Central banks

Buttonwood,

"QE seems to have destroyed the private mortgage market and ensured that mortgage lending is now largely a government affair".

This, if true, would be a wonderful thing. Government providing affordable housing? Gosh. Government will be providing affordable healthcare and education next as well if we're not careful! Don't breath a word of this to those Tea Party chaps.

Its central planning gone wild. Banks are now planning stock prices, home prices, CPI prices, interest prices, etc...

The free market uses price to determine supply/demand, and allocates capital accordingly. Central planning of so many prices is preventing the free market from allocating capital to its most efficient use. Examples of misallocation due to printing include millions of empty McMansions in the first world, and entire empty cities in the third world wilderness. None of the loans extended for misallocation will ever be repaid. Thus the endless bailouts.

I agree with your concerns about QE hangover more than your concerns about underfunded pensions as valued under current market interest rates.

On my understanding that QE has driven down bond yields - and therefore inflated marked to market pension deficits - would it be reasonable to assume that the phase-out of QE would then push up bond yields, thereby somewhat reducing pension deficits?

I can only afford to worry about one thing at a time. Please tell me which. :)

Interesting points. The underlying issue,tho, is the role of central banks in a globalized economy. An unintended consequence seems to be that they are in a position of enormous power (defining that as the ability to determine the course of events). For example, the ECB can both devalue the Euro (promoting exports) & aid the Euro zone banking system (& governments) by quantitative easing. Although Bernanke could trump the devaluation by his own QE3. Bernanke could probably significantly influence the election in the US. He might want to keep Geithner in place (a former Fed official). I don't mean to suggest any of these individuals are self-interested. Just to point to the power they have, & the role personal relationships might play. All the key central bankers are connected interpersonally by old school ties. So the next question to be considered is how will power be exercised by this elite group of masters of the universe. I would suggest that the elation of power leads to hubris. They wont so much worry about the after effects of policy because they will feel they can control those in due course. Walk a mile in the shoes of a master of the universe & you will get the picture.

I was with the post until the last paragraph. That reminded me of going to the hospital for an operation: it hurts, there may be complications and the recovery is difficult but the alternative is worse or I wouldn't do it. To point out that QE has less than optimal effects is silly. Of course it does. Every action has unintended effects. To then say "cause" is more silly: the relation of QE to the mortgage market is far more correlative than causative and that's without noting that without QE even worse might well be the norm today.

As for the primary question, what is needed is some sustained growth because the excess can be bled into supply during periods of optimism. This casts an interesting light on austerity. There is the odd thing that too much debt leads to cutting but that slows growth and makes the too much debt problem worse for the central bank and thus for the banking system and thus for the rest of the economy. This piece of the problem tends to be overlooked.

There is the scenario (admittedly unlikely) that austerity will reduce the refinancing burden. One can always hope.

Fund managers have a job to do - invest the money they are given. They need to invest the money regardless of whether they know the market will soon go down or not. Following the exact timing is always beneficial to small traders like myself, but fund managers who lack the freedom of moving quickly might not be able to react to these market changes fast enough.

Great post. Their is really no easy way out of this position. It's very possible that in the future a majority of deficit financing will be done by the Central Bank. In the US I do see this as a likely outcome.

Anyways, the result will be rather interesting, to say the least. Although, terrifying may be a better word.

Who cares? The current batch of political executives will likely be out of office by the time it becomes a problem, allowing them to add the title of "Savior of the Markets" to their memoirs while their successors have all of the blame heaped on them for overseeing the popping of yet another government-induced financial bubble.

I think that anyone who thinks about it knows that backing out of unprecedented interventions will present unprecedented difficulties, but we'd rather not think about it right now.