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Global Crisis/Innovation Blog

QE2 Has Failed – Here’s the Evidence

By Shlomo Maital

   My friend David Frank,  a rising blogger who has significant experience in US bond markets, provides evidence that Fed Chair Bernanke’s QE2 (quantitative easing, version 2) has failed.

In his forthcoming blog, he notes: 

  •  Since the program began in November, 5-year-yields (the yield on five-year US treasury bonds) have risen by a very large 0.9 percentage points (90 basis points).  This means that the Fed has taken a $3 b. capital loss on the $116 b. worth of bonds it bought, because their prices have fallen, making their current value only $113 b.   This is not the key point – the point is, QE2 was aimed at LOWERING long-term interest rates, and apparently it has done the opposite.

What went wrong?

  Frank attributes the core problem to lack of coordination between the White House and the Fed  — not the first time.  The White House, by embracing the Republicans ‘ beloved extension of the ‘tax cuts for the rich’ program, has created even more red ink and postponed even further dealing with America’s near-11  per cent of GDP deficit.  This means the Federal government will need to sell even MORE bonds in future to pay for its deficits – and by the laws of supply and demand, higher supply means lower prices (and higher bond yields).

    It is not at all surprising, given the actors in place now in the Obama Administration, that the Treasury is acting at odds with the Fed.   But it is distressing – because the Fed is the World’s Central Bank, not just America, and at the moment, it is bring mismanaged, as is the US Treasury, to the detriment not only of the rest of us outside the US but to the detriment of ordinary Americans as well.    



Global Crisis/Innovation Blog

Secret Bankers’ Meeting:  Is This Restraint of Trade or What?

By Shlomo Maital

   Take senior business leaders from nine top companies in a vital industry.

    Arrange for them to meet on the third Wednesday of every month in New York.

    Purpose of the meeting: Protect their monopoly on an enormously profitable product.

    Secrecy:  “the details of the meeting and identities of the participants have been strictly confidential”.

    Question:  Does this qualify for breaking the law, under America’s anti-trust legislation, or what?

     In her front-page exposé in the Global New York Times “Secret group keeps grip on trading derivatives” [Monday Dec. 13 2010], Louise Story reveals how top global banks “fought to block other banks from entering the market [for derivatives], and are also trying to thwart efforts to make full information on prices and fees freely available.

     Let me get this straight. The huge, unregulated global derivatives market, including CDS’s (credit default swaps, that destroyed AIG), created by the huge banks, almost destroyed the global economy during 2007-9.  The same people who brought you the Global Crisis Act One are now conspiring in secret to recreate it and keep it alive – the very assets that caused ordinary working people all over the world enormous grief and job loss. 

      Why are they doing this?  Apparently, according to Story, because the derivatives market is hugely profitable, precisely because it is secret, unregulated, and no-one knows for sure how much the banks are charging legitimate companies for the vital hedging activities that derivatives permit. 

      How do we know it is enormously profitable?  Checked the banks’ P&L statements lately?  Wondered where all that profit is coming from, in a weak economy, with limited bank lending and borrowing?  Two sources:  Derivatives, and speculative trading. 

      The global banks failed to truly destroy global capital markets in their first try.

      Perhaps this time, unless they are brought under control, they will succeed.

  For the record, the bankers who meet secretly are: Thomas J. Benison, JP Morgan Chase; James Hill, Morgan Stanley; Sthanassios Diplas, Deutsche Bank; Paul Hamill, UBS; Paul Mitrokostas, Barclays; Andy Hubbard, Credit Suisse; Oliver Frankel, Goldman Sachs; Ali Balali, Bank of America; Biswarup Chatterjee, Citigroup.  Note that it was JP Morgan who invented credit default swaps in the first place.

     Ostensibly they meet to manage a “clearing house” for derivatives. In practice, they are effective in keeping out newcomers, including respected banks including Bank of New York-Mellon Clearing.

    “Fundamentally the banks are not good at self-regulation”, said a former Federal Reserve regulator Theo Lubke who oversaw derivatives review until last autumn.

     Here, we have the hands-down winner for Understatement of the Year!

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
December 2010
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