Tuesday, September 18, 2012

Guest post explains QE3 – quantitative easing

QE3: Is it Really Going to Help You or Me?

So it’s finally here. They have been speculating about it, but now Bernanke has finally gone and done it. We have quantitative easing round three. There are many questions for ordinary Americans about this new development. The most important ones of all are what is quantitative easing and how will it affect ordinary Americans? These are some of the questions answered below.

What is Quantitative Easting?

Quantitative Easing is a economic term for when a central bank, in America’s case the Federal Reserve, prints new money. Since the use of electronic and paper money this has been a lot easier for governments to do. In previous times, since the Roman era when such policies were first performed, the government either had to buy more metal to make money with or devalue the currency by making more coins from the same amount of metal. Now the Federal Reserve can tap a few buttons and increase its bank balance. If only normal Americans could do this with their bank accounts.

In America, the first round of quantitative easing, now called QE1, took place under President Bush in 2007. This was as a direct result of the financial crisis in the banking and mortgage industry at that time. QE takes the form of expanding the assets of the Federal Reserve and is distinct from government policy per se. Usually it is used to buy bonds from banks and mortgage companies. Theoretically the use of QE and bond buying reduces the interest banks pay to each other for lending money. This in turn should lead to small and medium businesses having greater access to bank loans at favorable rates.

Does America Need QE3?

QE3 has happened, but many are still asking if it was needed. Harlan Green believes it was required to fulfill the Federal Reserve’s desire for low long term interest rates. The economy is suffering because private companies are not increasing employment at a sufficient rate to take the burden of costs off the federal government. There is a lot of money in America and a lot of profit, but it is increasingly being held up top. QE is intended as a trickle down mechanism.

Where Does The Money Go?

QE3 will take the form of $40 billion a month being pumped into the economy. That works out at $480 billion a year. This is the equivalent of $1,600 per American per year. The money will not be given to average Americans or even poor ones directly. It also will not be used to pay off government debt or to increase government spending on social or medical projects. Instead the money has been earmarked for buying up bad mortgages.

Who Will Benefit Most?

Shareholders and stock market speculators of many companies listed in America found themselves as instant beneficiaries of the policy. Stock prices, especially in riskier sectors, rose quickly on the back of news from Ben Bernanke concerning QE3. The Dow Jones Index rose by 206 points alone. The NASDAQ and the Standard & Poor’s Index also rose. Theoretically, as noted above, the money will first go to the banks and then trickle down to smaller banks and finally to businesses requiring loans. As seen with QE1 and QE2, a lot of the money will be kept by the banks and used to pay high wages and bonuses to stock market speculators – the very people who created the crisis in the first place.

Will It Help Ordinary Americans?

Probably not, but it would be nice. As an increasing number of people are pointing out, increased productivity in the stock market has virtually no effect on the ordinary lives of normal people around the world. Bernanke believes the move will help alleviate the unemployment rate in America. A combination of job loss, medical bills or the ending of such coverage and amoral mortgage systems have taken a lot of good Americans to the wall leading to homelessness, poverty and government handouts.

The opposing view from both Liberals on the right and the Occupy Movement on the left, is that it will not work. Liberals see a waste of money and a conspiracy to re-elect Obama, but Occupy and many others see it as a means of helping people at the top, corporations at the top and not those who really need the help. As Mitch Feierstein points out, stock markets have no positive effect on Main Street and QE3 is a meaningless policy designed to help friends and former colleagues of the Federal Reserve’s top brass. One thing is certain though, QE3 will push up the costs of meat, gas, oil, corn, bread and so on and so on to pay for this largesse.

“Eve Pearce” epearce@andalemono.com

Posted By Valerie Garner

Categories: Finance

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Comments (4)

Bubba Greene

September 18th, 2012 at 9:37 PM    


By far the WORST explanation I have EVER seen. AND, poorly written apart for the inaccuracies.

Val

September 18th, 2012 at 10:45 PM    


Bubba, write me a guest post about this and I’ll post it with your real name assuming it is not Bubba.

Bubba Greene

September 19th, 2012 at 10:25 AM    


Since I am awaiting the grass to dry a bit, I’ll just comment here as I consume my 3rd K Cup.

The term was coined by central banks to characterize a sequence of actions designed to stimulate the economy.

Parties involved are The Federal Reserve, the Treasure and commercial banks plus investment banks.

The process is simple. The Federal Reserve Bank (the BIG Bank) purchase securities (generally bonds) held by our banks (little banks). This inflow of money
goes to the little banks who in turn are supposed to then have more funds to make available for loans. More available funds are also supposed to keep interest rates low so cheap money and lots of it will flow into the economy. BUT, there is nothing that mandates the little banks actually loan the money, nor to control the rates they may charge, the terms they may set and to whom they may loan. So in reality they can just stuff the money in their vaults…sort of. But lets look at some key facts.

1. The Federal Reserve (our “Central Bank”) is NOT a branch of the US Govt. It IS a private collective of wealth and it is a for profit collective but yes, with a honorable purpose supposedly.

2. Does the money used by the Federal Reserve come from their pockets? Not necessarily and actually mostly NOT. It comes from bonds issued by the Treasury and purchased by the public including financial institutions so in effect it is money BORROWED by the federal govt.

So, in keeping it simple, the US govt borrows money. They give it to the Federal Reserve. The Federal Reserve gives it to little banks via bond purchases. Little banks are supposed to put it into circulation via loans.
Another twist on it is that The Federal Reserve can “ease” the requirements on “little banks” as to their reserve requirements. Lowering these requirements allows “little banks” to have more cash available for loans. The good side of this “easing” is that no debt (borrowed $$) is necessarily needed. They just plunk their magic twanger and reduce the dollar amounts banks are required to hold in reserve.

So, Our govt borrows $$. They give it to the Fed. The Fed gives it to little banks. Little banks are supposed to give (loan) it to their customers.

QE is and has been proven without any doubt to be an ineffective policy. QE1 was not successful, QE2 was not successful and QE3 will not be successful. The end result of all the QE is simply a massive explosion of federal debt. The parties who profit are: Investment banks who handle the purchases and sales of the securities and the owners of the Federal Reserve. (BTW, can anyone tell me who they are?)

Bubba Greene

September 19th, 2012 at 10:29 AM    


First PS:

The ability of QE to be effective is built around borrowing and lending. If the little banks won’t lend OR if people do not desire to borrow, nothing works, yet the interest obligation incurred by the US Treasure on bonds sold to support the Feds policy still must be paid.

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