How Does Quantitative Easing Create Jobs?
With QE supposed to save the world, let’s review what QE actually does to jobs. Courtesy Omid Malekan.
Federal Reserve Chairman Ben Bernanke recently announced the central bank will now undertake open ended Quantitative Easing until the economy gets significantly better. Specifically he said: If we do not see substantial improvement in the labor market, we will continue our asset purchases.
Although the first two rounds of QE have failed (if they hadn’t there would be no need for a third) the Federal Reserve has now decided to go all in on its signature program. Instead of taking finite action and waiting to see the results, going forward the Fed will take action every month until we get lots of job creation. To see how all these “asset purchases” are supposed to create jobs, lets study the mechanics.
Quantitative Easing is a fancy way of saying printing money and using it to buy stuff. In this iteration, the Fed will buy securitized mortgages. So every month it will create $40 Billion out of thin air and give that money to the big banks in exchange for mortgage bonds. According to Ben, these actions will lower rates, spur the housing market and make stocks go up, and as a result jobs will be created.
The idea of lowering rates further being a major benefit to housing is farcical. Since the peak of the housing market 6 years ago, the interest rate on 15 year mortgages has been cut in half, from over 6% in 2006 to less than 3% today. Today’s rates are the lowest ever, but housing is still in the gutter. The reasons are obvious to anyone who has tried to buy a house. Unemployment is high, incomes are low, bank lending standards are tight, people’s credit histories have been damaged, and there is still a large inventory of foreclosures. If you didn’t qualify for a mortgage at 4% interest last year, you probably won’t qualify for a 3% loan this year, and rates falling to 2.5% going forward means nothing to you. Ironically not that long ago Fannie and Freddie, the same mortgage entities whose bonds the Fed will be buying, announced tighter lending standards.
Full article here.