Quantitative Easing Explained [Archive]

BillBoard

13th November 2010, 09:58 AM

Debt Bubble Chronicles:
Sometimes it’s worth putting things in context.
The world, particularly the US, has been in a bond bull market for roughly 30 years. During that time, bond prices (black line) rose almost continuously, while interest rates (blue line) dropped.

So here we are, interest rates are the lowest they’ve been in 30 years, and Ben Bernanke wants to make them fall even lower. His public reasoning is he wants to maintain the housing market and spur investment in business.
But does it?
Interest rates have been at 0% for nearly two years. Despite this, as well as a massive home-buyers tax credit, housing prices have at best stabilized a bit…but any claim that low interest rates have stimulated a housing recovery is flat out bogus.

As for low interest rates spurring investment in business, this claim is also nonsense. I don’t remember seeing any headlines about companies increasing their capital expenditures or hiring employees? Instead, big business is putting its excess cash to work with buyback programs.

* Time Warner Cable (TWC) plans $4 billion stock buyback‎
* CBS Broadcasts (CBS) Solid 3Q Results, Announces Stock Buyback Program
* Entergy (ETR) 2011 EPS Target In Line With Views, Ups Share Buyback
* Visa (V) Says Quarterly Profit Rises, Sets $1 Billion Buyback Plan
* Rent-A-Center (RCII) Boosts Stock Buyback Plan 33% To $800M

Let’s be blunt here. Corporations know that the recovery is not real. Revenues at S&P 500 companies still remain 11% below their Spring 2008 levels. That’s why companies are not bothering to hire or expand their operations (cap ex). Instead, they’re buying stock in their companies.
After all, companies only issue stock buybacks for two reasons 1) they think shares are cheap or 2) they’ve got nothing better to do with the money. Given that the same corporate insiders voting to issue these buyback programs are dumping their PERSONAL shares hand over fist (the insider selling to buying ratio for the month of October ranged from 229 to an unbelievable 2,019), I somehow doubt these folks think their stocks are cheap.
Thus, both of Bernanke’s claims (that QE will help housing and spur business investment) are a crock. So what’s the REAL reason he’s frantic to keep interst rates low?
Derivatives.
According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.
Five banks account for 95% of this. Can you guess which five?

Gee, that looks a bit like a list of the TOP banks Bernanke’s been bailing out/ backstopping/ funneling cash since the Financial Crisis began doesn’t it?
Now, why would Bernanke be so hell-bent on keeping interest rates low? After all, how much of the $223 TRILLION in notional value of derivatives is related to interest rates?
Try $188 TRILLION.
Yes, thirteen times the US’s entire GDP and nearly four times GLOBAL GDP.
Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/spread out dozens of ways by different banks as a means of dispersing risk.
However, given the amount of money at stake, if even 2% of this money is “at risk” and 10% of that 2% go wrong, you’ve wiped out ALL of the equity at the top five banks…and likely kicked off another systemic implosion at the same time.
If you think Bernanke isn’t aware of this, consider that his predecessor, Alan Greenspan, knew as early as 1999 that the derivative market, if forced into the open and through a public clearing house, would “implode” the market.
Don’t buy ANY of Bernanke’s claims that he’s trying to help housing or business. If he had ANY interest in helping the little guy, his track record wouldn’t be so abysmal.
No, Bernanke is doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails. He is sacrificing the US Dollar, middle class, savings, and possibly even the Republic just to aid his Wall Street masters. http://seekingalpha.com/article/235939-derivatives-the-real-reason-bernanke-is-maintaining-low-interest-rates