QE3… With Teeth?  A Modest Proposal

By J.M. Hamilton (8-7-11)

Mr. Bernanke, can you hear it in the distance?  They are beckoning you…that’s the whine of Helicopter rotors.

By now we all pretty much know how America got here:  a democratic government that would rather campaign than govern, fiscal incompetence, two wars, government failure to regulate, regulatory capture, bankers run amok, underwriting prudence tossed out the window, hyper-leverage, debt securitization, funky accounting, unlimited campaign contributions (thank you Supreme Court) ….bank bailout after bailout, and a total lack of monetary temperance.  And, there it is, the inevitable ratings down grade. 

Yup, ma, we are just like everybody else now: in hock and broke!

It’s almost enough to make you weep for our children’s and the nation’s future.  And of course, its one thing to blog about it, write and complain about it, but how about a solution?  J.M. Hamilton was not a fan of QE1 or even QE2, but we understand why Mr. Bernanke engaged in it, primarily because of the extreme dysfunction of the congress, and their near complete inability to govern.  After all, someone has to conduct domestic, foreign, and trade policy.  That said, monetary policy is a crude instrument with which to conduct the affairs of state.   In a perfect world and with the Congress willing to govern, responsibly, it would be much better if Mr. Bernanke set the interest rate, presumably above zero, and went to bed for the next four or five years.  But that ain’t gonna happen.

The pressure will build as never before for the Fed to engage in another round of quantitative easing, or debt monetization, after all election season is upon us.  Many scribes have said it is unlikely, but both the Street and the economy appear to be crying out for it, so addicted has the nation and business become to the largesse of Rome, and currency mechanization.  This economy is not healed by a long shot.   And the primary reason for the struggling economy is that the engine of economic prosperity, the American consumer, is still financially under water or unemployed.   Up until now, QE1 and QE2 were focused on the supply side of the credit market.  The Fed got out its bazooka, and flooded Wall Street with cash, which it promptly leveraged and invested in T-Bills, the stock market, commodities, or sent offshore to much more favorable financial climes.  Ah, our patriotic banker friends…. You gotta love ‘em.  We bail ‘em out, and they sell America short or invest elsewhere.

My point is… up until now Mr. Bernanke has been dumping the cash from his helicopter on the wrong side of the demand and supply curves.  What America needs is not another back door Wall Street bailout, but rather, what America needs is some consumer relief from its 14 trillion in mortgage and personal debt.   In other words, if the Fed is going to turn the spigot one more time, that is if we are going to roll the dice… the money should be directly allocated to pairing down consumer debt (all the better to free up Americans to begin buying, purchasing and consuming again).  If Americans are buying and consuming again, demand increases, which should set off a round of hiring as business seeks to keep up with demand.   The rising economy increases the tax base and receipts at the IRS, helping to alleviate our national debt, or giving both political parties an excuse to spend more.  Things -  uh, maybe, get better.

 As for our friends the bankers, well perhaps they can be put to good use after all.

F.D. R. was alleged to have said, “It Takes a thief to catch a thief,” which was in reference to placing Joseph P. Kennedy as the first head of the Securities and Exchange Commission.  And perhaps it takes our Wall Street banker friends, and some creative thinking, to get America out of the jam the bankers helped put America in? 

What if QE3 was launched by the Fed with strings attached, or caveats and conditions governing its use?  QE3 could be leveraged, turned into 30 year debt, and sold to investors, with the idea that at least half of the proceeds would go exclusively to paying off U.S. consumer debts and obligations (which would show up as a reduction in the consumer’s monthly mortgage payment).  The debt and servicing of the same could be set up in LLC’s or SPV’s, away from the bank’s balance sheets.   It would then fall upon Wall Street to utilize their wizardry and the other half of the proceeds from the QE3 debt sale to pay down both the principle and interest of the combined QE3 debt, over a thirty year run.   It would be patriotic to buy such an offering; and even more patriotic for a banker to serve such an organization, and quite possibly lucrative.  Just as the banks transferred their debts and obligations to the government and the public sector, perhaps a percentage of the mountain of personal or consumer debt, the banks helped to create, could in like manner be transferred back to Wall Street?

Think about it, if we added up all the bailout programs launched since this crisis began (TARP, TLGP, TALF, Fiscal Stimulus, QE1 and QE2, etc. etc.), and if it had been allocated to the writing down some amount of the $14 trillion in private sector debt, this economy may have already returned to normalcy.  The housing market might have become liquid again.

There might be some outcry about socialism from some, perhaps even the banks; but those arguments went out the window, when we bailed out Wall Street.  Of course, CEO’s in manufacturing and the service sector would have to do their part, that is to say, utilize the increase in demand to employ Americans.

What’s in it for Wall Street banks?  In addition to getting to write down a percentage of debt from their balance sheets without taking a hit, the Fed and the government could play this any number of ways.  In exchange for the bank’s assistance and cooperation with the QE3 plan, it could help the banks out with a tax holiday or perhaps they get a break on some of the foreclosure problems they have been having; or if that wasn’t working for the Street, maybe the government could audit our friends, institute mark to market accounting, and nationalize the bastards, as should have be done in 2008 and 2009!  After all, GM was nationalized, re-orged and turned loose again to the private sector, and just reported an 89% increase in profits in the latest quarter.  Why not our buddies on Wall Street?

Some people speculated that perhaps Mr. Milken’s (of Drexel/ junk bond fame) talents could have been put to better use, when he was convicted/jailed in the late 80’s for some creative financial engineering… like using his financial acumen to help reduce the national debt.

Maybe America should consider putting Wall Street to work for Americans?  What a wonderful way for the Banks to redeem themselves, the Street could deploy it’s greed for the betterment of mankind and a reinvigorated world economy.  Shoot, if the banks can’t hack it, private equity might step in.

Desperate times call for desperate measures.   Cue up the Flight of the Valkyries!