however, if inflation takes hold presumably asset prices will have recovered and probably the economy will have recovered as well as people will be encouraged to chase yield. this means that the banks will be facing credit losses that are lower in future real terms. the high estimates that i have seen (estimates of the “banks need $1 trillion in new capital over the next three years”) all assume credit losses on the level of the great depression. these estimates have, i am sure, an assumption of deflation baked into them.

the push to refinance mortgages should also reduce losses due to default.

as a side note, also note that the fed stress tests only go out to the end of 2010 and most of the “$1 trillion” style estimates go out until mid 2012 or so.

So there are two effects of QE on t-bill rates: direct effect (increasing demand, bidding up t-bill prices, and lowering t-bill rates), and indirect effect (by altering inflation expectations). The second appears to be dominating.

Also, note that the non-t-bill long term rates (the stuff the Fed is not directly buying or supporting through its various programs) are also impacted by both effects.

If QE were to decrease the yield on govt. bonds, this would presumably push some money out of govt. bonds into other long term bonds, thus dropping rates. (a substitution effect) But again, the inflation expectation effect appears to be slowly dominating.

(Also, there is a huge demand for refinancing into long term mortgages right now – I suspect that the govt. is deliberately holding rates low for a period of time to shift people into long term mortgages from ARMs and flex-rate mortgages. Obama has directly signalled as much:
http://article.wn.com/view/2009/04/10/Obama_says_timing_right_for_millions_to_refinance_e/ )

I wonder about that.

Hearing the concerns of men like Simon Johnson, Bill Black, Nouriel Roubini, etc., I became actively involved in some of the bailout protests – actually, quite a few of them, both on the left and the right, which was a novel experience for me, given that my type doesn’t normally march in the street. I did this at no small cost to myself – I work in the F.I.R.E. sector.

I’m disappointed that Simon Johnson, while basking in the media’s limelight, has failed to really embrace/support any of the grassroots movements that are involved in questioning the bailout. Look, having worked with several of them, I can understand his trepidation, but there’s a larger failure going on here:

None of the policy experts/economists/lawyers who have been so critical of TARP/PPIP/stress tests seem at all interested in working together to implement their “Plan B.” You know, a UNIFIED set of initiatives, given power and momentum by a UNIFIED group of dissenting economists. Which we the people (unshiny as we may be) can help them to implement, by rallying bipartisan public support for “Plan B.”

Do they know something we don’t? (Well, the average flea on a tick on a dog knows more than I do, but that’s another matter.) What I mean is, if this is such a crisis, why aren’t they providing necessary leadership?

Those of us on the ground can provide an enormous amount of muscle – we can organize, we can educate along the Simon Johnson points, we can raise money, we can mobilize voters, etc. – but without actual leadership from the experts, we’re fighting a losing battle. A losing battle that men like Simon Johnson told us we couldn’t afford to lose. So why the lack of leadership from the dissenting economists?

Dr. Johnson, may I introduce you to Brooksley Born? I think it could be the beginning of a wonderful leadership duo.

If the FDIC bank seizure plan involves seizing the firm in complete secrecy on Friday night, and if secrecy is of sufficient value that it fired on WaMu a day early to cope with rumors, you would have hoped that the group appreciated the importance of not talking to the affected banks.

Unfortunately, this is what happens when you have the political team driving the technical team. Rahm wants message testing (as though this were a direct mail campaign) and that means persistent leaks and trial balloons.