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How QE Is Impeding the Economic Recovery


The problems that are impeding the economic recovery are not due to the lack of federal agency-backed mortgage loans that wind up in securities, but rather the continued contraction of US bank balance sheets.

It is my belief that an ensuing bear leg in stocks will be very difficult to navigate from either side. I think there is a distinct possibility we just completed a cyclical bullish pattern off the 2009 low and that a retrace is in order that could take the S&P 500 back to the large 1160 pivot at a minimum with the potential for a deeper move that challenges 1000. However unlike the two previous corrections in 2010 and 2011, this will likely not be swift and steep but rather long and choppy.

Chairman Bernanke is scheduled to speak to the Economic Club of New York this week, which has historically been a venue for which to discuss policy options, and I expect him to telegraph his intentions for the December 13 FOMC meeting. The general expectations are for more of the same buying of MBS and Treasuries in an attempt to stimulate credit creation. Bernanke will try to convince the markets that he will do what is necessary to keep the easy-money spigot open for as long as it takes.

Instead of touting the duel mandate of supporting and economic recovery in the context of price stability, it would be helpful if he could explain just how a continuation of QE and a negative interest rate regime would be successful in stimulating lending. There is a difference between credit creation for refinancing and credit creation for investment, and in order to see velocity rise, we need credit extended for investment. For that to happen the banking system needs to be compensated for not only credit and collateral risk, but also interest rate risk.

Twitter: @exantefactor
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