Friday, September 21, 2012

Helicopter Ben Does It Again: QE3: Buying Mortgage Backed Securities

This week Fed. Chairman Ben Bernanke announced that the Federal Reserve will buy up Mortgage Backed Securities (MBS) to the tune of $40 billion dollars a month; with this action being open ended or without an end date.  His rationale in doing so is that it will lower interest rates and stimulate borrowing to buy everything from cars to houses to washing machines; thus creating jobs.

We've already completed $2 trillion dollars of Quantitative Easing (QE) stimulus in the last 3 years.  Yet, unemployment has remained high.  As far as borrowing is concerned, interest rates on loans are already at near historic rates.  So, why would anyone think another round of QE will matter to this economy?

To me, Bernanke is "Keynesian economics" and "Monetarist economics" out of control.  He is called "Helicopter Ben" for a reason.  Like most Keynesians, he believes that just introducing a lot of money into the economy will stimulate growth.  But, my god, between a near trillion dollars from Obama and $2 trillion from Bernanke, the economy and jobs are still limping along and none of those trillions have done much to fix anything.

All that Bernanke's QE3 will do is make a lot of people rich who now hold Mortgage Backed Securities.  These people finally have a sucker to buy all these junk securities that they've been stuck with since the housing collapse.  As far as lowering interest rates is concerned, a lot of average people with money in the bank will just get less interest on their accounts; making them feel less wealthy and less confident in spending the kind of money needed to grow our economy.  At the same time, food, energy, and import prices will go up; again, forcing consumers to watch their wallets.  And, it is this praxeology (or human behavior) that both Bernanke and Obama and most Keynesians never seem to understand.  People aren't buying houses because interest rates aren't low enough, they simply can't afford the 20% that is "now" required to buy a home.  Hardly anyone has that amount of money just lying around.  For sure, having higher food, energy, and import prices doesn't help anyone save the kind of money needed to buy a house, car, or whatever.  The bottom line is that when things are tight, rational people don't spend their savings.

Bernanke and Obama need to stop this top-down money-spending belief that it will somehow grow the economy.  They both need to look to the consumer and what the consumer is contending with and formulate a solution to address it.  Otherwise, our economy will remain stagnant for decades.

No comments: