FED: Fed announces QE3

[cbc58]

Brian,

Thank you very much for your detailed reply. I am trying to understand this better to determine the long-term implications and to be able to explain it to others.

Essentially what you are saying is that the FED is going to create money out of thin air and start buying MBS to help drive rates down. They will pump this money in and take the MBS off the hands of whomever owns it (Fannie/Freddie/Goldman, etc)., and then those people will go out and make new loans or put it to work somewhere else. Likely riskier assets or T-Bills. Buy buying T-Bills that also helps Treasury finance more of the national debt (yes?).

Money will also likely flow into other things getting refinanced to reduce consumer and personal debt - which in turn may make people more comfortable and feel better about going out and buying things and maybe taking on some riskier investments like stock and equities.

The 40 Billion per month is added to the FED balance sheet which further dilutes the monetary base of the US dollar thereby reducing it's purchasing power. Items in demand will see investment flow into them which will cause inflation in various sectors (food, oil, energy, pm's). Low interest rates hurts savers and the elderly. The fiscal cliff will increase unemployment and further slow the economy.

Sooner or later this program will have played out and then we are totally screwed because the FED is out of bullets. There will come a time when our creditors will demand more interest for the inherent risk they are taking and then that will force rates to rise whether or not the FED wants it. If inflation gets out of control the FED will also have to raise rates to fight it - which will slow growth as consumer purchasing power is reduced. Housing will likely take a huge leg down again. It is when the FED loses control of all this that the SHTF for real and we get the flush of bad debt and severe depression we really need.

In other words.. they just bought some time but not much else. Placed us between a bigger rock and a hard place simply to keep the wheels greased for a bit longer.

Is that your take ? Thank you for your feedback.

 

[AuH20]

Those with access to the FED WEALTH will be buying up assets... the middle classes and poor will fall even further behind.

That lying POS Bernanke sure changes his tune one month to the another, eh?

RON PAUL on FOX BUSINESS @ 4:30PM PST

That's the idea. An exclusive game of musical chairs with excess monopoly money is being played out.

 

[devil21]

Do you guys think this open ended MBS purchase program will loosen mortgage lending standards? Im looking into buying a second house and am not qualifying for a second mortgage at the moment. Hoping this may open things up more.

 

[CableNewsJunkie]

Sarah Palin is being very vocal about this today - let's continue to build those alliances guys.

h ttp://www.freerepublic.com/focus/f-news/2930588/posts

 

[Gaddafi Duck]

The Fed has not been a net purchaser of T-bills since June, 2011. They have used money from maturing notes to buy replacements since then.

Ugh..not this again..

This move is inflationary. It seems like many are of the opinion that unless the Fed prints money and hands it to Americans who use it to buy gas or food, then how on earth does this money find its way into the economy?

Pretty obvious. Many of you are arguing that these banks made bad loans, but now the Fed is swapping out the bad loans and recapitalizing the banks pre-bad loan bubble period with no inflationary implications as the banks arent taking that money and turning around to loan it so i can buy a car. That's nonsense. If that's the case, have banks loan money to anyone and anytime there's a default on a loan, have the Fed buy the bad loan and recapitalize the bank. See how ridiculous that idea is? Of course it's inflation---even if the bank doesnt lend out the money they receive to be recapitalized because that original bad loan money they lent out has circulated, and now they dont write down the loss as it's off their books. That means the reverse multiplier effect doesnt take place as occurs anytime you withdraw money from the bank.

Oh, and the money isnt sitting idle. Remember, the Fed and the banks are buying government debt. Governments dont sit on their cash, they spend it. Why do you think everytime there's high inflation there are wars? Because wartime = government spending, which is made possible with inflation.

 

[gonegolfin]

Brian,

Thank you very much for your detailed reply. I am trying to understand this better to determine the long-term implications and to be able to explain it to others.

You are quite welcome.

Essentially what you are saying is that the FED is going to create money out of thin air and start buying MBS to help drive rates down.

I do not like the term "create money out of thin air" as it is not accurate. The Fed is injecting reserves into the banking system. They are expanding the monetary base (bank reserves + currency in circulation = monetary base) with the potential to increase the money supply (except in the case where I noted money supply is directly increased by Fed action). In traditional operations, the Fed credits the reserve accounts of selling banks (or selling primary dealers that are functioning as arms of banks) with the money required to purchase the securities. The securities purchased are then recorded as an asset on the Fed balance sheet. The reserves credited to the depository institution(s) are recorded as liabilities on the Fed balance sheet. I really encourage you to read my articles (more than once if necessary) in sequence as I take you through this and other more advanced concepts.

Yes, they are buying MBSs in an attempt to drive down MBS yields, thus making mortgages even cheaper. Since our mortgage market increasingly over time has become a securitized one ... and in particular securitized by Agency backed MBS securities (as opposed to the declining private MBS market) ... MBS yields have much more influence on mortgage rates than long term treasuries. Since the end of QE2, the yield spread between MBSs and long term treasuries has been widening (MBSs having higher yields). The Fed wants to fix this.

They will pump this money in and take the MBS off the hands of whomever owns it (Fannie/Freddie/Goldman, etc)., and then those people will go out and make new loans or put it to work somewhere else. Likely riskier assets or T-Bills.

The Fed will be purchasing from primary dealers whom will be agents for the banks. This is taking even more risk off of the bank balance sheets and will send more profits the way of the banks (in the form of higher purchase prices for these securities as the Fed enters the market). This is why I call the Fed operations since 2007 (even before the first QE) a stealth re-capitalization of the banking system. The banks can then sit on this cash and earn 0.25% (soon to be more than you can get for a three-year treasury), making their balance sheet stronger. Much of the cash will be held in this form. They will also utilize some of it for speculative plays ... maybe more MBS purchases, treasury purchases further our on the yield curve, equities, arbitrage, etc.

By buying T-Bills that also helps Treasury finance more of the national debt (yes?).

Certainly.

Money will also likely flow into other things getting refinanced to reduce consumer and personal debt - which in turn may make people more comfortable and feel better about going out and buying things and maybe taking on some riskier investments like stock and equities.

Not sure what you are referring to here.

The 40 Billion per month is added to the FED balance sheet which further dilutes the monetary base of the US dollar thereby reducing it's purchasing power.

The monetary base is increased, but this does not result in an increase of money supply unless those reserves are invested by the depository institutions (whether the investment is asset purchases or lending).

Items in demand will see investment flow into them which will cause inflation in various sectors (food, oil, energy, pm's). Low interest rates hurts savers and the elderly. The fiscal cliff will increase unemployment and further slow the economy.

Some of these created reserves will certainly see there way into fixed income, commodities, and equities. Some of (a vast portion of) the created reserves will stay on deposit with the Fed.

Sooner or later this program will have played out and then we are totally screwed because the FED is out of bullets.

I guess it depends on how you define "bullets". If "bullets" are Fed monetary policy mechanisms that continue the stealth re-capitalization of the banking system, then no ... they are certainly not out of bullets. They also have all of the bullets they need to raise asset prices of their choice.

If by "bullets" you mean policy mechanisms that will translate into solving our economic problems, then I agree. This is because you cannot solve core economic problems with monetary policy. In this sense, the Fed never had any real bullets. What the Fed can do is favor certain assets over others and inflate away the debt burden. But this does nothing to help the economy. It simply manipulates the supply and demand for money and credit, distorts the capital structure, and picks winners and losers. This leads to mal-investment by business and creates increasingly more violent boom/bust cycles.

There will come a time when our creditors will demand more interest for the inherent risk they are taking and then that will force rates to rise whether or not the FED wants it.

Yes, there will come a time when investors will require compensation for their risk of principal. This will come in the form of lower treasury prices and thus higher yields. But as I have espoused on this forum, we are a long time from that happening. Long term treasuries (and more recently MBSs) have been incredible investments over the past decade ... and is one of the assets I hold. There will be a time when that will not be the case. But not yet.

If inflation gets out of control the FED will also have to raise rates to fight it - which will slow growth as consumer purchasing power is reduced. Housing will likely take a huge leg down again. It is when the FED loses control of all this that the SHTF for real and we get the flush of bad debt and severe depression we really need.

Remember that there is a very strong lever the Fed has been controlling since 2008 that mitigates the chance of catastrophic inflation. It keeps the bulk of those excess reserves deposited with the Fed (instead of working into the economy). Interest paid on excess reserves. If the Fed were truly not concerned about inflation, they would simply cut or eliminate this interest rate and let the federal funds rate stand on its own. But keeping this mechanism in place allows the Fed to nurse the banks back to health while mitigating serious inflation risk. Not that we will not experience some inflation, because we will and we have. But not the crippling variety anytime soon.

In other words.. they just bought some time but not much else.

But this is what governments principally transact in. And they always buy much more time than investors think. Invest accordingly.

Brian

 

[cbc58]

Brian,

Thank you.

 

[wgadget]

Dollar sinking. 78.85.