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Fed Undertakes QE3 With $40 Billion in MBS Purchases Each Month
- Toshio 14y agoI'm confused, how is this hacker news?
- bstewartnyc 14y agoWell it is a kind of hack
- boon 14y agoHah, for finance geeks, this was a particularly clever rebuttal :)
- bira 14y agoGot gold?
- ryanaghdam 14y agoyes :)
- fbuilesv 14y agoCan someone with knowledge of economy explain what's going on here and how does this affect me as an individual or as a company?
- anonDataUser 14y agoSure. Here's a great video on the subject: http://www.youtube.com/watch?v=PTUY16CkS-k http://www.youtube.com/watch?v=PTUY16CkS-k
- misterbwong 14y agoDownvoting because this isn't so much an explanation of QE as a biased dialog put into cartoon form. Here's something a little better: http://en.wikipedia.org/wiki/Quantitative_easing http://en.wikipedia.org/wiki/Quantitative_easing
- pdog 14y agoBernanke is pumping up the stock market to help President Obama get reelected. </conspiracy-theory> It's incredibly hard to predict how these massive macro changes affect us on an individual or company level.
- RyanIyengar 14y agoIf he wanted to do that he would have done it in June or July, not now.
- anamax 14y ago> If he wanted to do that he would have done it in June or July, not now. Not necessarily. If he'd done it in June/July, we could look at the results, which might not be good. Doing it now, Obama can continue to argue "things are going to get better real soon now".
- pdog 14y agoStock market indexes are generally forward-looking. We'll see QE3 "priced into" the market before we see its effects.
- anamax 14y ago> Stock market indexes are generally forward-looking. We'll see QE3 "priced into" the market before we see its effects. QE3 is pretty much already priced into the market. However, the stock market won't help Obama. He needs employment. The median income has gone down more during the "recovery" than it did during the recession. The only reason why unemployment is stable/creeping down is that folks are dropping out of the workforce; workforce participation is dropping. Heck - compare the number of folks going on disability to the number finding work.
- YZF 14y agoI'm not an expert but I'll try. The Federal Reserve is buying mortgage backed securities to keep the mortgage interest rates low. Those securities are the way that banks that give you a mortgage raise their money. The federal reserve is also trying to keep longer term interest rates lower by selling short term bonds and using the proceeds to buy long term bonds (operation Twist). The general idea is to spur economic activity by increasing the money supply. ( http://en.wikipedia.org/wiki/Quantitative_easing http://en.wikipedia.org/wiki/Quantitative_easing ) The most significant thing this signals, in my opinion, is the expectation that the economy will continue to do poorly in the short and medium term. People have equated these policies to pushing on a rope, the Fed can lower the rates but it can not force companies to take loans and higher risks. As an individual you may be able to refinance your debt at a lower rate. As a company you may be able to borrow money at a lower rate. In the real world however (as someone involved in a business who just got a bank loan for 6%) this doesn't always work. The stock market may go higher because lower rates make bonds a less attractive investment. The only problem is the bond market isn't as impacted because some people feel the Fed will not be able to continue maintaining lower yields due to inflation. (EDITed with some more thoughts)
- deleted 14y ago[deleted]
- photon137 14y agoI'll add to this. Edit: consumer-level or corporate level credit won't be any cheaper - only a very specific type of credit, ie mortgages, would become cheaper still. As you've rightly pointed out, the Fed is targeting mortgage rates, and thus, home affordability. This is to support house prices and encourage construction-based spending in the economy. House-buying and construction have the biggest multipliers in terms of their knock-on effect on the economy. That's why the recession was so deep - and that's why a recovery can only truly be kick-started by making mortgages affordable. However, some big downside risks here: (a) The European crisis, obviously - although the politicians now seem to have come to their senses a little bit. (b) The credit burden on the US consumer - consumers are still quite leveraged and spending is still financed heavily by credit than by pure income. That will always cause blips to the economy (like oil-price induced inflation) to be magnified and will defeat what the Fed is trying to achieve. (c) Short-term commodity inflation risks - but given that WTI light crude is almost $20 below Brent crude, there already is a North American supply glut.
- boon 14y agoMy opinion on the matter is that ultimately this is a maneuver to devalue the dollar. Historically, there are two ways out of massive sovereign debt: 1) default, and 2) print as much currency as you can so that you can easily pay your debts with worthless paper (or coin as it has been historically). This is a method under the guise of helping the housing market to inject billions (if not trillions) of extra liquidity. Eventually, that leads to higher inflation, which devalues the currency.
- marvin 14y agoI would like to hear arguments _against_ this view, because this is what seems most likely to me as well. But it is certainly not what all the markets are expecting: The bond market is eating up all long-term bonds issued by any economically stable state under the "flight to safety" phenomenon. At very low interest rates. So any good arguments against the inflation view (except the obvious: the market is not expecting it) would be welcome.
- photon137 14y agoI tried to explain this in a post a while ago: http://news.ycombinator.com/item?id=4087686 http://news.ycombinator.com/item?id=4087686
- pkaler 14y agoI'm guessing you're looking for something punchier than the Wikipedia page. But may I recommend the EconTalk podcast. http://www.econtalk.org/archives.html#category http://www.econtalk.org/archives.html#category In particular, Barofsky on Bailouts (http://www.econtalk.org/archives/2012/09/barofsky_on_bai.html http://www.econtalk.org/archives/2012/09/barofsky_on_bai.htm...), Johnson on the Financial Crisis (http://www.econtalk.org/archives/2011/11/simon_johnson_o.html http://www.econtalk.org/archives/2011/11/simon_johnson_o.htm...), and Wapshot on Keynes and Hayek (http://www.econtalk.org/archives/2011/10/wapshott_on_key.html http://www.econtalk.org/archives/2011/10/wapshott_on_key.htm...). Hell, the entire EconTalk podcast series is full of so much braininess. This is a pretty complex subject and there is more to it than just printing money and buying up T-Bills.
- fghh45sdfhr3 14y agoThe Fed is trying to stimulate the economy. The ideas is people and companies should spend money, invest, give loans, etc. The Fed can't force you to spend, but they can raise the inflation rate. Ideally this means you decide to shift from saving to spending and investing and the economy recovers. The downside is that this hurts savers, particularly small time savers who aren't investor class people. And is still not guaranteed to work. So you get the worst of both worlds, a higher inflation rate and still not enough jobs.
- pessimizer 14y agoI find it interesting how you judge the inflation rate on a continuum (higher than before, when it was lower), but the jobless rate as a binary (enough/not enough). For example, I could say that it was the best of both worlds: more jobs, and the inflation rate won't be bad. I just looked back at the first sentences of that paragraph, and they're just as interesting. Both parts of the observation are binary (hurt/unhurt vs. guaranteed/not guaranteed), but the one that you want to imply is more important, you judge on a positive margin, and the one you want to imply is less important, you judge on a negative margin, i.e. if a "small time saver" loses a single dollar more under Q.E.3 than if it hadn't happened, that "small time saver" was clearly hurt; if there is any confluence of future possibilities that could cause Q.E.3 to not achieve the Fed's goals, it is clearly not guaranteed. People are so interesting in so few words.
- fghh45sdfhr3 14y agoGreat analysis, I am indeed biased. But too lazy to describe my bias in details, so I just write with bias.
- cjlars 14y agoFinance geek here. The whole point of this is to raise inflation. Not by a lot, but by a little. The market is currently forcasting ~2.5% inflation looking forward and this won't likely push that expectation above 3-3.5%. The reason for this is because the fed's 'dual mandate' to keep inflation low and unemployment low. The big theory behind this is the so-called Phillips Curve, which states that there's an inverse relationship between unemployment and inflation. The reasoning here is threefold: 1. It's believed that inflation 'lights a fire' under capital (i.e. it's expensive to hold cash), which spurs people to invest, which in turn creates jobs. 2. Wages are sticky -- after losing a job, people tend to be reluctant to take a big pay cut when accepting new job and so tend to wait for something better to come along. Paradoxically, people are more willing to take a REAL pay cut when the NOMINAL pay cut is smaller, as would happen in an inflationary environment (note: there's no change in actual spending power). 3. Higher inflation acts as a transfer to borrowers from lenders. Any debt currently issued before a change in inflation will have been valued in light of lower epected rates of return. A change in inflation expectations effectively decreases the debt burden on any debt held before the change. This improves firm's balance sheets by decreasing the value of debt on their balance sheets, making them more able to invest. As an individual, there's not much to guard against here. We should expect this to have a slightly positive impact on jobs and asset prices. We should also expect inflation to run a little higher, but there's little risk of any sort of run-away, or "hyper," inflation because of this -- the fed can stop inflation as easily as it can start it by [Edit: Corrected Taylor Rule to Phillips Curve]
- ajtulloch 14y agoI think you mean the Phillips curve instead of the Taylor Rule here - but excellent explanation.
- cjlars 14y agoThanks, you're right and I changed it above. For those curious, the Taylor Rule is more accurately a method for optimizing along the Phillips Curve.
- GrothingFash 14y ago
- RockyMcNuts 14y agoBasically using more and more extreme measures to keep interest rates down and try to accelerate the recovery. Step 1, bring short-term rates to zero (end of 2008) Step 2, (2010) announce that you're going to keep rates near zero for an extended period, and make it increasingly specific (currently through 2015). Since today's 2-year rate is the current 3-month rate compounded with the forward 3-month rates out to 2 years, that has the effect of pushing the yield curve down to near zero out to 2 years. Step 3, (2011) 'Operation Twist', announce that you're buying long-term bonds and selling short-term bonds. That pushes low low rates even further out the yield curve. Step 4 (today) buy mortgages via MBS, directly pushing down mortgage rates relative to Treasurys. Means lower rates for borrowers who can qualify for mortgages/refis. Also lowers credit spreads by taking away an option for people who want to get high rates by taking on credit risk such as mortgages/corporates, pushing lower rates up the credit spectrum. bottom line... low low rates. Europe, China, Japan not doing too well these days, Fed trying desperately to avoid similar fate for US. Generally good for stock markets/startups, if investors can't make high returns in deposits/bonds they're more likely to try to find them in stocks/startups.
- cjlars 14y agoNot exactly. Long terms rates have actually risen* from this announcement. The short term effect is, yes, more demand for treasuries which pushes yield down, but the long term effect is higher inflation, which pushes yields up. Following the same reasoning, this is indeed good for stocks, since there's both a liquidity effect (more money that has to go somewhere) and an inflationary effect (larger future cash flows increase present value) *http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield http://www.treasury.gov/resource-center/data-chart-center/in...
- RockyMcNuts 14y agowell, sometimes there are second order effects... The Fed is committing to lower rates to boost the economy... traders say, I think they're going to succeed in boosting the economy...that means some rates should go up! Paradoxically, if people decide that the economy is going to do better, and then they invest and spend more and long rates go up, the Fed thinks 'mission accomplished'. Neverthless, as a first order approximation I would stand by the notion that buying bonds makes their prices go up, rates go down. But yeah, if the policy is successful it will steepen the yield curve.
- politician 14y agoBased on the results of QE1 and QE2, I expect the price of gold to rise, and the action to provide no long term benefit in terms of jobs or GDP growth. The answer to our problems is cheap energy, not more paper. .. looks like gold spiked up 2% on the news.
- raverbashing 14y agoGold is already overvalued, I'm really not sure of its outcome
- GFKjunior 14y agoI think it's still on sale.
- nirvana 14y agoPlease share with us your calculations to determine the intrinsic value of gold. I don't think you can do it, which is why I don't have an opinion about its intrinsic value. But if you look at the price of gold as actually the price of dollars measured in gold, then things look much different. By that measure, taking monetary inflation into account over the past 100 years, gold is historically cheap.
- jstalin 14y agoThere is no such thing as "intrinsic" value. All value is subjective.
- raverbashing 14y agoWell, it's simple, isn't it Gold has "two values" (and one sale price) It can be a "money substitute" But it is also a mineral, with an extraction cost, and usage in the industry Now let's compare to oil Oil is very liquid (pun intended), it can almost anytime be converted into money. And then, used, converted into products or services. Gold has no such property. Yes, seeing "the price of dollar in gold" is certainly eye opening, still, the US has enough gold (and other resources) to keep the price of dollar (compared to gold) high enough.
- johnnyg 14y agoFirst the problem: Say your company brought in $1M a year in revenue and you had $1.04M in debt and growing. Say you had 40% margins and were trying to service that debt with your 400k of gross profit. You would not be in business long. The fiscal reality of the US government is the same save for one key fact: they can print money. As a result, they can carry on this sorry fiscal situation for an amazingly long time, but not forever. Japan has been in this situation more than a decade. They remain powerful. This state of affairs will affect you as a company in these ways: 1. Your taxes must go up. This isn't a political thing so much as bottom line math thing. The more they take in revenue from you, the less they have to borrow or print and the longer this whole system keeps going. They can tax the rich at 100% and still not have nearly enough money to service their current debt, let alone the constantly increasing spend. 2. Market certainty will go down. No one wants increased taxes - politicians or citizens. This pressure from both sides creates things like the coming 'fiscal cliff' where either we reach a budget cutting agreement or draconian cuts go into effect. The market hates not knowing and people spend less in these cases. It looks like there will be a pattern of these occurring in the foreseeable future, which means less people spending less money with your business. 3. Dollars will be worth less. To hold the true value you receive for your service steady, you will have to increase the number of dollars you ask for from customers. Unfortunately, these customers will have less dollars in their pocket because wage inflation tends to trail price inflation. Be aware that as long as the US can borrow money and keep interest rates on bonds low as a result, inflation reported by the feds will remain low. It also pays to be the tallest midget. US dollars remain the world standard, so when there is a panic in Europe or Asia, people rush to buy our bonds, which bolsters our dollar and purchasing power relative to other nations. This ends when the market no longer believes we can pay. This could be tomorrow, next year, in 10 years or never if we really get our act together. 4. The dollars you've earned might not be worth much when you go to spend them. Say there's nothing to worry about for the next 10 years, but then it gets so bad that the market says 'enough, we're not buying these bonds anymore USA.' The USA at that point can print the money and pay the bonds with it or default. Either way, the dollars you earned through sweat and tears aren't worth much and the business that made them isn't attractive to customers at the "new normal" price points. At this nearly worst case point, you are poor, hit from both sides of the inflation game. This is one reason any thread of this nature has at least one mention of 'Gold!', as it holds its value no matter what the government does - assuming you can both hold onto it and trade it for fair value when you need it.
- ww520 14y agoIs that why the BitCoin is roaring back?
- sp332 14y agoIs it? It's still only around $11 after previous spikes of $15 or even $30.
- jstalin 14y agoThe PhD's at the Federal reserve, the same ones who have gotten every major economic and financial prognostication wrong, think that printing more money, i.e., debasing the currency, is going to create jobs. Since the Federal Reserve now is the largest single owner of US government bonds[1] and since it has come close to purchasing all available bonds at the long end of the spectrum[2], it is doing the last thing it can think of: an open-ended, unlimited purchase of Mortgage-Backed Securities. This is the terminal end-game of central banking. This won't end well. [1] See http://cnsnews.com/news/article/fed-now-largest-owner-us-gov-t-debt-surpassing-china http://cnsnews.com/news/article/fed-now-largest-owner-us-gov... (2011), updated data here http://www.federalreserve.gov/monetarypolicy/files/quarterly-report-20120630.pdf http://www.federalreserve.gov/monetarypolicy/files/quarterly... and here http://www.treasury.gov/resource-center/data-chart-center/tic/Documents/mfh.txt http://www.treasury.gov/resource-center/data-chart-center/ti.... [2] http://www.zerohedge.com/news/scary-math-behind-mechanics-qe3-and-why-bernankes-hands-may-be-tied http://www.zerohedge.com/news/scary-math-behind-mechanics-qe...
- nirvana 14y agoPrinting unlimited money has a political advantage as well-- not only does the Fed profit from it, but the government, and more specifically, politicians profit from it. A good example is Obama's "stimulus" which was a big old pork package, underwritten by the Fed that he got to pretend was "taking action" to "improve the economy" / "create jobs". It was a complete failure by even its own promises, but that has not hurt Obama's re-election chances, because people don't hold politicians accountable for damaging the economy. And this goes for Bush, Clinton, Bush 1 and Reagan -- all of whom took at least some actions that damaged the economy.
- mindslight 14y ago.. and just when I was starting to forget the details of the insane rabbit hole called the "economy" that make leading a simple life, getting a salaried job, and making an incremental contribution to society an utter non-starter. Even more direct subsidies to the bankers who own "your" house, so they can continue their charade of overinflated home prices and demanding hefty rent simply for a place to exist. Never mind that you're still responsible for the maintenance, and probably have not the knowledge nor time to do it yourself, as you're too busy working to service your indentured servant mouse wheel. I just don't get what keeps most people complaining about one or two narrow pieces of the puzzle, but yet completely accepting of the entire perverted ball of wax of over-abstracted, hollowed out, and corrupt institutions. This mild dissent is then amazingly converted into support every time an election roles around, where the socially acceptable thing is to cheer on your chosen republocrat, pretending that electing new faces will change anything (not that a third party would magically fix things either, it's just a minimum viable dissent). Is it just straightforward cognitive dissonance because of how painful it would be to admit most things you take for granted are simply not there? Is it that most people smart enough to actually see how rigged the game are still able to achieve an "above average" place in society and thus aren't interested in meta questions ? I suppose anything is easier than developing an adversarial individualist perspective which can't be unseen.
- confluence 14y agoFellow HNers - the comments you see here are from random people on the internet without the slightest qualifications and their own pet theories and agendas so please take them with a grain of salt.