QE3: Pour it on
By Agvisors LLC
On Sept. 14 the Federal Reserve announced that it will embark on Quantitative Easing 3. Yes, it's true; the Federal Reserve has once again found a reason to enter into the capital markets in yet another attempt to "fix" what is wrong with the United States economy.
QE3 will focus on the U.S. housing market by purchasing 40 billion--yes, billion--per month of mortgage-backed securities with no stop date set. This is a monetary policy that in essence goes on in perpetuity. The Fed believes that it can heal the unemployment and economic issues by implementing this program on top of QE1 and QE2. Their stated goal is to keep borrowing rates low at least through 2015.
Here are what we see as the pros and cons of QE3.
--Mortgage rates will continue to remain low.
--Banks will continue to be able to acquire funds at near zero percent.
--Increased refinancing of current mortgages will free up monthly cash flow.
--The banking industry will maintain high levels of liquidity.
--Commercial lending rates should remain low.
--Increasing the money supply will drive down the value of the dollar.
--Commodities will continue to rise in price do the deflation of the dollar.
--Inflationary pressures down the road will increase due to increase in the money supply.
Now for our opinion and analysis of QE3 and its intended effects. In looking at the pros, you have to ask whether any of the items listed would be different if QE3 were not implemented. Mortgage rates are already at historical lows, and most all mortgage originators are already running at max capacity. Keep in mind that the number of mortgages being originated is not at the peak in 2006 and 2007; the issue is that so many mortgage companies went under.
Banks could already borrow funds from the Fed at near zero and they have mountains of cash to loan. The underlying issue is new regulations that are choking off the flow of money to those who need to borrow funds to expand or start up new businesses. There isn't a bank in the U.S. who would loan funds to someone who created a new product that wants to take it to market. The risk is simply too high under current economic conditions to justify loaning the money.
The goal of QE3 is to heal the housing markets, which in turn should help improve the overall economic situation. The stock market wanted this cash infusion and got what it wanted. QE3 will continue to punish saving and those who rely on an income-based investment portfolios over the next few years. Fed Chairman Ben Bernanke stated that they understood QE3 and other Fed policies will hurt those who rely on fixed income, but the overall need of the economy for this program far exceeded the income needs of savers.
We will not know if QE3 is a success or failure for years to come. Government intervention into the capital markets has never really had positive results, but we are always hopeful that this time will be different.
Editor's note: Agvisors provides commentary about agricultural markets, including grain, dairy, livestock, equities, financials, and energy, highlighted by a live weekly webinar discussing conditions and responding to questions. For more information, visit http://agvisors.com.