Is Bernanke’s Bubble About to Burst? The End of QE?

Published on Counterpunch, by Mike Whitney, May 14, 2013.

It looks like the Fed will be tapping on the brakes sometime in the near future, although the date has yet to be determined.
Stocks headed lower on Monday following an unofficial announcement from the Fed that the Central Bank had settled on a process for winding down its bond buying program called QE. While the article–which appeared in the Wall Street Journal– did not set a specific date for QE to end, it did say that the Fed had a plan for scaling back stimulus depending on economic conditions. According to Fed-mouthpiece Jon Hilsenrath:  

“(The Fed) plans to reduce the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated….

Officials are focusing on clarifying the strategy so markets don’t overreact about their next moves. For example, officials want to avoid creating expectations that their retreat will be a steady, uniform process like their approach from 2003 to 2006, when they raised short-term interest rates in a series of quarter-percentage-point increments over 17 straight policy meetings.”

Clearly, the Fed is trying to allay fears that it’s going to quickly turn off the liquidity spigot and leave the markets to fend for themselves. But traders are still worried, which is why stocks dipped into the red all day Monday despite good news on retail sales.  The fact is, even mentioning “taking away the punchbowl” has an adverse affect on the markets.   This presents a problem for the Fed chair Ben Bernanke who’s looking for a viable exit strategy, but doesn’t want to trigger a selloff in the process.

The Fed sent up a second trial balloon on Tuesday via Philadelphia Fed President Charles Plosser who said in a speech in Stockholm that the Fed might “scale back the pace of purchases as soon as our next meeting.” If the Fed is serious about ending its large scale asset purchases (LSAP), there should be more warnings on the way.

While QE  has never achieved it’s stated objectives– to reduce unemployment or jump-start the real economy–it has helped to buoy stock and bond markets.  In fact,  the Dow Jones Industrial Average (DJIA) just crashed through the 15,000 mark while the S&P 500 surged beyond 1,600, up an eye-watering 141 percent from its March 9, 2009 low of 665.  Of course, the downside of  zero rates and liquidity injections is the  prospect of asset-price bubbles, the likes of which are appearing everywhere from junk bonds to farmland … //

… Bernanke realizes by now that he will not hit his targets of 2.5 percent inflation or 6.5 percent unemployment before he’s forced to reduce his monthly bond purchases. It was all a fraud anyway. QE was designed to do exactly what it does, goose stock prices so filthy-rich plutocrats can skim more cream off the top. On that score, it’s Mission Accomplished.

But there’s no way the Fed can gradually taper off its buying without sending stocks into a nosedive. Whatever the real impact of QE might be, traders believe that it’s the gas that fuels the rally, which means that they’ll be watching for any change in policy.

So when Bernanke scales back on his buying, the dash for the exits will begin.

(full text).

(MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. Whitney’s story on how the banks targeted blacks for toxic subprime mortgages appears in the May issue of CounterPunch magazine. He can be reached here).

Links:

Deadly Manufacturing Mirage, Green-Red Alternative, on ZNet, by Paul Street, May 14, 2013: By now, perhaps, you have picked up a media report claiming a recent and almost miraculous comeback for United States manufacturing – one that is, to quote a recent Time magazine cover story, “defying the narrative of the nation’s supposedly inevitable manufacturing decline” …;

Shocking: The Elusive Minimum Wage, on Counterpunch, by DAVID MACARAY, May 14, 2013;

You Say What You Like, Because They Like What You Say, on Media Lens, by David Cromwell, May 13, 2013;

Social Networking and the Death of the Internet, on Counterpunch, by Alfred Lopez, May 8, 2013;

The Illusion Of Democracy
, on Media Lens, by David Cromwell, January 7, 2013;

Mike Whitney, USA (the American writer) on World People’s Blog, March 17, 2009;

A Guatemalan court finds former president Efraín Ríos Montt guilty of genocide and crimes against humanity, on wikipedfia Main page-in the news of May 15, 2013.

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