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dcrednek (72.08)

More QE and low interest rates



September 18, 2012 – Comments (0)

Last week the Fed announced its plan to implement QE 3, yet another round of significant mortgage and treasury bond purchasing (approximately $40B/mo in mortgages and $40-45B/mo of treasuries).  Do the quick math and that is no less than $960B of asset purchases over the next year.  The effect of this purchasing will be to remove high priced, low-yielding bonds from the books of many large, institutional investors (think banks, pension funds, and the like) and increase the money supply. 

This strategy compels me to look back at the housing bubble of the early and mid 2000s.  As housing asset prices began to increase at rates well above the historical averages lending standards and credit availability actually increased, making the additional marginal risk (to borrowers who purchased more expensive assets) less expensive rather than more expensive.  Now the Fed is doing the same, continuing to purchase assets (government and mortgage-backed securities) at prices that are higher than they were in the past.  Basic economic theory dictates that marginal return should increase along with marginal risk.  However, Bernanke is leading the Fed to take MORE risk for less return. Greater risk for a smaller return is a recipe for disaster. 



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