In the truth is stranger than fiction category, Fed chairman Ben Bernanke tells US Senators that Quantitative Easing will create 700,000 to 1 Million Jobs.

Please consider Bernanke Defends Fed Stimulus in Closed-Door Talk With Senators

Federal Reserve Chairman Ben S. Bernanke met with U.S. senators today to defend his expansion of record monetary stimulus, saying it would aid job growth and the central bank would control any inflation.

Alabama Senator Richard Shelby, the senior Republican on the Banking Committee, said Bernanke cited an estimate that the program may help create 700,000 to 1 million jobs. Bernanke met with about 11 committee members amid a Republican backlash against the Nov. 3 decision by U.S. central bankers to buy an additional $600 billion of Treasury debt.

Bernanke reiterated his view that the central bank needs help from Congress in aiding the economy. “He went out of his way to say that he absolutely hopes Congress will take the lead in setting economic policy,” [Indiana Senator Evan] Bayh said.

Curiouser and Curiouser

Inquiring minds are asking, if that’s all it took, why didn’t he do so in 2008 when the unemployment rate started soaring? Why not double it and create 1.4 to 2 million jobs?

That last paragraph in the Bloomberg snip above has me wondering if Bernanke went down the rabbit hole. Allegedly Bernanke wants help from Congress to set Economic Policy?! Really? What about that big battle Bernanke had with Congress over that very same issue?

Failure of QE Round One

Round one of QE was supposed to stimulate housing. Did it?

Lee Adler at the The Wall Street Examiner has a nice report on housing this month that touches on this very issue. Here are a few snips from a 19 page (subscription) PDF.

Housing Report – Wednesday, November 17, 2010

Purchase mortgage applications dropped to near record lows last week as government programs to suppress mortgage rates first failed to stimulate demand, and now seem to be failing to suppress rates. Zillow sales volume data now confirms that this September was by far the worst September since the housing collapse began. Since then, purchase mortgage applications have remained near record lows.

That means that housing sales data to be reported over the next two months will continue to be terrible. Data from as of mid November shows that price declines are actually accelerating. Meanwhile shadow inventory will continue to feed into the supply with the inventory to sales ratio already near record levels. Supply demand imbalances will grow increasingly unfavorable.

Mortgage Applications

Mortgage purchase applications fell in the week ended November 12 leaving them barely above the absolute lows, recently unresponsive to the record plunge in mortgage rates. Now an uptick in mortgage rates threatens to shut down what’s left of a barely functioning market. The Fed’s strategy to drive down long term rates to stimulate the housing market has failed miserably and now it looks as though an even larger program of QE2 may turn out to be an even bigger bust.

click on chart for sharper image

Applications are now down 12% versus this date last year which itself was in the vacuum that followed the ending of the first homebuyer’s tax credit. They are down 38.5% since the end of the second homebuyers’ tax credit, and down 28.8% since April 2009 when mortgage rates made their last previous low. Applications are down 66% since the May 2005 peak. Rates are currently approximately 16 basis points lower than they were in April 2009 and yet sales are far weaker.

Even worse, the market has now been dead in the water at these levels for 5 months, including what are usually the strongest months of the year. Where do we go from here? Falling rates have not stimulated sales. Nor have falling prices enticed buyers into the market. The level of applications remains at the lowest levels of the past 13 years.

Anyone who refinanced at cheap rates has more money to spend each month, but that is the only conceivable point of success for QE I. The cost side of the equation is increased taxpayer exposure to Fannie, Freddie, and the FHA.

QE II like Using Shotgun to Kill Mosquitoes

The first and foremost problem in arbitrarily cranking up the printing presses is the Fed has no control of where the the money goes, or indeed if it goes anywhere at all.

QE I at least had a definitive target, mortgages (not that it helped much, as noted above). QE II is more like trying to kill mosquitoes with a shotgun. Not many (if indeed any) pellets will hit the intended target.

Cheap Money Creates Jobs in Mexico, Peru, China

Bloomberg reports Bernanke’s ‘Cheap Money’ Spurs Corporate Investment Outside U.S.

Southern Copper Corp., a Phoenix- based mining company that boasts some of the industry’s largest copper reserves, plans to invest $800 million this year in projects such as a new smelter and a more efficient natural-gas furnace.

Such spending sounds like just what the Federal Reserve had in mind in 2008 when it cut interest rates to near zero and started buying $1.7 trillion in securities to spur job growth. Yet Southern Copper, which raised $1.5 billion in an April debt offering, will use that money at its mines in Mexico and Peru, not the U.S., said Juan Rebolledo, spokesman for parent Grupo Mexico SAB de CV of Mexico City.

“You’re seeing leakage from quantitative easing,” said Stephen Wood, chief market strategist for Russell Investments in New York, which has $140 billion under management. “That leakage is going into emerging markets, commodity-based economies, commodities themselves and non-U.S. opportunities.”

“I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an Oct. 19 speech.

Wal-Mart Stores Inc., the world’s largest retailer, raised $5 billion last month and said it would use the money to pay off existing short-term debt and for general corporate purposes. A spokesman for the Bentonville, Arkansas-based company didn’t respond to an e-mailed question about planned investment locations.

Tim Hoyle, vice president for research at Haverford Investments in Radnor, Pa., which manages $6 billion, said Wal- Mart is among several corporations he follows that are refinancing existing debt and reinvesting the proceeds.

“In Wal-Mart’s case, all of the reinvestment is happening in overseas markets,” he said.

That phenomenon illustrates the challenge confronting Bernanke. “All the Fed can do is create liquidity,” Hoyle said. “What Fisher is saying is correct: The Fed has no control over how that liquidity is used.”

There are many more examples in the article. Yet somehow we are supposed to believe this shotgun blast will create 700,000 to 1 Million Jobs.

Bernanke is out of his mind if he believes that. So is Bernanke out of his mind or is he purposely lying to Congress to shut them up?

Mike “Mish” Shedlock
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