Is QE3 Just Around the Corner?

Secret loans from the Fed to Wall Street totaled $1.2 trillion at the height of the 2008 panic.

That’s the conclusion of Bloomberg after analyzing 29,346 pages of documents released by the Fed only because Bloomberg went all the way to the US Supreme Court to obtain them.

The top 10 recipients alone account for 56% of the total. The $669 billion these 10 borrowed is, um, rather larger than the “official bailout figure” of $160 billion represented by the TARP program.

Top 10 Recipients of TARP Loans

“These are all whopping numbers,” according to former Justice Department official Robert Litan, who served on a commission that looked into the savings-and-loan scandal of the 1990s.

“You’re talking about the aristocracy of American finance going down the tubes without the federal money.” To say nothing of the European banks that make up nearly half of the top 30 borrowers.

Under new Fed rules, the banks are to keep a minimum amount of operating funds on hand every day to prevent this from happening again. But the rule doesn’t come into effect until 2015.

In other words, the banks will sober up after one last drink.

Elsewhere, we see the Obama administration is leaning on New York Attorney General Eric Schneiderman. He’s being told to lay off his opposition to a settlement between the feds and the banks over a host of mortgage scandals.

“In recent weeks,” according to New York Times reporter Gretchen Morgenson, “Shaun Donovan, the secretary of Housing and Urban Development, and high-level Justice Department officials have been waging an intensifying campaign to try to persuade the attorney general to support the settlement, said the people briefed on the talks.”

It appears Mr. Schneiderman holds the heretical belief that there should be some sort of accountability when banks forge paperwork to speed along a foreclosure…or when they lie about the quality of the mortgages they bundle into securities and sell to unsuspecting investors.

In the smoking ruin of the savings-and-loan crisis 20 years ago, the feds secured more than 1,000 felony convictions of senior banking executives. This time, in the aftermath of a crisis far more severe? Bupkis.

Another unresolved issue: Whether the “double dip” recession is under way in earnest.

We believe the recession never really ended… but we’re also tuned into “official” indicators to which the market pays heed. One of the most reliable is out this morning: It’s flashing yellow, but not red.

The Chicago Fed National Activity Index crunches 85 indicators. Whenever its three-month moving average reaches -0.7, it’s as surefire a recession indicator as any. It came dangerously close to that level last month at -0.6.

But this month, it’s recovered a bit to -0.29.

The Chicago Fed National Activity Index Remains Above Recession Levels

No doubt Ben Bernanke will pore over this report as he prepares his big speech in Jackson Hole, Wyo., on Friday. Last year’s speech was when he dropped some not-so-subtle hints about QE2.

“It’s clear that Bernanke wants a ‘QE3’ program,” says Strategic Short Report’sDan Amoss, “yet probably feels the need to wait until deflation fears reach a crescendo.”

At least one “insider” believes QE3 is a sure thing, sooner or later. “Count on it,” said Dartmouth professor David Blanchflower to newsletter editor Fred Hickey back in June. Blanchflower is tight with many Fed members, including Bernanke and New York Fed chief William Dudley. Asked about the Fed trying to pump up the economy by buying more assets with newly created money, “The only answer is more,” he said.

But judging by the Chicago Fed numbers today, those deflation fears just aren’t there yet. Another highly reliable recession indicator comes from the Philadelphia Fed tomorrow. Maybe that’ll give Bernanke what he wants. We’ll check it out for you.

Addison Wiggin
for The Daily Reckoning

The Daily Reckoning