy where wage rates are stagnant, the consequences could be dire10.

Another concern is that the intended goal of QE to increase the amount of money available to lenders and, ultimately, the marketplace has not been entirely successful. The reason may lie, at least partially, in another program implemented by the Fed. In October 2008, in an effort to deter the fears of depositors, the Fed began paying interest to banks for the funds they keep in reserves.11 While all banks within the Federal Reserve System are required to maintain a certain level of reserves available for depositors who may want to withdraw their cash, they are deterred from keeping excess reserves by other market forces. Absent the Fed paying them interest on all reserves, including excess reserves, banks would be more inclined to loan money in order to increase income from interest payments. The rate of interest paid on bank reserves is currently 0.25 percent.12 That may not sound like much, but the daily federal funds rate has been held between 0 and 0.25 percent for the last several years13. When accounting for inflation, real interest rates are hovering near zero14, so a risk-free 0.25 percent return is actually a bargain for banks. As of August 2012, banks that deposit with the Fed are holding nearly $1.5 trillion in excess reserves, up from close to zero historically.15

In short, the Fed is incentivizing banks to keep the excess money they receive from QE programs in their reserves in order to collect the interest paid by the Fed. While mortgage rates did decline after QEs 1 and 2, even former Federal Reserve Chairman Alan Greenspan calculated that, as of July 2012, there was “very little impact on the economy”, adding that he was “very surprised at the data.”16 Former Chairman Greenspan also commented that the effect of the untold trillions of government and Fed spending actually may have had a negative impact on the health of the economy. He posits that the rash of deficit spending and manipulation of the interest rate is crowding out private investments.17


If the former Chairman of the Federal Reserve has doubts that quantitative easing efforts have brought about the promised economic stimulus, why is the Fed proceeding with the same old bag of economic tricks? As API has discussed before, there are multiple places where the Fed’s missions and actions are in direct conflict with one another; attempting to push “created” money into the marketplace while simultaneously incentivizing banks not to lend money is yet another conflict that must be seriously reevaluated.

1 Quantitative Easing, FINANCIAL TIMES LEXICON, http://lexicon.ft.com/Term?term=quantitative-easing
2 Kimberly Amadeo, Federal Reserve is Printing Money, http://useconomy.about.com/od/glossary/g/Federal-Reserve-Printing-Money.htm.
3 Polyana da Costa, QE1: financial crisis timeline, http://www.bankrate.com/finance/federal-reserve/qe1-financial-crisistimeline.aspx.
4 Polyana da Costa, QE2: financial crisis timeline, http://www.bankrate.com/finance/federal-reserve/qe2-financial-crisistimeline.aspx.
5 Press Release, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, (September 13, 2012) http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm.
6 Id.
7 Id.
8 Jeffry Rubin, Quantitative Easing is Just Devaluation, http://www.huffingtonpost.com/jeffrey-rubin/quantitative-easing-isju_b_777970.html.
9 Don Mecoy, Federal Reserve Official Disagrees with Monetary Policy Decisions, (September 19, 2012), http://newsok.com/federal-reserve-officialdisagrees-with-monetary-policy-decisions/article/3710981.
10 Wage Growth in the U.S. Will Feel Effects of Great Recession for Years to Come, (April 26, 2012), http://www.conferenceboard.org/press/pressdetail.cfm?pressid=4466.
11 Press Release, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, (October 6th, 2008) http://www.federalreserve.gov/newsevents/press/monetary/20081006a.htm.
12 Interest on Balances Maintained to Satisfy Reserve Balance Requirements and Excess Balances, THE FEDERAL RESERVE SYSTEM, http://www.frbservices.org/files/reserves/pdf/calculating_required_reserve_balances_and_excess_balances.pdf
13 Federal Funds Data Historical Search, FEDERAL RESERVE BANK OF NEW YORK, (July 1, 2010-July 31,2012), http://www.newyorkfed.org/markets/omo/dmm/historical/fedfunds/ff.cfm.
14 Rodney Sullivan, Negative Real Interest Rates: The Conundrum for Investment and Spending Policies, http://blogs.cfainstitute.org/investor/2012/07/03/negativereal-
15 Excess Reserves of Depository Institutions, FEDERAL RESERVE BANK OF ST. LOUIS, http://research.stlouisfed.org/fred2/series/EXCRESNS.
16 Bruno J. Navarro, Alan Greenspan Sees ‘Two Separate Economies’, (July 12,2012), http://finance.yahoo.com/news/alan-greenspan-sees-two-separate-161122638.html.
17 Id.

Good Friday 2012: When the Line Is Crossed

By Daniel Downs

An excellent editorial was published in yesterday’s edition of the Guardian, a U.K. newspaper. The editor shows how the short story Christ in Concrete relates the Good Friday story to past and present sacrifice of individuals that altered human history. The story was a thinly veiled account of the life and death of Italian-American writer Pietro di Danato’s father Geremio, who was an underpaid brick layer. Peitro likened his father life and work-related death on Good Friday to the Via Delarosa of Christ and his selfless suffering as a result of mindless capitalism. Christ in Concrete shifted the American mood, and Geremio’s death counts among those that have, to one extent or another, altered history.

The editor also mentioned the Buddhist monk Thich Quang Duc who burned himself to death protesting against the South Vietnamese government’s terrible treatment of fellow Buddhists. His death sparked a movement among the South Vietnamese people that resulted in the fall of the Ngo Dinh Diem’s government.

The editor is right the sacrifices of those men and of men like Jan Palach in Czechoslovokia in 1969 or Mohamed Bouazizzi in Tunisia in 2010 cannot be compared to the sacrifices of lives in Jihad.

They cannot even be compared to the sacrifices farmers, parents, spouses who sacrificed their lives so that their loved ones would survive the end of their life of farming. In the 1980s, Federal Reserve induced inflation caused many rural bank defaults and interest rates of agricultural loans to skyrocket. Farm loans encouraged by rural farm lenders has to be called in. Of course, most farmers couldn’t pay, resulting in bankruptcy. What urban bankers, investors and politicians didn’t realize was that farming is life to generational farm families. The end of farming meant the end of life. As a result, many unusual accidents occurred killing the head of the bankrupt farms. The benefit was the large insurance claims were be paid to their surviving spouses and children.

“The insecure economic world in which Geremio lived – and died – is back with us again, after a half century during which we thought we had made its return impossible. Our leaders, and those who influence them, are not malign. But they are inept, and they seem often to be uncaring.”

What the editor failed to mentioned is that Jesus Christ lived in a world dominated by the same kind of leaders who produced economic conditions that impoverished masses in Israel, Asia, Europe, and the rest of the world they controlled. The difference between Jesus’ death and those mentioned in the editorial is this: The sacrifice of the lives mentioned in editorial produced freedom and justice in their nations for a season, but Jesus’ sacrifice secured life for all people in all nations forever. The death and resurrection of Christ is source of the freedom enjoyed by West still today.

We fail to return to the source of our freedom at our own peril.

(The eidtorial can be read at http://www.guardian.co.uk/commentisfree/2012/apr/06/good-friday-when-line-is-crossed.

Restore the American Republic to the American People

[youtube http://www.youtube.com/watch?v=DGNdQTBNWvE&w=560&h=315]

Restore the American Republic to the American People

[youtube http://www.youtube.com/watch?v=DGNdQTBNWvE&w=560&h=315]

FED’s $600 Billion Quantative Easing Tax, Is it Necessary?

Charles Plosser, CEO of Philadelphia’s Federal Reserve, addressed an audience at Cato Institute on the topic of employing monetary policy to prevent asset bubbles, which caused the current recession. He told the audience that using monetary policy to adjust interest rates in order to compensate for asset price gaps (bubbles) was not a good idea. One example given was raising rate on mortgages to restrict rising housing prices. Two reasons for being against employing broad-based monetary policy for individual asset markets like housing were: (1) The risk of wrecking havoc in other parts of the economy is too great, and (2) no precise measure of asset-movement exists by which to form sound rule-based monetary policy. (Read his Cato speech titled “Bubble, Bubble, Toil and Trouble: A Dangerous Brew for Monetary Policy.)

John Mauldin, CEO of Millenium Wave Advisers, came to a similar conclusion about Fed Chairman Ben Bernanke’s decision to inflate the economy through the latest $600 billion quantitative easing. Bernake’s reason was to prevent deflation, which means core inflation rate as measured by the Consumer Price Index (CPI) dropped below 1 percent. Core inflation is all consumer goods except food and energy. Mauldin claims core inflation is actually about 1.5% not 0.6% when housing costs are removed.

There seems to be two reasons Mauldin measures inflation without housing costs: (1) Historically, the Bernanke should have used monetary policy to lower an increasingly high inflation rate back in 2005 that was caused by the housing price bubble. (2) More important is the fact that over the past few years housing cost is growing at near zero percent (see the chart below).

If Puru Saxena, CEO of Hong Kong based Puru Saxena Wealth Management, is right, Bernake’s quantitative easing will not revive the U.S. economy. Just like the previous two stimulus bailouts, quantitative easings never do. (Read his article titled “Band-Aid Solutions

What Bernanke’s cash infusion will do is devalue the dollar. This will causing food, energy, and everything else to rise, which will act as a tax on disposable income. Less disposable means fewer sales. As Mauldin also pointed out, food and energy costs already are high for those with lower income. These people will suffer the most as a result of the Fed’s easy quantitative induced inflation.

There are some creative ideas that could solve the housing price problem. For example, Fannie Mae, Freddie Mac, and FHA could rent their growing stock of foreclosed houses, which would keep some people in their homes. Banks also could lend to investors (landlords) to buy cheap housing if they promise to rent them out. Read Maudlin’s article “O Deflation, Where is Thy Sting?” to learn more.

Islam, AIG Bailouts, Federal Reserve Banks, Tim Geithner, and Barak Obama : Connections

I just came across a pending federal court case against U.S. Treasury Secretary Tim Geithner and the Federal Reserve for their involvement in the federal governments bailout of AIG bank. The case alleges the federal government’s bailout and majority ownership is a violation of the Establishment Clause of the U.S. Constitution. By bailout and acquiring a controlling interest in AIG, the federal government participates in funding Islamic Sharia law and religious activities. The White House leaders and Federal Reserve leaders not only knew they were funding Islamic religious activities but the openly publish it on official website and similar means of communication.

It becomes clearer why a Muslim President was needed to work his PR magic throughout a stupefied America as well as predominately Muslim Middle East. Acquiring AIG is good for Islam. It is good for federal revenues, and it is good some types of investors. However, it is not good for predominately non-Muslim taxpayers to fund Islamic religious activities no matter how profitable it may be.

Some prophecy writers see Islam as dominating the globe during what the Bible describes as the last days. The same believe the anti-Christ will be a Muslim. They also see this anti-Christ figure as having worldwide control over commerce and banking. Could it be we are witnessing the means by which the anti-Messiah will rise to this level of power?

Economic Trends, What Do They Mean?

By Daniel Downs

The latest economic trends report by the Federal Reserve Bank of St. Louis reveals why City of Xenia officials think they need more of taxpayer’s scarce financial resources. In 2009, the report shows a 3 percent increase in GDP, which means total revenue produces by all our work as a nation. That figure reminds me of pre-industrial era economic growth when governments and citizens lived within their means most of the time.

Coinciding with the low GDP was low industrial output reflected by a significant decline in payroll and sharp increase in unemployment. During 2009, industrial production increased by a meager 6 percent. At the same time, payroll declined by $5 million and unemployment rose from 7 percent to around 10 percent.

The loss of jobs and income resulted in the loss of homes, which in turn meant a loss of tax revenue for municipal governments including Xenia. The rise in the cost of gas that contributed to the rise of costs of food and other goods as well as services has made matters worse–not to mention Wall Street’s short, like Soros, gleefully stuffing their pockets with our GDP revenue.

Nevertheless, long term government bonds have maintained their value while short term bond rates dropped to near zero. If that is also true of municipal bonds, then local governments are still giving our tax dollars at the same or possible higher dividend rates. This means less tax revenue for actual operating costs like paying police, fire, and street maintenance personnel.

While officials also claim higher costs for goods and services require higher taxes, the report shows the total increase of good and services represented by the Consumer Price Index (CPI) to be around 2.4 percent for 2009. That is quit low. The last quarter of 2008, inflation dipped to minus 2.5 percent. This could be interpreted as rendering overall inflation as near zero. As such, local governments use of higher costs to justify raising taxes does not appear to be warranted.

The best course of action by both government and taxpayers is one of fiscal restraint. Governments should decrease spending and tighten their budgetary belts. Taxpayers should restrain themselves from giving government tax increases until the economic trends show declines in unemployment to less than 6 percent, consistent payroll increases, and increased production figures i.e., industrial production, GDP, GDI, and the like.

Obama’s State of the Union Address: Economic Plans Only Problem Causers Believe In

Last Tuesday, Obama presented his “let’s get the party agenda done” speech. Like his campaign rhetoric, it was long on feel good sales hype and short real substance.

While blaming all of the nation’s economic woes on Wall Street, he proclaimed our economic salvation is to be found in spending more money. The core of his spending plan was focused on three areas: The first is developing clean energy because it will save us from the impending catastrophe of climate change. The second is spending more money on health care because it will supposedly save us all money. The third is spending more money on education so that the next generation will be able to afford more loans in the global economy. Before Obama can increase spending on those three areas, money must be spent on getting banks to lend more money because credit (meaning more debt) is the lifeblood of the American [corporate] economy.

Ramussen recently published the results of its national survey of American opinions about government spending and the economy. The results make it clear that Obama and congressional Democrats are out of touch with the nation, which is to say Obama only hears the cheering choir of the elite liberal and socialist Left.

About 53 percent of Americans told Ramussen reduced government spending would help the economy. Sixty-one percent (61%) said cutting taxes is a better way of helping the economy than increased spending. One of Obama’s save the nation initiatives, heath care reform, is opposed by 61 percent of the nation. Americans want it dropped. Apparently, American fail to believe the presidential sales hype that health care reform will save money or do much to create good paying jobs.

Will Obama’s federal spending freeze help the economy? If temporarily halting the rate of spending 17 percent after increasing it by 20 percent in a single year, then yes it will help. Financial advisors like John Mauldin also say such a gesture is laughable. It’s laughable because the freeze covers only a small part of the federal budget and consequently maintains the 20 percent increase in discretionary, social security, military, stimulus, health care spending, according to the Independent Institute.

Obama’s statement that he is not for big government is as laughable as the spending freeze, but his placing the sole blame for the economic crisis on Wall Street and banks is not.

Remember, the economic crisis began with the collapse of the housing market. The mortgage industry bubble burst because Washington lawmakers made it possible for cheap loans to unqualified buyers continued unabated. Big banks held very large portfolios in those types of loans. We should not forget that the SEC is the federal regulator of Wall Street as Ben Bernanke’s Federal Reserve is of the banking system. The Bush administration appealed to the various oversight committee of Congress to correct the mortgage problems evident at Sallie Mae and Freddie Mac, but the Democrats refused, and it gets even better. The legal counsel of ACORN who was the main player in forcing banks to lend to the unqualified home buyers was none other than Barak Obama, whose Treasury Secretary Tim Geithner is a federal reserve insider, a previous Fannie Mae executive, and a reputed bailout king of Wall Street. It is Obama who selected Geithner and fought for Bernanke’s return the Fed to continue wrecking our national economy. As the old saying goes, point one finger and three are pointing back at you, Mr. Obama.

In a May 2009 article, Independent Institute Senior Fellow Ivan Eland points out the practices of the Federal Reserve that produced the housing bubble and financial industry meltdown. To soothe Wall Street jitters after 9/11, the Federal Reserve lowered the federal fund rate, printed huge sums of new money, flooded the credit market making easy loans the norm, which led to overly inflated housing values, inflated costs of consumer goods, and decreased spending.

Those are a few likely reasons why 72 percent of Americans surveyed by Ramussen expect Obama and congressional Democrats to increase spending and the national debt. In other words, most Americans realize elected and unelected bureaucrats are expected to continue the same policies of spending our way out of debt. Those who have suffered bankruptcy know it will not work.

Okay, but, what about energy and education? Surely, spending more on developing new forms of energy and related technologies as well as improving education will surely create more jobs. According to the Ramussen survey, about 60 percent of Americans believe government spending less will result in the creation of more jobs.

The issue is who should pay for the development and marketing of new energy and related technologies? Loaning taxpayer money to businesses developing new types of energy or new related technologies would benefit society. However, investors and banks exist for that purpose–not government. Increasing taxes or taxpayer debt to spur profitable businesses is a misuse of taxpayer money. Let the private sector invest in and profit from new forms of energy and related technologies. That is how capitalism works. Government’s job is to ensure it benefits all citizens, consumers, groups, industries, businesses, and employees.

Obama’s rhetoric about spending more taxpayer dollars to make all of America’s children globally competitive is the same old sales baloney regurgitated since the passage of the Elementary and Secondary Education Act (ESEA). The poor still are dropping out of school in alarming numbers, students still to not do as well as others in the world, the gaps between poor and non-poor student still (and is not actually expected to cease to) exist, and more money is being spent to solve the problem they do not solve. Why spend more on failed policy and practice? In her book Dependent on DC, Economic professor and lawyer Charolette Twight explains how ESEA spending was never meant to solve the problems of education. The purpose of ESEA (now, NCLB) is to expand federal power over state and local education. Federal spending on education means more dependency of local school for funding on unaccountable elites in Washington D.C.

An Open Letter to the U.S. Congress

Below is a letter sent to Xenia Citizen Journal by a local citizen and patriot. This patriot encourages anyone reading it to copy it, revise it as desired, and to email it to your representatives in the U.S. House of Representatives.

* * * * * *


Please co-sponsor and/or support H.R.1207, an effort to audit the Federal Reserve. Recently, it has come to light that there is little to no accountability to the people on the part of the Federal Reserve. While the citizens of this country are required by law to give an accounting of every penny they come in contact with, the Federal Reserve has never been held to the same standard. During this time of extreme economic crisis, the people deserve an accounting of where our money is going. Currently there are 11 co-sponsors for this legislation, and it is enjoying bi-partisan support. Your efforts in supporting this important legislation would go a long way in proving to your constituents that you not only hold the Federal Reserve to the same standard as you do your constituents, but it would also show that you believe in transparency. Anything less than support for this resolution suggests that you are in favor of secrecy and a lack of accountability to the people who pay the bills. We pay the tab; we have a right to know where our money is going. Unlike recent bills that were voted in favor of, that had hundreds of pages and just a few hours to read, this bill can be read in under 5 minutes. I encourage you to take the time to read it, and then move to support it. Thank you in advance for your attention on this important legislation. I have every expectation that you will do right by your constituents and support this measure