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The Fed telling us there is no QE3 is like a vegetarian eating short-rib ravioli or pork eggrolls. Just because you can't 'see' meat doesn't mean it's not there.
True, there is no QE3 (yet) in the form of QE1 or QE2. QE stands for quantitative easing and quantitative easing happens when a central bank buys financial assets to inject money into the economy.
Even though it's not called QE3, the Fed is right now making billions of dollars available to buy financial instruments. We're not talking about Operation Twist here; we're talking about a covert operation that's essentially a U.S. bailout of Europe.
Covert Doesn't Mean it Doesn't Exist
You probably heard of the 'temporary U.S. dollar liquidity swap arrangement.' This arrangement, which the Federal Reserve has with the European and other central banks, sounds innocent enough.
Before we go on, keep in mind that the European Central Bank's (ECB) constitution does not allow the ECB to print money and use it to buy government bonds (such as Greece, Italy, Spain, Portugal, etc.).
The dollar swap agreement with the Fed however, allows the ECB to circumvent its constitutional prohibition to buy extensive amounts of European debt. The Federal Reserve acts almost as a money launderer and helps the ECB to keep face. The 'benefit' of buying bonds from struggling governments is that it keeps interest rates low and manageable.
How Does it Work?
Why doesn't the Fed just lend money directly to U.S. branches of foreign banks? For one, the Fed's gotten embarrassed by the 'secret' files showing its prior largess with foreign banks. Also, it doesn't want the debt of foreign banks on its books (at least not officially).
Which European government wouldn't want the ECB to bail out Europe? The ECB covertly does what political leaders want it to do and political leaders won't cry foul. It's easy to look the other way when there's a unanimous consent.
Instead of engaging in an official version of euro-QE, the ECB borrows money from the Federal Reserve and lends it to euro banks. Banks in turn are urged to buy European government bonds.
It's a great deal for European banks (at least at first) because they pocket bond returns north of 4% and get the loan on the cheap (1%). The ECB or Fed will no doubt cover any defaults, so it's a risk free margin.
What's the Scope?
In addition to the money shipped to Europe from the U.S., European banks can count on unlimited three-year, 1% loans from the ECB. In December, banks borrowed $638 billion from the ECB.
The dollar swap agreement doesn't get much attention here, but Germany's Frankfurter Allgemeine newspaper reported that euro banks took three-month credits worth $33 billion, which was financed by a swap agreement between the Fed and ECB.
In the fall of 2008, the Fed had more than $600 billion of currency swaps on its books. By January 2010 those draws were largely paid down, but in mid-December it jumped back up to $54 billion.
In addition to the amounts mentioned above, the Fed uses money from maturing securities on its balance sheet to buy Treasuries (NYSEArca: TLT - News) from U.S. banks (NYSEArca: KBE - News). I consider this QE2 light. The chart below compares the monthly inflow of QE2 with that of QE2 light. If you add the amount of unlimited ECB loans and dollar swap loans to QE2 light, you have an almost full grown QE3.
[img]http://l.yimg.com/bt/api/res/1.2/hMqSMMvMuucF1IBnlE4nlA--/YXBwaWQ9eW5ld3M7cT04NTt3PTQ4MA--/http://globalfinance.zenfs.com/en_us/Finance/US_AHTTP_EtfGuide_Dev/QE2vsQE.gif[/img]
True, there is no QE3 (yet) in the form of QE1 or QE2. QE stands for quantitative easing and quantitative easing happens when a central bank buys financial assets to inject money into the economy.
Even though it's not called QE3, the Fed is right now making billions of dollars available to buy financial instruments. We're not talking about Operation Twist here; we're talking about a covert operation that's essentially a U.S. bailout of Europe.
Covert Doesn't Mean it Doesn't Exist
You probably heard of the 'temporary U.S. dollar liquidity swap arrangement.' This arrangement, which the Federal Reserve has with the European and other central banks, sounds innocent enough.
Before we go on, keep in mind that the European Central Bank's (ECB) constitution does not allow the ECB to print money and use it to buy government bonds (such as Greece, Italy, Spain, Portugal, etc.).
The dollar swap agreement with the Fed however, allows the ECB to circumvent its constitutional prohibition to buy extensive amounts of European debt. The Federal Reserve acts almost as a money launderer and helps the ECB to keep face. The 'benefit' of buying bonds from struggling governments is that it keeps interest rates low and manageable.
How Does it Work?
Why doesn't the Fed just lend money directly to U.S. branches of foreign banks? For one, the Fed's gotten embarrassed by the 'secret' files showing its prior largess with foreign banks. Also, it doesn't want the debt of foreign banks on its books (at least not officially).
Which European government wouldn't want the ECB to bail out Europe? The ECB covertly does what political leaders want it to do and political leaders won't cry foul. It's easy to look the other way when there's a unanimous consent.
Instead of engaging in an official version of euro-QE, the ECB borrows money from the Federal Reserve and lends it to euro banks. Banks in turn are urged to buy European government bonds.
It's a great deal for European banks (at least at first) because they pocket bond returns north of 4% and get the loan on the cheap (1%). The ECB or Fed will no doubt cover any defaults, so it's a risk free margin.
What's the Scope?
In addition to the money shipped to Europe from the U.S., European banks can count on unlimited three-year, 1% loans from the ECB. In December, banks borrowed $638 billion from the ECB.
The dollar swap agreement doesn't get much attention here, but Germany's Frankfurter Allgemeine newspaper reported that euro banks took three-month credits worth $33 billion, which was financed by a swap agreement between the Fed and ECB.
In the fall of 2008, the Fed had more than $600 billion of currency swaps on its books. By January 2010 those draws were largely paid down, but in mid-December it jumped back up to $54 billion.
In addition to the amounts mentioned above, the Fed uses money from maturing securities on its balance sheet to buy Treasuries (NYSEArca: TLT - News) from U.S. banks (NYSEArca: KBE - News). I consider this QE2 light. The chart below compares the monthly inflow of QE2 with that of QE2 light. If you add the amount of unlimited ECB loans and dollar swap loans to QE2 light, you have an almost full grown QE3.
[img]http://l.yimg.com/bt/api/res/1.2/hMqSMMvMuucF1IBnlE4nlA--/YXBwaWQ9eW5ld3M7cT04NTt3PTQ4MA--/http://globalfinance.zenfs.com/en_us/Finance/US_AHTTP_EtfGuide_Dev/QE2vsQE.gif[/img]
