I’ve been assuming since day one (since there was no other logical explanation for QE aside from the fact that it can clean up bank balance sheets) that QE2 was a bank bailout and not a Main Street rescue plan and it now looks like Ben Bernanke and the Fed are (at least partially) confirming this. They are concerned about the capital positions of the nations largest banks. The WSJ reports:
“The Federal Reserve will require all 19 banks that underwent stress tests during the height of the financial crisis to undergo another review of their capital and their ability to absorb losses under an “adverse” economic scenario.
The Fed, in guidance issued today, said all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by the central bank.
The request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.”
The Fed clearly sees something that Wall Street doesn’t. They know the housing market is now rolling over again and that Christopher Whalen is likely correct about the banks and their woes. Ben Bernanke has implemented QE in case he needs to buy MBS and shore up the credit markets. He wants to avoid a repeat of Q4 2008. That’s a good thing. It’s actually quite brilliant if you ask me. But the fact that QE is being sold to the public as some sort of jobs creation program or Main Street stimulus is 100% nonsense. It will have little to no impact on Main Street, but will likely go great distances in ensuring that the credit markets don’t relapse. It’s nice to see the Fed being proactive for once. But now the question must be asked – just what do they know that the market doesn’t and how bad could it really get?
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.