Wednesday, September 7, 2011

QE and Stimulus Thoughts ahead of Bernanke and President

I am going to put on my economist hat and discuss what we are going to get from Bernanke and Obama tomorrow.

First of all, I am extremely skeptical of those measures. If the "leak" about both gentlemen's measures are true, we are going to get more of the same. Bernanke is getting ready to engage in "operation twist". I have discussed here before the possibility of QE Lite - reinvestment of the interest on portfolio. I think that "operation twist" is another version of what will happen. Fed will get rid of short-term paper and will buy long-dated. While the idea is to help housing refi market, I am going to remind that it is not an interest rate but the overall lending freeze that is affecting the housing market. Also this will not address the issue of deflating housing prices, even though supposedly Fed is trying to keep folks in their houses. Banks will continue foreclosures due to high unemployment, declining prices, home owners unwilling to repay due to being upside down on their mortgage. Let's remember this is the same Fed Chairman who said "subprime mortgage crisis will be contained".

Now about The President's speech. I have to give him a credit for moving the speech one day behind. So it looks like he is cooperating with GOP on something at least. I want to see more cooperation between the parties. Anyway, I hear that $300B of stimulus is coming. Folks, it is paltry at best. We have a $14T sluggish economy (that Beige Book was really stinky, 7 out of 12 regions are close to stagnation). We need at least $2-3T of stimulus, like we had during QE I and II, just to keep us from going into recession.

I am going to wait until tomorrow night to make all of my conclusions, but if the above information is correct, it will not be enough to keep this huge economy from recession.

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