The Biggest Difference Between QE3 And QE2

Back in 2011, in an exclusive analysis, Zero Hedge showed how virtually all the reserves created as a result of QE2 ended up as cash on the balance sheets of foreign (mostly European) banks operating in the US. Some suggested that this was due to a change in FDIC rules which was being arbed by foreign banks which were able to engage in a mini carry trade affecting the Fed’s excess reserves. We disagreed, and suggested that this was nothing short of yet another way in which foreign banks abused the Fed’s “Bernanke Put” to bail themselves out at a time when the Eurozone and its currency seemed like they would implode any second.

QE2 came and went, and was replaced by QE3. And, having lasted nearly a year now, it has allowed us to observe the main way in which the Fed’s open-ended QE3 has so far differed from the QE2 of 2011.

Recall that while the Fed’s Quantiative Easing programs are largely determined by what securities the Fed monetizes: i.e. the sources of funds, what is always left unspoken is where the Fed’s created reserves end up, or the “uses” of funds, or rather, reserves. Luckily, as the chart below shows and as tracked by the Fed’s H.8 statement, there is a perfect correlation, and causation, between the Fed’s newly created reserves parked at banks, and the corresponding change in cash held on the books of either domestic (large and small) and foreign commercial banks operating in the US.

What may not be quite visible in the chart above is that during QE 2, virtually all the newly created cash ended up at foreign banks. This is shown far more clearly in the chart below showing the change in cash balances at large domestic commercial banks and foreign banks between the start and end of QE 2.

So while the Fed was explicitly pumping the deposit base of foreign banks in 2011 – and thanks to JPM and the entire deposit collateral pathway we now know that this cash was used to satisfy collateral requirements needed when purchasing risk assets, even if the banks never explicitly used the Fed’s cash to buy up risk – what has it been doing so far in 2013? The answer is shown below.

Surprisingly – if only to all those who claimed our assertion that the Fed was bailing out Europe’s banks was bunk due to “regulatory arbitrage” – entirely unlike during QE 2, this time around, virtually every dollar newly created by the Fed has landed on an equal basis at both large domestic commercial banks, and foreign banks operating in the US. But… but… whatever happened to the regulatory arbitrage of QE2?

To those still confused, here is the best visualization of the cash change in domestic vs foreign banks under the two QE regimes:

Indeed – a pretty clear summary of what the Fed’s deisgnated bailout audiences was under QE 2 (European banks) and QE 3 (everyone on an equal, pro rata basis).

The above, far more importantly than what the Fed is monetizing in order to build up its reserves, gives us a clear snapshot of the other part of the equation – where the Fed’s reserves end up.

All of this should perhaps once again spark the debate over just why has the Fed parked a record $1.3 trillion in cash not with US-based banks, but foreign ones, and just for whose benefit – since by now it is quite clear that QE is solely for the benefit of the 0.1% of the population and, of course, the banks – was QE designed.

Because it is one thing to bail out the rich, at least they are America’s rich. But when more than half of the proceeds of QE to date…