en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en en
Last month Federal Reserve Chairman Ben Bernanke announced the roll out of QE3—the third installment of a plan to intervene more directly into the financial sector of the U.S. economy.
We hear and read a lot about it in the media and on the web, but how much does it affect us?
As individuals, very little; but collectively, the effect is more substantial.
What is QE (quantitative easing)?
Quantitative easing involves the Federal Reserve making unusual increases into the monetary system in order to stimulate economic growth.  Since credit is what moves so much of the country—think mortgages, auto loans, student loans and credit cards—this is where the involvement is most substantial.
The Fed does this by taking steps to lower interest rates and free up bank liquidity so that banks are free to make new loans.
Though it wasn’t called “QE1” when it first came out in 2008, the first round of quantitative easing centered on buying up distressed loans from banks.  Those loans were sitting on the banks’ balance sheets, tying up capital and making the banks hesitant to make new loans.
In the first round, the Fed bought up $600 billion worth of bad loans from the banks, and while it didn’t seem to stimulate the economy, there’s a real possibility that it kept the economy from getting as bad as it could have.
The actual buying of bad debt from the banks may have helped improve their balance sheets, but at least as important was the fact that the Fed was taking action.  Decisive action by the Fed usually builds confidence in the business and financial communities, as well as in the population at large, that substantial steps are being taken to fix what ever is wrong.
The second round of easing—“QE2”—was rolled out in November of 2010.  It involved the Fed purchasing $600 billion of Treasury Notes (federal government debt securities that mature between two and ten years).  By artificially increasing demand for government securities, interest rates were kept lower than they might have other wise been.
What is QE3? – the latest edition
The two principal components of QE3 are (1) a commitment to keep the federal funds rate near zero through 2015, and (2) the monthly purchase by the Federal Reserve of $40 billion in mortgage backed securities.
The net effect of those two actions are to make sure that interest rates continue to be low—with the idea that low rates stimulate economic growth—and that banks continue to stay liquid so they can lend.
How will QE3 affect you?
This is QE2, but not quite the QE we’re talking about here.
No one can predict the future and know exactly how QE3 will play out, but we can get some clues from the last two episodes.  And while none of this will benefit us in a direct sense—we won’t be getting larger tax refunds or higher paychecks—it might help in indirect ways by improving the economy.
More predictability in the economy.
Confidence is a huge part of what drives the economy.  By launching QE3, the Fed signaled that its policies of recent years will continue.  That continuity gives banks and businesses some sense of direction in a still wobbly economy.
At a minimum, they know that the Fed stands ready to intervene to cover the weak spots.
A stronger stock market.
Though there isn’t a direct connection, it’s generally thought that money injected into the economy by the Federal Reserve ultimately finds it way into the stock market.
This plays out in three ways:
Lower interest rates make stocks more attractive than fixed income investments, meaning that investors will have a preference for stocks because of their potential for far greater returns
Relieving the banks of bad loans frees them up to make new loans that will both increase corporate earnings and/or increase the flow of money into stocks
Actions taken by the Fed increase investor confidence to invest.
Continued low interest rates.
This is a mixed scenario.  Low interest rates are thought to stimulate borrowing which strengthens the economy, and it’s a direct benefit to you if you’re a borrower.  But if you’re a saver, low rates are a negative, especially if you are retired and/or have preference for fixed income investments over equities.
A stronger job market.
Because of all of the above, companies may be more willing to hire than they would otherwise.  That can mean more job opportunities and, hopefully, higher pay.
As you can see, we should expect little in the way of direct benefit from QE3.  But the positive affect is has on lending and business in general might produce trickle down benefits that can help us in a more tangible way.
There are different opinions on this. What are your thoughts on QE3—or even on all three QE’s?  Good, bad or irrelevant?
Filed Under: Economy Tagged With: quantitative easing
Glen Craig is married and the father to four children that he spends the day chasing as a stay-at-home-dad. He took an interest in personal finance when he realized most of his paycheck was going toward credit card bills. Since then he's eliminated his credit card debt and started on a journey towards financial freedom.
October 8, 2012 at 8:46 am
I hope it helps but I wonder what all of this intervention really has done. If we had just crashed hard would the recovery have been stronger and faster? I just hope it doesn’t cause the crazy inflation some are worried about.
William @ Drop Dead Money says
October 8, 2012 at 9:58 am
Bernanke’s stated goal was to improve unemployment. Doing that with more debt will probably cause more inflation than job growth…
KenFaulkenberry - AAAMP Blog says
October 8, 2012 at 3:52 pm
The few benefits are far outweighed by the distortions caused by QE. Keeping interest rates artificially low steals money from savers and causes some to take more risk than they should. In addition, if QE causes inflation then it will rob the middle class by reducing their purchasing power.
QE mostly benefits the government politicians who won’t get there fiscal house in order. It also help the big banks who can continue to pay near zero percent interest rates.
A Little About Me
I'm Glen Craig - I used to live paycheck-to-paycheck, drowning in credit card debt. I turned that all around and now I build wealth rather than debt.
My goal is to make personal finance easy for you.
Join our email list (FREE) and never miss an article!
Use Google Calendar To Pay Your Bills On Time
9 Things to Do When You Retire
Side Hustle-Make Extra Money Cleaning Homes
Four Ways You Can Pay Off Your Home Mortgage Faster
Don’t Forget Your 401(k) When You Leave Your Job! Here’s What You Can Do With It
Your 4 Step Guide on How to Stop Living Paycheck to Paycheck
What Is A Mortgage Escrow Account?
This is Why Your House Isn’t Selling – Here’s How to Finally Get Your House Sold
7 Ways to Get Rich Quick
What is Renter’s Insurance and Why You Need It
What Is a Probate Lawyer and When Would You Use One?
Money Market Account VS Savings Account – What’s the Difference?
Five Ways Fantasy Baseball is Like Personal Finance
Tools to Help Organize Your Taxes
Don't Let Your Goals Fizzle Out! - 5 Reasons Goals Fail, and What You Can Do To Make Yours Succeed
What Do You Think of New Year's Resolutions?
Tools to Improve Your Finances
Online High Yield Savings
All About Online Checking Accounts – Why Pay More Fees Than You Have To
Personal Capital Review - A One Stop Financial Center
Online Brokerages That Won't Break Your Bank
Credit Karma Review - Get Your Credit Score and More
Mortgage and Refinance Rates
Follow Us On Pinterest!
Follow Free From Broke's board Most RePinned and Popular {Free From Broke} on Pinterest.
Think Long Term When Shopping Black Friday and Cyber Monday
10 Essential Tips For Shopping Black Friday And Cyber Monday That Will Save You Money
How to Improve Your Credit Score Fast
What is a Refund Anticipation Loan (RAL) and is it Worth It?
Paying Taxes with a Credit Card: Pros and Cons
Free From Broke is for general information or entertainment purposes only and does not constitute professional financial advice. Be smart and do your own research or contact an independent financial professional for advice regarding your specific situation.
In accordance with FTC guidelines, we state that we have a financial relationship with companies mentioned in this website. This may include receiving access to free products and services for product and service reviews and giveaways.
© 2007–2022 Free From Broke A Personal Finance Blog For Regular Folks – All rights reserved.
No content on this site may be reused in any fashion without written permission from FreeFromBroke.com | Privacy Policy | Sitemap
Copyright © 2022 · Metro Pro on Genesis Framework · WordPress · Log in
We are using cookies to give you the best experience on our website.
You can find out more about which cookies we are using or switch them off in settings.
Go to mobile version
Close GDPR Cookie Settings
Powered by  GDPR Cookie Compliance
This website uses cookies so that we can provide you with the best user experience possible. Cookie information is stored in your browser and performs functions such as recognising you when you return to our website and helping our team to understand which sections of the website you find most interesting and useful.
Strictly Necessary Cookie should be enabled at all times so that we can save your preferences for cookie settings.
Enable or Disable Cookies
If you disable this cookie, we will not be able to save your preferences. This means that every time you visit this website you will need to enable or disable cookies again.