QE4 Just Around The Corner

Mike Foil (Bio and Archives) Sunday, September 23, 2012

Quantitative Easing, Mortgage Backed Securities, Bond Buying, Federal Reserve

The Federal Reserve just announced what their latest attempt will be to help rescue the American economy. It is being called QE3, for Quantitative Easing 3. Quantitative Easing refers to the policy of creating more money and injecting it into the economy in hopes that the additional dollars will stimulate the economy and cause a growth in employment.

QE1 began four years ago, right at the time of the last presidential election (11/2008). By the time QE1 ended in 3/2010, the Fed (Federal Reserve) had purchased $1.25 trillion in mortgage backed securities (MBS) and another $175 billion in government debt.

When this failed to solve the problem, they tried it again with QE2. This round began in 11/2010 and ended in 6/2011. During this time, the Fed purchased $600 billion in treasury bonds. The US Treasury Department is responsible for the funds needed to run our government. They raise additional money by selling Treasury Bonds, which amounts to an IOU from the government to the buyer of the bonds (national debt).

We are talking about “real money” here as the Fed has injected approximately $2.3 trillion into the U.S. economy since 2008.

The latest announcement (9/2012) by the Fed is that they are beginning QE3. The first two attempts did not solve the problems in the national economy, so they want to try again, expecting different results.

QE3 will have the Fed buying $40 billion in MBS each month going forward until they decide the employment situation has improved to an acceptable level of stability. In other words, the Fed is beginning an open-ended, monthly injection of $40,000,000,000 into the money supply. At that rate, another half trillion dollars will be added each year until they decide to stop.

Investors.com just published an article by Sen. Jim DeMint, where he discusses QE3 and what it means. He refers to this policy as QE4-ever as it is an open-ended, monthly event. But, that is not why this article is named QE4.

QE3 will do what most of QE1 did, buy MBS. These mortgage backed securities amount to bundles of real estate mortgages. The Fed will gain ownership of $40 billion of additional mortgages each month, on top of the inventory they already own. These purchases are adding hard assets to the balance sheet of the Fed. The Fed has also been busy buying gold over the past few years, which is another hard asset.