Monday, May 30, 2011

Watch Out: QE2 Is Ending!

     Anyone who's been paying the slightest bit of attention to business news has heard as much about QE2 ending on June 30 as they did about the world ending on May 21.

     Except, on June 30, QE2 really will end.

     So what's the big deal? And what is QE2 anyway?

     QE2 is the sequel to the original Quantitative Easing that came out in 2008. It's a program where the Federal Reserve Bank, led by Chairman Ben Bernanke, backs up the truck to the nation's banks and unloads huge piles of money.

     The Fed accomplishes this by creating money electronically, then buying assets such as bonds and commercial loans from the banks. The transactions increase "liquidity" in the banking system -- meaning the banks are bulging with cash.

     So now the banks are flush. Bankers have so much money they don't know what to do with it all. Sure, they stuff some of it in their pockets as bonuses, but the rest they put "on sale," in the form of low interest rates, and try to push it out the door as mortgages, car loans, student loans, credit-card loans, small business loans. All to try to jump start the U. S. economy.

     The problem is, Quantitative Easing didn't work too well. Bernanke couldn't make interest rates low enough to get anyone to buy a house, or entice consumers to go to the mall. So when QE1 ended in November 2010, and the economy was still sputtering along like my old Jeep, the Fed immediately came out with QE2 -- on the theory that if one QE didn't work, then two QE's certainly would.

     Now QE2 is scheduled to expire at the end of June. And the question nobody knows the answer to -- as discussed in "The End of QE2 -- Does It Matter?" -- is whether or not shutting off the tap of free money will hurt the economy. How could they? Nobody knows if QE1 and QE2 actually did any good.

     Oh, the economists do know that the twin QE's helped raise the stock market, causing the S&P to double since its low in March 2009. They know the QE's have depressed the value of the dollar and kept interest rates near zero. Mortgage rates are at an historic low (if only anyone wanted to buy a house.) Car loans are pretty reasonable, and most experts agree that the QE's have helped the beleaguered American car industry.  Of course, your credit-card rates are still ridiculously high -- after all, the banks need to "shore up their balance sheets."

     And the rate that savers get on a bank CD, or a Treasury note, is smaller than a  ... well, let's just say you can't see it with the naked eye. Which means after taxes and inflation, you're actually losing money by keeping your savings in a bank or loaning it to the Treasury. And since the older you are, the more likely you are to have savings, it's the Greatest Generation and the Baby Boomers who, along with the Chinese, are really bailing out the economy.

     Anyway, the best guess is that all that QE money went to Wall Street (with some leftovers to Detroit and Washington). But not much got to Main Street. And that's why Main Street is still coughing and belching like an old beater, while Wall Street and people "inside the Beltway" purr along like brand new BMWs.

     For most of us, the end of QE2 won't make much difference. If you're a saver, it might help you out a bit, by increasing the rate you get on a CD. If you're planning a vacation to Europe, maybe the dollar will be worth slightly more, making your trip marginally less expensive. If you're looking for a job, or looking to expand your small business, the end of QE2 won't change things. Life was hard; it will stay hard.

     If you're a Wall Street trader, though, it could make a big difference, according to this Reuters poll. Perhaps that's why the stock market has sagged in May, down about 3 percent. So now some people are pushing to follow up QE2 with QE3. On the theory that if two QE's didn't work, maybe a third one will. Does that make sense to you?

    [A shorter version of "QE2 Is Ending!" appeared last week on Technorati.]


rosaria said...

Now I know! And I feel worse for it!

Kay Dennison said...

Don't get me started on Bernanke et al!

Friko said...

I came over from Schmidley's because I liked your comment.

I don't understand the QE2 thing fully because I live in England but I have just read back over a few posts and you made me laugh. Which is a good thing. I like being made to laugh.

So, if you don't mind, I'll pop over again and when the topic is one I can follow, I'll comment. And, hopefully, laugh.

Dr. Kathy McCoy said...

Oh, my. I had no idea! I'm so angry at the banksters. The thought of them sitting there with piles of money they don't know what to do with while families are homeless and hungry and/or without medical care is making my blood pressure spike!

Robert the Skeptic said...

I worked in banking until 1986, banks paid passbook savings rates of 5.5%. There were usury laws which regulated how much interest one could charge on a loan. Today, people pay institutions interest rates that used to be charged by Loan Sharks.

Low interest rates, falling real estate prices... it's all fruitless if consumers don't have the income to service debt. I even personally have a $195,000 line of credit. If I borrowed that much, I wouldn't be able to afford the monthly payment.

I have been saying for a long time that American businesses don't realize that when they layoff employees, they are in fact eliminating their own customers.

But apparently US businesses are looking for their consumers now in India and China.

All this about Bernanke I find somewhat confusing; I never took him to be a Wall Street Type, the guy is from humble working-class beginnings. Unlike Greenspan, he seems the last person to sell out Main Street. But then again I voted for Reagan way back then as I thought "Trickle Down Economics" made sense. It did... until my first layoff.

As far as the wisdom of a QE3 following a QE2 - you know the definition of insanity is doing the same thing over and over expecting a different result. said...

Poor Bernanke, damned if he does and damned if he doesn't. The world is a big mess at present, and he cannot cure it. He might be an expert on the Depression, but perhaps he should have studied economic booms, to figure out what mankes them happen. I don't think anyone knows these days.

Linda Myers said...

I suspect the easy problems have been solved already. I wish we were all kind and fair, but suspect that will never happen.

MerCyn said...

It is frustrating to see the major Wall Street guys get big bonuses while the rest of us re-order our world to the new economic realities. One financial scandal after another over the years resulted in a slap on the wrist for the big firms, a couple of people are scapegoats and lose their jobs, and the firms march on to the next scheme.

Sightings said...

Kay, I don't know that Bernanke is the big villain in this story. Read "Reckless Endangerment" by Gretchen Morgenson and Joshua Rosner (which I have not read yet, but it's on my list), and they finger Timothy Geithner, the people from Goldman Sachs (inclu. Robert Rubin and Henry Paulson), the people involved with Fannie Mae (inclu. Franklin Raines and Barney Frank), and a lot of others, both Dems and Reps, in the Wall Street to Washington axis.

Also, it isn't just the corrupt, short-sighted or self-serving power brokers who are to blame. A lot of "regular" people lied their way into liar loans before the housing bubble burst.

Anyway, Friko, many thanks for visiting. I'm glad I made you laugh. Not everybody appreciates my sense of humor. (For example, my kids!) But also, as these comments confirm, not every issue lends itself to being funny.

And I agree with those of you who say (which, actually, is just about everybody) that we've painted ourselves into an economic corner which, despite Bernanke's best efforts, we will not likely get out of very easily, or very soon.