On September 13, the Federal Reserve announced a third round of quantitative easing (QE3) by committing to purchase mortgage bonds at the rate of $40 B per month and to continue doing so indefinitely.
Effectively, QE3 does several things at once, all of which LANDCO has called for in the past few years, particularly in our Q3‑11 Situation Analysis (“Foreclosure Resolution”) and in our Q2‑11 Situation Analysis (“Time and Money”).
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|Voraciously buying mortgages will drive down interest rates. More buyers will come into the market. Greater demand will buoy home prices, even as foreclosures persist.|
|Bank profits||Banks’ main source of profit today is
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mortgage origination, particularly refinancing. By lowering rates and signaling home price-support, QE3 will not only continue to spur refi’s, but it will add significantly
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|Inflation is the solution,
not the problem
|QE3 essentially declares that inflation is not a
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problem right now, nor in the foreseeable future. The far greater risk is deflation, such as further declines in home prices or household income.
|Employment||Of all financial assets, mortgage bonds are the best employment lever. Construction, home goods, home sales and financing — all these are major employers that respond immediately to changes in demand.|
|Optimism||With a floor under home prices, consumer confidence will improve. Home equity will again be seen as a nest egg. Household spending will rise, hiring will follow, good news will breed further confidence — a positive feedback loop.|
As we’ve said before, when political opposition to federal spending is so entrenched, so partisan, and so wrong-headed, the Fed can initiate its own policies to move us in the right
With QE3, they have done so. Congress could have made this work better, faster and more efficiently, but its members are unwilling to do so.
So, thanks for finally stepping in, Mr. Bernanke.