Unraveling Why A Fed President Just Suggested Doubling QE3

By Daniel R. Amerman, CFA / GoldSeek.com

Chicago Federal Reserve Bank President Charles Evans was interviewed on CNBC on Monday, and he indicated that he was in favor of continuing asset purchases at a rate of $85 billion per month all the way through 2013. If approved by the rest of the Fed, this would have the effect of about doubling the size of “QE3″, or Quantitative Easing Three, the massive Federal Reserve monetary creation and market intervention program announced only three weeks ago.

QE3 combines mortgage security purchases of $40 billion per month until the labor market substantially improves, while continuing “Operation Twist”, with the Federal Reserve switching another $45 billion a month out of short term Treasuries and into long term Treasury bonds through December. There is a total of $85 billion per month in asset purchases, of which $40 billion a month is to be financed by creating new money out of thin air. Importantly, the amount of market interventions is scheduled to drop in half at the end of 2012.

If the Federal Reserve follows through with what Evans proposes, it will mean that the pace of $85 billion a month won’t slow, and that an additional $540 billion will be created out of thin air over the course of 2013, which will likely be directly injected into the economy without “sterilization”. In other words, what Evans is proposing is that the government create and spend a little more than $5,500 per above-poverty-line household to manipulate the markets and to hold down pension and retirement investment returns.

Not too long ago, this would have been the most aggressive and irresponsible action in the history of the Federal Reserve. But at this stage with QE1, QE2, QE3, Twist 1, Twist 2, along with assorted trillions of dollars in loans and purchases with unnamed parties under secret terms, a mere proposal by a (currently) non-voting member of the Fed’s policy-making Open Market Committee (FOMC) to increase the size of an already staggering program to an even more staggering amount might not seem like that big of deal to the small slice of the public that pays attention to this sort of thing.

So why did Charlie Evans do it? And why did Ben Bernanke likely authorize the nationally televised interview?

Let me suggest that it is only when we answer those questions that we can find out what the Fed is really up to – which is playing a quite different game than what is being put out in the press releases.

Implausible Explanations – Conventional

We’ll start with the conventional perspective. The Federal Reserve and Ben Bernanke are already taking a great deal of heat over the recently announced massive and open-ended QE3 program. There is loud and public skepticism about whether QE3 will actually make any difference to the economy, given that both QE1 & QE2 failed in their stated goals of restarting the economy and housing market.

Given the size of QE3, even members of the Federal Reserve are starting to publicly express concern over the danger of causing increased rates of inflation, as shown by the recent comments from Richmond Federal Reserve Bank President Jeffrey Lacker in explaining his dissenting vote on QE3.

There is a presidential election next month, and Bernanke is already taking a great deal of heat for QE3. Why toss gasoline on the fire and have a non-voting board member talk about doubling down on the size of QE3? After all, there is no money being created and no solutions are actually implemented – there is just the risk of political damage for seemingly no benefit at all.

Why did a non-voting Fed member go on national TV to talk about his desire to increase the size of QE3 months down the road? Why risk the pain for no gain?

Implausible Explanations – Contrarian

If the conventional doesn’t make sense, then maybe it is the usual contrarian perspective that will hold the answers. OK then, let’s assume that what many are writing about is true, which is that the United States dollar is right on the brink of collapse, with destruction likely to occur in the fall of 2012, even as the Federal Reserve desperately tries to hold on.

Now, from that viewpoint, the Federal Reserve and the US dollar are on the verge of imminent annihilation because of the massive creation of fiat currency that is about to lead to a complete collapse in confidence. Viewed from that perspective, what Charles Evens just proposed was insanely stupid – as he just accelerated the loss of confidence and resulting destruction of the dollar for no gain whatsoever. There is no money being created and spent – he’s merely talking about why he wants to do so.

Why would he do that? Why did Ben let him?

Again: why would a non-voting Fed member go on national TV to talk about his desire to increase the size of QE3 months down the road? 

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