Tuesday, October 26, 2010

Wall St Journal: Fed's QE2=Few Hundred Billion Dollars

If this is true Wall St isn't going to be happy:

"(Reuters) - The U.S. Federal Reserve is likely next week to unveil a program of U.S. Treasury bond purchases worth a few hundred billion dollars over several months, the Wall Street Journal reported on Wednesday.

What the Journal report called a "measured approach" compares with investors' base-case scenario of an initial commitment to buy at least $500 billion in Treasury debt over five months, in an effort to spur lending and to support an economic recovery that is too weak to tame high unemployment.

The Journal gave no source for the report on its website and said that, although details remain to be sorted out internally, the broad outlines have taken shape.

The bond-buying program is likely to focus on Treasury bonds with maturities mostly between two years and 10 years, it said.

The Fed could buy even longer-term bonds, although some officials are reluctant to do that aggressively because it could expose them to long-term losses without much added benefit, it said."

Quick Take:

Wall St is expecting a Bazooka from the Fed next week and it appears like they are about to get a BB gun instead.

In today's world of trillion dollar deficits this is the equivalent a gnat on an elephants you know what.

What I find interesting is how the Fed purchases will include two year bonds which are having no problem selling right now. 

In fact, last week's 2 year auction sold at record low yields with a bid to cover at a strong 3.43.  Why are they pissing away money on this area of the bond curve? 

Sometimes I just want to start baging my head of my keyboard when I read articles like this.  It's so frustrating watching the Fed piss away hundreds of billions of dollars on something that will accomplish absolutely nothing.

The lack of attention to the long end(which I expected) combined with the small size of the easing in general could explain why this part of the bond curve sold off hard this afternoon. 

It's also possible that the bond boys also may have just simply had a temper tantrum this afternoon as the primary dealers come to terms with not totally getting their way with QE2(which is not something they are used to).

I find it humorous that they admitted that they want to avoid treasuries at the long end of the curve because it could expose them to long-term losses.


Well.....It sounds like we can now bank on a QE2.  In other words:  We are about to officially announce on November 3rd that we are financing ourselves.

Let the amusement begin!!!


Anonymous said...

Jeffy - I just got around to reading your post on the cash 4 keys program (youve been prolific with the posting recently), and I must say, your anger is largely (but not totally) misplaced.

It may seem like the payment of 1-3K to deadbeat homeowners is a huge waste of taxpayer money - the truth is its sound fiscal practice.

Reason #1 is you (the bank) get posession w/o need of foreclosure. Even a pro-forma foreclosure for a "foreclosure mill" attorney costs a good thousand bucks. If the homeowner fights it, your looking at 2-3K minimum. Add in filing fees, sheriff's fees, occasional storage fees, etc. and it can add up quickly.

Reason #2 is that it greatly mitigates damage to the property from the disgruntled homeowner. 90% of the deadbeats leave peacefully. However, the other 10% trash the place to the tune of 40K or more. Average this out over all the foreclosures and you are looking at a 4K loss per home.

However, when a deadbeat agrees to go with cash 4 keys, a condition of recieving the $$$ is that the property is in good condition the day the bank obtains possession. If the place is trashed, no cash.

So at the end of the day, while giving a deadbeat 1-3K of taxpayer money seems like a huge waste - when compared to a taxpayer expense of (on average) 4-7K per foreclosure, it actually makes alot of fiscal sense to offer cash 4 keys.

Now, I agree with you that I dont like that its our money in the first place, and I really dont like that theres a cosmic sense of unfairness in allowing a deadbeat to profit - but those are policy issues to be taken up with our reps in congress. So putting that aside, in the here and now, as grotesque as it seems cash 4 keys is actually a significant savings for the american taxpayer.

Just FYI...

Anonymous said...

The fed and everyone need to quite worrying about how the market will react. To hell with the market! This is the kind of thinking that got us into this mess. Eventually the economy will heal itself with strong fundamentals underneath rather then manipulation and companies will earn profits which will cause the markets to rise. This process may not happen as quickly as everyone would like but at least you will know it is a solid recovery rather then wondering after the life support is removed if it will hold or not.

Jeff said...

Anon 1

Fair enough. I can agree with that.

I just hate to see that it's creating bad behaviour.

With 25-40% of all mortgages underwater(and increasing) I just hate to see people use this as an excuse to "walk away".

When so many homes are at risk from the walk away scenario I think you are creating a moral hazard by offering the money out so easily.

I hear your arguement and it makes sense. I just think we are playing with fire with this program in today's unstable housing environment.

Jeff said...

Anon 2

Couldn't agree more.

Let the forces of the market dictate prices not the Fed.

Bill Gross is out with a serious letter that calls out the Fed.

Scathing remarks.


Anonymous said...

"I hear your arguement and it makes sense. I just think we are playing with fire with this program in today's unstable housing environment."

And again, thats a policy argument to be made with our esteemed representatives in congress. Dont conflate the 2 issues here.

The question I had for you is what (in the here and now of this moral hazard quagmire that our laws have created) do you want the banks to do? Lose less money (via cash 4 keys) or lose more?

Anonymous said...

Jeffy - nevermind my last response. I sent it because I thought you originally said

Fair enough. I can"T" agree with that.

Oops on my part. Reading is fundamental!!!