Industrial Insight

QE2, feckless? | June 16, 2011

http://www.bloomberg.com/news/2011-06-02/is-qe2-a-savior-inflator-or-a-dud-business-class.html

Is QE2 a Savior, Inflator, or a Dud?: Business Class

The red dashed line represents total Fed holdings of Treasury notes and bills. You can see the sharp rise starting in November 2010. The Fed purchased $600 billion of long-term government bonds, giving banks $600 billion more reserves in return. (Bank reserves are accounts banks hold at the Fed.)

The vertical lines mark the two big Fed announcements. On Aug. 10, the central bank announced that it would reinvest maturing assets in Treasuries. On Nov. 3, it announced the actual QE2 program.

QE2 doesn’t seem to have lowered any interest rates.

With near-zero short-term interest rates, and bank reserves paying interest, money is exactly the same thing as short-term government debt. A bank doesn’t care whether it owns reserves or three-month Treasury bills that currently pay less than 0.1 percent.

This is what drove the Fed to QE2 in the first place. Conventional easing — buying short-term Treasuries in exchange for reserves -– obviously has no effect now. Taking away your green M&Ms and giving you red M&Ms instead won’t help your diet.

But if exchanging money for short-term debt has no effect, it follows inescapably that giving banks more money is exactly the same as giving them short-term debt. All QE2 does is to slightly restructure the maturity of U.S. government debt in private hands.

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