Federal Reserve announces new round of stimulus to boost weak economy. (1 Viewer)

[greenroom]

Gold and silver popped yesterday from the news. It will be interesting to see just how far oil will run with a weakened dollar.

Oil and with it gas prices will rise steadily along with all commodities... The moron-in-chief and his boy Ben made sure of that...

Well, since Oil and gas prices tend to rise as the economy improves, that's not exactly a bold prediction BoneYardJim11.

You sir are absolutely clueless...

From the king of clueless!!!

 

[nashua55]

Federal Reserve Finally Working Expectations Channel With Open-Ended QE

By Matthew Yglesias | Posted Thursday, Sept. 13, 2012, at 12:39 PM ET

QE 3 is here, and it's pretty big. They've announced a form of "open-ended" quantitative easing in which the central bank commits to "purchasing additional agency mortgage-backed securities at a pace of $40 billion per month."

But there's something much much much more important here than the numbers. It's the guidance. It's not the Evans Plan and it's not Nominal GDP Level Targeting but it's good and it's right here (emphasis added):

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

This isn't my dream of super-clear forward guidance, but it's a huge step in the direction of Krugman/Woodford style precommitment. The key thing is that they're no longer saying that accommodative monetary policy is conditional on the recovery being weak. Instead, interest rates will stay low for a while even after the economy recovers. In other words build that apartment building right now. I reserve the right to flip-flop, but my initial assessment is that this is a huge positive step.

Ben is finally waking up!!

Finally some concern for the employment rate from the Fed as opposed to their overhawkishness on the inflation side.

He's right, the last few years have had the lowest inflation since the Great Depression.

haha, lowest inflation rate in years. I guess if smart phones were the only thing in the inflation equation one could believe that, I am not sure what determines the inflation numbers, but the things that I need to survive have gone up greatly in the last few years. All anyone has to do is go to the supermarket and see how far your buck goes. Fuel and energy costs also have risen quite a bit in the last few years. Personally, i would rather have cheaper food and fuel prices over being able to buy a low priced smart phone and a cheap pair of shoes. Even though some consumer goods have decreased in price, the things that people really need live have not.

QE 3 is funny. I really dont think the fed ever stopped QE to begin with. QE to infinity will weaken the dollar. The one benifit of a weaker dollar, is, the goods produced in the the USA will be cheaper than the goods from countries with a stronger currency, thus increasing exports from the usa . hopefully that will spur business growth and increase manufacturing. Hopefully an increase in manufacturing will create jobs. The other benifit is for the people that own Gold and silver. Precious metals should continue upwards as the dollar weakens. I just hope oil stays under $5.00. With gas prices at $4.00, i am scared to think how high gas will be if the USA and European economies were booming. The rise in food and fuel costs that are likely to occur due to QE 3 is going to hurt the people that are barely making it the most. Its basically a pay cut they cant afford.

 

[Mr Two Cents]

"Fed Up: Bernanke Declares War On The Poor

This week, we saw both the European Central Bank and the Federal Reserve deliver massive amounts of stimulus to the markets.

The Fed has decided to go all-out in fueling the next massive asset bubbles through its QE3 bazooka. The Fed announced plans to buy $40 billion worth of mortgage securities per month on an open-ended basis, while continuing to reinvest its income from the securities purchased during QE1 and QE2.

This new move by the Fed is unleashing massive amounts of money into the risk assets. Markets will now believe that, between the ECB and the Fed, all tail risks to the markets have gone.

In other words, this could mean that all the money that was hiding in the safety of U.S. Treasuries will now leave the Treasury markets and flow into equities and commodities.

If so, I would not be surprised to see a parabolic move into year-end in both gold and equities that could take the S&P 500 to 1,650 and gold to $2,000 per troy ounce by year-end.

Now here is the dangerous side to this equation. This rally will also lead oil and grains to new highs, which will results in higher gas prices at the pump and food prices at the grocery store. While employment and wages are still low, this will hurt the working class.

This massive and irresponsible Fed stimulus package by Ben Bernanke & Co. will make the rich richer by fueling their asset portfolios and bringing loads of misery to the poor, who will find it harder to make ends meet."

 

[Mr Two Cents]

"QE3 Removes Price Ceiling for Gold and Silver

Peter Schiff, chief executive officer of Euro Pacific Capital, recently gave an interview discussing the prospects of gold. When asked how high the price of gold may reach, he responded that there is no ceiling for the precious metal, because there is no limit on how much money will be printed. The Federal Reserve’s latest announcement confirms this theory, and paves the way for much higher gold and silver prices.

On Thursday, the central bank proved it is willing to do whatever it takes to prop up asset prices in an effort to cause a wealth effect among consumers and spur a recovery. The Federal Open Market Committee launched yet another quantitative easing program. This time, the Federal Reserve will buy agency mortgage-backed securities at a pace of $40 billion per month, in addition to its current Operation Twist 2 program. The net effect of these actions will increase the Federal Reserve’s long-term holdings by about $85 billion each month through the end of the year. Furthermore, the central bank extended out its zero interest rate policy to at least mid-2015.

Interestingly, QE3 will be open-ended, meaning that the Federal Reserve has no set limit to how long the fresh money printing will last. It will also conduct additional asset purchases if the labor market does not improve. In a press conference following the statement, Fed Chairman Ben Bernanke explained, “We’re looking for ongoing, sustained improvement in the labor market. There’s not a specific number we have in mind. What we’ve seen in the last six months isn’t it.” The headline unemployment rate in the U.S. has remained above 8 percent for 43 consecutive months.

While the announcement of the first open-ended program in the Federal Reserve’s history was rough enough on the U.S. dollar, the central bank explained it will keep its finger on the print button until well after an economic recovery takes place. “To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,” according to the FOMC statement. Bernanke later added, “We’re not going to rush to begin to tighten policy.”

A Bernanke led Federal Reserve has been very kind to precious metals. Since the Chairman was appointed in early 2006, the price of gold has increased from $570 an ounce to more than $1,700 an ounce. In the same period, the price of silver has surged from $9.70 an ounce to over $34 an ounce. After QE3 was announced, both precious metals outperformed as expected. Gold quickly increased $38, while silver jumped more than $1. Meanwhile, the U.S. dollar index, which compares the greenback in a basket against six other fiat currencies, fell to 79.25 and reached its lowest level against the euro since May. On Friday, the dollar continued its decline."

 

[Mr Two Cents]

Ready or not here we go spiraling down the rabbit hole.

"The following are 10 shocking quotes about what QE3 is going to do to America....

#1 Ron Paul

"It means we are weakening the dollar. We are trying to liquidate our debt through inflation. The consequence of what the Fed is doing is a lot more than just CPI. It has to do with malinvestment and people doing the wrong things at the wrong time. Believe me, there is plenty of that. The one thing that Bernanke has not achieved and it frustrates him, I can tell—is he gets no economic growth. He doesn’t do anything with the unemployment numbers. I think the country should have panicked over what the Fed is saying that we have lost control and the only thing we have left is massively creating new money out of thin air, which has not worked before, and is not going to work this time.?

#2 Peter Schiff, CEO Of Euro Pacific Capital

"This is a disastrous monetary policy; it’s kamikaze monetary policy"

#3 Michael Pento, The Founder Of Pento Portfolio Strategies

"This is the nuclear option for them. This is a never-ending weapon that is being fired at the middle class"

#4 Donald Trump

"People like me will benefit from this."

#5 Economist Anthony Randazzo

"Quantitative easing—a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages—is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy. It is a primary driver of income inequality formed by crony capitalism. And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy."

#6 John Williams Of Shadowstats.com

"That’s absolutely nonsense. The Fed is just propping up the banks."

#7 Marc Faber

"I happen to believe that eventually we will have a systemic crisis and everything will collapse. But the question is really between here and then. Will everything collapse with Dow Jones 20,000 or 50,000 or 10 million? Mr. Bernanke is a money printer and, believe me, if Mr. Romney wins the election the next Fed chairman will also be a money printer. And so it will go on. The Europeans will print money. The Chinese will print money. Everybody will print money and the purchasing power of paper money will go down."

#8 Mesirow Financial Chief Economist Diane Swonk

"I think this will end up being a trillion-dollar commitment by the Fed"

#9 Federal Reserve Chairman Ben Bernanke

"I want to be clear — While I think we can make a meaningful and significant contribution to reducing this problem, we can’t solve it. We don’t have tools that are strong enough to solve the unemployment problem"

#10 Credit Rating Agency Egan-Jones

"The FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities). The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power. Hence, in our opinion QE3 will be detrimental to credit quality for the US…."

We have reached a major turning point in the financial history of the United States.

It would be hard to overstate how much damage that QE3 could potentially do to our financial system. If the rest of the world decides at some point that they no longer have confidence in our dollars and our debt then we are finished.

Sadly, the mainstream media does not seem to understand this, and most Americans gleefully believe whatever the mainstream media tells them."

 

[Paul Bremer]

New Banker Bailout Disguised As QE3

 

[Chadstroma]

Wow.... so, this might actually push mortgage rates down even further. (hard to believe) Awesome timing- hopefully I time buying my new house at the right time.

 

[Politician Spock]

Ready or not here we go spiraling down the rabbit hole."The following are 10 shocking quotes about what QE3 is going to do to America....#4 Donald Trump"People like me will benefit from this."

Exacltly! The first level of people to benefit from QE are people who own assets. It's then supposed to trickle down to the rest of the economy. But as it's supposedly trickling down to them, the cost of living increases. Eventually it's just a wash. But before it works, the rich get richer and the poor get poorer. And if it doesn't eventually work, the rich stay richer and the poor stay poorer.

 

[Andrew74]

I wonder if we'll get to find out which banks the Fed gives the money to this time. I'm guessing not.

Banks are not being loaned or "given" anything under this plan.

Ah, so they're just purchasing toxic assets again. Which institutions will the Fed be buying these securities from? Where's the money coming from to finance these transactions?

Agency MBS are not toxic assets. Whoever whats to sell them. Your imagination.

Aren't MBS comprised of the mortgages that debtors are underwater on? Why would the Fed need to step in and buy these if the market will purchase them on their own merit? Are you sure about that? You think the Fed is equally as likely to purchase assets from small banks versus the Citibanks and JP Morgans of the world? Again, where will the 40 billion dollars be coming from each month?

MBS are just securities backed by residential mortgages (in this case mortgages that confirmed to Fannie and Freddie standards). These aren't toxic. I would guess, worse case, the # of underwater mortgages are the same as general market (est 25%). They are buying these to try to drive mortgage rates down. Agency MBS is the second most liquid market in the US bond mkt after treasuries and are approximately 35% of the investment grade US bond market. Yeah, the Fed would buy them from small banks if it were efficient. Now the small banks just sell them to JPM. They create the $40bn each month by typing it into a computer.

 

[ren hoek]

I wonder if we'll get to find out which banks the Fed gives the money to this time. I'm guessing not.

Banks are not being loaned or "given" anything under this plan.

Ah, so they're just purchasing toxic assets again. Which institutions will the Fed be buying these securities from? Where's the money coming from to finance these transactions?

Agency MBS are not toxic assets. Whoever whats to sell them. Your imagination.

Aren't MBS comprised of the mortgages that debtors are underwater on? Why would the Fed need to step in and buy these if the market will purchase them on their own merit? Are you sure about that? You think the Fed is equally as likely to purchase assets from small banks versus the Citibanks and JP Morgans of the world? Again, where will the 40 billion dollars be coming from each month?

MBS are just securities backed by residential mortgages (in this case mortgages that confirmed to Fannie and Freddie standards). These aren't toxic. I would guess, worse case, the # of underwater mortgages are the same as general market (est 25%). They are buying these to try to drive mortgage rates down. Agency MBS is the second most liquid market in the US bond mkt after treasuries and are approximately 35% of the investment grade US bond market. Yeah, the Fed would buy them from small banks if it were efficient. Now the small banks just sell them to JPM. They create the $40bn each month by typing it into a computer.

Thanks.Sounds like a great plan.

 

[Chadstroma]

New Banker Bailout Disguised As QE3

Infowars

 

[Sand]

"Fed Up: Bernanke Declares War On The PoorThis week, we saw both the European Central Bank and the Federal Reserve deliver massive amounts of stimulus to the markets. The Fed has decided to go all-out in fueling the next massive asset bubbles through its QE3 bazooka. The Fed announced plans to buy $40 billion worth of mortgage securities per month on an open-ended basis, while continuing to reinvest its income from the securities purchased during QE1 and QE2.This new move by the Fed is unleashing massive amounts of money into the risk assets. Markets will now believe that, between the ECB and the Fed, all tail risks to the markets have gone.In other words, this could mean that all the money that was hiding in the safety of U.S. Treasuries will now leave the Treasury markets and flow into equities and commodities.If so, I would not be surprised to see a parabolic move into year-end in both gold and equities that could take the S&P 500 to 1,650 and gold to $2,000 per troy ounce by year-end.Now here is the dangerous side to this equation. This rally will also lead oil and grains to new highs, which will results in higher gas prices at the pump and food prices at the grocery store. While employment and wages are still low, this will hurt the working class.This massive and irresponsible Fed stimulus package by Ben Bernanke & Co. will make the rich richer by fueling their asset portfolios and bringing loads of misery to the poor, who will find it harder to make ends meet."

 

[Politician Spock]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices.

The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.

To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing.

And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up.

Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.

QE3 is the Ex-lax.

 

[Chadstroma]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

 

[Mr Two Cents]

It will cause another housing bubble except when it pops this time it will be even worst than the last one, many more people will be hurt and a lot worse. The dollar could collapse with it.

 

[Rohn Jambo]

For those who have not seen it, this video does a decent job of explaining the last credit crisis. Link

 

[Politician Spock]

It will cause another housing bubble except when it pops this time it will be even worst than the last one, many more people will be hurt and a lot worse. The dollar could collapse with it.

I agree it won't work. Just responding to the question about whether MBS are toxic. All it's really doing is buying time. If the market were acting naturally, home and commercial real estate prices would be a lot lower than they are right now. The only reason they aren't is because the banks have kept a lot of natural foreclosures and natural delinquencies from moving to the next stage. Not only is this necessary for the stability of the dollar given how much new debt the currency needs to stay stable and how much of that new debt needs to come from mortgages, but a price drop in real estate would significantly hurt bank balance sheets. Their assets are valued by what they believe the asset would get on the market. But they are manipulating the market to be higher than it would be naturally. So their asset values are unnatural.One of the benefits of this QE3 plan is to get a lot of those assets off the bank balance sheets. If home prices do drop (like they would naturally) then their balance sheets have room to handle it because they dumped those over valued assets on to the Fed's balance sheet. In fact, they might actually be doing it because they know home and commercial real estate prices have to drop and the banks would become insolvent when it happens.

 

[Fennis]

If Congress wasnt such a mess, QE3 wouldn'tbe necessary. The Fed isnt going to sit by while Congress continues to do nothing and take us to the fiscal cliff yet again.

 

[Rohn Jambo]

It will cause another housing bubble except when it pops this time it will be even worst than the last one, many more people will be hurt and a lot worse. The dollar could collapse with it.

I agree it won't work. Just responding to the question about whether MBS are toxic. All it's really doing is buying time. If the market were acting naturally, home and commercial real estate prices would be a lot lower than they are right now. The only reason they aren't is because the banks have kept a lot of natural foreclosures and natural delinquencies from moving to the next stage. Not only is this necessary for the stability of the dollar given how much new debt the currency needs to stay stable and how much of that new debt needs to come from mortgages, but a price drop in real estate would significantly hurt bank balance sheets. Their assets are valued by what they believe the asset would get on the market. But they are manipulating the market to be higher than it would be naturally. So their asset values are unnatural.One of the benefits of this QE3 plan is to get a lot of those assets off the bank balance sheets. If home prices do drop (like they would naturally) then their balance sheets have room to handle it because they dumped those over valued assets on to the Fed's balance sheet. In fact, they might actually be doing it because they know home and commercial real estate prices have to drop and the banks would become insolvent when it happens.

I have been wondering why inflation remained lower than expected through two QEs even when the monetary base has tripled. Is it because the banks kept the money to cover their bad investments or investors holding dollars in reserve and keeping it out of circulation?

 

[Politician Spock]

It will cause another housing bubble except when it pops this time it will be even worst than the last one, many more people will be hurt and a lot worse. The dollar could collapse with it.

I agree it won't work. Just responding to the question about whether MBS are toxic. All it's really doing is buying time. If the market were acting naturally, home and commercial real estate prices would be a lot lower than they are right now. The only reason they aren't is because the banks have kept a lot of natural foreclosures and natural delinquencies from moving to the next stage. Not only is this necessary for the stability of the dollar given how much new debt the currency needs to stay stable and how much of that new debt needs to come from mortgages, but a price drop in real estate would significantly hurt bank balance sheets. Their assets are valued by what they believe the asset would get on the market. But they are manipulating the market to be higher than it would be naturally. So their asset values are unnatural.One of the benefits of this QE3 plan is to get a lot of those assets off the bank balance sheets. If home prices do drop (like they would naturally) then their balance sheets have room to handle it because they dumped those over valued assets on to the Fed's balance sheet. In fact, they might actually be doing it because they know home and commercial real estate prices have to drop and the banks would become insolvent when it happens.

I have been wondering why inflation remained lower than expected through two QEs even when the monetary base has tripled. Is it because the banks kept the money to cover their bad investments or investors holding dollars in reserve and keeping it out of circulation?

There's a couple of reasons. First, inflation can be calculated many different ways. The government choses the method that produces the lowest number. There are other methods that show inflation to be quite higher.Second, the US Dollar is the world's reserve currency. So when base money is increased, it doesn't just affect us. It affects every country that uses US Dollars for international trade. And this is really the most dangerous risk of inflating the monetary base of the US Dollar, for a couple of reasons. First is that inflation is far more painful for people in other countries than it is for us. Say for example, you as an American spend 20% of your income on food. If food prices rise 5%, it will take an additional 1% of your income to cover that increase, assuming your income didn't increase too. But a lot of other people around the world live in countries that use the US Dollar for international trade, and they spend 80% or more of their income on food. If food prices rise 5% because of US Dollar monetary policy, they feel it too because their internation trade is done in US Dollars, so it takes an additional 4% of their income to cover that increase, assuming their income didn't increase too. This creates a lot of upset people around the world, because they're struggling to feed themselves and their family, and they are ready to riot over the smallest of issues now because they're so sick of it. They could even be compelled to riot over nothing more than a stupid YouTube video. So it really doesn't matter what you feel in inflation, or even what the government claims inflation to be. What matters is what the rest of the world experiences.Second is that governments of countries around the world like China, Japan, Russia, Brazil, and India get tired of the US making the rest of the world pay for its bad fiscal and monetary policy. It makes them want to convince the world to rid the world reserve currency status from the US Dollar, which they are actively doing very heavily right now. If that ever comes to fruition, then there are trillions of dollars being held by countries around the world that would come flooding back into the states, and there will be no question any where that prices are inflating.The stability of the US Dollar is held in the hands of other countries. What we as US citizens think of it is actually pretty meaningless in the grand scheme of things.

 

[Sarnoff]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

I don't know why we're not letting home prices fall to a level that's reasonably in line with income. Propping up a system where individuals keep buying homes they will never be able to afford doesn't seem like the best plan to me.

 

[Slapdash]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

I don't know why we're not letting home prices fall to a level that's reasonably in line with income. Propping up a system where individuals keep buying homes they will never be able to afford doesn't seem like the best plan to me.

I don't see how you can judge that point has been reached; declining house prices lead to declining incomes. It is a self reinforcing cycle.

 

[humpback]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

I don't know why we're not letting home prices fall to a level that's reasonably in line with income. Propping up a system where individuals keep buying homes they will never be able to afford doesn't seem like the best plan to me.

I don't see how you can judge that point has been reached; declining house prices lead to declining incomes. It is a self reinforcing cycle.

Do you think that home prices aren't overvalued in relation to incomes?

 

[Chadstroma]

It will cause another housing bubble except when it pops this time it will be even worst than the last one, many more people will be hurt and a lot worse. The dollar could collapse with it.

I agree it won't work. Just responding to the question about whether MBS are toxic. All it's really doing is buying time. If the market were acting naturally, home and commercial real estate prices would be a lot lower than they are right now. The only reason they aren't is because the banks have kept a lot of natural foreclosures and natural delinquencies from moving to the next stage. Not only is this necessary for the stability of the dollar given how much new debt the currency needs to stay stable and how much of that new debt needs to come from mortgages, but a price drop in real estate would significantly hurt bank balance sheets. Their assets are valued by what they believe the asset would get on the market. But they are manipulating the market to be higher than it would be naturally. So their asset values are unnatural.One of the benefits of this QE3 plan is to get a lot of those assets off the bank balance sheets. If home prices do drop (like they would naturally) then their balance sheets have room to handle it because they dumped those over valued assets on to the Fed's balance sheet. In fact, they might actually be doing it because they know home and commercial real estate prices have to drop and the banks would become insolvent when it happens.

I have been wondering why inflation remained lower than expected through two QEs even when the monetary base has tripled. Is it because the banks kept the money to cover their bad investments or investors holding dollars in reserve and keeping it out of circulation?

Because the economy still sucks. So, the normal equation of inflation (too much money chasing too few goods) is only half there (being there is plenty of goods since no one is buying). I do believe that with everything that has and continues to be done to jumpstart the economy we will see a 'catch up' of inflation when the economy actually does get back on track. I don't think the Fed will be able to get out in front of it fast enough and we will see elevated levels of inflation.

 

[Chadstroma]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

I don't know why we're not letting home prices fall to a level that's reasonably in line with income. Propping up a system where individuals keep buying homes they will never be able to afford doesn't seem like the best plan to me.

I don't see how you can judge that point has been reached; declining house prices lead to declining incomes. It is a self reinforcing cycle.

Do you think that home prices aren't overvalued in relation to incomes?

Depends on the market. This is not a question you can ask nationally.

 

[humpback]

The issue this time isn't toxic loans. The system isn't suffering from sub-prime stuffed into MBS like last time. The issue this time is home prices. The amount of new debt that our currency needs to keep from collapsing is highly dependent on home prices. Therefore it's important that home prices start climbing again, and even more importantly don't keep falling.To keep home prices high, banks have a lot of foreclosed houses that the banks have NOT put on to the market in order to keep the supply of housing below the demand of housing. And because of that, there are a lot of delinquent mortgages that the banks have NOT foreclosed on to keep the foreclosures on their balance sheets from piling up. Basically the entire flow is constipated. The poop isn't toxic. It's just not moving.QE3 is the Ex-lax.

Though, I am not exactly sure the Ex-lax will work as intended. The problem with the housing market has not been rates. Running with your analogy, there are real issues that are causing the constipation that really Ex-lax does not directly address. But this is one of the few things that the Fed has left to prescribe and it will have a positive impact on the patient (at least short term though long term is debatable) even if the positive impact is helping the patient just get off the toilet and moving around.

I don't know why we're not letting home prices fall to a level that's reasonably in line with income. Propping up a system where individuals keep buying homes they will never be able to afford doesn't seem like the best plan to me.

I don't see how you can judge that point has been reached; declining house prices lead to declining incomes. It is a self reinforcing cycle.

Do you think that home prices aren't overvalued in relation to incomes?

Depends on the market. This is not a question you can ask nationally.

Obviously real estate is local, but you certainly can speak in general about the bigger national picture.My point is, while declining real estate values do have an impact on incomes, I think home prices are still overvalued relative to those incomes, and that's the main issue. It was a huge bubble that still hasn't been fully popped.

 

[pantagrapher]

Krugman weighs in. (again)

 

[mattdaddy]

Robert Murphy quotes Krugman twice 10 years apart.

This Time Will Be Different

Economics, Federal Reserve, Krugman

“One good question some of my readers have been asking is how the Fed’s new policy might actually boost the economy — that is, how could changes in expectations turn into a real increase in demand?

…

[W]e actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.

That said, I’m still skeptical about whether monetary policy alone can come close to doing enough…”

— Paul Krugman, September 16, 2012

* * *

“If the story of the current U.S. economy were made into a movie, it would look something like ”55 Days at Peking.” A ragtag group of ordinary people — America’s consumers — is besieged by a rampaging horde, the forces of recession.

…

To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.”

— Paul Krugman, August 2, 2002

 

[Chadstroma]

Fed’s latest stimulus may have little impact on mortgage borrowers

The Washington Post, September 19, 2012

By Danielle Douglas and Brady Dennis

The Federal Reserve took aim at the nation’s wobbly housing market last week with its biggest stimulus action in two years, but that firepower is doing little to lower mortgage rates or make home loans more available for Americans.

Instead, banks are set to see a windfall since the Fed’s actions will immediately lower the cost of issuing loans. It may take months or longer for benefits to trickle down to consumers, analysts say.

The emerging scenario highlights the limitations of the Fed’s ability to jump-start the housing market on demand: Rather than intervene directly with consumers, the Fed must rely on banks, brokers and other industry actors to offer borrowers better terms.

Banks say they are keeping rates high right now because lowering them any further would overwhelm them with customers. They say that over time, as volume thins out, rates could come down to attract new borrowers.

“Bank of America, Wells, Chase, whomever, have fixed capacity. You can’t take in more loans than you can handle,” said Matt Vernon, a senior mortgage executive at Bank of America.

Critics argue that banks are simply maximizing profits at the expense of consumers. Mortgage bankers are recording higher gains from home loans as the gap widens between the interest rate they charge consumers and the rate they must pay investors who finance the loans by buying mortgage securities.

Another challenge for the Fed is that many people eager to buy a home or refinance an existing mortgage simply can’t qualify because of poor credit histories. That may not change even if rates fall.

People “are seeing a dangling low fruit, but they just cannot reach it,” said Lawrence Yun, chief economist for the National Association of Realtors.

At a news conference last Thursday following the announcement that the Fed would begin buying $40 billion worth of mortgage bonds per month, Fed Chairman Ben S. Bernanke faced several questions about the significance of the central bank’s actions to the housing market.

Bernanke said that the initiative should “provide further support for the housing sector by encouraging home purchases and refinancing.” The chairman said “housing is usually a big part of the recovery process” but has been “one of the missing pistons in the engine.”

Yun said he believes the Fed was right to focus its latest round of stimulus at the long-suffering housing market, but it remains far from certain that the action will have meaningful impact.

Rates are already at generational lows, he said. Pushing them lower might spur some additional refinancing, but Yun said it is unlikely to create a new wave of home buyers.

Mortgage Bankers Association chief executive David Stevens expects even the refinancing boom to “burn out” since everyone who could qualify for a lower mortgage will have refinanced already.

To move that process along, banks are ramping up. Bank of America has added more than 800 people to its mortgage lending team to keep pace with refinancing applications. Vernon, the mortgage executive, said that as banks continue to work through backlogs of loans more quickly, they should begin offering consumers lower rates.

Once the refinancing activity dies out, demand for new homes will climb as borrowers gain confidence in the market, analysts say. The Mortgage Bankers Association is forecasting that loans used to purchase homes could increase by 20 to 25 percent.

Some regions of the country, which experienced only moderate price declines, are seeing a dearth of desirable homes for sale. Lower interest rates, therefore, may have little effect on boosting sales.

In Washington, the number of active listings in June reached a historic low, down 33 percent from a year ago. The result has been a wave of eager but frustrated buyers and a return of bidding wars, escalation clauses and offers to forgo requests for any repairs by sellers.

Wells Fargo senior economist Mark Vitner said he expects the Fed’s actions will give home builders confidence to build new properties in anticipation of demand.

“When Bernanke talked about giving a boost to the housing market, he was really talking about home building,” Vitner said. “Inventories are so low today and sales are growing that I think these actions are really meant to improve buying.”

Indeed, Bernanke said increasing home sales would provide the much-needed boost to the overall economy. “House prices are beginning to rise in some markets, which will encourage people to look at homes, will encourage lenders to make more mortgage loans,” Bernanke said. “So I’m hopeful that we’ll see continued progress in the housing market.”

 

[Paul Bremer]

Ron Paul: "Country Should Panic Over Fed's Decision"

 

[jamny]

Some great info in this thread.

The question I have is why do this now? Isn't the residential housing market a bright spot in the economy? I've heard good news about it lately. Why not let it work itself out. Is the risk to inflation worth it?

 

[Chadstroma]

Some great info in this thread. The question I have is why do this now? Isn't the residential housing market a bright spot in the economy? I've heard good news about it lately. Why not let it work itself out. Is the risk to inflation worth it?

It depends. There are some bright spots around the country for real estate but really the thing that is keeping the markets in most areas of the country from crashing further deeper in value is the big players in mortgages like Wells, BofA, Citi, Chase, Ally, etc not dumping all of their inventory on the market at once but trying to release them slowly and work through the inventory without having too much of a negative impact on the values of those markets. My realtor told me a few months ago that there is more than 18 months of inventory in the Chicago area that has not even been put on the market yet with properties that are already banked owned and not released or in late (past late) stages of foreclosure. That is on top of the existing inventory already on the market- those numbers have decreased in Chicago but median values have decreased by about 10% this year. So, it is a mixed bag. As long as there is 8%+ unemployment (with real unemployment much higher) and consumer confidence low- it does really matter how much money is floating out there because if people are not buying it keeps inflation in check. Now, when the economy finally does get going- I think the Fed is going to have a very hard time getting out in front of it and we will see elevated levels of inflation. Basically, at this point, the Fed is in a damned if you do- damned if you don't position. As normal, they are trying to fix the now and worry about tomorrow later mode. Will QE3 work? Depends on what you mean by work and there are so many variables that it is hard to guess. I am doubtful it will work as intended but it is really pretty much the only thing the Fed has left to do.

 

[humpback]

Some great info in this thread.

The question I have is why do this now? Isn't the residential housing market a bright spot in the economy? I've heard good news about it lately. Why not let it work itself out. Is the risk to inflation worth it?

They are doing it now because the economy isn't doing well enough on it's own. No, the housing market isn't a bright spot, it's just not as big of a dark spot as it was. There is no easy answer here- our economy was artificially boosted higher due to the bubble and massive over leveraging. We've done some de-leveraging, IMO we still aren't at healthy levels, and we haven't allowed the bubble to fully pop. The options are basically to allow market forces to take over, which will lead to a quick, fairly steep drop, or throw everything but the kitchen sink at it to stop the bleeding, which is the path we've chosen. There are pros and cons to both, time will tell how it works, but I wouldn't expect strong growth anytime soon unless we get another bubble.

 

[Politician Spock]

Some great info in this thread. The question I have is why do this now? Isn't the residential housing market a bright spot in the economy? I've heard good news about it lately. Why not let it work itself out. Is the risk to inflation worth it?

If by "bright spot" you mean "we might be at the bottom of its fall", then yes its a bright spot in the economy.The reason that risking inflation is worth it is because the alternative to inflation is worse.

 

[Jewell]

Bernanke on the Fed's strategy

 

[Zegras11]

Bernanke on the Fed's strategy

 

[Politician Spock]

Bernanke on the Fed's strategy

 

[Dinsy Ejotuz]

It therefore seems appropriate to consider what we can learn from all the policy experiments conducted around the world since the 2008 crisis.

The main lesson is that government decisions on taxes and public spending have turned out to be more important as drivers of economic activity than the monetary experiments with zero interest rates and quantitative easing that have dominated media and market attention. Fiscal decisions on budget deficits, taxes and public spending have mostly been debated as if they were largely political choices, with much less influence than monetary policy on macroeconomic outcomes such as inflation, growth and employment. Yet the reality has turned out to be the opposite. While every major economy in the world has followed essentially the same monetary policy since 2008, their fiscal policies have been very different and the divergence in outcomes, especially when we compare the United States and Europe, has been exactly the opposite to what was implied by the rhetoric of most politicians and central banks.

Countries that took emergency measures to reduce public borrowing have mostly suffered weaker growth, as in the case of Britain from 2010 to 2012, Japan this year and the United States after the 2013 “sequester” and fiscal cliff deal. In more extreme cases, such as Italy and Spain, fiscal tightening has plunged them back into deep recession and aggravated financial crises. Meanwhile countries that ignored their deficit problems, as in the United States for most of the post-crisis period, or where governments decided to downplay their fiscal tightening plans, as in Britain this year or Japan in 2013, have generally done better, both in terms of economics and finance. The one major exception has been Germany, where budgetary consolidation has managed to coexist with decent growth, largely because of a boom in machinery exports to Russia and China that is now over, pushing Germany back into the recession its stringent fiscal policy suggested all along.

Thus the six years since 2008 have provided strong empirical support for the supposedly outmoded Keynesian view that government borrowing is more powerful than monetary policy in stimulating severely depressed economies and pulling them out of recession. In a sense, it is odd that the power of fiscal policy has come as a surprise – or that it continues to be categorically denied by the German government and the U.S. Tea Party. The underlying reason why fiscal policy is so important in recessions, and has now come to dominate over monetary policy, is a matter of simple arithmetic that should not be open to debate.

Recessions generally occur when private business and households decide to spend less than their incomes in order to reduce their debts or increase their savings. If this process of “deleveraging” is happening in the private sector, which it clearly has been, then simple arithmetic shows that economic balance can only be restored if some other sector of the economy spends more than its income – and such excess spending is only possible if that “other sector” is willing to increase its debts. Disregarding the role of exports and imports, which must sum to zero for the world as a whole, the government is the only possible candidate to play the crucial balancing role as the “other sector.” It is therefore a mathematical certainty that governments must increase their borrowing whenever businesses and households decide to boost their savings by spending less than they earn.

Despite this indisputable arithmetic, there has been surprisingly little interest in the macroeconomic impact of budgetary policies in contrast to the endless debates about every twist and turn of monetary policy. The explanation lies in the monetarist theories that came to dominate standard economic models of the pre-crisis period – and the related institutional changes that elevated central bankers above finance ministers as the supreme arbiters of economic policy.

Monetarism overturned the Keynesian fiscal consensus that prevailed from the 1930s to the 1970s, by introducing one simple assumption into the models that guided governments and central banks. The case for Keynesian fiscal stimulus in deep recessions was simply assumed away by asserting that interest rates could always be reduced sufficiently to stimulate private investment, discourage private savings and so restore growth. As a result, the private sector as a whole would never suffer for long from a shortfall in spending. Therefore government borrowing would never be needed to balance inadequate private demand.

As a result of these assumptions, interest rate decisions by central banks came to be seen as the only effective tool of macroeconomic management, while fiscal policy was relegated to a microeconomic supporting role. Tax structures and public spending levels were seen as supply-side issues influencing incentives and resource allocation, but the demand impact of government borrowing was largely ignored. Whether government borrowing expanded or contracted, interest rates would rise or fall to offset the Keynesian demand effects. Independent central bankers would manage macroeconomic demand with monetary policy, leaving governments to set taxes and spending plans to achieve political or supply-side objectives.

In the era of high inflation when monetarism was introduced, the idea that interest rates could always be cut by enough to revive private economic activity was reasonable enough. After all, when inflation is running at 5 percent, an interest rate of 1 percent is equivalent to minus 4 percent in real terms, imposing a massive tax on savers and offering a big subsidy to private investors. But this argument fails completely when inflation falls to negligible levels or disappears completely, as in the euro-zone and Japan.

Ironically, therefore, the very success of monetarism and central banking in conquering inflation now means that the era of monetary dominance is over. Keynesian fiscal thinking has triumphed and finance ministers are again more important than central bankers, even though most of them have not yet noticed. Once interest rates fell to zero, traditional monetary management lost its ability to provide further stimulus. And now that central banks are providing “forward guidance” which commits them to very low interest rates for years ahead, monetary policy has also lost its ability to offset fiscal easing and restrain demand.

As monetary policy has lost traction, fiscal policy has automatically gained power. With interest rates at or near zero, private demand cannot be simulated with further rate cuts and this means that monetary easing can no longer offset fiscal tightening. As a result, any reduction in budget deficits becomes unambiguously deflationary, which is why the French and Italian governments were right to resist enforcement of the German-inspired fiscal compact in the euro-zone. Conversely, fiscal expansion now provides an unqualified economic stimulus because there is no risk of interest rates rising significantly in the next year or two – and perhaps not until the end of the decade. In short, the world has returned to a period of fiscal dominance, as in the 1950s and 1960s.