CEOs Debate the Merits of QE2 ??
QE2 sounds like something out of a Star Wars movie. One of my kids who overheard me talking about QE2 thought it was C3PO's brother. When I tried to tell him it was quantitative easing, that was all a six year old had to hear. His eyes glazed, and it was like I was talking Ewok.
Too bad QE2 wasn't a guarantee that the force of the Jedi would be behind it and save the day. This is what economists and CEOs are debating as the important two day Fed meeting approaches. The economy, while still sluggish, looks "less bad" than it did a year ago. But with interest rates already near zero, just how much oomph can this additional quantitative easing have on the economy? ??
In the first quantitative easing, the Fed purchased some of the bad assets from the banks. But this time the Fed is tackling a different set of economic problems. It's not just bad paper. It's the overall economy that's in need of a serious jolt.
Companies need to be incentivized to hire, but it appears the low level of job creation is a product of the policy uncertainties coming out of Washington right now. Banks need to lend money to small businesses—the jobs generators in this country—but they are bogged down with the foreclosure crisis.
If the Fed does decide to dip back into the seemingly bottomless pool of printing money, will that entice banks to lend again? Banks are already sitting on excess capital and they are less inclined to part with their cash.
Wilbur Ross, Chairman and CEO of WL Ross & Co is not hopeful a second round of quantitative easing would accomplish much.
"The banks already have more than a trillion dollars of excess reserves but they still are not making loans,” Rosse told me. “Giving them more excess reserves, which is what quantitative easing does, will not change lending. What it probably will do is to lower the exchange rate of the dollar to other currencies and that will provide a modest economic boost because it will affect imports adversely and will boost exports. But since the Renminbi is relatively pegged to the dollar, the help will mainly be relative to Europe, Japan and possibly Canada. So I think the impact will not be huge in any event. Bernanke's problem is that QE2 is like trying to push a string. It is very hard."
Robert Wolf, Chairman and CEO of UBS Group Americas thinks QE2 would send a strong message to the markets.
"The Fed is responding to weaker-than-expected growth (relative to its own forecasts) which, if persistent, raises the risk of the economy stalling and moving closer to deflation. QE2, while not a panacea, is a demonstration that the Fed is prepared to act to ensure the recovery remains on track,” Wolf said. ??
The economic blame game and Congressional stalemate between the two parties is also another reason why some think the Fed should act.
"With unemployment at 9.6 percent, the Fed can't be aggressive enough in easing monetary policy. Conservatives in Congress are blocking fiscal support to our fledgling recovery and interest rates are near zero, so quantitative easing is the only tool we have left to get the economy out of first gear and start creating jobs. If the Fed creates a little inflation, it will take the edge off of debt burdens so families can spend with more confidence again,” said Adam Hersh, an economist for The Center For American Progress.
Another political factor hanging over the whole QE2 debate is whether Congress will pass another fiscal stimulus. Depending on how the balance of power shifts in the midterm election, this is one big question mark. Let's face it, both parties like to spend. They just differ in how they spend it.
"In theory, the U.S. would apply further stimulus over the next 12-24 months and then shift to large and wide ranging deficit reduction actions, beginning in 2013, " explains Evercore Partners Chairman and former Deputy Treasury Secretary Roger Altman, "But, Congress isn't likely to adopt much, if any, further fiscal stimulus. That puts the short term onus on monetary policy and is why The Federal Reserve Board is moving towards further quantitative easing. Such a step isn't likely to have a truly major macro-economic impact but is nevertheless worth doing. Already, it has spurred an upward movement in equities. That alone assists households a bit, as they continue moving their debt/income ratios back towards historical norms." ??
Richard LeFrak, President of The LeFrak Organization says QE2 may just be what the economic doctor ordered, "... because lowering interest rates eventually drives investment in riskier and more entrepreneurial assets which should result in job creation. In addition low rates assist the housing market." ??
Everyday more and more comments are interjected into this discussion and it seems the balance between the pros and cons on the additional quantitative easing is pretty even.
Stifel Nicolaus Chairman and CEO Ronald Kruszewski is skeptical about the perceived upside of such action.
"You have to ask yourself, is it going to change the GDP by one point? To spend a trillion dollars — what's the overall benefit? To do QE2 just because people want to do it is not a reason. I wouldn't do it. I don't see the benefit of it. A lot of economic indicators are showing that the economy is improving but I think it still has to run its course. We went through a major financial disaster. There is no magic bullet. QE2 is not the magic bullet to fix this problem," Kruszewski said.
It took years for all the leverage to build up and the markets are still in the process of clean up. Instead of a six shooter, maybe the Fed should reach for a dust pan and let the markets sweep out the filth that's clogging the economic engine.
We'll see November third what the Fed decides.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."