You can’t push on a string.
— John Maynard Keynes
The Federal Reserve’s policy-setting Federal Open Market Committee sat down today with one big agenda item: QE2. That would be “quantitative easing,” where the central bank tries to stimulate lending and spending by purchasing Treasury securities. How can it do that, you ask, dear reader? By printing more dollars.
The private sector is either sitting on huge amounts of cash or skating on thin ice, and few companies see big demand ahead. The housing boom is kaput. The White House and Congress are paralyzed on further stimulus (just wait until January, too) and the original stimulus too small and badly targeted. That leaves the Federal Reserve. Chairman Ben Bernanke, one of our foremost scholars on the central bank and the Great Depression, is determined to avoid the mistakes of the 1930s. That was when the Fed kept credit tight and accelerated a deflationary spiral (this was Milton Friedman’s most important contribution to economics).
Bernanke has a fragile coalition on the FOMC that agrees deflation — not inflation — is the biggest threat to the economy. And, by extension, that QE2 not only won’t worsen price stability, it could help with disastrous unemployment, a faltering recovery, etc. Watch for how much easing — will $500 billion be too little? Too little has also been seen on infrastructure investment, job creation, foreclosure relief, etc. It seemed the only time the right amount of power was applied was when we saved the bacon of the big banks and the shadow banking system.
Yet the Fed is not acting in a vacuum. The world economy has decoupled. While America struggles under its financial swindles, middle-class swoon and deindustrialization, Asia is powering ahead. There, central banks are worrying about inflation. And will QE2 make dollars and/or Treasury debt less appealing to investors? The Depression Fed didn’t have to deal with these issues. Japan’s lost decade was also different. Real analogies to our present mess are tough to find.
My guess: QE2 won’t hurt much and might help a little. A little. The Fed already took so many toxic “assets” off the books of the big banks and gave them cheap money with which to speculate, what’s a little more? It might not make it to Main Street. It wouldn’t be the first time.
More WaMu: Here’s the rundown on Monday’s WaMu decision, via CRT Capital analyst Kevin Starke:
Senior Notes – Positive — benefit from the support that the Examiner lends to the proposed settlement and a timely resolution of the cases (year-end). Though the Examiner does create some doubt as to whether Wamu would have unfettered access to the cash deposits if the settlement fell apart.
Subordinated Notes – Positive — Same conclusions as for Senior Notes. But there is some confusion in the Report about recoveries, which Hochberg pegs at 70-80%. I think this is a mistake. Recoveries should be par plus accrued.
WAHUQ (“PIERS”) – Positive – on timely resolution of the cases, which will stop the bleeding due to payment of professional fees and post-petition interest to the classes above the WAHUQs. Positive also in that Hochberg concludes that the company will have very large residual tax assets after emergence. Timing of emergence has a big influence on whether these will be subject to a 382 limitation or not. It seems that emerging in January may be better than emerging in December. Still trying to decipher this section.
Hybrids (TRUPS, or REIT Trust Preferreds) – the market is saying negative, but I’m saying it’s more neutral than that. I think the report actually gives some ammunition to the Hybrids arguments, but more on this later.
WAMPQ, WAMKQ Preferreds – Negative, except that any recovery from the waterfall would be enhanced if the company can get out of Ch 11 sooner and stop paying post-petition interest.
WAHUQ Common Stock – Negative – The report was written mainly for the benefit of common stock holders, and shows them that there is too great a risk to the estate in litigating on all the fronts necessary to produce a recovery at this level. The report concludes that the existing settlement is fair.
Washington Mutual Bank NA (“WMB” or “Opco”)
Senior Notes – Somewhat neutral on balance, except that they will benefit from a timely resolution of the Holdco cases. Hochberg portrays avoidance and conveyance issues between WMI and WMB as so tangled and complicated as not to be worth litigating. Some readers may draw some support for arguments that WMB’s share of the tax refunds ought to be bigger, but my sense is that the Examiner finds the settlement fair as it is.
Subordinated Notes – No real impact. This class is unlikely to get any recovery under almost any scenario.
I would add: Seattle — still wounded, by Washington Mutual’s shameful management and board oversight, greed and foolishness.
Today’s Econ Haiku:
Spy our spy budget
Other nation’s GDPs
Should be so ample