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Quantitative bonuses

By Karl Smith

Felix Salmon suggests that QE2 is a give away to big banks.

The people selling Treasury bonds to the Fed, then, are big banks, who are told in advance exactly how many Treasury bonds the Fed wants to buy. As a result, they’re likely to buy Treasuries ahead of the auction, with the intent of selling them to the Fed at a profit. This is pretty much what [Gawker’s John Cook] said would be going on, only they buy the bonds before the auction, rather than afterwards. Once the banks have made that profit, it’ll get paid out in bonuses to the people on the bank’s Treasury desk, with the rest going to their shareholders. We’re not exactly helping the unemployed here.

This isn’t exactly right. The winners – and there are specific winners from this type of policy – are the folks who were holding Treasury Bonds before the anyone realized that the Fed would do quantitative easing.

Felix is exactly right that big banks will go out and try to buy bonds ahead of time. This is why the interest rate on U.S. Treasury bonds started to fall even as rumors of QE2 started to circulate. However, just as banks have to compete to see who sells bonds to the Fed, they have to compete to see who buys them from their current owners.

This means that, as soon as anyone even thinks that there might be a round of quantitative easing, dealers from the big banks start placing orders for more bonds. Just like the stock market, this causes prices to start to rise, and anyone who has bought bonds in the past can now sell them at the higher price.

Thus contrary to Shahien Nasiripour's assertion, if you were a judicious saver and were buying Treasury bonds all along, then QE2 is good for you. The message behind it can be summed up as: Thanks for placing your savings with the U.S. government, now here’s a bonus if you will kindly stop. That is, savers make money from QE2 by selling their Treasury Bonds and either buying something nice for themselves or investing them in a more dynamic part of the economy.

This works because, as I mentioned before, a key feature of the crisis is not that people are afraid to lend money to the allegedly wild, out-of-control U.S. government, but that too many people are trying to lend money to the U.S. government.

Karl Smith is an assistant professor of economics and government at the University of North Carolina and a blogger at

By Karl Smith  | November 5, 2010; 1:31 PM ET
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I call outright BS. The individual saver will get raped by the banks, who will take the profits for themselves one way or the other. QE is not aimed at rewarding individual savers.

Posted by: Bullsmith1 | November 5, 2010 2:19 PM | Report abuse

"not that people are afraid to lend money to the allegedly wild, out-of-control U.S. government, but that too many people are trying to lend money to the U.S. government."

Should be too many people are trying to lend money to the wild, out-of-control US Govt. And it's not true, people are buying up the bonds so that the fed will buy the bonds from them, not because they think we're a good loan risk.

With the service on the debt set to equal the defense budget by 2017, something has got to give. I personally think it involves not spending millions of dollars per person on "health care" that keeps us breathing in hospital beds for a year before we die, but I think that makes me a commissioner on a death panel, so I don't mention it to any of my older friends.

Posted by: staticvars | November 5, 2010 3:02 PM | Report abuse

Karl, pondering this one myself, as I have shorted Treasuries in the past with varying degrees of success. My inclination is a little against the grain that yields will soon rise.

Correct me if you think this will not happen.

I don't see foreign buyers continuing to embrace T's when the Fed is so blatantly trashing the dollar. Given that possibility, won't the Fed have to buy even MORE to make up for the shortfall, or raise the yield?

I'm also buying dollars short term on the dips because I just don't see other currencies and economies watching this ship sail without taking any action.

Justin would love to have you weigh in also.

Posted by: 54465446 | November 5, 2010 3:26 PM | Report abuse

Here is a chance for Obama to be populist and say we should have this fed money going to people not banks so lets have a payroll tax holiday of $600B.
How can the GOP say no?

Posted by: gregspolitics | November 6, 2010 12:49 PM | Report abuse

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