Last Thursday, Mr. Bernanke and the Fed announced the beginning of QE3. (The third try at stimulating the economy through quantitative easing). The key word is “easing” which in Fed speak means to put more money into the economy in hopes that banks will loan it out to businesses, so that they can expand, and loan it out in the form of auto loans and home mortgages, which they hope will create more jobs in these sectors. The Fed hopes to do this by purchasing $40 billion in mortgage securities each month.
So, the big question is, will QE3 work? If QE1 and QE2 had worked, we wouldn’t need this QE3. What went wrong with the first two rounds of quantitative easing? The banks didn’t loan it out! They took the money and because it was mostly free money to them (meaning they paid little or no interest to the Fed for the money), they were able to invest it in U.S. Treasury securities, make money on it and strengthen their own balance sheets.
I’ve known people who have wanted to borrow money for a couple of years now to use to expand their businesses, and they can’t get the loan. Same with people wanting to buy houses. Banks have tightened their lending standards so much that only the very top credit worthy people can qualify. Generally those people don’t need to borrow money. So, will the Banks loan this time around?
Another interesting thing about this is that about 10 years ago as the U.S. was coming out of a small recession and recovering from the attacks on 9/11, the Fed was determined to keep interest rates low to stimulate the economy. It worked, in particular because the housing industry took off. Mortgage lenders had tons of money to loan. The federal government was pushing the idea that everyone should own their own home. Lenders kept dropping their standards to qualify more people for loans; home prices skyrocketed; people borrowed equity from the increase in home prices and all was well until one of the major cards in this house of cards (Lehman Brothers) had so much of their money invested in virtually worthless mortgages that they went out of business. We know how all that ended and it wasn’t very well.
Because our politicians aren’t able to work together and work out real reforms that will get the economy moving, the Fed has had to assume the roll of economic stimulator, and their efforts have proven useless over the last four years. I don’t see QE3 turning out for the good either.
Mike Berry is a Registered Representative offering securities through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Legacy Wealth Management, LLC and Cambridge are not affiliated. Cambridge does not offer tax advice.
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