Bernanke’s QE3 slamming California economy

Sept. 17, 2012

By Wayne Lusvardi

Those desperately in search of a cure for cancer will often try apricot pits bought in Mexico, exotic herbs or light therapy treatments. None has been proven to be effective.

In an action with direct implications for California, the Federal Reserve Bank is conducting a third desperate round of “quantitative easing” as the therapy of last resort, what it’s calling QE3.

Quantitative easing is a sophisticated indirect way to print more money without having to use a printing press.  This process was once described as similar to dropping dollar bills from a helicopter by no less than Ben Bernanke, the Fed’s chairman.  Thus his nickname, Helicopter Ben.

Wise voters know that any nostrum or treatment peddled right before an election is often likely to be snake oil.

QE3 is hospice care for the terminal debt crisis. It will get money flowing around the economy when the conventional economic stimulus method of cutting interest rates no longer works because the Fed already cut interest rates close to zero, and so can’t cut them any more.

Quantitative easing magically creates new money.  The Fed just increases the size of the accounts of in its member banks.  It then buys mortgage assets of banks so that the banks have more money to put into circulation.

Think of quantitative easing as a sort of swap of a bank’s mix of good and bad mortgage loans for a credit on their balance sheet at the central bank that is equivalent to cash.  So now the bank doesn’t have to wait for the pay down of the loans to get their principal back. They can loan out more money.  And using fractional interest banking they can loan out maybe 7 times what they were credited at the central bank. With fractional interest banking a local bank can become its own mini-Federal Reserve, creating money out of thin air.
The balance sheet of the Federal Reserve has increased $820 billion in the last four months due to quantitative easing.  That is about ten times the annual operating budget of the California in just a third of a year.  But with fractional interest banking that may equate to about $5 trillion, 740 billion dollars pumped into the money supply ($5.74 trillion or $780 billion x 7). 

Ben’s QE3 a boom for Bakersfield and Berkeley….

QE3 will push up the price of any commodity, whether it is houses, gold, food, or oil.  By weakening the purchasing power of the dollar, it boosts demand for hard financial assets and essential goods.

This means that communities in oil rich Kern County are experiencing a boom.  Bakersfield is already reported to be experiencing an economic “recovery” because of QE1, QE2, and now QE3, which is already four months old.

It also pumps up demand for housing with near-zero interest rates and escalating home prices occurring at the same time.  Bakersfield home prices are up 7.0 percent since last year. The 30-year mortgage rate for Freddie Mac was 3.55 percent last week, with monetary inflation for the past year running 2.4 percent.  The effective mortgage rate after inflation is about 1 percent. But after QE3, it may be a net zero percent, which is effectively free money.

According to Ruchir Sharma of Morgan Stanley Bank, in 2009 the lowest income groups had to spend 41 percent of their after-tax income on gasoline and food, with little money left over for luxuries.  Conversely, the top income brackets spent only 2 percent of their incomes on gasoline alone, which was only 25 percent of what the poorest income bracket spent.  All that QE1 and QE2 did was boost the stock market, which benefited the wealthiest 10 percent of the population that hold 75 percent of all common stocks.

This means that wealthy communities along the California coastline, such as Berkeley, are likely to be less damaged by the effects of QE3.  And cities like Berkeley have a higher percentage of homes with built-up equity that can be used to downsize into more affordable housing or serve as collateral for small business loans.

Those who have an oil-related economic base, like Bakersfield, and a low percentage of underwater mortgages and trust fund wealth like Berkeley are able to weather the storm of inflation better.

… and a bust for San Bernardino …

Even though home prices are also up 7.0 percent in San Bernardino, the effect of high gasoline and food prices from QE3 will make it hard for a housing recovery without an accompanying increase in jobs and incomes.  San Bernardino County doesn’t have the oil jobs boom that Kern Count does.  And it has a high percentage of home foreclosures and underwater mortgages.

All that QE3 will likely do in places like San Bernardino is penetrate through the inflated price of housing and stocks to higher prices for gasoline and essential goods.  This will result in less money to save up a down payment for a home.

According to Richard Green, director of the U.S.C. Lusk Center of Real Estate, “The constraint that is keeping people out of the housing market is absence of equity [down payment].  The drop in house prices means that many borrowers are underwater on their houses, and high unemployment has prevented potential first-time buyers from accumulating down payments.”

… as well as a bust for Gov. Brown’s Tax Increase Proposition

Sharma also said, “Inflated prices for commodities like oil carry the seeds of their own destruction, because the higher they rise, the more likely they are to stall the economy.”

Sharma reported that speculators are betting on QE3 diluting the dollar and driving up oil prices, thus putting the United States right back into another economic recession in 2013.

More inflation of gasoline and essential goods may spell doom for Brown’s Proposition 30 tax increase proposal on the November ballot.  Prop. 30 mainly would hit taxpayers making $250,000 or more a year. But voters aren’t likely to vote for a tax increase that doesn’t reduce their higher gasoline and foods costs and provides new private sector jobs.

As economist Michael S. Rozeff noted, QE3 is driving up government bond rates and the cost of government borrowing: Higher government bond yields are “a far larger negative to the government than any minuscule decline in mortgage yields” from lower interest rates or QE3-induced inflation.

QE3 is a treatment for the debt cancer that continues to spread in California. But it would only make the bottom-line economy worse for most households.

Politicians should be reminded that those afflicted with the QE3 debt cancer will still vote with their pocketbooks and don’t want political placebos.

(Editor’s note: The paragraphs in boldface were corrected from earlier versions.)

29 comments

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  1. Soquel Creek
    Soquel Creek 17 September, 2012, 08:21

    While most Americans were more interested in talking about “Fifty Shades of Grey” and other distractions, here’s what your Federal Reserve was doing:

    “United States Federal Reserve Buys Nearly $1 TRILLION in U.S. Treasury Securities Over One Year Period”
    http://soquelbythecreek.blogspot.com/2012/02/united-states-federal-reserve-buys.html

    Imagine the fun you could have if you could manufacture your very own shiny, newly-manufactured zeros to add to your bank account.

    Reply this comment
  2. BobA
    BobA 17 September, 2012, 09:07

    Adding to San Bernardino’s woes is that over 35% of the people who live there work somewhere in the city of Los Angeles and have to drive the long commute on I-10 to go back and forth to work so paying even higher gas prices will put a serious crimp in the finances. San Bernardino already has some the the highest gas price in So. California.

    Furthermore, the overwhelming majority of people living in San Bernardino county are on some form of government assistance and the medium income there is well below the national average. This story portends an even bleaker outlook for San Bernardino county residents.

    Times are tough and near 0% interest rates are killing the savings of the elderly and everyone else. Things are getting worse for the common people and our federal government’s only concerned is saving the banks and the wall street fat cats.

    Reply this comment
  3. Queeg
    Queeg 17 September, 2012, 09:51

    Worse.worse..gloom…doom….do you bunker people ever take a happy pill?

    Reply this comment
  4. CalWatchdog
    CalWatchdog Author 17 September, 2012, 09:55

    Queeg: Sounds like you took the blue pill.

    http://en.wikipedia.org/wiki/Red_pill_and_blue_pill

    — John Seiler

    Reply this comment
  5. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 September, 2012, 10:36

    Teddy took the bue pill and became Queeg 😉

    Reply this comment
  6. Hondo
    Hondo 17 September, 2012, 10:44

    There is no ‘trick’ to getting this country out of it’s recession. QE3 is like blowing up a balloon with hot air. Inside the balloon, you still have nothing but hot air. And you increase the chance of it blowing up due to the increase prices of commodities, gas, food, corn, ect.
    To get out of this recession we need to stimulate private enterprise thru tax cuts, cutting regulation and tort reform.
    Gotta go, boss is here and he may do some quantitative easing with my job.
    Hondo…..

    Reply this comment
  7. Dyspeptic
    Dyspeptic 17 September, 2012, 10:45

    “Worse.worse..gloom…doom….do you bunker people ever take a happy pill?”

    No Queeg, self medication to block out reality isn’t the answer. Neither are the stale and desperate policies of our political and banking overlords. All of the absurd Jerry-babble in the world won’t change that. Besides, my bunker is warm and cozy and makes a great root cellar and game room 🙂

    Reply this comment
  8. Queeg
    Queeg 17 September, 2012, 11:22

    Sick people can get sicker?

    Uplift us…..posters…amen!

    Reply this comment
  9. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 17 September, 2012, 13:09

    Relax fellow trolls–and remember — Milton Friedman famously said that the time lags in monetary policy are long.

    Reply this comment
  10. BobA
    BobA 17 September, 2012, 13:31

    Queeg:

    Stop it. We all know your paycheck comes from the government so nothing that happens in the real economy affects you in the least bit. Your fat government salary and pension is secure so you have no skin in the game.

    You offend those of us who don’t suckle on a government teat as you apparently do when you so cavalierly dismiss the issues being discussed here. Enjoy your teat and let real tax payers have their say.

    Reply this comment
  11. Queeg
    Queeg 17 September, 2012, 14:43

    Bobbie….

    Little you truly know about Queeg.

    Reply this comment
  12. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 September, 2012, 14:56

    Relax fellow trolls–and remember — Milton Friedman famously said that the time lags in monetary policy are long.

    How long is “long”….50 years 🙂

    Reply this comment
  13. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 17 September, 2012, 15:03

    Queegster—- How right you are!

    Reply this comment
  14. Kris
    Kris 17 September, 2012, 16:02

    “I beleive that Banking institutions are more dangerous to our liberties then standing armies”

    – Thomas Jefferson

    Reply this comment
  15. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 September, 2012, 17:27

    There is no ‘trick’ to getting this country out of it’s recession. QE3 is like blowing up a balloon with hot air. Inside the balloon, you still have nothing but hot air. And you increase the chance of it blowing up due to the increase prices of commodities, gas, food, corn, ect.
    To get out of this recession we need to stimulate private enterprise thru tax cuts, cutting regulation and tort reform.
    Gotta go, boss is here and he may do some quantitative easing with my job.

    Hondo nailed it, everything is correcy except tort reform, that is OK right nw.

    Reply this comment
  16. Queeg
    Queeg 17 September, 2012, 17:33

    Shun him

    Reply this comment
  17. Rex the Wonder Dog!
    Rex the Wonder Dog! 18 September, 2012, 00:54

    Hi Teddy 🙂

    Reply this comment
  18. BobA
    BobA 18 September, 2012, 08:47

    Queeg:

    Come on man. Have the courage of your convictions and fess up. You have nothing to fear but fear from me. Let’s argue the facts from perspectives and not perceptions. You at least owe the readers in this forum that much. Or do feel no obligation to be truthful? What say you?

    Reply this comment
  19. BobA
    BobA 18 September, 2012, 09:03

    Edward Steele:

    Are you and Queeg ganging up on me? Pffff!!Is that all you got? My arguments are unbreakable so come on, take your best shot. I can and will defend my opinions until you can persuade me otherwise. I am imminently persuadable if your arguments and facts are superior to mine.

    Don’t worm out by giving me the silent treatment. I take that as “I won, you lost” the argument.

    Reply this comment
  20. Queeg
    Queeg 18 September, 2012, 10:01

    Bobbie…..

    Your slave master Globalist buddies are cutting jobs, bring in aliens to lower domestic wages, cut wages, jobs and benefits through outsourcing causing massive misery and unemployment.

    Is that specific enough for CWD Koolaid drinkers?

    Reply this comment
  21. Queeg
    Queeg 18 September, 2012, 10:06

    Teddy is the sage of CWD. He has paid his dues. Only Teddy brings balance to CWD…otherwise, the Deliverance Boys would froth up the disturbed kooks and bunker dwellers into who knows what!

    Reply this comment
  22. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 18 September, 2012, 10:40

    BobA– I won’t worm out. But Queeg is correct, there is alot of frothing out here. I guess you can expect that from us “little people”, we 47% who Mitt does not care about…we non country clubers……(tm)

    Reply this comment
  23. BobA
    BobA 18 September, 2012, 10:43

    Queeg:

    You are wrong to suggest that globalists are my buddies. They are not. But I am opposed to government policies that chase US corporations off shore.

    Where do you think pension funds, 401K’s and IRA’s invest their money? It ain’t with the government. If the government was a such good investment then explain to me why social security is broke? If the government was such a good investment then explain to me the $16T dollar debt which is closer to $175T when you add everything the government is on the hook for all up? Buying a lotto ticket is a better investment.

    I’m not against global corporations per se but I am against the colossal salaries and bonuses the pay themselves. Against the political patronage their mega-bucks buy. Against their manipulation of the stock market to enrich themselves and screw the small investors. Against the global banking system and against the “One-worlders”.

    Don’t assume without knowing the facts up front. Politicians do that. You & I, the folks who always end up paying the bills, should not play that game.

    As I’ve said before, we can differ on the issues but let’s not lose sight of the cause of the underlying causes of our problems.

    I’m neither a democrat or a republican. What I am is a “small government” conservative with a libertarian streak.

    Reply this comment
  24. Queeg
    Queeg 18 September, 2012, 11:41

    Bobbie

    You have been in the 99% a lifetime and brainwashed by Savage, Hannity and Ingram….

    Think it out…..your in a caste system and a enthusiastic loyalist for your laffer/trickle down masters.

    Enjoy your Globalist Walmart farm raised Thai river fish and Costco Atlantic salmon from Peru. GAG!

    Reply this comment
  25. Edward Steele, Chief Investigator
    Edward Steele, Chief Investigator 18 September, 2012, 13:21

    Bob A– I too think we need to shrink gov a bit…..but the Queeg is correct—– I hear the dull normal talkling points of the sleepy Fox crew in your mantra— don’t be a litmus– think for yourself man!

    Reply this comment
  26. Hondo
    Hondo 18 September, 2012, 19:47

    Queeg:
    All those big money donors to Obama, how many are invested in Bain. Lots of them, and lots of those union funds do the same thing.
    How many Obama donors own apple stock or own Iphones or Ipads or pods or macs. Aren’t all apple products made by slave labor in China.
    Queeg. Do you own a computer or a cell phone and is it made in america?
    Every rich liberal dem owns stock that outsources all over the world.
    I absolutely support made in america. I’m just not a hypocrite about it.
    By the way, I gotta samsung from t-mobile.
    And you?
    Hondo………

    Reply this comment
  27. Queeg
    Queeg 18 September, 2012, 23:38

    Hondo….chill. no prudent person discloses private info on web sites.

    Queeg keeps you balanced!

    Reply this comment
  28. BobA
    BobA 19 September, 2012, 09:49

    Edward Steele:

    The only programs on the FOX network worth watching is Lou Dobbs and John Stossel. The rest of the programming is industrial grade crap.

    I prefer to read the news rather than watch the news. Only low IQ morons get their news from watching the low IQ morons on TV report what they allege is “news”. The drudge Report, Investors Business Daily, Financial Times, the Wall Street Journal, Der Spiegel (English edition), RealClearMarkets, The Economist, The UK Telegraph, The Diplomat, Asia Times and Moscow Times are my primary sources of news. And I also watch Al Jazeera to find out what the Islamic world thinks.

    The crap that’s on TV at best can be called “info-tainment”. It’s fit for people of low intelligence and no more.

    Reply this comment
  29. BobA
    BobA 19 September, 2012, 10:03

    Queeg:

    It’s obvious to me now that you are incapable of intelligent though and your brain is an inert gelatinous mass. Tell me, were your born that way or did the tainted Kool-Aid and watching too many Beavus & Butthead cartoons make you that way? Do tell -inquiring minds want to know.

    Reply this comment

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