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Bernanke’s Open Bar QE3 Party

On September 13th, the Fed announced that it would start buying $40 billion in mortgage-backed securities for as long as it takes. While I appreciate the fact that an open-ended QE3 will eliminate the seemingly annual speculation for QE4,QE5, etc., I am skeptical that enacting QE3 was a good idea to begin with. The intended goal of quantitive easing is to keep supporting the mortgage bond market until employment improves “significantly.” The thinking is that by the Fed purchasing longer-dated assets such as mortgage-backed securities, this will help keep interest rates low for longer. At the same time the Fed is injecting more money into banks and the financial system, which should theoretically increase lending, stimulating the economy.

The success of the first two rounds of quantitative easing are debatable. The graph below shows commercial and industrial lending on a monthly basis from 2008 to now. QE1 was put into effect in 2008 and QE2 in 2010. The graph shows that lending has started to recover to pre-crisis levels in the last two years. You could make the case that there is a time-lag between quantitative easing and its intended effect, but the uptick in loans could also be the result of a lot of other factors. I would be curious to see the results of a regression that tracks the correlation between quantitative easing and lending.

A quick look at long-dated US Treasuries or 30 year mortgage rates suggests that long-term interest rates are already at historic lows. Can we really expect QE3 to push them any lower?

Many studies have shown that there are diminishing returns to quantitative easing. Even Bernanke admitted it at the Fed’s June 19-20 meeting. With diminishing returns to a policy that has a questionable impact to begin with, do you think open-ended quantitative easing is worth doing? Do you think the benefits outweigh the costs? Federal Reserve Bank of Philadelphia President Charles Plosser certainly does not think it is a good idea:

By Doug Poetzsch


  1. If the measures themselves do nothing, then maybe they can convince people that it’s safe to invest because interest rates will stay low for a long time. That is, this is really a story about trying to change expectations. Hence “for long as it takes” is the operative term, not QE3.
    Furthermore, since Congress and the states are either doing nothing or acting so as to slow the economy (respectively), the only player left in the game is the Fed. So why not give QE3 a try? — there’s no downside (unless you’re a nailed-to-the-cross-of-gold old-school pre-Milton-Friedman monetarist).

  2. vernier vernier

    I am skeptical as well, but like Professor said, the opened-ended QE3 might just have a significant impact on consumer expectation and confidence. For an easy example, housing sales are bouncing back to a two-year high.

    The market has stabilized and is beginning to grow again. This is, of course, due to both natural market correction and government intervention. I personally have a more conservative view on government economic policy in the sense that I favor less government intervention and more capitalistic/private sector solutions rather than large “G.” And I also don’t think even lower interest rates are necessarily a good thing. Think about the reverse, where are returns on investments if interest rates are approaching zero?

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