Federal Reserve Slow Walks QE3

Posted by Michael A. Kamperman on September 21, 2011

The Bernanke led Fed has taken a baby step towards another round of QE3. The market expected the so called operation twist whereby shorter dated Treasuries are sold for longer dated Treasuries driving down long term interest rates. But in a little appreciated move the Federal Reserve will once again start purchasing Agency mortgage-backed securities with interest earnings and return of mortgage capital from home sales. Mortgages were what the Federal Reserve bought in the first quantitative easing program driving down mortgage rates. Once again Bernanke had the courage to act in spite of three no votes on the Committee. He has clearly signaled he is willing to buy something besides Treasuries and he will continue to ease monetary policy despite opposition from inside and outside the Committee. Importantly, the Federal Reserve has downgraded the outlook for the economy. If the economy continues to deteriorate the Federal Reserve will continue to take action. One action that I think would be particularly effective is to not only stop paying banks on reserves held at the Fed, but to charge them for those reserves creating significant incentives for banks to make loans. Right now banks can make money by not making loans. Make it so that they take losses by not making loans.

Regrettably the Republican leadership in the House and in the Senate have sent a letter to Bernanke insisting he stop easing monetary policy. This sort of pressure is entirely inappropriate. It is either based on a brazen attempt to make political gains or it is out of ignorance of how monetary policy actually can help the economy. I will lean on ignorance for the time being because economic ignorance is now running rampant in a Republican Party at all levels from the voter right to the top of the leadership. Believe it or not many of these Austrian economic beliefs were reinforced by the way the Obama Administration bungled the stimulus plan and the selling thereof.

But Bernanke cannot do all of the economic lifting at the Federal Reserve. The White House and the Congress must chip in. The President needs to quit playing politics and get to work with a serious effort to create jobs. His plans to pay for the jobs plan and reduce the deficit cannot even pass the Senate with 57 Democrats, no less the Republican led House. He has one more shot with a proposal to fix the mortgage mess. He needs to go big. Bernanke has paved the way for mortgage interest rates to go lower. It is up to the President to put forward a plan where it is easier to get mortgage credit. I favor refinancing every mortgage holder that come current on their mortgage without an appraisal or credit check. I would also like to see an interest credit to principal reduction for those mortgages more than 10% underwater. If the interest rate is 4%, then 1% or 2% or 3% of the interest can go directly to mortgage principal reduction depending on how far underwater the collateral is. This would allow the borrower to reduce their principal more quickly while allowing the banks to avoid a write down on the mortgages on their books. While I don’t know what the President will do, who does, he must go big on housing or he simply must go.

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The Incredible Smallness of The American Jobs Act

Posted by Michael A. Kamperman on September 9, 2011

The American Jobs Act presented by President Obama is not big, not bold, and not up to the challenge of helping 25 million Americans find full-time work. When the President calls for a joint-session of Congress to present a plan to deal with what he termed a ‘crisis,’ shouldn’t the plan ‘solve’ the crisis? It’s not that the plan is without merit, it’s just that it’s way too small to solve the problem. For starters, where is the fix for housing? The President has backed Wall Street over Main Street and has rejected the idea which I originated in my book, but is now being touted in many quarters, to refinance all homes that are current on their mortgage without an appraisal or credit check. Instead, the President’s economists will get together with housing regulators to see how to get the already failed HARP program to be more effective. The payroll tax credit is a very good idea, especially offering it to both the employer and the employee. So why limit it to only $5 million in wages for the employer? That limits the incentive for larger firms to higher and most of the good jobs in this country are in those larger organizations. Basically, why come forward with a plan designed to do less than 10% of the job? Moody’s estimates the plan will create/save only 1.9 million jobs.

Basically, for the $450 billion the President proposed you could take 15 million unemployed Americans and give them a job with the federal government with a total compensation package of $30,000 each. Most of the unemployed are lower skilled workers and that would be a meaningful wage for many of them. You could find something for all of them to do that would improve America. That would create 10 times the number of jobs as the President’s plan does for the same amount of money. Is ideology against government workers so sacred that we would be willing to get only 10 cents on the dollar to avoid some form of conservative sacrilege?

The worst part of the plan is that the President wants to fully pay for it by cutting other parts of the budget over the next ten years and raising revenue from the wealthy and from corporations. The bottom line is that any form of raising revenue without growth is raising taxes. And raising taxes is a drag on economic growth, which would offset some of the benefits of the plan. Plus, it plays into the false ideology that the biggest concern the nation has is the debt and the deficit. They should simply buy back all outstanding Treasuries with printed money and end this falsehood. At least then we could talk about policies that would really revitalize the nation. Importantly the plan is not $450 billion in new money. Almost $250 billion is intended to replace programs that expire in 2011. We already have that part of the plan in place and job creation in August was still zero. The idea that simply doing more of the same will create jobs is farcical. It will save jobs to continue these policies because to cut them off would actually cost a couple of million more jobs. If the Federal Reserve doesn’t go big in a couple of weeks the economy is toast.