Fed’s QE2, a dangerous and unnecessary step: futures pioneer

Leo Melamed, the founder of financial futures, has labeled the U.S. Federal Reserves’ second round of quantitative easing not only dangerous but unnecessary.

The Federal Reserve announced Wednesday it would buy another 600 billion dollars worth of U.S. Treasury securities to revive the sputtering U.S. economy.

“The U.S. Federal Reserve is taking a very dangerous and unnecessary step by undertaking a second round of quantitative easing policy,” Melamed told Xinhua reporter in an exclusive interview here Friday.

“We have certain opinions as market participants. I think the Fed is taking a very dangerous step, because it’s not clear that the QE2 is necessary, and it’s also not clear whether it can achieve the purpose Fed intends,” said Melamed, currently chairman emeritus of CME Group and CEO of global consulting enterprise Melamed & Associates, Inc.

“We already had a good deal of quantitative easing in the U.S, and so far it hasn’t done any restructuring of the market. In terms of strength of the economy, our economy has not rebounded, so why would it be necessary to do it again, when the first round isn’t helping. We should give it more time before we do anything else,” he said.

Melamed warned it was a very dangerous move the Fed was undertaking. The danger was that it might not work to rejuvenate the economy but would create a falling dollar, which was not helpful for the economy and eventually would create an inflationary environment in the United States.

As for the rest of the world, Melamed indicated it would create a dynamic where every nation tried to lower the value of its currency so it could compete with the U.S. dollar. “If every nation competes to depreciate their currency, it’s not a good thing,” Melamed said.

“A currency war is not the right word to describe the current situation. War is an intentional act, I don’t think the U.S. is intending to create a war climate, I think it’s just a logical result, not an intentional war,” he said.

Melamed admitted that the QE2 was very bullish on commodities, creating a surge in the price of commodities due to the influx of money. “But the danger is that there are no underlying reasons for the rise of the prices, it doesn’t really change the supply and demand equations, the prices could suddenly break, and it will create a very dangerous climate,” Melamed said.

As an independent voter, Melamed was generally very pleased with the mid-term election results and has confidence that newly elected officials will change the direction of the economy and solve the high-unemployment through tax and spending cuts.

“If we reduce spending and taxation, that will encourage the business community to invest more and create more jobs, and that’s the best way to reduce the unemployment rate,” said Melamed, “I don’t believe the Federal government should be printing money, they should be creating an environment for jobs by inviting investment and cutting taxes.”

Source: Xinhua

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US Poll results as crystal ball

Behind the headlines
By Bunn Nagara

US MID-TERM elections were never made for presidential incumbents. After two years into a presidential term, opponents become agitated as supporters grow complacent.

And so it was that last Tuesday President Barack Obama’s Democrat Party lost seats in Congress to the Republican Party, while maintaining a wafer-thin majority in the Senate. There was little change in the gubernatorial elections of 37 states and two territories.

A loss of seats in Congress for a sitting president’s party is not unusual. Of the previous 20 mid-term elections, there were 17 such losses.

However, the size of the loss this time is significant. The swing of some 64 seats is the biggest since the Roosevelt presidency’s 72-seat swing in 1938.

An inopportune combination of setbacks explains the Democrats’ present predicament: a weak economy, high unemployment and ambitious federal government programmes requiring vast public expenditure. Together with tweaks to Bush-era tax breaks for the rich, it was enough to bring right-wing Republicans onto the streets to condemn Obama’s “socialism”.

Groups like the reactionary Tea Party movement were motivated ideologically, yet decry the administration for its ideological motives. That revealed themselves collectively as something of a riddle wrapped within a mystery inside an enigma, with little contribution to nation or society apart from the anticipated policy gridlock to come.

Much of the fallout from this particular mid-term is admittedly subjective. What then are the factual or substantive features?

One distinguishing notch is the cost of the exercise, which at almost US$4bil (RM12.38bil) in total is unprecedented. That naturally shifts the focus to its value for money, which is practically negligible.

Of course, mid-term results can be read as barometer data, usefully indicating the direction of political winds halfway through a presidency. But that purpose can be served by good opinion polling costing far less.

Now that the data indicates strong support for the conservative Opposition, there is talk that Obama may have to start diluting his policies. This could be the beginning of the end of his promised “change”.

His aides have said that he would “stay the course,” but they would say that anyway. With a Republican-controlled Congress to come from January, there may be little choice but to adulterate if not abandon his pledges – particularly those that could make a difference.

Still, little of Obama’s promised changes have materialised two years into his presidency. That means whatever reform that may yet come could be strangled at birth.

For months already, his critics had made themselves far more vocal and visible than his supporters, regardless of the merits of their arguments. They had staked the battleground where they would fight and win, banking on their savvy showmanship and extremist positions rather than any sense or reason in stating their case.

And they remain in the spotlight. Far from Obama’s supporters being sated with the success of their several campaigns for change, liberals and reformists continue to wait for the changes in relative silence.

The right-wing’s novelty value may not add up to much in terms of political maturity, coherence or even sanity, but with media attention it can acquire a multiplier effect in influencing popular perceptions of political incumbents. It would be a naive politician to dismiss their reach out of hand.

As the battle now stands, Obama, the consummate community organiser and campaigner via new media, is on the defensive, trumped by people who insist on repeating slogans often enough and loudly. These people have tasted victory, and are hungry for more.

Their two years of vilifying Obama over little or nothing seem to have paid off. So what is there not to repeat?

There is a strong current in US politics that elevates the frivolous and the bizarre to undeserved heights of significance. Thus the constant targeting of Obama personally, from being dressed in a turban by his host on a visit to Kenya in 2006 as senator to bowing to King Abdullah of Saudi Arabia and then to Emperor Akihito in Tokyo as president last year.

If Obama had been trying to show that he respected foreign cultures, it would be a significant departure from some of his predecessors. But supporters of the latter would naturally condemn him for that.

In policy terms, Obama’s working-class opponents would reject his federal programmes such as in health care even when these benefit them. This continues the kind of uncomprehending class-unconsciousness that denies its own self-interests, as seen during the presidency of George W. Bush in a right-wing Republican Party favouring the rich.

On a visit to Kuala Lumpur earlier in the week, Secretary of State Hillary Clinton said an incumbent party losing control of the House at mid-term is a self-correcting mechanism in US politics to keep things at the centre. If so, that does not bode well for Obama’s promised change.

After the costliest mid-term elections yet, the US president is now on the longest foreign excursion (10 days), including the longest stop in any country (three days in India). That should give his opponents back home more ammunition to use against him personally.

But anyone who thinks Obama is temporarily seeking an escape from the Congressional turmoil at home would be wrong. More than even his supporters in the US, his foreign hosts are extending their welcome based on the “hope” for “change” that he represents and had promised to deliver.

As some had forecast when Obama won the presidency in 2008, he would spend the first term settling down and focusing on re-election – only to find that in the second term, if he wins it, he would not have enough time to push enough meaningful changes through.