October 11th 2010 – And isn’t it ironic…don’t you think?

Today the Queen launched the new “Queen Elizabeth”, the replacement for the 40 year old QE 2 cruise liner that now resides permanently in Dubai. In the US their QE 1 set sail in 2008, but after only two years has already been found wanting for the job in hand and QE 2 is being prepared for sea trials.

The new “Queen Elizabeth” cost £365 million to build. America’s QE 2 is estimated to come in at $2 trillion, but, with over runs, could be considerably more. For that sort of money you would expect the Fed’s latest vessel to be “unsinkable” but that would be an assumption of heroic, indeed Titanic*, proportions…QE 1 cost $1 trillion give or take the odd billion and the Fed’s POMO (Permanent Open Market Operations) is adding to that on a weekly basis. The cunning plan was that the banks would be able to rebuild their balance sheets and start lending again to individuals/private enterprises that would be keen to increase their spending/output using “cheap” money. Only it didn’t work out that way.

Instead of borrowing more, debt levels have been reduced and a lot of the cheap cash has ended up in the stock market with the Dow now over 11,000 as a consequence. One of the reasons for launching QE 1 was the disaster that was the sub-prime mortgage bond market and the need to bail out the banks. QE 2 could be on the slipway for rather similar reasons. The modus operandi in sub-prime was to package up mortgages form one lender and sell them on, releasing capital, to do it all over again. They were then re-packaged to produce bonds with different “flavours” and this didn’t happen just once. The problem now is that the paper trail of mortgage documents has started to disappear like a track across windblown sand.

Without the mortgage deeds the banks can’t pass good title to mortgagees who have paid off their debt and more importantly, for the banks that is, they can’t foreclose on properties where mortgage payments are in arrears or have stopped completely. This hasn’t prevented some of them trying and the allegedly fraudulent practises used has resulted in the judiciary bringing a complete halt to the foreclosure process in over a dozen states; a number growing daily. “Another fine mess” that Stan Laurel would have been proud of…

The proponents say that QE 1 wasn’t big enough and European style austerity will just bring the economy to its knees. A further trillion or two may well spur the markets to greater heights or will it be a case of buy the rumour and sell on the news?

*The building of the Titanic was funded by J.P. Morgan. Who said the Americans don’t do irony?