Quantitative easing will make recovery difficult

The Federal Reserve recently announced its third round of quantitative easing, otherwise known as QE3. Quantitative easing is defined by The Washington Post as “an unconventional monetary tool used by central banks to stimulate the economy … [the Federal Reserve] can buy up assets like long-term Treasuries or mortgage-backed securities from commercial banks and other institutions.”

QE3 amounts to printing finite and predetermined amounts of money. The first round was worth $1.4 trillion and the second round worth $600 billion. What makes the third round so scary is that the whole “predetermined quantity” aspect now goes out the window. With QE3, the Federal Reserve has committed to buying $40 billion in mortgage backed securities per month for an indefinite amount of time, causing it to be dubbed “QEternity” by publications such as Barron’s.

Printing money in methods like QE3 is often the last refuge of failed republics. This choice indicates that we are certainly not in a good economic spot, and things will probably worsen. The most surprising thing about QE3, however, is that several officials within the Federal Reserve don’t think it is going to make anything better at all.

According to Reuters, chairman of the Philadelphia Federal Reserve Mark Plosser has said he “believes that increasing monetary policy accommodation is neither appropriate nor likely to be effective in the current environment.” Similarly, when the massive QE1 and QE2 programs as well as the Operation Twist (which was basically cover for more asset buying) have managed to fail this whole time, it’s likely that QE3 will not be the magical exception.

Short-term inflation can often create the illusion of demand. Bolstering one failing sector in the short term will, at the very least, prevent things from getting worse between now and November.

Maybe Federal Reserve Chairman Ben Bernanke, like most Americans, just wants to keep his job.

Unfortunately, it’s plausible that Bernanke realizes that if Republican candidate Mitt Romney wins, he’ll probably be replaced. Therefore, he may be trying to make conditions optimal for President Barack Obama to win. These conditions include a robust and recovering economy, especially in the housing market, particularly the secondary mortgage market whose failure caused the recession.

Described by Forbes columnist James Dorn as “financial morphine”, QE3 seems to be a failure from the beginning as its predecessors were. The Federal Reserve will need to sell the trillions of dollars on its balance sheet in assets.

That’s when we’ll really see the negative effects of the QE series. As of right now, there don’t seem to be many positive aspects of the initiative.

The original article can be found here.


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