On Thursday, September 13, Federal Reserve Chairman Ben Bernanke announced that the Fed will begin to "buy" $40 billion in mortgage-backed-securities (MBS), a type of security packaged by our good friends at Fannie Mae and Freddie Mac. Every month. Indefinitely. $40 billion. This unconventional monetary policy performed by the Fed is called Quantitative Easing (QE). Most people have no idea what it means or how it will impact them. Most people ignore this as just arcane monetary policy enacted by the government, that we can trust because Hey, the government did it and the government acts in our best interests. The apathy is ill-deserved and the trust in government is ignorant. QE will impact You, and the government is not looking out for your best interest, they are not acting out of virtue, they are acting in their best political interest (in this case reelection). This 3rd round of QE by the Fed will harm the middle class, will make us poorer, and will further deteriorate at the long-term strength of our economy.
First, what is QE, second, why is it bad.
What is actually happening is the Fed approaches Wall Street banks and buys their mortgage securities by crediting their accounts. This money will not be added to the national debt though, because the Fed just makes it up. They credit the account by just "printing" money, although no actual money is printed because it is electronic, but you get the idea. Money is created, and it is given to Wall Street. (There is a reason Goldman Sachs, JP Morgan Chase, & Citigroup were all within the top 10 contributors to the Obama campaign in 2008, see here) So, the Fed creates cash and gives it to the big banks holding mortgage securities.
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QE3 will relieve banks of their mortgage securities, allowing them to use this influx of cash to invest in other ventures. QE3 will also make it easier to borrow and buy a home. The Fed hopes that this indefinite promise of $40 billion every single month to buy mortgage backed securities will spur investment in the US economy (commodities, small businesses, capital ventures, IPO's, etc) which will in turn create jobs. Wohoo, sounds great, right! right?
No. It is not great. Is our memory really so short-sighted that we do not recall the 2008 sub-prime mortgage crisis where easy credit, a la Fannie Mae and Freddie Mac (government guaranteed mortgages totaling 1.4 trillion, or 40% of all mortgages in the US, see here), and government directives, a la the Community reinvestment Act (The Act's goal was to promote home ownership by requiring loans to low-income households, see here), created such a massive bubble (mis-allocation of wealth) that when it burst the economy was thrown into a recession which we are still struggling with. Instead of allowing the free market to reach equilibrium and for real estate, and homes, to return to their true value so that the economy can begin to enjoy true and sustainable growth, the Fed is going to subsidize the housing market. The free money for mortgage backed securities will create a malinvestment in real estate which will only further damage the economy.
When you first look at it, QE3 seems great, it allows for more investment by Wall Street in Main Street and it does not add to the debt! Yay. However, "there is no such thing as a free lunch" (Milton Friedman) and this infusion of cash will be no different. I just described how it will cause malinvestment, but it will also benefit the rich at the expense of the poor and middle class. This is because of inflation. Simply, when you add money to the market, prices increase. But it is not immediate. QE3 will give Main Street plenty of cash to profit off of while at the same time inflating the price of commodities and everything else people buy. This inflation in price, in homes, in gas, in food, in clothes, will harm the average consumer, while Wall Street gets to invest it and use it before the inflationary correction. The dollar has already been weakened by the announcement, see here.
SUMMARY:
The Fed is going to continue to print money to buy mortgage securities until there is a substantial increase in employment. This action is a boon to Wall Street yet will further tighten the average consumer's pocket book. It will create malinvestment. Also, it will not create true sustainable growth because it is premised on free money and easy credit, something which will not always exist. Jobs created that rely on this easy credit will not last, they cannot last. It is a facade of prosperity.
To steal a Peter Schiff analogy, we are building a larger and larger skyscraper on a crumbling foundation. We need to mend the foundation before we can have sustainable growth, building the skyscraper higher will only further break the foundation.
QE3 is meant to help Pres. Obama win reelection, it is meant to make people feel good about the economy, its a move in an incumbent President's playbook to create a political advantage. QE3 is not meant to make this country stronger, it does not create real growth, it does not benefit anyone but Wall Street, and you should care, because you are being screwed.
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