Low Rates better than QE2/3? currently, increase, without, better

chetan86

I've been thinking about this, and isn't promising to keep rates at "near zero" until 2013 a form of stimulus which does what QE2 was supposed to do without the cost to the Fed while attacking the areas Bernanke wants to attack?

We can expect the two year to be pegged below 0.25% for quite a while and this depresses the five year (currently at 0.94%) which depresses the ten year (currently at 2.2%). The goal of QE2 was to lower long-term rates and increase risk-taking in order to spark the wealth effect and boost long-term confidence. saying you'll keep rates at "near zero" for two years forces people further down the curve if they want risk-free that has a positive expected real return. hell you'd have to be in 10+ years right now if you wanted yield from fixed income that has any chance of having a positive real return. so now you have the short-end capped, the long-end overbought, where does new money go? well it'd have to go into the risk markets because do you really want to be buying a 30 year that has a chance of having a negative return over that time period?

i commend the Fed for this move and think its the best thing i've seen in my four year career...



Edited 1 time(s). Last edit at Thursday, September 1, 2011 at 09:25AM by MattLikesAnalysis.

Analyze_This

I agree it's good, but it's really a minimum response, but the Fed has to target the real problem - we need consumers and businessess to start levering up again to increase demand.


But things like the mortgage refinancing plan are a great idea. Is creating something like a SWF to invest in things like infrastructure a possibility?

brainsX

QE was pretty sneaky though. Everyone thought QE2 would mean lower rates. But, starting in Aug. '10 at Jackson Hole, rates started moving up. The objective of QE2 was to force investors into risky assets - corporate bonds, stocks, etc. Once QE2 ended, rates fell rather quickly, as did the stock market.

ZIRP, Operation Twist, QE2.5, and the rest are all designed to do the same thing - build up the wealth effect.

Mortgage refi is a horrible idea. It doesn't fix any of the problems in the housing market. It's another band aid that may artificially prop up home prices for a short time, but doesn't do anything about all those that are upside down on the mortgages, or the 5 years of shadow inventory. That's the real problem.

I would be behind a decent infrastructure spending plan though. It's in need of a major update.

thecfawannabe

Sweep the Leg Wrote:
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> I would be behind a decent infrastructure spending
> plan though. It's in need of a major update.


Infrastructure spending USED to put a lot of people to work. It was quick & easy. Today, it just doesn't have the same effect. There's no need for infrastructure spending, plus it doesn't put as many people to work as it used to.

former

I'm more concerned with the $2T update our infrastructure requires. Our roads and bridges, power grids, broadband access, etc. are all in need of drastic improvements. Since (most of) this has to be done by the government anyway, might was well get it under way and the people that do get hired is a nice bonus.

BelalM

mp3bu Wrote:
-------------------------------------------------------
>
> Infrastructure spending USED to put a lot of
> people to work. It was quick & easy. Today, it
> just doesn't have the same effect. There's no
> need for infrastructure spending, plus it doesn't
> put as many people to work as it used to.


I agree that infrastructure spending doesn't put as many people to work as it used to, but the overall economic benefits are still significant, if not quite as obvious. Infrastructure spending used to mean building new roads, bridges, etc., which opened up new parts of a region to development and/or resource extraction with very clear economic benefits. We really don't need that many totally new roads and bridges, but the ones we have are falling apart and/or don't meet current demand. I don't know the numbers off-hand, but I understand the cost of sitting in traffic jams is astromical when aggregated across the country over the course of a year and that's not even considering the environmental impacts. Also, how many tires, rims, suspensions, etc. are destroyed by continuously driving on highways that are in horrible shape. I understand fixing the highways would have a negative effect on auto repair shops, but is that really where our collective money is best spent?

canadiananalyst

MattLikesAnalysis Wrote:
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> I've been thinking about this, and isn't promising
> to keep rates at "near zero" until 2013 a form of
> stimulus which does what QE2 was supposed to do
> without the cost to the Fed while attacking the
> areas Bernanke wants to attack?


Close in my opinion. I would say that it accomplishes the fed's goal of discouraging savings and encouraging spending and investment without have to actually "do" anything.

Where I disagree is in the implications of the word "cost" which seems to imply that the fed is running low on spending power (nothing could be further from the truth). What I think this does do is implement policy in a tricky political atmosphere without having it as easily labeled as "QE" or "money printing" etc. So I think the action has less political cost.

Good illustration of the range of things the Fed can do given the latitude of control over a fiat currency.