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QE3 + 60% PSI

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Hilsenrath reports that the discussion inside the Fed has turned to QE3, but that this time MBS is back on the agenda.

I think that the Fed would do well to stay out of credit allocation – the fiscal authority already owns three mortgage firms (ginnie, fannie and freddie), so they are equipped to deal with this if they are determined. Having said this, Congress is gridlocked, and I can imagine that the Fed is under intense pressure from the Whitehouse to do something (anything!).

Even with a Nobel prize it will be difficult for Obama to get re-elected if the unemployment rate is not (at least) trending down.

The FT reports that the EU is nearly gridlocked itself, and that an IMF stress test suggests the final cost of Greece could be four times higher than the original estimate of ~110bn. Naturally, the broke governments of Europe do not wish to pay such a high price, so they are looking for a much larger private sector haircut (PSI) for Greek bonds.

I feel like a fool for having faith, but i figure the Europeans realise that if they do not fix things this week – the summits are 23 Oct and 26 Oct – that there will be a credit chrunch and a recseeion which will cost them their Credit ratings, and increase the support required by their banks.

They are all out of band-aids – let’s hope they realise.

7 comments

  1. one of ratings agencies has already warned that france (among others – except DE) are likely to be downgrade if economy tanks. this is looking more likely. This is thanks for ECB’s tight monetary policy. Dumb. They are fighting last century’s war.

  2. “Lower mortgage rates, in turn, could encourage more home buying and mortgage-refinancing, and help the economy by freeing up cash for consumers to spend on other goods and services. Mortgage rates are already very low, but some Fed officials believe they might be pushed lower. Moreover, Fed officials believe their past purchase programs helped to lift stock markets, by driving investors from low-risk ”

    Biggest joke ever. Europeans do look like geniuses compared to this rubbish.

    1. What has never convinced me here is that the fed taking this risk is just the taxpayer taking the risk – as the fed is ultimately the taxpayer. Not everyone is rational, sure, but this reality puts a hard cap on the effectiveness of central bank maturity transformation and risk sharing.

      I suppose this is a sort of ricardian equivalence argument…

      Sent from my iPad

      1. They should just buy the entire stock markets directly, until they own all of the S&P 500 shares. Ah, that’s called Communism…. Anyway, I’ll be there with them when they buy and out in a flash when they stop. And then I’ll save the money I make…. because no one really believes the inflation story when interest rates are at zero. Go online and check: USA is now among the CHEAPEST places in the world.

  3. A friend at the Fed tells me that the place is now (post the financial crisis) dominated by financial market experts rather than monetary policy or macro experts – hence stupid ideas like this. Within the contraints of their remit, they would be better off just loudly and repeately committing to do whatever it takes to ensure inflation does not drop below 2% until unemployment is down below 6%. QE3 without that sort of commitment won’t have a huge effect, especially now that it will come too late to avoid another recession.

    The way things are looking, I might have to make a special trip up to Sydney to see Chris do his nudie run. Better start shaping up, Chris!

  4. “October US Consumer Confidence drops To 39.8 From 45.4 Lowest Since March 2009” ….

    The power of monetary policy. But I am sure QE3 will fix all that. The magic of finance.

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