QE 2

[Hingle McCringleberry]

NEW YORK (CNNMoney.com) -- In its latest move to jump start the sluggish recovery, the Federal Reserve announced it will pump billions into the economy.

 

The central bank will buy $600 billion in long-term Treasuries over the next eight months, the Fed said Wednesday. The Fed also announced it will reinvest an additional $250 billion to $300 billion in Treasuries with the proceeds of its earlier investments

 

 

he bond purchases aimed at stimulating the economy -- a policy known as quantitative easing -- will total up to $900 billion and be completed by the end of the third quarter of 2011.

 

Ever since the Fed first signaled back in August that it was considering a second round of monetary stimulus, dubbed QE2, investors have been preoccupied with speculating on how much the Fed would buy.

 

Now the verdict is in, and is roughly in line with forecasts. Mainstream estimates had predicted a total between $500 billion and $1 trillion.

 

"It was all largely as expected," said Calvin Sullivan, chief strategy officer at Morgan Keegan. "The markets are responding as one would expect."

 

Stocks seesawed between gains and losses, as investors digested the news. The real surprise was in the bond market, where yields on the longer term 10-year and 30-year rose, after traders realized the Fed's plan called for 91% of its purchases at shorter maturities than expected.

 

Read the Fed statementThe Fed also reiterated its bearish view on the stalling economy, saying "the pace of recovery in output and employment continues to be slow."

 

Amid sluggish consumer spending, businesses have been reluctant to hire and the economy has grown at a snail's pace. At the same time, inflation is dangerously low, causing some economists to warn that the United States may even be flirting with deflation -- a debilitating drop-off in prices and demand.

 

The Fed has already kept the federal funds rate, a benchmark for interest rates on a variety of consumer and business loans, at historic lows near zero since December 2008. The Fed said Wednesday that it would continue to hold the rate at "exceptionally low levels" for an "extended period."

 

The federal funds rate is the central bank's key tool to spur the economy and a low rate is thought to encourage spending by making it cheaper to borrow money.

 

When already low rates failed to get consumers and businesses to spend, the Fed decided to resort to the more unconventional tool of quantitative easing, to lower interest rates even further.

 

But critics of QE2, including some Fed members, believe that too much monetary stimulus might lead to runaway inflation that could derail the economy, or future asset bubbles that could endanger economic stability over the long term.

 

The most outspoken voting member of the Fed, Kansas City Fed President Thomas Hoenig, was once again the lone dissent among policymakers, saying he believed the risks of additional securities purchases outweighed the benefits.

 

Other opponents have argued that it simply won't work. The Fed already made nearly $2 trillion in similar purchases during the Great Recession, and current low interest rates have not jolted spending, they say.

 

"I don't think this is going to make any difference at all," said Paul Ashworth, senior U.S. economist with Capitol Economics, who feels the plan is too small. "This is a slippery slope. Once you're on it, it's very hard to get off."

 

He predicts a repeat of what happened with the first round of quantitative easing two years ago. The Fed initially announced a $600 billion program in November 2008, but then four months later, increased that to $1.8 trillion, when it wasn't enough.

 

 

 

 

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OK, so what are your thoughts. I can the see the benefit of this over the long term, by printing money to buy up bonds and the pull the money out of the system at a later date, thus canceling debt. The down side is a weaker dollar, even more than we have, and running the risk of hyper-inflation at a later point. As stated in the article we have already done this to the tune of 2 trillion, and it really hasn't worked, as the banks that got the money have mostly propped up there own balance sheets, so there really is no proof that this will work.

 

 

 

 

Also other thoughts. We have TARP money, and are using some of it in QE2(+-300 billion), why not use more of this, or unspent stimulus money. This would prevent the printing of more money and maybe keep the dollar propped up. Also is a weaker dollar really a bad thing, case in point it helps us export more, this has a massive benefit on our economy (see China), also before the collapse, I read an article about the weaker dollar had caused the US to re-industrialize faster than Europe. A big boost in exports would really be a shot in the arm as that is a direct injection of capital, and jobs. On the flip side, at home, we would have prices rise due to oil going up, and food costs rising from there importation, so would exports be offset by increase costs at home. In the end I really do not know what to think of this. I dont like the idea of weakening our currency, as I think it hurts our stability, but I know other countries do this as part and parcel, Italy and Greece come to mind, although they couldn't do it this time around due to the Euro (this more than anything put a strain on the entire system, I am more than a little amazed one of the southern countries didn't leave, but that is a topic for another day). As a default I take the stance of keeping the Feds out of as many systems as possible, while the intentions may e good the execution of many programs are poor at best.

 

 

 

 

 

[huskertim]

My thinking is pretty simple on the matter. Government intervention into the natural corrective actions of the marketplace caused or at very least exacerbated this economic downturn and more intervention is not the solution. In any recession (panic or depression) the market has always found its own level and managed to climb out of the proverbial hole generally within 1-2 years (longer for the Great Depression but that's another discussion). Usually monetary manipulation has served only to reduce the impact of the immediate fallout but long term, the market ditates a recovery. Further, every economic downturn leads to an increse in worker productivity (as we are seeing now) which leads in turn to greater profitability, which leads to more fiscally fit industry, which leads to greater output, which leads to the need to expand and thus hireing begins. These corrections happen with regularity and are a natural part of the marketplace but can be thwarted by overzealous government actions such as QE2. Hopefully, we will see the Fed act to shore up an unstable dollar instead of further debaseing it.