Fed QE Critics From 2010 Hold To Their Statements

Criticizing the U.S. Federal Reserve (Fed)’s quantitative easing (QE) policy can be difficult for an academic or respected financial professional. Difficult because outwardly it appears to be working so well. The stock market is at all time highs, and real estate, particularly in wealthy neighborhoods, has once again skyrocketed. But criticize is what a number of esteemed academics and financial practitioners did in 2010 and they are holding to their critique today, according to a report from Bloomberg.

Fed’s QE program would distort financial markets

In November of 2010, a letter signed by a horde of well-known academics, economists and practitioners warned the U.S. Fed that it’s unprecedented purchasing of bonds and other securities would “distort financial markets.”  Since then, the equity markets and high-end assets such as real estate and art have risen well beyond statistical averages.  The stock market delivering over 30 percent performance in 2013 is a prime example.

Fed QE Critics From 2010 Hold To Their Statements

Source: Pixabay

The problem with arguing against stimulus is it makes everyone feel so good. But the problem, these academics and financial insiders argue both publically and privately, is the longer the stimulus is used the harder it will be to break the addiction and the more severe the crash will become.  Behind the scenes, some financial models are predicting a crash worse than 2008 if the U.S. Fed is not careful and certain government fiscal policy relative to coming social security and medicare payments are not properly managed.

Bove, Klarman, Chanos, Asness and Singer criticizing Fed’s QE program

“I would argue the bulk of QE money never reached the economy,” Rafferty Capital Markets analyst Richard Bove said in a follow-up Bloomberg interview four years after he, along with 23 other respected economic luminaries, signed the Hover Institution letter. Other notables to sign the letter from the hedge fund community included Cliff Asness of AQR Capital, Jim Chanos of Kynikos Asssociates, Seth Klarman of Baupost Group, and Paul Singer of Elliott Associates.  Also signing the letter were several academics and officials who held significant economic posts in government.

“The clever thing forecasters do is never give a number and a date,” former Director of the Congressional Budget Office Douglas Holtz-Eakin was quoted as saying. “They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”

“This is the slowest recovery we’ve ever had. Working-age employment is lower now than at the end of the recession,” said John Taylor, a professor of economics at Stanford University. “Where is the evidence that it worked? It’s just not there.”

The real evidence of the damage of quantitative easing will be felt in a market crash.  When this occurs there are likely to be a host of Fed apologists who will attempt to deflect blame from artificial price manipulation of markets.  Those who signed the letter of November 15, 2010 will know otherwise.




About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com