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Is QE3 about to set sail?

By Gregg Fields · Bankrate.com
Wednesday, July 13, 2011
Posted: 3 pm ET

Is it anchors aweigh for QE3? It certainly is looking more like it, following the House testimony of Fed Chairman Ben Bernanke Wednesday, which acknowledged weak hiring, abysmal demand for mortgages and tepid consumer confidence.

Bernanke, speaking to the financial services committee, said a new round of quantitative easing remains a possibility in light of recent weak economic data.

"I think we have to keep all the options on the table," he told the committee. "We don't know where the economy is going to go."

Bernanke's comments came two weeks after the second round of quantitative easing, commonly nicknamed QE2, came to a close. Despite a somewhat complicated name, quantitative easing is simply an effort to pump capital into the banking system. The Fed buys Treasury securities held by banks, replacing them with cash.

With QE2, the Fed purchased $600 billion in Treasury securities. With QE1, which began in late 2008 and ran through early 2010, the Fed purchased $300 billion of Treasury securities, $1.2 trillion in mortgage-backed securities and $175 billion in debt issued by federal agencies.

The theory is that banks, flush with cash, will then lend the money out, stimulating the economy and creating jobs.

However, the results have proven underwhelming to myriad critics of QE1 and QE2. In June, only a net 18,000 jobs were created in all of America, which wasn't enough to prevent the unemployment rate from rising to 9.2 percent from 9.1 percent in May. The U.S. economy lost 8.5 million jobs in the recession, Bernanke said. To date, only 1.75 million have returned.

Traditionally, housing has been a primary driver of U.S. economic recoveries. But Bernanke made it clear that the housing industry is in no position to lead the economy. In addition to recession-scarred consumers, lending for home loans has also frozen up, Bernanke said.

"The demand for homes has been depressed by many of the same factors that have held down consumer spending more generally, including the slowness of the recovery in jobs and income as well as poor consumer sentiment," Bernanke said. "Mortgage interest rates are near record lows, but access to mortgage credit continues to be constrained."

Finally, even creditworthy buyers "remain concerned about buying into a falling market," Bernanke said.

Bernanke also admonished the members of Congress to raise the debt ceiling, and therefore avert default, saying failure to do so would prove "a huge financial calamity" for the economy.

Although the Fed can set its own schedule, more details about a possible QE3 are likely to be revealed when the Federal Open Market Committee convenes on Aug. 9.

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2 Comments
Homeless
July 14, 2011 at 11:11 am

This is the definition of insanity...doing the same thing over and over, expecting a different result!

This will not DO ANYTHING. They need to find other ways to put people back to work!!