QE3 and stock prices
Excerpt:
Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target valueComment: I'm not convinced it is good policy! Here's a view that it is bad policy: How Quantitative Easing Helps the Rich and Soaks the Rest of Us
Probably the best definition of QE: Weimar Republik monetary policy. What could possibly go wrong?
ReplyDeleteGeorge Will on QE: Monetary morphine:
ReplyDeleteBecause today’s rate is negative, the Fed’s stimulus repertoire is reduced to “quantitative easing.” That phrase, which is how government speaks when trying not to be understood, means printing money. Except printing is so 20th century. Nowadays, the Fed gives banks digital transfusions of money to lower long-term interest rates, which result in . . .
Not much bang for trillions of bucks. With corporations holding upward of $2 trillion in cash, and 30-year mortgages at 3.5 percent, George, speaking several weeks before this week’s meeting of the Federal Open Market Committee, asked: “Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?”
Very low interest rates discourage saving, punish retirees living off interest-bearing assets and, George says, “incent people into riskier assets.” These include commodities, farm land (for the first time on record, prices of cropland in George’s district have risen more than 20 percent for two consecutive years) and equities.
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Uncertainty is exacerbated by the Fed’s exercise of its vast discretion, including QE1, QE2 and, perhaps soon, QE3 (or QE5, including two “twists” also aimed at lowering borrowing costs). Bernanke, who promises more “policy accommodation” to support the economic recovery, is inadvertently vindicating Milton Friedman’s belief that “the stock of money [should] be increased at a fixed rate year-in and year-out without any variation in the rate of increase to meet cyclical needs.”
When the independent Fed buys bonds to affect short-term economic stimulus by manipulating long-term interest rates, this is less monetary policy than fiscal policy, which is the business of an accountable Congress
Read the whole thing ... worthwhile