The wait is over; the
Fed announced its new stimulus program. Therefore, we will soon have the
launching of QE3—phase three of quantitative easing. The stock markets (Dow
Jones Industrial Average and S&P 500) responded rather gleefully with about
a 1.6% rise in their indexes before 24 hours had passed; many economists, who
had been strongly advocating another stimulus program, cheered; meanwhile, many
politicians, among others, angrily pointed to the possibility of higher
inflation rates resulting from this stimulus program.
The very word,
“stimulus,” has taken on both positive and negative connotations in the past
several years—mainly negative—during which time we’ve seen rather
straightforward concepts wildly politicized. And serious problems may result because
most people still don’t know what “quantitative easing” means and what possible
bearing it may have on their lives.
Let’s look, therefore,
at the ways QE, phase 3, brings new ideas to the table. Hidden beneath the
arguments about whether it may really work are two rather astonishing—if
subtle—changes to the program. Let’s start with a simple question. Does
stimulus work in the first place?
Very early on, the
current administration passed a very expensive law that has caused critics ever
since to complain about its lack of effectiveness. It is an argument we don’t
wish to enter here, but it’s worth noting that a recent book—The New New Deal
by Michael Grunwald—asserts that the stimulus act saved the nation from a great
deal of economic trouble.
Writing about the book
in The New York Times Sunday Observer, David Firestone argues that, “On the
most basic level, the American Recovery and Reinvestment Act is responsible for
saving and creating 2.5 million jobs. The majority of economists agree that it
helped the economy grow by as much as 3.8 percent, and kept the unemployment
rate from reaching 12 percent.” While this doesn’t settle the rampant
arguments, the numbers are striking.
In any case, what’s new
about the third phase of quantitative easing is that 1) it is focused largely
on real estate (because the Fed will buy up mortgage bonds) and 2) it is
open-ended (because the Fed will cease its extraordinary purchasing of mortgage
bonds only when the economy has displayed signs of improvement for many months.
In other words, there is no pre-established time limit for this program. Thus,
it provides stronger and more reliable stimulus for as long as it is needed.
And as a result, the program packs a lot more authority than did past versions.
Okay, we can be upset
about the fact that the Fed will buy these bonds with money it has printed into
existence, and we can legitimately worry that uncontrolled inflation may
result. Bill Gross, one of the world’s most famous bond experts, has quickly reduced
his holdings of American national debt in anticipation of higher inflation, for
example.
But the program is
likely to give us even lower mortgage rates and to imply, at the very least, an
endorsement of the real estate market as one of the few places where we may
find strong growth in the near-term future. It is difficult to fault the Fed
for standing behind the real estate market’s future.
No one expects the
program to solve all the nation’s economic problems, but it may help a bit and
may, in particular, boost the sales of real estate—and the needed construction
or more real estate—significantly.
Or so we hope.
by: Bill Fisher
