Are You Sick of QE Yet?November 09, 2010 Posted by: Joe Morgan, CFA
Ran into the Devil
He loaned me twenty bills
I spent the night in Utah
In a cave up in the hills
- Grateful Dead
By now you must be sick of hearing about QE2, the latest QE or quantitative easing effort to come out of the Fed. But at the risk of encouraging you to stop reading here, I feel the need to add one more perspective to last week's action and I promise to be brief.
Let's realize there is only so much the Fed can do.
When there is tremendous uncertainty coming out of Washington regarding the rules of how the economy will work, activity comes to a halt. Today, there is uncertainty about everything from healthcare to tax rates to immigration. And now that we have such a tremendous shift in the make-up of the legislative branch, there is confusion in Washington regarding "next steps."
The Fed is attempting to smooth the bottom of the riverbed and has been successful for the last 15 months or so at this endeavor, but recovery is beyond its reach. Instead, we must have some resolution on the above issues and many more out of Washington. The most important is the mortgage market, about which I've railed on enough.
The Fed's tools are primarily designed to affect the quantity of money in circulation — that's not the problem today. The problem is the velocity at which money is moving through the system. This is the "banks aren't lending"* mantra that has gone so very mainstream. But lack of transactions is not just occurring in the financial sector, consumers are also lowering their velocity by increasing savings.
Again, much of this is due to uncertainty that can be cleared up by a legislative and executive branch that can cooperate. It remains to be seen whether we will have such cooperation, but I suggest planning for the worst while hoping for the best.
* In the interest of full disclosure, Silicon Valley Bank has actually grown our period-end loan balances over the last two quarters by $654 million
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