Quote from intradaybill:
I think he is damn serious. I wonder why you are asking. Can't you see there is a liquidity trap? Banks get the money in US and Europe and they invest it back in government bonds because they are afraid to lend businesses.
That's largely off the mark. The contraction in credit is not just a supply issue. Most recently it's been mostly a consequence of demand shrinking due to deleveraging. Banks are investing in government bonds, but it's mostly not because they're afraid to lend to businesses. It's because a) as I said above, businesses that are crediworthy don't need the credit and would rather pay down debt accumulated in the previous cycle; b) banks are addressing the liquidity regulations, such as Basel III, which require them to hold a much higher percentage of govt bonds on their balance sheets than before. This is all part and parcel of what Reinhart & Rogoff call "financial repression".
As a result the bubble in bonds. The governments in turn get the money to repay debts. Surpluses of a few lender nations increase. QE is not helicopter money. It is a means of bolstering bank balance sheets only. Just a few executives get good pay and they are the only ones who spend money.
Well, I don't see a bubble in bonds, really, but you can call it whatever you will. The term "bubble" is very much abused and, most importantly, ill-defined, so I don't use it and don't argue with its use. Surpluses of lender nations have nothing to do with the situation in the govt bond mkt, but result from patterns of global trade. As to QE, the idea is that once you bolster bank balance sheets, they'll happily supply credit to the rest of the economy. Of course, as I mentioned above, if it's not a supply problem, QE isn't that effective. Finally, regarding executive pay, what does that have to do with anything?
Real QE would be to print money and pass it directly to businesses with an allocation model that relies on earnings, growth and expansion plans. True, a lot of money would be wasted but the net effect would be a drop in unemployment and a rise in inflation. The rise in inflation would be small if the money is allocated to companies that are competitive and productive.
This can be done by the FED purchasing directly bonds issued by corporations.
Firstly, your sugestion has some merit. This version of credit easing has been adopted by other central banks (BoE, SNB and, kinda, ECB). The problem with this, of course, is who's gonna decide which company is "competitive and productive", if you're gonna take this function away from the mkt? Is it going to be a panel of "govt experts" who will tell the Fed which corporate bonds to buy? Moreover, I think you're being excessively optimistic regarding the effect, unfortunately. After all, one of the indirect (but intended) effects of QE has been the unprecedented rally in credit, which meant that corporations have been able to borrow at rock-bottom yields (there was a thread here about IBM issuing at 1%). Has that translated into lower unemployment and a rise in inflation? So direct credit easing, in my view, won't help much. The problem is that the American economy has, as a result of the crisis, undergone a very significant split. The large corporations that have access to the bond mkt are doing marvellously well, whereas small businesses haven't recovered at all. This tiering (which you can observe by looking at the ISM vs NFIB data) means that the Fed is, in fact, pushing on a string to a large extent.
