A Quick Note on QE3

Just a quick summary on the goals of QE3 and its success so far:

The is now the Fed’s explicit policy to purchase mortgage-backed securities in the hopes of driving down long term interest rates so that more people will buy houses, causing housing prices to rise.  As prices increase the Fed hopes that homeowners will use the increased equity in their house to borrow money and spend it in the economy, thus improving the economy.  

Now it shouldn’t take too long to realize that this program seems wildly familiar…as in it is exactly the cause of much of the ailments from which the economy is currently suffering: a housing bubble.  After suffering through the effects of the last housing bubble for nearly 4 years, the Fed’s solution to restore economic prosperity is to blow it back up again.

However, despite the Fed’s best attempt to re-inflate the housing bubble with QE3, yields have actually risen since the announcement as investors sold off treasuries.  Not only did the announcement to purchase $40 billion/month in securities inspire confidence in the market, it actually did the opposite as more and more investors are refusing to hold these long term securities.  

No matter how hard the Fed may try, the housing bubble already has too many holes in it to be re-inflated again.  If the Fed sticks with this policy it will only delay the necessary correction in interest rates and make the economic pain all that much worse. 

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2 thoughts on “A Quick Note on QE3

  1. I don’t even think the FED’s underlining theory was correct. Do interest rates really have to go much lower to inspire borrowing? Mortgage interest rates are already at historic lows.

    • I think you’re right. Obviously people used adjustable rate mortgages to get the ultra low rates that allowed them to buy houses they couldn’t afford in the first place. However, as I made mention in another post, lowering interest rates is really the Fed’s only tool. So while they might have been near all-time lows already, the only choice in the playbook is to try to push them even lower. It may work in the short term, but like the previous housing bubble, the gains will be short lived.

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