Tags: fed | qe | easing | economy

Hussman: Fed’s Next Round of Easing May Be $400 Billion

Monday, 16 Jul 2012 11:50 AM

Unless the Fed violates the Federal Reserve Act as it did in 2008, quantitative easing (QE) is the best tool it has to boost the economy, and one it will almost undoubtedly use, according to economist and fund manager John Hussman.

“I expect that the Federal Reserve will initiate QE3, though only after more substantial market and economic weakness,” Hussman wrote in a note to investors.

“It doesn't really matter that QE does little but help stocks recover their prior six-month losses, and does next to nothing for the real economy. Fed governors evidently prefer superstition to evidence on this.”

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

Hussman expects the next round of QE will be in the $400 billion range because of balance sheet and duration risks for larger amounts. In addition, QE3 could possibly involve mortgage securities and will probably require banks to hold the proceeds on reserve with the Fed unless implied inflation expectations decrease sharply.

Hussman believes that the Financial Accounting Standards Board’s suspension of mark-to-market accounting was far more important than QE in driving the market in 2009.

“Relieving banks and other financial institutions of the need for transparency relieved them of the risk of being seized as insolvent by regulators, and also relieved them of the immediate need to build capital buffers,” said Hussman. “European banks are now in a situation where receivership is the only option.”

Hussman said QE3 would most likely be disappointing to investors and will “be unhelpful in materially reversing a global recession.”

According to a recent CNNMoney survey, most Wall Street investment experts believe that more stimulus from the Fed is coming. Specifically, of the 30 experts polled, two-thirds said the Fed’s extension of its Operation Twist policy was warranted, and the same percentage believed the Fed will reconsider a QE3.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

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Monday, 16 Jul 2012 11:50 AM
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