Will Bernanke’s QE3 Program Be A Pathetic Attempt Or Utter Genius?

Bernanke’s possible QE3 program is back on the table and possibly coming to a printing press near you! Following his comments in Jackson hole, the Federal Reserve chairman made it clear that they would continue to help where needed – secret Fed code = QE3.

What is Quantitative Easing?

Everyone’s talking about it yet you may not even know what it means. So here’s the short and sweet answer…

• Central Banks set the price of money as an official interest rate. The lower the rate, the more attractive borrower is for the economy and thus people save less and borrower/spend more.
• Since rates cannot go below zero, once they have cut the target rate then they move onto Quantitative Easing as another way to stimulate the economy.
• The goal of QE is to bring down interest rates for businesses and household. But how exactly do they do this? Easy…
• The Central Banks print money and use that money to purchase assests. In our case, US Bonds.
• The purchase of US bonds drives the price higher and yields (interest) lower.
• As Government Bonds become less attractive at lower rates, then money is filtered to riskier assets classes (like corporate and municipal bonds) which in turn lowers rates.
• With lower rates, the HOPE is that companies will borrower more and spend more to stimulate the economy.

Let’s Be Realistic For A Second

We are heading into a possible 3rd round of QE. So will the Fed pumping more than $1 trillion dollars into the system really make a difference? Not enough I fear.

The country needs a fundamental boost to housing and the job market. Without these two keys, there will be no recovery – period end of story. Jobless claims and the unemployment rate in general have been stuck in a rut for months and it’s going to take more than marginal downticks to instill confidence.

Quantitative easing is intended to bring down interest rates, but my argument is that they are already at historic lows. Therefore, any additional impact of another round of QE would be modest.

Both the 10-Year Treasury Bonds and 30-Year Mortgage Rates are already at historic lows, and yet rather than borrowing and spending, many businesses and households are still scared to do anything. This is clearly evident in the most recent reading of consumer sentiment which is taking a nose-dive right now.

What’s The Point Of All This?

Believe me, I’m not naive enough to think that the stock market won’t get a boost from another round of QE because it will (and frankly already has enough though it hasn’t been officially announced yet). Each and every QE program thus far has correlated with huge gains for stocks – but that’s the market, I’m focusing on the economy.

GDP growth has slowed to less than 2%, which is down right pathetic for our third year of economic recovery wouldn’t you say?

I think we are in a modern “liquidity trap” where people are too afraid to invest and spend that cutting interest rates further doesn’t accomplish much. Sure QE came be great for American exports as the dollar slides it makes it more attractive to buy cheap American products, but even those numbers have been less than strong this year.

Ben Is A Student Of The Depression

Let’s stop beating the guy up for a second. He wouldn’t be the chairman of the central bank if he wasn’t well educated and really who are we to tell him what to do right? From what I’ve read Ben is a real student of the Great Depression and focused much of his attention on learning why, how, what happened. So I have to believe that he’s on our side and knows what the hell he is doing.

Do You Think Another Round of QE Will Help/Hurt?

As always, I’m interested to get your opinion on this. Add your comments below and share you thoughts/concerns about the possibility and impact of another QE program.

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