It's a signal, Putin. The bailouts are a signal to the market saying "Oh, don't worry about excess risk. If it all tanks, the government will bail you out" It's a huge debate among economists right now.

You can overcorrect for wanting to punish excessive risk and scare off investment.

"bailouts benefitted the banks"

Well there's a controversial viewpoint. Who would have thought that bailing out the banks and stopping them collapsing would be a positive thing for the banks? Duh.

In other news:

- Water benefits the thirsty.

^

Putin, I still think that we're too lenient in terms of risk-taking in the market. But, for a few separate reasons. Banks are scared to lend their money out nowadays. Why? Because their assets are too risky. Why? Because the Fed buys up $85 billion of safe investment vehicles every month.

I think its far past time to reduce QE. The market will crash a bit, but the consequence will be far worse if we let this continue and keep growing the bubble.

I mean, my personal view on the point blankflag was making is not that the country is "suffering" from the losses on TARP loans. Evidence points to the contrary - that we'll break even or only lose a little bit. My concern is that the implications of the bailouts and the policies that followed have created an environment that is toxic for the future.

Goldfinger, why would buying up bonds make banks less likely to loan out money? Are you suggesting that raising interest rates would increase lending? How is that?

" The market will crash a bit, but the consequence will be far worse if we let this continue and keep growing the bubble."

The consequences of persistently high long-term unemployment (combined with persistently low inflation) is what is keeping QE from ending, as is the fact that we're not doing anything fiscally to address it. The Fed would probably happily exchange the elimination of QE for some significant fiscal stimulus to rectify the lack of private sector investment.

Because the Fed is crowding out the market. It is the single largest buyer of bonds. But it's not just any bonds that it's buying, but bundles of home mortgages. There is only a finite supply of investment grade mortgages out there, so by buying all of the good ones up, the Fed is leaving the market riskier and less liquid.

I'm not saying raising interest rates would increase lending. I'm saying ending QE would be beneficial to the economy.

And it's my opinion that much of the change going on in the labour market is structural rather than cyclical. No amount of fiscal or monetary stimulus can reduce structural unemployment.

Added to that is the fact that recent growth in the stock market has detached itself from the real economy. It always has been a bit detached, but now moreso than ever. Russia is at 2% growth, Brazil and Switzerland are on the verge of currency crises, the EU is still contracting, Chinese and Indian growth is sluggish - the equities markets don't reflect this at all!

Added to that is the fact that QE is *not* keeping interest rates down at all. The first round of it back in 2009 knocked rates down over a hundred basis points. This latest round? Maybe ten.

TARP is destroying the breadth and depth of the American banking industry and concentrating power in fewer and fewer banks.
http://www.latimes.com/business/la-fi-too-small-to-succeed-20130918,0,1014175.story

@Emac - a consolidated banking industry is not necessarily a bad thing, since there are economies of scale in banking.

Goldfinger
I would agree with your arguments if the concentration occurred through market forces, but this concentration is a result of government regulation.

I disagree, Emac. Much of it occurred before the 2008 crash. The only thing that the government did was facilitate the sale of bankrupt companies to other companies. If those banks went through bankruptcy, then millions of Americans wouldn't have access to their bank accounts and investments during a very bad time in the American economy.

But consolidation was already happening before then. I forget what law it was that passed during Clinton's Presidency, but it allowed for banking across state lines and that led to the growth of these mega-banks.

The pre-crisis consolidation of TBTF banks does not compare with their market share today.

"JP Morgan Chase is reportedly holding more than $1 of every $10 on deposit in the US. The four biggest super banks (JP Morgan Chase, Bank of America, Wells Fargo and Citibank) now issue one of every two mortgages and about two of every three credit cards in the US. Since the financial crisis, these four super banks are each allowed to hold more than 10% of the nation’s deposits, having been exempted from a longstanding rule barring such market dominance. In several metropolitan regions, these new super banks are now permitted to take market share beyond what the Department of Justice’s antitrust guidelines previously allow. The American banking system is now one of a handful of large global trading companies pretending to be banks, taking huge profit from high risk proprietary trades with government-backed money, instead of one of a network of small conservative local institutions serving their domicile communities merely as intermediaries of money through local deposits for nominal fees.Sheila C. Bair, chairman of the Federal Deposit Insurance Corp, described the TBTF problem as: “It fed the crisis, and it has gotten worse because of the crisis.”

http://www.rooseveltinstitute.org/new-roosevelt/coming-implosion-too-big-fail-and-theory-large-numbers

Here is an excellent article on how TBTF banks threaten the community banking industry.

Only by actually downsizing and restructuring "Too Big To Fail" institutions - by limiting the systemic risk created by the sheer size and interconnectedness of the institutions that put our financial system and economy at risk - can we eliminate unfair competitive advantages, unleash our free markets and allow community banks to truly compete in the financial landscape.http://www.theintelligencer.net/page/content.detail/id/590110/-Too-Big-to-Fail--Banks-Harm-Local-Communities.html?nav=509

Maintaining the status quo would only result in community banks' continued subjugation by the megabanks that enjoy privileged status in Washington. For the community bankers like me who want our industry to survive and thrive, we must stand together to break up the "Too Big To Fail" stranglehold and ensure a future for Main Street community banking and the communities we are privileged to serve.

In the third quarter of 2012 the top 12 banks held a 69% market share of banking assets, and the top 88 banks an 88% market share. http://seekingalpha.com/article/1121101-the-u-s-banking-system-too-bigger-to-fail

Should have been "top 82 banks held an 88% market share

"There is only a finite supply of investment grade mortgages out there, so by buying all of the good ones up, the Fed is leaving the market riskier and less liquid."

So here is where I don't follow you. I don't see how the market can become both riskier and scared of lending. There is a fixed amount of agency backed MBS by Fannie and Freddie, and the Fed is buying up a big share of them. Presumably that means that prices on other types of bonds, riskier bonds go up because investors are putting their money in other types assets like commercial banked mortgage securities , etc. If that's the case then doesn't that mean that investors are less scared of investing and lending out money? I just don't see how, if the market is purchasing riskier bonds, that that means there is less money being loaned out.

Presumably if the Fed did not do this then mortgage interest rates would increase because the yields would be higher and the price of the bonds would be lower. If the housing market is deemed to be key to economic recovery, I don't see we'd want interest rates on mortgages to increase.

"And it's my opinion that much of the change going on in the labour market is structural rather than cyclical. "

If long-term unemployment rate of over 4% is structural then our economy is not going to recover. That's a catastrophic number if we can't bring it down. Never before have we had such a high long-term unemployment rate. I'm unclear as to what the evidence is that it's structural, especially in light of the fact that we're engaged in a policy of fiscal consolidation rather than stimulus, taking government money out of the economy instead of putting it in. There is ample evidence to suggest that employers simply do not like to hire anybody with any kind of gap in employment history. In fact, although this is anecdotal, I've been told as much by an HR staffer for Nationwide Insurance.

"Added to that is the fact that QE is *not* keeping interest rates down at all."

How do you figure? Mortgage rates are at 4.5%. That's low.

I don't have time to answer all your points in depth at this time, so I'll just pick the lowest hanging fruit.

There's a lot of reason to believe that the current labour market has a lot of structural unemployment. If you take a look at the graphs from the BLS (http://data.bls.gov/pdq/SurveyOutputServlet) take a look at how unemployment rises and falls during a recession. If you look in 1982 it peaked and then by 1984-85 reached pre-recession levels. Same if you look at 1992. The shape of it is a pyramid, essentially.

Now, look at the last two recessions and you'll see something different. In 2003 unemployment peaked. This is about 1 year and a half after the crash, which is about normal. But, unemployment never reached pre-recession levels, despite having five years to do so. But our economy was doing fairly well. This is called jobless growth. It's a phenomenon that's under a lot of scrutiny. I don't know what sort of access you have to journals, but NBER, World Bank, etc have a bunch of literature on it.

As for interest rates, there are many studies showing that each round of QE is having a smaller effect. I'm gonna try not to butcher this chart. All the numbers are basis points

QE1 QE2 MEP QE3
Asset Purchase News (MBS & Treasury) (Treasury only) (MBS & Treas) (MBS only)
Treasury Yields (CMT)
5-year -74 -17 +3 -6
10-year -107 -18 -7 -3
30-year -73 -9 -17 1
Inflation Swaps
10-year 96 5 -4 3
Corporate Bonds
Aaa -77 -9 -16 4
Baa -81 -7 -15 0

Agency MBSc
15-year -88 -9 -7 -16
30-year -107 -12 -23 -16

Fed Funds Futures
12th month -33 -4 0 0
24th month -40 -11 -1 -3
Implied Signaling Effect
5-year -35 -18 0 -1
10-year - 20 -12 0 -1

Yep, butchered. QE 1 should be above the first term in parenthesis (since it was MBS and Treasuries), QE 2 over the second, etc etc. Imagine a column coming down from each one (MEP is "Operation Twist" from 2011) and that is the effect that each one had on the interest rates for each category

Your link didn't work. I have this link which is also BLS data.

http://portalseven.com/employment/unemployment_rate.jsp?fromYear=1980

I don't know when exactly you're saying the 2001 crash began, but in mid-2001 the rate was 4.5%, and in 2006 we got back down to that rate. Long-term unemployment was also not nearly as high as it is now, and average & median durations of unemployment were about what they had been in the 80s & 90s, those durations have skyrocketed now.

Here, try this. Just click back to 1980 or so on it.

http://data.bls.gov/timeseries/LNS14000000

Could the effects have QE3 been minimized since there has been talking of tapering since the beginning of the year, and especially since the beginning of the summer? I mean the 30 yr went down 10-15 basis points after the latest announcement.

"http://data.bls.gov/timeseries/LNS14000000"

This says the same thing as my chart. In June/July 2001 the rate was 4.5/4.6. By mid 2006 that rate had been met. At any rate we did get back to pre-recession levels with respect to the 2001/2002 recession.

I don't see how we can give up on the 4% long-term unemployed when we're not even trying stimulus, we're actively cutting back with sequestration and other cuts, and raising taxes. And the original stimulus was far short of the amount we lost in the economy due to the recession. And if long-term unemployment really was structural, pursuing policies that slow growth - like sequestration and fiscal cutbacks, is only going to make that worse. Fixing structural unemployment can only occur in a growing economy.

"Could the effects have QE3 been minimized since there has been talking of tapering since the beginning of the year"

Well now you're getting into academic finance. Market efficiency hypothesis says that the market only reacts to new information. If the market suspected tapering (which it did) and found out there was none, based on the assumption of market efficiency, rates should have dropped as soon as Bernanke announced he wasn't tapering. They did drop, but not by all that much, and they had already bounced back by friday. The numbers that I posted above were from the announcement of QE3 last October.

You can see the numbers from last week here
http://www.federalreserve.gov/releases/h15/update/

You can see a noticeable drop on Wednesday, but on Thursday they climbed back 30% or so of the drop, so was there really much of an affect? I mean, we'll see in the next weeks.

And considering that some estimates have put the impact of QE1 at over 100 basis points, a 10-15 point change seems like a waste of money, right?

you people who think the bailouts or the fed policy helped the economy are mentally retarded. they took losses of private companies, and instead of letting the companies fail, having some investors lose some money, they transferred all the debts to the american people as a whole. and now the government is bankrupt, the currency is destroyed, and there is no way out.

if you think preventing losses to some massively rich investors at the expense of the entire country is good for the economy then you obviously cant see what is happening in front of your eyes.