There are lots of news reports and internet musings about Quantitative Easing. I’ve read many with the hope of discovering one comprehensible article that would fairly represent QE for the non-fiscal, non-monetary schooled citizen. Not to be. The explanations are either way over my head or focused on attacking or defending the policy. People seem to use many exotic terms to describe an already abstract subject.
So I’m going to take a swag at explaining what and why.
The Fed chairman, Ben Bernanke has been fearful of the country falling into another depression since the bubble burst in 2008. He’s made plain that the bogeyman we have to fear is deflation, not inflation. Simply put, inflation is too much money chasing scarce goods. Inflation causes prices to rise. Deflation on the other hand is an abundance of goods and not enough money, or at least not enough buyers. Deflation causes prices to fall.
A recession brings a lot economic distress: job losses, company failures, personal bankruptcies….its ugly. But a depression, that’s an event that changes lives, economies and even governments, sometimes permanently.
The clear similarity between 1929 and 2008/2009 is that in both cases, a massive amount of capital disappeared. Money invested in almost anything (except long term treasury bonds) just disappeared. When money in investments and the value of owned assets disappears people won’t or can’t go out and buy things. Then more jobs disappear because employers know people aren’t spending as much money so they reduce expenses by laying off workers. Fewer jobs equal fewer paychecks and there is even less available money around. As you can see this becomes a really ugly self-perpetuating down spiral.
The 1929 depression saw the collapse of the stock market erase the supply of capitol. In 2008/2009 the wealth disappeared from home equity first and then the stock and bond market followed. Again, as in 1929 and the 1930′s, wealth just melted away. Homes purchased in 2000 for $300,000 escalated to $500,000 in 2005 then fell to $200,000 by 2010. This happened millions of times. Almost all the homes had mortgages, many owners had refinanced and taken money out for home improvements and vacations. By 2010 the inflated value was gone. Owners owed more than the possible selling price of the house. A vast amount of capital was taken out of the American economy. Whatever the details, 80 years ago or today, a huge amount of wealth ceased to exist.
Bernanke is using QE to replace the private capital that had been lost in the recession. To do this the Fed is using new money to buy mortgage backed securities (MBS) from banks so that the banks, in turn, make more loans. In other words replacing money which had disappeared and getting it back into the economy.
You might say that this is nice for the banks that are getting premium prices for otherwise unwanted securities, but has this worked to help the little guy? The answer is no, not directly. However, good things have happened to reverse some of the losses from the recession, For example: (1) The stock market is within hailing distance of its 2007 high, thus replacing a fair measure of the capital that was lost in the recession. (2) Unemployment has improved slightly. Not that much, but its better than it was two years ago. (3) New housing is showing some signs of life. Again its not a great recovery, but there is improvement. Along with that will come housing prices which will rise and replace a lot of lost wealth.
The arguments against QE mostly have to do with it reducing interest rates for savers and opening the door to inflation. The inflation argument is pretty weak right now since its very unusual to see high unemployment and high inflation at the same time. Later, when employment improves we hope the Fed stays ahead of the curve. Low interest rates for savers also means low interest rates for home buyers, so that’s a mixed blessing. Savers must take on more risk since bank interest rates won’t even keep pace with low inflation numbers.
SRBAC
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Joe Paterno, Tiger Woods and Media Excesses.
The blistering news comments about Joe Paterno reminds me a lot of the media frenzy that surrounded Tiger Woods two years ago. Both have been the subject of relentless speculation, mostly by people who weren’t there, possess no firsthand knowledge and believe themselves worthy of pronouncing judgement.
The coverage has been suffocating. The speculation has been exhausting. The blame has been placed.
Over what?
Joe Paterno was told about a terrible sexual assault observed by a graduate assistant which he immediately reported to authorities at Penn State. Paterno’s sin apparently is not doing “enough”. There is not yet any agreement on what would have been “enough”. Woods admitted to multiple infidelities. This is massively bad judgement on his part, but infidelity today is hardly a news item of any real merit. (note: I didn’t say infidelity isn’t serious, I just said its not much of a news item).
Ahhh….wait a minute. Do you suppose the media excesses have something to do with a little retribution? Maybe the little people in the media are getting in some payback for being ignored. (The worse thing you can do to self-important people is ignore them).
The irresponsible treatment of Paterno and Woods isn’t about an association with an accused pedophile and it isn’t about cheating in your marriage. Its about writers losing all sense of proportion and taking the opportunity to punish two talented, successful people, who have about as much use for the media as a pimple on your butt.
Paterno and Woods share two traits: a predilection to protecting their privacy and a total disdain for the media. Call me crazy, but I detect ill-hidden glee from some writers (masked with self-righteous proclamations). They can’t criticize Joe’s 400 wins or Tiger’s 14 majors, so they find another way.
Joe Paterno and Tiger Woods only committed one sin in the eyes of the media…they don’t suffer fools gladly.
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