I’ve shown in rather elaborate detail in recent weeks that quantitative easing does not help the real economy generate a sustained recovery. This can be summed up as follows:

• QE did not reduce interest rates in Japan and was ultimately deemed a failure by the Bank of Japan:

“QE’s effect on raising aggregate demand and prices was often limited” (Ugai, 2006)

• QE has been shown to have had little to no impact in the U.K. (also see here).
• While QE worked to ease the strains in the credit markets in 2008 and also improved bank balance sheets there was no change in interest rates during the entirety of the program in the USA and borrowing has remained very weak.
• Because the US has a demand side problem and not a supply side problem QE is unlikely to result in higher aggregate demand and revenues (see here).
• QE is likely to negatively impact corporate margins as investors falsely interpret QE as “money printing” and seek the safety of hard assets (see here).
• The “wealth effect” of QE is likely to fail. Attempts to keep asset prices “higher than they otherwise would be” will always fail (see here).
• Since QE has been shown to have no discernible long-term impact on interest rates or aggregate demand there is no fundamental reason for stocks to move higher due to the program (see here).

All of my work regarding QE has me wondering why the Fed would implement such a policy when the evidence appears to point to little to no gain in economic growth? The only logical answer is that QE2 is really just another case of the Federal Reserve proving that this is a country centered around the bankers, by the bankers and for the bankers. Before you brush me off as some conspiracy theorist please consider the evidence.

The problem with a policy like QE is that it does not actually add net new financial assets to the private sector. This is ultimately the primary misconception regarding QE. The expansion of the monetary base is not net new money in your pockets. Thus, it will not help finance new spending or investment, it will not create jobs, it will not increase aggregate demand, etc. Therefore, any policy effectiveness is based on a shuffling of assets and hopes for a sustained psychological change. A sitting member of the FOMC has (finally) admitted that QE is unlikely to do anything for the economy:

“What is the ultimate impact on the overall economy of this shift in risk? In the baseline models used by central banks, all bondholders are taxpayers. In these models, QE is essentially shifting risk from one pocket to another. As a result, the increase in tax risk (what I’m calling the fourth effect of QE) completely undoes the decrease in interest rate risk (the third effect of QE). QE ends up having no effects, except for those associated with any new forward guidance that it signals.”

But there is one distinct benefit of such a policy – it alters the composition of bank balance sheets. At the end of the day it’s really just an asset swap and a transfer of risk via bond duration or bond type. The kicker here, is that if you’re a bad bank with a few trillion dollars in bad mortgage paper you’re delighted if a AAA rated entity comes in and swaps those assets out with their highly rated paper. This is exactly what the Fed did in 2009 and make no mistake – it was hugely successful in clearing the credit markets and altering the composition of bank balance sheets. This was Mr. Bernanke’s goal after all. He was simply trying to clear the credit markets and improve the banking system and he believed that would ultimately fix the problems in the US economy. Unfortunately, he misdiagnosed a household balance sheet recession as a banking crisis. QE1 provided liquidity in the credit markets and it gave the banks some much needed breathing room. Unfortunately, the impact on the real economy was far more muted.

I think Ben Bernanke knows all of this. He has added $1T in reserves to the banks already and it hasn’t resulted in a surge in borrowing or self sustaining economy recovery. It doesn’t take a genius to understand that adding another trillion won’t change anything either. If there is low demand for apples putting more apples on the shelves does not improve the apples salesman’s ability to sell more apples.

But Mr. Bernanke is seeing the same thing that I am seeing. He sees a weak economy and a housing market that appears to be rolling over again. Knowing that the banks are extremely fragile here and understanding that there is absolutely no political will for another bailout Mr. Bernanke is creating his own bailout by bypassing Congress.

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Some of my colleagues say I am giving Mr. Bernanke far too much credit here. After all, this would require a great deal of foresight and a level of proactivity that hasn’t really been a trademark of his in recent years. I am not so certain. In fact, I don’t doubt for one second that Mr. Bernanke is fully prepared to do whatever he must to avoid another bank meltdown. He continues to believe that this is a supply side problem and not a demand side problem. He may have failed in his mandate of full employment, but when it comes to the banking sector Mr. Bernanke is more than accommodative.

What’s unfortunate in all of this is that the policy is being sold to the American public as if it’s a Main Street stimulant. There is, arguably, some merit in doing what Mr. Bernanke is doing. After all, another bank meltdown would be truly traumatic (though probably necessary). So, there’s an argument in favor of being prepared. But selling it as another Main Street stimulant is disingenuous at best. And unfortunately, 99.9% of the public is too oblivious to:

1. Understand QE

2. Raise a fuss.

The implications are obvious. The Fed will likely start with a rather small round of QE this week. After all, if I am correct Mr. Bernanke doesn’t want to unload all of his shells too early. He wants to be fully prepared in case the banks relapse so he can step in with a sizable bank bailout. So, don’t be one bit surprised this week when Mr. Bernanke announces a small round of Treasury purchases with the option to buy MBS in the future. In all likelihood, this program will remain open until it’s clear that the U.S. economy is sustaining recovery and another bank meltdown is off the table. Don’t be fooled into thinking that this is some economic panacea. Unless of course, you’re a banker.

Aaron Dykes
Infowars.com
November 2, 2010

Rand Paul has defeated incumbent Jack Conway in bid for Kentucky Senate

Aaron Dykes
Infowars.com
November 2, 2010

Rand Paul has been “projected” the winner over incumbent Jack Conway uniformly in the mainstream press, and is expected to be named Senator-elect in Kentucky. Numbers that have come in since the polls closed appear very close to the latest polls published just prior to the election, showing a double-digit lead for Rand Paul. In this election, his victory is one identified with the Tea Party, with the GOP struggle against President Obama, and/or with Libertarian- and Constitutional- conservatives everywhere.

But the system knows that more than anything, Rand Paul represents an anti-establishment tide.

Immediately following news of his win-apparent, the Wall Street Journal published an article cutting right to the bottom line of what his presence in the Senate could signal once the election fervor dies down: Rand Paul Victory Sends Fed Critic to Senate

Phil Izzo cites that “Retiring Sen. Jim Bunning, who Paul succeeds, has been the chief Fed critic in the U.S. Senate,” in Kentucky, indicating that Rand Paul could inherit Bunning’s place on the Senate Banking Committee. Izzo goes on, “Of course, there’s no guarantee that Paul will take Bunning’s spot on the Senate Banking Committee. But judging from his interest in the Fed, it seems likely that Paul will seek a spot on the influential panel.”

{youtube:www.youtube.com/watch?v=4JX-Ir9FOa8}

Without a doubt, Bernanke and the others must be wondering whether greater scrutiny will come upon the Federal Reserve with the election of Rand Paul. Already, his father, Congressman Ron Paul has become one of the strongest voices against the institution, and the economic crisis has put greater focus on the Fed. The high profile calls to audit the Federal Reserve, under a bill sponsored by Ron Paul, have gained significant support.

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In the Senate, the amendment brought by Sen. Jim DeMint to audit the Fed was blocked. But now Rand Paul could make the Federal Reserve an issue in the Senate again. That would be a significant challenge to the establishment and a victory for the grassroots movement to restore sound money.

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Aaron Dykes is frequent writer for Infowars.com and webmaster for JonesReport.com. He is also a videographer, researcher and editor who has worked on numerous documentaries and video reports.