"In June/July 2001 the rate was 4.5/4.6"

My chart says unemployment bottomed at 3.9% in December 2000. The closest we got in 2006 was 4.6% I believe. But, regardless, my wider point stands. If you go farther back you'll see that after 2 years from the peak of past spikes, unemployment continues to trend downward. In the 2000s, it was reduced at a much slower pace (as well as the Fed funds rate moving up at a much slower pace) and never quite got to where it was before. Almost, but not quite. My theory is that we living in a time of creative destruction. Now, in 2013, factories are moving back to America, but they're mostly empty. A plant that used to hire 50 workers now uses 20, etc. Thus, output is improving while unemployment is not. These people who are unemployed have skills that aren't needed anymore, which is why they've been unemployed for so long. This happened with the manufacturing sector and now it's going to happen in the services sector. Every self-service checkout is one less cashier that has a job.

**after 2 years unemployment reaches pre-recession levels and then continues downward***

@Blankflag - we didn't bail out companies to save rich investors. We did it to save the financial system.

The premise that government spending has the same economic impact of private spending assumes facts not in evidence.

The idea that sequestration impacted meaningful spending that builds productive and creates jobs ignores the fact that the GAO identified $250 billion in duplicative, wasteful, and unnecessary spending in the last fiscal year. The pro-rated sequester cuts for fiscal year 2013 were only $44 billion.
http://gao.gov/products/GAO-13-279SP
The administration's own gloom and doom predictions were even rebuffed by the WaPo. http://articles.washingtonpost.com/2013-06-30/politics/40292466_1_sequestration-predictions-obama-administration
John Stossel made the persuasive argument that the sequester doesn't even represent a cut in federal spending, but in reality simply reduces the amount of growth in federal spending. http://townhall.com/columnists/johnstossel/2013/03/06/john-stossel-n1526347/page/full

The Federal Reserve of San Francisco indicated that the uncertainty created by Obama administration's policies prevented normal reductions in unemployment characteristic in previous recoveries. "Since 2009, U.S. job vacancies have increased but unemployment has fallen more slowly than in past recoveries. There is evidence that heightened uncertainty about economic policy has been an important factor behind this change. Increased uncertainty may discourage businesses from filling vacancies, thereby raising unemployment. An estimate indicates that, without policy uncertainty, the unemployment rate in late 2012 would have been close to 6.5%, 1.3 percentage points lower than the actual rate." http://econintersect.com/b2evolution/blog1.php/2013/07/23/policy-uncertainty-and-the-slow-labor-market-recovery

It's too bad that we didn't meet the recession caused by the financial meltdown with the fiscal policy implemented in 1981, tax cuts (ERTA) instead of the massive $890 billion dollar stimulus of 2009. The ERTA tax cuts worked so much better.

@Blankflag - we didn't bail out companies to save rich investors. We did it to save the financial system.

what does that even mean? iceland let their banks fail, and their financial system is a much safer investment than the american financial system.

are you implying that if the current banks that run the system fail and new ones come in, that the new system will be worse in some way to the old one? maybe overly cautious about risk or something?

"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?"

Not enough time to reply to everything, but one point. What do you mean "waste of money"? No money is spent in QE. You're just changing the composition of bonds vs reserves on the balance sheets of the banks and the fed. The Treasury's balance sheet is unchanged. Reserves are not money.

It's more akin to checking vs savings account. Reserves = checking account. Bonds = Savings.

Blankflag, you might find this article comparing Iceland's default with Ireland's refusal to default interesting. http://one-salient-oversight.blogspot.com/2010/12/iceland-vs-ireland-which-is-worse.html

"iceland let their banks fail, and their financial system is a much safer investment than the american financial system."

I understand the point that you're coming from, but I don't think it's a fair comparison. I know Iceland's banks defaulted on debt several times larger than Iceland's GDP. However, that total was only $85 billion. To contrast, the currency crisis in Russia in 1998 was started by a default of $40 billion.

What happened to Iceland? 80% devaluation of the currency, 900% increase in unemployment, 20% annual inflation. They took a big hit. And the only reason they did claw themselves back out of it is because of trade surplus due to the currency devaluation. So, reason #1 why we can't copy Iceland is that if everyone did it, everyone's currency would be devalued and nobody ends up gaining.

Reason number 2 (a much more important one) is that the stakes were much, much bigger in the US. We're talking multiple trillions of dollars in reserves all of a sudden bankrupt. First off, if those banks had gone bankrupt, the FDIC may have gone with it. Secondly, during the process of bankruptcy, people wouldn't have access to their money. Third, the US dollar would lose its status as a world reserve currency and New York would lose competitiveness as a global financial center if we allowed that many firms to go under. New firms don't spring up overnight. They take years of building contacts, acquiring capital, etc. If the dollar were devalued enough or if we lost reserve currency status, the US government would have to pay much higher interest rates on Treasuries.

And the most important reason is that if we didn't step in, market confidence would be gone. Prior to us stepping in, the commercial paper market was frozen. Now, if you don't know what the purpose of commercial paper is, it's short term debt issued by corporations so that they can cut their employees their paychecks every two weeks. Not only was the commercial paper market frozen, but so was the mortgage market and half a dozen. And we're not even roaming into AIG and the insurance market.

Do you get what I'm saying?

Putin - you seem to think first off that I don't know what QE is and secondly that QE doesn't create money. Both I would like to disagree with. Currently, the Fed holds 35% of long term Treasuries. Buying those Treasuries pushes rates downward. This downward pressure increases the money multiplier, since people will be more apt to borrow at a lower rate. Additionally, when the Fed buys those bonds from banks (or whoever holds them, since they buy them on the open market) they do it by crediting their accounts at the Fed with money that did not exist before.

How can the Fed exit its current policy and even more importantly how can it sustain it? The Federal reserve held interest rates low from 1992 to 1994 to fight the recession that began at the end of the 1st term of G.H.W. Bush. From Feb to May in 1994 the Fed raised its rate from 3% to 3.5%. The 10yr. T-Bill rate exploded from 5.8% to 7.5% at the same time. The influence of the Fed's monetary policy on real economic growth is already diminishing by the day. Only the stock market continues to respond with any type of vigor.

What happened to Iceland? 80% devaluation of the currency, 900% increase in unemployment, 20% annual inflation.

uh no. icelands currency and unemployment numbers are amazing. they are destroying the us and before they let the banks fail they were in pretty much the same situation as greece. unfortunately the greek people had less control over their government and we see the result of bailing out the banks vs letting them fail.

blank, I thought you knew what term I was talking about. 2009-2010 Iceland was a godawful place to be.

As in, much worse than any place in the US or EU godawful.

And.....you should really do some research, but the ISK is awful compared to where it was before the crash. Pre-crash it was 60 ISK/USD. Now it's sitting at 120 ISK/USD and is much more volatile than it was in the 2000s

Also, Greece was a case of sovereign debt whereas Iceland was banks, and Greece owes about....5 times what Icelandic banks defaulted on.

i had a chart back when i originally made that website... maybe i can find it again. i wonder if the source updated it for today...

i had a chart back when i originally made that website... maybe i can find it again. i wonder if the source updated it for today...

ok i cannot find an updated version so just go to the old one

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/03/Iceland%20vs%20Greece.jpg

and tell me where on that chart was iceland in the cesspit in which america now finds itself

A more accurate portrayal would be Iceland vs. USA. I reiterate the fact that one was merely a banking failure, while the other was banking failure compounded by a sovereign debt crisis.

ok well icelands unemployment rate is under 5% now. when do you think america will see numbers like that? i dont think the government can manipulate the data much more than they already have, they are already at the point where they are quoting numbers less than half of the real unemployment rate... so my guess is it will not happen again. unless the system collapses and a better one replaces it, as happened in iceland.

or maybe we can go with the cyprus model, instead of dumping the banking losses on the public as a whole through currency printing and government debt, just seize deposits. their unemployment rate graph looks like the hockey stick graph of world temperatures the ipcc gave us (before they admitted it was junk science and threw it out and came up with some new ones). only difference is this data is based on reality.

Banks do not increase the amount they loan out based on their level of reserves. Banks do not lend reserves. The money multiplier does not exist.

http://www.newyorkfed.org/research/staff_reports/sr497.pdf

" when the Fed buys those bonds from banks (or whoever holds them, since they buy them on the open market) they do it by crediting their accounts at the Fed with money that did not exist before."

All banks have reserve accounts at the Fed. The only thing that happens when the Fed "buys bonds" is increase the reserves at the bank's account and decrease bonds at the bank's account, in effect a shifting of accounts from one asset to another. At the same time it increases the bonds on the Fed's balance sheet and decreases the reserves. The cash in circulation is the same. Reserves aren't money because all they do is sit there and earn interest. That's like calling a house you rent out money. You can't buy anything with reserves, they aren't a medium of exchange. The people who held the bonds and who shifted them over to the Fed held them not as a medium of exchange but as a store of value, ie to earn interest. So all they're doing is replacing the bonds with another store of value - reserves.

I think people are confused by the fact that we don't use a gold standard anymore, and use the language and thinking of the gold standard. All QE is is portfolio rebalancing.

Well, you're right in many aspects, Putin. Certainly that's how it's turning out now.

But the money multiplier certainly does exist. That's fractional reserve banking. If you look at the difference between the M1 and M3, it's massive. Most money in the economy is not in the form of cash. Now, theoretically, the more reserves a bank has the more it should lend out. However, banks are for the most part just sitting on these reserves this time around, and that is the phenomenon the paper you cited is referring to. In normal economic situations, that should not happen. What should happen is that banks use these essentially free excess reserves in order to lend out more money. But now they're just sitting on the money the Fed gives them.

Since what the Fed is doing is not working as intended, it should stop the repurchases since they're just creating a crutch for the argument.

I see the line you're arguing Putin, but based on what you're saying QE does nothing and is worthless. If that was true, why do it at all?

"In normal economic situations, that should not happen. What should happen is that banks use these essentially free excess reserves in order to lend out more money."

Banks do not need reserves to lend out money. This again stems for gold standard thinking, the idea that you must have deposits first before making loans. Banks make loans first and then get reserves from the fed or other banks if they need them. Credit is created out of nothing. Banks can always get reserves if they need them. The Federal Reserve always makes sure the system has enough reserves. If a bank runs out of reserves and can't get them from another bank, the Fed gives them the required reserves automatically. Reserves have no effect on their lending and never have, not just in this case. People think "fractional reserve banking" means that banks must keep a fraction in reserves for withdrawals. This is false. Some countries with fractional reserve banking don't even have reserve requirements.

A thorough explanation of this can be found here.

http://www.standardandpoors.com/spf/upload/Ratings_US/Repeat_After_Me_8_14_13.pdf

I certainly agree that QE (and monetary policy in general) is limited in what it can do. Japan is a testament to that. Japan is also a testament to the fact that QE doesn't cause inflation. Japan did all it could through monetary policy to cause inflation for years, but it didn't occur.

As to the question of why do it? I think it's more of a signal than anything else. The Fed has repeatedly scolded Congress about its fiscal policy, but they don't get any response. The Fed is making it clear that the economy is not doing well, and since they have a dual mandate of both curbing inflation and unemployment, they must not do anything that might undermine maximum employment. If the market for non-agency MBS and other types of securities declines, this could cause a sudden rise in mortgage rates and diminish the housing market. Since inflation is very low they really have no excuse to let interest rates increase when the economy is not doing well.

" Banks can always get reserves if they need them. The Federal Reserve always makes sure the system has enough reserves. If a bank runs out of reserves and can't get them from another bank, the Fed gives them the required reserves automatically."

This statement is irrational. No bank would ever fail if this statement was true. Banks fail.

in theory the fed could keep all the banks alive by constantly giving them money. the fed could do pretty much anything. it depends if it wants to.

the fed acted like it could not save the banks back in 2008, and succeeded in its goal of extorting most of the available credit of the united states and getting the american government to borrow money from itself to give to the banks.

now instead of forcing the government to loan money from itself and give to the banks, the fed could have just given the money to the banks directly. i think now that the american government has been essentially bankrupted this is what is happening now. with qe you have the fed buying up (currently) garbage mortgages from the banks. this is basically like giving money to the banks. they would have the government do it, but we are already screwed so much there is nothing left to take.

when i say from itself, it is a bit confusing, what i mean is
the government borrows money from the fed (which the fed creates out of nothing) and gives to the banks.

so under the bailout
money printed at fed -> given to banks
+ bonus feature: the government is now in debt to the fed by a massive amount

under quantitative easing
money printed at fed -> given to banks
(no bonus)

if they thought they could extort more, the banks might be under threat, but since there is nothing left, it is unlikely.

The Federal Reserve cannot constantly save all banks, and Ben Bernanke said so himself in regards to Lehman Bros.

Federal Reserve Chairman Ben S. Bernanke said Thursday that there was no way for the government to rescue Lehman Bros. from failure in 2008 without a huge loss of taxpayer money, and that he should have been "more straightforward" when explaining the decision to Congress shortly afterward. Appearing before the federal panel investigating the financial crisis, Bernanke said his vague congressional testimony less than two weeks after Lehman's collapse had helped feed what he called a myth that the investment bank could have been saved.But Bernanke said at that time he did not want to add to the growing crisis by admitting that the Fed lacked power to bail out some major firms. He also said Lehman didn't have the collateral needed to back any Fed aid. "It was a judgment at that moment … that making that statement might have even reduced confidence further and led to further pressure," Bernanke said Thursday. "I regret not being more straightforward there because clearly that has supported the mistaken impression that, in fact, we could have done something. We could not have done anything."

http://articles.latimes.com/2010/sep/03/business/la-fi-crisis-bernanke-20100903

"Federal Reserve Chairman Ben S. Bernanke said Thursday that there was no way for the government to rescue Lehman Bros. from failure in 2008 without a huge loss of taxpayer money"

saving any of those banks will cost americans money. but since the fed controls the money supply they have a huge amount of americans money to spend through inflation.

you underestimate the power of the printing press if you think the fed cannot save the banks. they can save them, it just destroys the american economy as a whole as a result. which is pretty much what is happening. lehman was not particularly special. all the other banks were in similar situations.

QE is about pull HQC (High Quality Collateral) out of the system. It's all about re-hypothication within the "shadow banking system" and has NOTHING to do, what so ever, with rebuilding the economy from the "Main Street" perspective.

QE is about keeping interest rates low. The Fed's purchase of debt increases demand for treasuries (aka high quality collateral), doing just that.

QE is about stimulating demand.