Monday, November 1, 2010

November FOMC Meeting Starts Tomorrow

and concludes on Wednesday. The statement will be issued shortly after 2:00PM EST. If you still invest in the stock market, don't freak out if you see Dow spike 100 points in a matter of seconds and collapse 150 points the next few seconds. Traders (or algo bots) seem to enjoy doing that kind of theatrics at FOMC announcement. It's almost like a ritual.

However, this particular FOMC meeting may trigger different reaction from the market, all because of .....

QE2 or not QE2? How much? How long? What will the Fed buy this time?

The emerging consensus seems to be: Yes, the Fed's going to do QE2; it will be $500 billion or more for several months (6 months or so), and it will be Treasuries that the Fed will purchase, although there are some who expect mortgage-backed securities to be included in the purchase. (See Bloomberg for more.)

The consensus in the blogsphere is that QE2 will be the dumbest thing to do, which will damage the real economy by destroying the dollar. Zero Hedge's Tyler Durden called QE2 an act of war by Bernanke against the middle class and the holders of US dollar denominated assets.

The world as we knew it died already in September-October 2008. The world as we've known since then will die on Wednesday.

What's the big deal, you may ask. The Fed already did QE1, for more than $1 trillion. What's the big deal now with $500 billion?

Back when it did QE1, the purpose was to provide liquidity in the banking system which had frozen. This time, Ben and the Inkjets will do it to create inflation. In their minds, inflation means the economy is expanding. Inflation means more people are employed. Inflation means people are spending. If you think that's BS, it is.

Congressman Ron Paul wanted to audit the Fed. He wanted to do it for three decades. His bill finally passed the House in 2009. In the Senate, Senator Sanders capitulated and agreed to significantly weaken the Senate version of the bill. That was on the day of the "flash crash", May 6, 2010.

I'm more or less resigned to the fate that QE2 will bring. Why? Because I don't see any mechanism that can stop the Federal Reserve from doing what it says it wants to do "for the good of the country", where "the country" is represented by the bankers and politicians connected to them. No one can stop the Fed.

Just look at the website address of the Federal Reserve. The only entity that has ".gov" is Board of Governors of the Federal Reserve in Washington DC, because the board members (currently 6) are appointed by the president and confirmed by Congress. Aha, you say, the Fed is a government agency! Well, not really. The board members are pre-selected and suggested by the member bankers, and all the president does is to rubber-stamp their choices. Ditto for Congress. The bank that will do QE2 is the Reserve Bank of New York, whose web address ends with ".org", just like all the other regional Feds. They are private entities.

If they screw up big time, what will happen to them? Nothing. Or I should say nothing bad.

Alan Greenspan presided over the dot-com bubble and the ramp-up of the housing market bubble and securitization bubble. What happened to him? He was given the knighthood, and awarded the most august honors in the US, France, and UK. Ben Bernanke declared the housing market was sound, and the problem was confined to subprime mortgages. Was he fired for his incompetence? He was re-confirmed for the second term as the Fed chief.


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