We have QE III
The FOMC announces QE III !*
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
As Angrybear readers know, I consider the phrase “mortgage-backed securities” by far the most important part of the announcement. I feared that they would compromise again and implement QE III but base it on purchases of long term Treasuries.
My inner weasel notes that this is still not the Gagnon proposal (as amplified beyond all political possibility by yours truly). I would advocate the purchase of all newly issued agency MBS. That would be on the order of $100 billion a month (if the effort was a total failure and didn’t cause higher agency issue of MBS) to maybe $200 billion and month in my wildest dreams.** So if this doesn’t work, you can’t say I was wrong.
* Note the English are only up to QE II and the Scots still on QE I, so they are way behind.
* last night said dreams included 19 running out of gas on a mountain road, putting the car in neutral by accident and falling over a cliff to my relief as it beat blocking traffic and hearing Italian curses for hours and 2) hearing that Andrei Shleifer had taken over Harvard University in a faculty coup. Plus a nightmare about not having enough time to pack in order to catch a plane that was really scary.
How is buying MBS going to increase jobs, can someone explain? Thanks
The idea is that if more is paid for MBS issued by Fannie/Freddie/Ginnie then they will be willing to pay more for mortgages (Fannie and Freddie are required to maximize profits (really minimize losses) as per the Fannie/Freddie bailout but I sure don’t trust them to do this).
If they pay more for mortgages banks will be eager to initiate more mortgages. To do this they will lower the interest rate they charge on mortgages and possibly loosen lending standards.
This should make it easier to sell a newly built house. This should cause more house construction and more employment.
Also it should be easier to refinance. This should cause higher consumption by people who send less money to their mortgage servicer. This should cause higher aggregate demand and more employment.
Finally it should be easier to sell existing houses. This should make it easier for unemployed people to move to [strike] states [/strike] North Dakota where there are plenty of jobs. Needless to say this last channel is extremely unimportant and cold comfort for the unemployed.
Robert, I can’t tell from your comment whether you do or do not think the Fed’s MBS purchase will be all new stuff, but it will be. It’s “newly-issued and to-be-arranged” MBS, though the Fed reserves the right to buy any MBS it wants.
I would amend the mechanism by which MBS purchases will foster growth. Since the purchase is of soon-to-be-minted mortgages, the Fed has reduced one form of risk for mortgage lenders. The prefer to be in the business of collecting fees for issuing mortgages, rather than holding the mortgages. If the Fed buys a particular kind of mortgage, lenders will have reasonable hope of being able to pass on those mortgages. That’s good for the lender. There is still some doubt, because portfolio decisions of third parties, about whether a particular lender will be able to unload particular mortgages. The Fed’s decision to buy newly minted mortgages means the big pool of already-held mortgages are kept out of the process, greatly improving the odds that a lender can unload new mortgages. The plan, as devised, does a great deal to foster new lending, rather than merely fostering portfolio turnover. This may not be the biggest deal in the world, but the Fed is now in the business of refining its easing efforts to squeeze every drop of growth out of them.
Note also that by eliminating intermediaries, the Fed may also have reduced the lag between policy action and economic effect.
The size issue may have to do with the decision to by newly minted mortgages. How may are their each month? I’m thinking it’s not $100 bln, but I could be wrong. If the Fed wants to limit purchases to new stuff, it cannot buy more than all the new stuff issued each month.
Robert, thanks for the explanation. Here are some more comments/questions:
Refi could produce more aggregate demand, but is that for (new) products/services that will require additional staffing? Your post had a lot of “IF..” and “Should..” which makes me wonder – has this technique worked in the past? The chain of effects you described seems like a rather long and circuitous route to get more jobs going – a typical response from those who wish to promote the paper economy (I am not referring to you).If I had 40B to invest a month I might have worked backwards from your post. Round up people who have the skills/potential to be trained for the jobs in ND, train them for those jobs, and let them become a part of a workforce in the real economy. The assumption is that these positions in ND are for well paying/long term jobs, otherwise we should be investing those dollars elsewhere. Any thoughts?
I agree with anonymous (possibly the first time I have ever stated those words.)
The QE III story all sounds good, but is very abstract and iffy. All QE I and II did was inflate equity prices.
Maybe this will be enough to artificially buoy up the economy by a few points for a few more months and help keep the odious Romney out of the White house.
But the real answer is fiscal policy, and that is nowhere on the horizon.
So we’re pretty much still screwed.
JzB I agree that fiscal policy would be much more effective and we are still pretty screwed (well I’m an Italian resident and over here we are really screwed).
The only time it was tried was QE1 in 2009. Then the Fed bought $ 1 trillion of MBS. Many economists (prominently including Ben Bernanke) are convinced that this had a dramatic effect. But things were very different then. Investors were terrified of MBS. The volume of trading of MBS was very low. The Fed did a lot of other (less gigantically huge) things at the same time. And, of course, there was the ARRA at about the same time. So there is no way to know.
I think the really weak link is from higher MBS prices to different Fannie/Freddie/Ginnie behavior. They are supposed to react that way, but no one can force them too. The guy effectively in charge of both Fannie and Freddie Edward DeMarco keeps finding new reasons not to do anything.
The best I can say is that it’s worth a try and, given Congress, it’s the only game in town.
Do I really need to say it?
Oh Boy. More QE. Still not seeing the customers with money to spend.
it makes my head hurt.
it seems all very rube goldberg.
wonder what would happen if the state governments hired more people to work in the DMV.
shorter lines? people would stop saying how inefficient the government is. and they would be glad to pay their taxes.
me and rube go way back.