Dallas Fed Richard Fisher: QE3—Gift of Free Money for Speculation, (for the benefit of the Wealthy)

Even a high ranking official of Fed recognizes how incumbent financial repression policies confiscates arbitrarily, secretly and unobserved, an important part of the wealth of their citizens in which such “process impoverishes many, it actually enriches some”.

 

Here is an excerpt from yesterday’s speech of Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, before the Shadow Open Market Committee Manhattan Institute New York City. (bold mine)

What of the expansion of the Federal Reserve’s holdings of longer-term Treasury securities under QE3? Fed purchases of longer-term Treasuries amount to nothing more than the transformation of long-term Treasury obligations into short-term obligations of the Federal Reserve. Essentially, long-term government obligations are transformed into short-term government obligations. The government benefits from lower interest costs in the near term, but its future net revenues become more sensitive to future interest-rate increases. Government finance problems are reduced today, at a cost of potential future problems. The larger bank reserves become, the greater is the government’s future interest-rate exposure.

Chairman Ben Bernanke famously said that “the problem with QE is that it works in practice, but it doesn’t work in theory”—QE3 seemed to succeed in pushing interest rates lower out along the yield curve, energizing the bond market and lowering the hurdle rate for discounting cash flows and earnings of companies whose shares traded in stock markets.This came, of course, at the expense of savers who kept their money in the most basic of short-term investments. But this was a cost that the committee felt was exceeded by the expected wealth effect.

Well before last week’s FOMC meeting, it seemed to me that QE3’s effectiveness had waned while its current and potential future costs were mounting. I was thus an enthusiastic supporter of killing the program.

Indeed, I would rather we had never had QE3 in the first place. To this day, I feel that the costs of accumulating another $1.7 trillion of Treasuries and MBS will be shown to exceed the benefits. And yet, as I have said on countless occasions, drawing on former Dallas Fed board Chairman Herb Kelleher’s love for bourbon, once we had QE3 in place, I considered it unwise to go directly from Wild Turkey to cold turkey for fear of getting the financial equivalent of delirium tremens; indeed, we saw that with the “taper tantrum” the markets threw in May of 2013. So I was an eager proponent of the tapering program the FOMC initiated in January of this year.

I want to be clear here. Especially at the beginning of QE3, when the nonsense term “QE infinity” was being broadcast by otherwise responsible analysts, journalists and pundits, rates dipped to lows that helped creditworthy businesses bolster their balance sheets and strengthen their wherewithal for future expansion. Again, even if you were living under a rock, you know that this gift of near-cost-free debt as measured in inflation- and tax-adjusted terms has thus far been used primarily to finance stock buybacks, increase dividends and fatten cash reserves, and recently, finance mergers by the most creditworthy companies. For those with access to capital, it was a gift of free money to speculate with. (One wag—I believe it was me—quipped that there was, indeed, a “positive wealth effect… the wealthy were affected most positively.”)…

Invisible subsidies to the government via manipulated interest rates also signifies as a subsidy to the wealthy, and the politically connected financial elites.

Let me add, Mr. Fisher said: The government benefits from lower interest costs in the near term, but its future net revenues become more sensitive to future interest-rate increases. Government finance problems are reduced today, at a cost of potential future problems.

Last April I wrote of a similar context applied to Philippines:

The principal cost to attain lower public debt has been to inflate a massive bubble. The current public debt levels have been low because the private sector debt levels, specifically the supply side, have been intensively building. 

And yet the secondary major cost from inflating a bubble in order to keep debt levels low has been to diminish the purchasing power of citizenry, so aside from domestic price inflation, this can now be seen in the falling peso. Government debt has been and continues to be subsidized by the private sector in possession of the currency, the peso.