Daily commentary: On QE3
This one’s short today as I am running out of time. I posted earlier regarding Bill Gross’ comments about the Fed doing a mortgage-backed QE3. There’s nothing fundamentally off about this call. But we really aren’t there yet as it is wholly dependent on the US economy. Right now the Fed is on cruise control until the economy breaks one way or another. That means they are committed to zero rates through 2014. Tim Duy’s reading of events below makes sense to me because what he’s saying is that the Fed would actually withdraw liquidity and start to tighten if the economy moves strongly toward robust job growth. if the US economy weakens, only then will the Fed resort to QE.
QE is bad policy in my view because it is just an asset swap. Only in a loanable funds view of the world can it work. However, if the Fed loads its balance sheet up with mortgage-backed securities, it’s not really "quantitative easing" its "qualitative easing" and that represents a portfolio shift at the Fed to induce the same in the private sector.
So what Gross is saying is that he expects the economy to underperform so much that the Fed gets off the fence and goes QE. That would be aggressive policy in an election year but time will tell if it’s right.
That’s it. Here are the links.
On the face of it, it seems absurd that the government could directly pay for health insurance for all Americans and levy a tax to support that program – but may be barred from requiring Americans to personally purchase insurance. Don’t they amount to the same thing? In a sense, they do. Under either scheme, Americans would be required to be insured and they would be paying for it. But that’s only what it looks like on the surface.
In essence, Bernanke suggests that the recent rapid improvements in unemployment reflect largely a reversal of out-sized deterioration experienced during the recession. As such, we should not expect a slower pace of improvement given current growth forecasts. Under such conditions, I believe, Bernanke would push for another round of QE – although it stills begs the question of why he doesn’t push for more now given the existing forecasts. But he hasn’t, so we can only infer that he thinks the costs of additional easing outweigh the benefits. He leaves open the possibility, however, that labor markets will continue to improve at the recent pace, in which I think QE3 is off the table. And that is where Federal Reserve President James Bullard steps in to the picture. He said pretty much the same thing in a CNBC interview
Instead of saving up for their sons’ college education, Bill Dunham and his wife are taking out loans for high school. Their eldest son will begin ninth grade at a school in Boston where annual tuition runs around $10,000 — and they already pay $5,000 a year for their younger child. A project manager for a mechanical construction company, Dunham says the schools referred him to lenders who specialize in pre-college education loans. He’s taking a loan to cover his son’s full high school tuition, which he plans to repay over two years. "If we had the money, we’d pay it now," he says.