We all know Dick Bove ♥ banks â sometimes to a fault.
But the Rochdale Securities analyst brings up an interesting QE2-related point in his latest note. The Federal Reserveâs first round of quantitative easing, he reckons, failed because it ended up creating a partial liquidity trap, with banks just sitting on all their Fed-given funds instead of lending them. This wasnât a huge problem of course, as the original QE was more about repairing the financial system than boosting the economy â but it does rather beg the question; what is QE2 all about?
For a start (and bear with us here) Bove thinks QE2 has some ulterior aims â namely debasing the dollar and having the Fed finance US Treasury debt:
There may be another explanation as to why the Federal Reserve has embarked on its new policy. My view is that the United States is in a financial war with China. This war is being fought in two arenas. They are the budget deficit and the trade deficit. The United States is losing both wars and, therefore, may be taking some relatively dramatic action to adjust the battlefield.
Which brings us, in a roundabout way, to the topic of banks â or rather, the lack thereof in Fed chairman Ben Bernankeâs recent QE2-related musings:
If one carefully reads Mr. Bernankeâs [Washington Post] op-ed article, he is enunciating a new financial concept. He is implicitly arguing that bond and stock markets will supplant the banks in generating credit growth. He never mentions the banking system. Repeating, he writes:
* âLower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.â
Unsurprisingly, given his FT Alphaville-donated nickname, Bove is skeptical about whether credit creation can be achieved without the banks. He writes:
The shadow banking system has been effectively crippled. This makes it difficult to understand how the stock and bond markets are now going to supplant the banks in generating new capital to spur economic growth. One cannot argue that it cannot be done. However, it is an untested view of how the financial system works. Under this new system:
* * The Federal Reserve provides the funds by purchasing Treasuries with new money.
*The stock and bond markets obtain these funds generating capital gains that increase consumer confidence.
*This then inspires consumers to spend more creating a virtuous cycle. Banks are minimalized as part of the process.
*They do not participate because they have to be reduced in size and they must increase their capital and liquidity.
*Moreover, the new system relies on consumer spending to buy Chinese products (?) to get the U.S economy moving again.
I just do not understand it. In my view, the processes that must be put in place do not stimulate growth by debasing the currency; ignoring the traditional modes of credit creation; and relying on consumption of foreign goods rather than production of low cost American made goods to restart the economy. In my view the Fed will find relatively quickly that to avoid a liquidity trap, it must utilize the American banks to make loans.
http://ftalphaville.ft.com/blog/201...-qe2-as-a-bank-less-financial-war-with-china/
Yep, exactly my point. Bernanke and his braniac "FED governors" are simply throwing your US Dollars out of the window !
But the Rochdale Securities analyst brings up an interesting QE2-related point in his latest note. The Federal Reserveâs first round of quantitative easing, he reckons, failed because it ended up creating a partial liquidity trap, with banks just sitting on all their Fed-given funds instead of lending them. This wasnât a huge problem of course, as the original QE was more about repairing the financial system than boosting the economy â but it does rather beg the question; what is QE2 all about?
For a start (and bear with us here) Bove thinks QE2 has some ulterior aims â namely debasing the dollar and having the Fed finance US Treasury debt:
There may be another explanation as to why the Federal Reserve has embarked on its new policy. My view is that the United States is in a financial war with China. This war is being fought in two arenas. They are the budget deficit and the trade deficit. The United States is losing both wars and, therefore, may be taking some relatively dramatic action to adjust the battlefield.
Which brings us, in a roundabout way, to the topic of banks â or rather, the lack thereof in Fed chairman Ben Bernankeâs recent QE2-related musings:
If one carefully reads Mr. Bernankeâs [Washington Post] op-ed article, he is enunciating a new financial concept. He is implicitly arguing that bond and stock markets will supplant the banks in generating credit growth. He never mentions the banking system. Repeating, he writes:
* âLower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.â
Unsurprisingly, given his FT Alphaville-donated nickname, Bove is skeptical about whether credit creation can be achieved without the banks. He writes:
The shadow banking system has been effectively crippled. This makes it difficult to understand how the stock and bond markets are now going to supplant the banks in generating new capital to spur economic growth. One cannot argue that it cannot be done. However, it is an untested view of how the financial system works. Under this new system:
* * The Federal Reserve provides the funds by purchasing Treasuries with new money.
*The stock and bond markets obtain these funds generating capital gains that increase consumer confidence.
*This then inspires consumers to spend more creating a virtuous cycle. Banks are minimalized as part of the process.
*They do not participate because they have to be reduced in size and they must increase their capital and liquidity.
*Moreover, the new system relies on consumer spending to buy Chinese products (?) to get the U.S economy moving again.
I just do not understand it. In my view, the processes that must be put in place do not stimulate growth by debasing the currency; ignoring the traditional modes of credit creation; and relying on consumption of foreign goods rather than production of low cost American made goods to restart the economy. In my view the Fed will find relatively quickly that to avoid a liquidity trap, it must utilize the American banks to make loans.
http://ftalphaville.ft.com/blog/201...-qe2-as-a-bank-less-financial-war-with-china/
Yep, exactly my point. Bernanke and his braniac "FED governors" are simply throwing your US Dollars out of the window !
