Introduction, Background of the Author and the Book
In order to give an intelligent critique of the book “In Fed We Trust”, by David Wessel (2009), and clearly understand his arguments, and points surrounding the success of failure of Quantitative Easing 3 (QE3), we must first set a background and vividly understand the author “David Wessel”. The information posted on the Wall Street Journal’s website denotes that:
David Wessel is economics editor for The Wall Street Journal and writes the Capital column, a weekly look at the economy and forces shaping living standards around the world. He is responsible for overseeing coverage of the Fed and the Journal’s daily coverage of the macro economy, global trade and economic trends. He appears frequently on National Public Radio1.
It’s no doubt that David Wessel is a prominent economist and a journalist, with a lot of experience since he earlier worked with the Wall Street Journal's Washington bureau, as deputy bureau chief, and he also as the newspaper’s Berlin bureau chief in the year 1999 to 2000. He has been in this industry since 1984, after graduating in Haverford College in 1975.
Definition and Understanding of Quantitative Easing 3 (QE3)
The simplest definition of Quantitative easing (QE) given by Roche (2011, p. 12) is that: It is an alternative monetary policy that the US central banks use to stimulate the national economy when conservative monetary policy turns to be ineffective.
Just to give a quick summary, in Quantitative Easing phase/round 1 (QE1) was referred to as “The Wall Street Bailout”, it took place in early fall 2008 and “The US Central Bank rushed in with socialized burn cream and handed its money to those in need (arguably, no doubt)”. QE2 was just after Halloween in 2010, “the US Federal Reserve decided that the US economy was not growing fast enough, hence, they brought the US Treasury Bonds (T-Bonds)”2.
Hilsenrath (2011, p. 12) expressed sarcastically that that:
QE3, which is rumoured to take place after QE2, if situationally needed. Well, as of July 2011, nobody knows for sure what exactly QE3 means yet. Maybe the Federal Reserve will buy more US Treasury Bills (T-Bills). Or maybe they will bailout banks again like in QE1. Or maybe the Fed will, oh what the hell. Nobody expects the US will ever pay back $14 trillion. So, go ahead raise the debt ceiling. What's another trillion or two? Go ahead S&P - downgrade our credit rating. QE3 will work, you'll see!3
An over View of the book “In Fed We Trust”, by David Wessel (2009)
David Wessel in his book “In Fed We Trust” re-constructs the constituents beneath “The Great Panic of 2008-2009”, a financial crisis or a recession phenomenon. This book is a keen analysis of the minds and reasoning of the financial controllers and managers who were responsible for comprehending the crisis at that time. Mainly this book centers mainly on the roles and efforts of by Tim Geithner who was the New York Federal Reserve System (Fed) president by then, Hank Paulson the then Treasury Secretary, and Ben Bernanke as the Fed chairman. While Paulson left the secretary of Treasury position, these three men had a common goal of saving the Fed system through saving the financial institutions.
This book emphasizes the words of Bernanke “whatever it takes” as a precise indication of his zeal to fight the crisis. The Fed eased quantitative and debt monetization and it came up with many with abbreviation loaded credit facilities. Deep reading of the book will enable the realization that, in several occasions the responsible individuals where unaware of the preceding actions and the following actions. Wessel praises the three (Bernanke, Paulson, Geithner) for their creativity and encompassing the rule book to its bounds without going overboard (Wessel, pp. 184-278)4. Especially, Bernanke being an academician and not good mannered, enabled the Fed to carryout actions that it had never done before.
The core of this book is the fact that the Fed was not able to predict the “housing bubble or proliferation of derivatives under the garb of hedging”. This is mainly because of the Greenspan’s arrogance with financial regulation caused “free for all unregulated financial innovation that was predominantly based on the belief that financial players will heed their self interest first and foremost”. But, that was clearly not to be as greed. “There is lot of cynicism on the powers of Fed and policy interventions it can pursue with little or no congressional approval. In reality Fed can and will preserve the financial system at almost any cost. In conclusion, is Fed better prepared now to identify crisis before they occur?”5
Barrett (2010, p. 10) an economist with New York Times, reviews David Wessel’ book “In Fed We Trust: Ben Bernanke’s War on the Great Panic,” and Barrett (2010, p. 10) emphasizes that Wessel admits in this book that the three main men in charge of the Federal Reserve, the Treasury and the New York Federal Reserve System these made some good decisions, during the 2008-2009 recessions, like “financing the absorption of the mortally wounded investment bank Bear Stearns by a larger competitor,” and at the same time they also made bad decisions, like “letting the equally decrepit Lehman Brothers disintegrate into bankruptcy, which helped set off worldwide financial hysteria”6. But, in overall this earlier published book, Wessel praises Bernanke for specific application of QE2, which was characterized by; neglecting to follow what the Federal Reserve rule book demands, and instead he floods the markets with new cash and swear to do “whatever it takes” to overcome the bank irrelevant practices7.
So far, the success or failure of Quantitative Easing 2 (QE2) becomes questionable since, this book affirm that, the precise application of QE2 assisted in preventing the actual worst that would have taken place following the 2008-2009 recession. However, Barrett (2010, p. 10) and even Wessel (2009, p. 336) conclude that the success or failure of QE2, which is denoted by Bernanke’s actions will only be left to history, to deem this diverse record a failure, or a success. This implies that the success of failure of QE2 is not very certain, and Wessel appropriately contend that, this will largely rely on the duration it take for the US economy to come out of the 2008-2009 recession and the severity of the damaged caused by this recession, just like it is usually gauged using the measure of the number of foreclosed homes, crippled companies, and workers laid-off8 and these were similar sentiments to those given by Richard (2009, p. 7) a German economist in his earlier review of this book9.
Three Reasons Why Quantitative Easing 3 (QE3) Should No Be There
The current debate on should or should there be QE3 is very interesting, critical and challenging. Many financial professionals prove to trust that quantitative easing 3 will take place, but, equally important is the presence of many people who are equally knowledgeable in the financial field who thinks that this is not a good move. The BlackRock’s chief equity strategist at fund manager Robert Doll expressed at an interview that, he is not yet persuaded that a QE3 package of any amount or magnitude from the Fed is attained without the a further freeze on the credit markets in the US or Europe. noticeably stumbles". Jim Sinclair one of the renowned gold expert in the world said that, “States and Municipalities can and will go broke. The economic impact will act to foil QE. That will result in QE to Infinity regardless of MOPE. (Management of Perception Economics), Therefore, Washington and the Fed will backdoor rescues by buying State & Municipal debt, a form of QE.”
But, based on information on Wessel’s book ‘In Fed We Trust’, and other data on the success of quantitative easing history, there are past and present signals to back the idea that quantitative easing has minimum success chances, even if it is in the form of QE3, QE4, QE5, or any other denotation. Below are the three reasons that prove that the U.S. economy does not need quantitative easing 3.
The US Stock Market Investments was not Assisted by QE2 and Related Operation
Permitting to TrimTabs observations “Investors put eight times more money into checking and savings accounts than into stocks and bond mutual funds and exchange traded funds (ETFs) in the first 11 months of 2011”10. It is indication that fed funds at a 0.25% rate, a security of saving and checking accounts is still being preferred by many investors other than riskier stock market11.
The is No Deployment of Money Supply
Its is no doubt that lending has risen at Citigroup, JPMorgan, and in many other US banks, but, they acquired much more money through quantitative easing compared to money provided by this lending12. This money is just kept idle in the service banks, but it should be lent out to credit worthy clients, so that they can devote it and this is a great economic stimulation. The current low bank loan interest rates, and the banks possess minimum enticements to lend at these, hence, consumers and minor businesses remain cautious on acquiring more debt. Thus with the present level of the bank’s money supply, the system doesn't need more cash, QE3 will not make sense in this instance.
The Current Rise in Inflation
The precise rise in inflation, mainly embrace items like fuel and food, has contributed greatly in moving the market than rates of interest have done. It is a fact that this is partly due because of what Bell (2012, p. 13) explains as: “the Fed's decision to leave interest rates at 0.25% for some time”13.
During the middle to the end months of 2011, inflation speeded up starting at 1% in the beginning of the year to almost 4% in the month of September 2011, before it instigated a stable pattern. Bell (2012, p. 17) reports that, “In December headline CPI stood at 3.0%. A survey of economist’s shows inflation will be moderate in 2012. Oil above $100 a barrel won't help the situation”14. The political tensions in Iran, a country very far from the US, will cause an influence on prices of oil and, eventually, on inflation. Despite this worrying trend, there are no unlikely the risks of deflation, it doesn’t make sense that the fed does not realize that there is actually no prerequisite for quantitative easing by additional expansion its books of accounts. Inflation will be driven further higher than the present level using such strategy15.
James Howard Kunstler a prolific author and writer, who focuses in novels on fictional delineations of the ‘post-oil’ American prospect, said this concerning QE2, “My guess is the Fed will find some other way to buy distressed securities or “investment-like” things. The models for that are the Maiden Lane portfolios (there’s more than one) which are stuffed with crap like bankrupt hotels. Yes, the Fed owns bankrupt hotels! If they don’t buy up what are essentially loans gone bad, the system sucks itself into a black hole of compressive deflation. That outcome is likely anyway, because the Fed won’t be able to keep up with loans gone badly”16 This is a clear indication of the direction that QE3 might take.
Bibliography
Cooper, Richard, N. “In Fed We Trust: Ben Bernanke's War on the Great Panic. (Brief article)
(Book review).” Foreign Affairs, March 1, 2010. Web. May 7, 2012.
Cullen Roche. “Quantitative Easing 3 – Another Monetary Non-Event?.” Pragmatic
Capitalism, 4 August 2011. Web. May 7, 2012.
David Wessel. “In Fed We Trust: Ben Bernanke's War on the Great Panic.” Crown Business,
2009.
David Zeiler. “Bernanke's Jackson Hole Speech: Why QE3 Won't Spell Relief”. Money
Morning August 26, 2011. Web. May 7, 2012.
Greg Hunter. “The Most Predictable Financial Calamity in History.” USA Watchdog, Monday,
January 24, 2011. Web. May 7, 2012.
Jon Hilsenrath. “Sterilized' Bond Buying an Option in Fed Arsenal”. Wall Street Journal,
March 7, 2012. Web. May 7, 2012.
Lindsey Bell. “3 Reasons Why QE3 Wouldn't Work.” The Street, January 19, 2012.
Paul, M., Barrett. “While Regulators Slept.” New York Times. August 6, 2009. Web. May 7, 2012.
