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.