Friday, March 06, 2009

The Perfection (of sorts) of Quantitative Easing

The Brits are now offically obsessed with quantitative easing, first not comprehending it, then wryly examining it, finally yielding to a stoic skepticism about it's parochial impacts. There is a certain anodine perfection to the phrase, quantitative easing, unlike anything else in the entire rather utilitarian financial or economic lexicon. It sounds wonderful, functionally-useful tonic, though certainly not dangerous or hazardous to our well-being. Yet it remains sufficiently innocuous so as to escape scrutiny and with it, the associated public examination that prying eyes bear. It is entirely Madison Avenue rather than inflated Goebbels-like propaganda or overly-wooden Soviet or Pyongyang slogans.

Once one begins to unwrap the phrase Quantitative Easing, it continues to enigmatically distract and intrigue, like Russian a Matryoshka dolls, opening one, only to find that it yields an empty shell, in which sits another nested figurine. Now make no mistake, I am talking about the phrase and not the substance. For those who perservere and look further, say (to continue our analogy) inside the first egg, one immediately encounters a measure of good feeling in the word "easing". One ignores quantitative at first, mostly because of some dormant maths-phobia. But the "easing" is offering tangible relief from something-left-unspecified, but, nonetheless something that must have been unpleasant. So far so good. After a deep breath, one re-approaches the imposing "quantitative". Ahhh, that's not so bad. It does have lots of letters, and "Q-words" are daunting - particularly those with twelve or more letters that are virtually impossible to construct upon a Scrabble board. But ignoring the feeling that it could just as easily inflate to fourteen or sixteen letters without impacting the meaning, the word actually confers a feeling that the subjects of its intention are getting more of something, and it's not costing them anything, - a bargain rarely seen in today's world, and one that defuses suspicion from all but the most cynical.

The architects of the phrase have been careful to avoid any suffixes with -tion, or -sion, thereby extinguishing unnecessary alarm or in the extreme causing the reader become panic-stricken. Inflation, deflation, recession, reflation, depression, castration, malnutrition, cessation, or the dreaded hyperinflation are nowhere in sight, their fearful suffixes kept as far away as phonetically possible. And for good reason.

When the disparate two parts are put together - "Quantitative....e-e-e-a-a-s-s-i-n-g" - one can imagine a free neck-massage by a friend or the relief one feels when winding down a manual jack to finally lower one's car after having worked hard and gotten filthy changing a tire. It recalls visions of opening a nicely chilled Laurent-Perrier 1998 Vintage Brut and slowly letting enough gas out to avoid a Tour-de-France celebratory ejection. Indeed, the two words "more" and "relief", (altogether now: "more relief"), indeed who could question or reject such a positively magnanimous offer?

Interestingly, I had a go at thinking of some alternatives of equal disarming grace and feel-good. And after more than thirty-minutes, I could not even begin to think of anything remotely as elegant. Complete defeat. Which begs the question: From where did it's coining precisely arise??!? Though first employed in Japan, and conceptually, wholly the child of rather utilitarian central-bankers, I am quite certain the term could not have been born in a government ministry, any branch of government or for that matter a financial institution. It's seduction and perfection can only be the brainchild of far more skillfully cunning Persuaders. It is time for them to step forward and accept credit where [no pun intended] credit is due.


Gerard O'Neill said...

Oddly enough the phrase 'quantitative easing' always puts me in mind of laxatives. Not very tasteful, I know, but then again, neither is a policy that reduces the value of currencies to that of toilet tissue.

Loved the anecdote about the LSE's Three Tuns; I was there in '81-'83: Buiter teaching macro; Layard teaching micro. Halcyon days indeed ...

Anonymous said...

I beg your pardon for continuing the discussion on the Tab. Respectfully, you say people who advocate forcible reorganizing c 11 funded with DIP financing by the Fed.

You say re socialization that the losses will be borne as follows "Liquidation WILL socialize the costs as one's money-market, insurance coverage, pension, 401k, and jobs and incomes are unilaterally haircut."

This is a misleading characterization of "liquidationism" for several reasons.

Jobs: The government can preserve jobs by providing DIP investments to keep debtor companies from liquidating and if necessary providing equity financing for the plan of reorganization; no asset sales are necessary if creditors are crammed down with a plan of reorganization funded by the US govt.

Insurance contracts / annuities: These are issued by regulated entities and are high in the capital structure they beat bondholders, preferred shareholders, and other junior stakeholders; they are protected. Mentioning them is a distraction from the real issue of losses for bondholders and undersecured derivative counterparties.

Money market accounts/deposits: These are guaranteed up to 250k. Another distraction from the real issue of losses for bondholders and undersecured derivative counterparties.

FDIC insured deposits: These are guaranteed up to 250k, another distraction from the real issue.

Panic: The FDIC is legally authorized an obligated to seize institutions in the zone of insolvency. This authority could be extended to any other type of financial institution, and could even be extended to reach financial entities perceived to be at even less risk of being insolvent; or even given authority to have a financial institutions holidy to seize all to extend financing. To put any or all of them into an operating c 11. There are many retired Fed, OTS, FDIC, and state financial regulators and FDIC personel that could be reactivated to do this work.

Arbitrary loss bearing: Over 70% of wealth in the US is held by households in the top 10 percent. The percentage is even higher if one looks solely at stocks, bonds, and securities. It is in no way arbitrary to impose forcible conversion of debt to equity on these people. The wealthy are the people who most benefited from the baby boomers serial asset bubbles.

The young would get a double whammy. High debt burdens, which will impose high taxes on them going forward. And perpetuate artificially inflated asset prices that reduce their ability to invest savings for a favorable return.

And stop calling this approach "liquidationist". Nothing is necessarily liquidated. You are misusing words to assist you in making your case by using a word with nasty connotations and denotations to describe your opponents.

Demetrius said...

In October 1914 the British Expeditionary Force faced the Kaisers Army. The Worcestershire Regiment, along with the London Scottish, under attack, hugely outnumbered, and out of ammunition, rather than retreat, fixed bayonets and charged. They stopped the German advance from reaching the channel ports, and everyone started digging trenches. Where's my shovel?

Anonymous said...

It is kind of pointless to discuss haircuts with Cassandra. C's client base consists of the high net worth people that would be forced to eat losses in any thoughful restructuring involving haircuts. She can't discuss that honestly any more than MacroMan can advocate a Tobin tax big enough to shut down high-frequency trading, which would hurt his buddies.

"Cassandra" said...

Anonymous 2:21,

As a preamble I have historically chosen to write anonymously precisely to avoid such conflicts and put business partners in uncomfortable situations due to the pursuit of truth as I see it. Your suggestion of conflict in this regard is just patently false.

First and foremost, I have long been on record against leveraged spec in most forms and demagogic populist policies that were, in the main responsible for getting here in the first instance, albeit with historical costs of lower growth, employment PCE and potential output gaps, on the basis that slower but more stable and resilient growth would end in higher future well-being than unsustainably higher short-term gains followed by a larger and longer bust.

Second, my line has been reasonably consistent. Responsibility has always run deep politically and through the polity. And witnessing at each juncture, the failure to accept culpability in any form, or bear short-term pain for longer-term benefit in any form (long a target of my satire), I have been resigned that change will occur only AFTER the wrenching Team America vomit-scene moment, something fast approaching in the event political compromise between populists, prudent libertarians, and Capital is not reached.

Third, I am for, in short, economically optimal resolution (or least sub-optimal)- pure and simple. I have no issue with haircuts per se. They, too, however, are a form of socialization since The People (directly and indirectly) hold money market funds, corporate stocks who own money market funds, private pension funds, municipalities, public pension plans, corporations who must top-up pension funds recursively due to hits from said shortfalls, life insurance contracts, etc. My belief that there is a need to limit haircuts - making them known a- priori - is solely a function of my belief that failure to do so AT THIS STAGE OF THE GAME will cause towards systemic mayhem and liquidation by causing capital to run from the feared to to the less feared, and the feared passing immediately into state ownership - not because they are insolvent, but because they are feared insolvent. This bears direct costs to the state, but huge indirect costs to the real economy in terms of unemployment precisely upon the parts of the polity you suggest that I am somehow unsympathetic towards and conflicted against. This is just false. The rights of bondholders ARE to liquidate at insolvency. But it's in no one's interest to liquidate since each liquidation forces more, and at lower prices causing higher unemployment and greater deflation. And for what purpose, since it's patently obvious The System cannot be liquidated.

What I don't understand is why those who seemingly claim to be non-top quartile taxpayers are so vehemently opposed to something that primarily will impact top quartile taxpayers. IF you're a top quartile taxpayer, then I fail to understand how you can argue that you didn't benefit LARGE over the past decade and somehow absolved of responsibility at the expense of The Public Interest. I personally didn't ask for lower marginal rates and refund checks, but I always knew they'd be asked for back again, in one way or another, since it's been obvious the current fiscal regime has been unsustainable. I would have preferred higher historical tax than large economic dislocation, higher future inflation and lower future real growth. There is no political perspective you can pigeonhole this view into except "the sensible and honest". For all this, I am angered by the implication the opinions I offer for discussion is in anyway dishonest. They may prove wrong, but I am at least attempting to be intellectually honest - something hollow unfounded accusations do not.

Anonymous said...

"This bears direct costs to the state, but huge indirect costs to the real economy in terms of unemployment precisely upon the parts of the polity you suggest that I am somehow unsympathetic towards and conflicted against. This is just false. The rights of bondholders ARE to liquidate at insolvency. But it's in no one's interest to liquidate since each liquidation forces more, and at lower prices causing higher unemployment and greater deflation. And for what purpose, since it's patently obvious The System cannot be liquidated."

You are mischaracterizing the protections that US bankruptcy law afford to debtors at the expense of creditors. Bondholders DO NOT have the power to liquidate a debtor in bankruptcy without court permission. The debtor can prevent that by getting DIP funding to continue operation, and by proposing a plan for emerging from bankruptcy that gets just enough creditor support to cram down the rest. A thoughtful US government could provide funding to companies as a DIP lender during the bankrutpcy and if necessary exit financing as well in debt or equity. Shareholders or management can get equity in the restructured company as long as they get it in exchange for a contribution of new money. The government could lend that to them. Restructuring this way allows creditors to be treated fairly, but does not give them a windfall.

"What I don't understand is why those who seemingly claim to be non-top quartile taxpayers are so vehemently opposed to something that primarily will impact top quartile taxpayers."

Everyone is not in your age cohort.

"Cassandra" said...

You've got the job! You're new Director of DIP at the US Treasury. I have nothing against sensible coordinated action. However, if you're concern is generational cost, I think you;d better root for inflation or outright revolution (repudiate on the basis of "illegally acquired" debts) since the accumulated is is the real problem. The deflationary in-betweens still seem inimical unless the cram-downs are to extend to Treasuries and agency MBS.

You fail to address the recursiveness of the direct costs.

You have a right to generational angst. I have generational angst - but its mostly directed at those who enabled the prior administration for essentially parochial gain.

Anonymous said...

"You fail to address the recursiveness of the direct costs."

I'm not sure what you mean. Panic or arbitrage selling? If panic, there are enough retired government financial services types to deal with a huge amount of receiverships / c 11's. If basis traders buying distressed debt and CDS, I'd modify bankruptcy law to deny any hedged creditor voting rights in bankruptcy.

I would deal with the GSE's by c 7. First, I'd repeal the anti-consumer aspects of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, which reduced access for individuals to c 13, and reduced the benefits of it. Second, I'd repeal the anti-consumer aspect of the Bankruptcy Reform Act of 1978 that prevened judges from cramming down mortgage lenders on primary residences. Third, I'd liquidate the GSEs and give the owners a choice of a cram down in bankruptcy or jingle mail.

Eva said...

I don't know if this is considered "private", someone called Cassandra "she" but I thought it is he... isn't it???

Anonymous said...

How about children of taxpayers (top quartile or otherwise). They may become top quartile someday. Don't they get a voice?

Sion said...

I wish I could construct long high-falooting sounding sentences like that. Maybe I would be in the top tax quartile then...

Richard Werner said...

I believe I am the originator of the phrase 'Quantitative easing'. The original Japanese expression is 'ryoteki kinyu kanwa' or 'ryoteki kanwa' for short. Both are, literally translated, 'quantitative easing'. Thank you Cassandra for your most wonderful description of the English translation.
I used the expression prominently in my articles in the Japanese press in 1995, 1996, 1997, 1998 (Nikkei, Japanese Economist, Toyo Keizai, Japanese Newsweek, etc.) to suggest the necessary and sufficient policy response to end the recession (I had predicted the Japanese banking collapse in 1991; in print see Discussion Paper 129, Oxford Institute of Economics and Statistics). I had already argued then that interest rate reductions, even to zero, won't help. What was needed was to stimulate the economy through the quantity, not the price of money - correctly done. I wanted to avoid expressions such as the figurative 'printing money' and the common 'expanding the money supply', not only because they would unnecessarily alarm Japanese lay readers, but also because these are traditional monetarist prescriptions, which I argued would not work (as the monetarists argued for an expansion of bank reserves). At the time I was chief economist at Jardine Fleming Securities (Asia) Ltd. and Assistant Professor at Tokyo's Sophia University and known as the BoJ's fiercest critic. The Bank of Japan adopted my expression in 2001 as its official policy. The BoJ used exactly my Japanese phrase, and in its English-language press statement literally translated it.
However, and this is a predictable irony of central bank behaviour, they used it is a cover, because they did not adopt true quantitative easing, and instead implemented simple monetarist expansion of bank reserves. As I had predicted, this could not work. Next year Japan will basically be in its 20th year of recession. One further comment: In my English-language articles and interviews that I gave I used the expressions 'credit expansion', 'liquidity expansion' or 'credit creation' (the latter being the most accurate description) instead of 'ryoteki kanwa', as the audience in the financial markets would then understand me more or less correctly. Anyway, shame I'm not getting license fees each time a central bank talks about 'QE'.
Professor Richard A. Werner, D.Phil. (Oxon), Chair in International Banking, Director of the Center for Banking, Finance and Sustainable Development, School of Management, University of Southampton.