Saturday, August 2, 2014

Andrew Huszar Interview - Discusses QE Program at the FED

Andrew Huszar is a former Managing Director at Morgan Stanley. For awhile he ran the first QE program for the US FED. Here is his full resume which is quite impressive. Mr. Huszar became somewhat famous for apologizing for the QE program and questioning whether it was worth the costs. This past week he did a couple of new interviews with the alternative media site King World News. In them he reveals some interesting new information about what things were like at the FED during the financial crisis.

First we will select some quotes from each interview and then add some concluding comments after looking at both the interviews.  Here is the link to the interview where he talks about what happened at the FED and a few quotes from that interview:

Eric King:  “Andrew, people forget but you were on Wall Street at the time of the 2008/2009 collapse.  And you were literally called upon by your bank to go in and access those emergency funds (from the Fed).  How hairy was that, those emergency meetings?”

Huszar:  “I actually left the Fed in early 2008, after 7 years there, and I was on Wall Street for about a year and a half before I went back (to the Fed) to help with QE.  And those were hairy days.  That’s the perfect adjective you were using in that we were desperately trying to figure out what stuff, and I could use other words than ‘stuff,’ we could pledge into the discount window at the Fed to get emergency funds to keep the lights on in the morning.”

Eric King:  “The reality was that you didn’t want to become another Lehman Brothers, another Bear Stearns.  It was that dire, right?”

Huszar:  “Yes.  Every bank, I don’t care what people say, every U.S. bank in the week after Lehman would have gone bankrupt.  Any major U.S. bank was done....

... we had a week where every day we were on the phone with the Fed.  Again, the Fed had very few people working the discount window -- it had really stretched its staff.  And so the first problem was really getting someone on the phone.  It took about an hour, and I was calling everyone I knew within the Fed to try to access the right staff, just because everyone was so swamped inside.

And then it was about, what could get into the (Fed) window?  What could we actually send into the Fed to try to get cash back?  And, in terms of the discount window, it had been decades that those standards had not changed.  (Now) they were changing by the minute in the midst of the crisis.

Eric King:  “But, Andrew, if you couldn’t do that, you ceased to exist at that point.” 

Huszar:  “Exactly.  We had no cash.  We were done.  It was at the height of desperation.  And it wasn’t just us, it was everybody.” 

Now here is the link to the other interview with some more quotes:

Eric King:  “Andrew, you are a former Federal Reserve executive and you were called upon to execute QE1.  You also set up the Fed’s massive trading room.  When you see the Fed cut another $10 billion of QE and you look at where we’ve been and where we are headed, what are your thoughts?”

Huszar:  “When I look back to 2008, I never thought we would be where we are today.  I thought QE was an emergency program to stabilize markets.  But I never thought we would see more than $5 trillion of bond purchases at this point, or a Fed balance sheet that’s at $4.4 trillion, compared to $800 billion pre-financial crisis.  So this is really uncharted territory that I find quite shocking....

So the Fed really is in uncharted territory in terms of how it deals with its balance sheet when it actually decides to stop buying.  I think those are massively important questions and have huge implications for the Fed and how it actually tries to step away from the market, if it tries to step away from supporting the market.”

Eric King:  “The question on everyone’s mind is: How will the markets trade when the Fed eliminates QE?  How will things unfold?”

Huszar:  “First, I think people are always overestimating how quickly the Fed is going to end easy money. Remember that in 2008 people were talking about the Fed raising rates in six months.  They are overestimating the influence that hawks like Fisher and Plosser have on the Fed.  This a highly dovish Fed.

So I think it could actually take some time for the Fed to meaningfully step away.  But when the Fed finally steps away, I think we are in for a rocky ride.  I remember before 2008 when we were talking about how we would solve the issue of volatility -- that’s the moment when volatility spikes.

So when the Fed actually pulls away the punchbowl, I think you are going to see massive volatility.  I don’t see the 10-Year going to 5, 6, or 7 percent immediately.  But what I do see is massive volatility and a loss of positive psychology.  This confidence that everyone talks about coming out of this easy money, this artificial stimulus, it can just as easily disappear as quickly as it built up.  If the Fed really pulls away, it will be an impossible situation in terms of preserving positive expectations.”
my added comments: 

When people like Andrew Huszar express how close we came to disaster in 2008 and how he does not think things have been solved since then, we need to pay attention. Note that he mentions how close we came to a banking shut down and yet the public was never told anything about it.

It's one thing when system outsiders question the stability of the system. But when system insiders raise questions (like the BIS did this past month) it is beyond foolish to just ignore them. 

We noted in our July summary post that so far they system seems to be holding up OK. Despite a wave of big events in July that could have been triggers for systemic problems, none have surfaced so far. We noted that it seems like a near miraculous balancing act has been done to maintain stability and prevent any kind of panic or severe market reactions. That is all good.

But these Andrew Huszar interviews remind us that we simply cannot close our eyes and pretend everything is solved and there are no potential problems left out there. We certainly hope that stability does prevail and that there will be time to implement solutions to the problems that still exist on a steady planned basis. We know there are good people working on it even now.

But it would be foolish to assume nothing can yet go wrong when so many like Andrew Huszar are telling us otherwise. It seems like a reasonable plan for most people is to prepare as if some type of systemic crisis will eventually happen and then hope it doesn't. Kind of like having an emergency set of supplies on hand in case you had an earthquake or some other natural disaster happen where you live. 

You hope you never use your emergency supplies, but you sleep better knowing you have them. Then you just live your life normally and hope for the best knowing you made reasonable preparation for unexpected problems. 

We live in historic times and what happens in the next few years is going to be beyond interesting. In our next article we will set up an ongoing matchup to watch - Jim Rickards vs. the FED. Someone has to be wrong eventually. Readers here will see what to watch for as it unfolds. Get your popcorn.

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