Fed Critics Question Usefulness of Quantitative Easing

By Korollos Shalaby

Critics of the Fed have long warned that quantitative easing could result in dangerously bloated balance sheets at the Central Bank, but it has never been clear why the internal finances of the Fed should have such an effect.

Now, the president of the Dallas Fed, Richard Fisher, argues that the health of the Fed's balance sheet could affect the health of the federal government, and even the regulatory role of the Federal Reserve.

Under three rounds of quantitative easing and various other market support programs, the Fed has purchased a whopping $ 2 trillion in Treasuries and mortgage bonds since the financial crisis hit in 2008. At that time, the Central Bank accounted for 900 million in bonds and securities on its balance sheet. Those bonds had accumulated over the years in "open market operations" which is the buying and selling when the Fed makes its policy changes.

Fisher's two favorite subjects are the virtues of his adopted state tax and fiscal sins of the legislature in Washington DC, which ran as a Democratic Senate candidate in 1994. He also mocks California's finances in a story that imagines the governor of California, Jerry Brown, spending millions on environmental impact studies after a confrontation he had with a coyote earlier, we know that the governor of Texas, Rick Perry shot a coyote on a morning walk. ("Bullet Cost: 25 cents. Cost to taxpayers: zero)."

Fisher, who currently has no vote in the Open Market Committee of the Federal Reserve, has long argued that further bond buying is useless until Congress balances the budget. He insists that QE is not achieving its stated goal of reducing the unemployment rate. Other critics, such as bond investor Jeffrey Gundlach, echoed his claims that quantitative easing has crashed into the law of diminishing returns.

Fisher goes further, saying that QE is not only useless, but is potentially toxic.

"The question is how far we are willing to go and how big will the balance sheet that we will be able to leverage before we run the risk of not only (damage) the financial welfare of the Fed, but also the country", Fisher said during a question and answer session after his speech at the Chamber of Commerce in Gainesville.

Basically, if the Fed maintains its mortgage and Treasury bonds as yields rise, it will have to adjust its portfolio with the markets. To remain solvent after a certain level, the central bank should stop sending cash to the Treasury. In 2010, the Congressional Budget Office (CBO) warned that the federal government could become increasingly dependent on remittances generated by the Fed's balance sheet.

Korollos Shalaby is a nationally acknowledged mortgage expert with over 6 years experience as a loss mitigation expert and mortgage finance consultant. He has owned several companies and has been at the forefront of all lending and banking practices since 2006.