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Did the Federal Reserve really help the economy, especially main street, when they announced QE3?  No, but they certainly helped Wall Street.

Everybody is getting all excited about the Federal Reserve's declaration of QE3.  My reaction of the announcement was, it won't help much and it's more trickle down policy with the money going to the 1% while the 99% hope to get trickled on.  Let's see why it was good for Wall St., but not so much for Main St. below the fold.

First we need to look at what the Federal Reserve statement actually said.  Here's the key part about what they're going to do.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
So the bottom part says they're just going to continue what they've been doing, and hasn't been working for awhile, and the top part is the new and supposedly stimulative part.  They're going to buy Mortgage Backed Securities at a rate of $40 billion/month, until hell freezes over, or unemployment drops, or they change their minds.

By now, just about everyone knows what a mortgage backed security (MBS) is.  For those that dont, I like to think of them as a whole bunch of mortgages that have been put in a blender, then the mess is divided into a bunch of portions and each portion is sold off like a bond.

Here's where the problem lies.  I'm sure a lot of people are thinking that because the FED is going to buy $40B worth of MBS a month, that somehow that's a lot like buying $40B worth of new mortgages a month, and that it will cause a huge amount of new houses to be built.  Well unfortunately, that's not remotely the case.

Lets do what Bill Clinton asks us to do, the arithmetic.

According to the census bureau August new home sales were at 372,000/year, or about 31,000/month.  The average new home price was roughly $263,000.  So if all of these sales were fully mortgaged (which they most certainly are not), and if all the mortgages were converted to MBS, which most probably are, what would this add up to?

31,000 X $263,000 = $8.153 billion.

So even if the Federal reserve were to buy every single MBS produced from every single new mortgage, it would still be a small fraction of the $40 billion they say they're going to buy.  So the VAST majority of the $40 billion they're going to spend on MBS is going to be on OLD MBS.

Everybody raise their hand who has some MBS they can sell to Ben Bernanke.  What? You don't own any MBS?  Well neither do I, and I don't know anyone who does own a MBS.  So who does own them, and how are they going to use the money they get from selling them to the FED?

Well, if you remember back in the panic days of 2008, what was it that actually got all the banks in trouble?  Right!  Their MBS and credit default swaps (bets on MBS) were going bad in a big way.  So we know that big banks own MBS, but so does FANNIE and FREDDIE, and hedge funds, and big foreign investors...

Here's one example of a Wall Street type that owns a lot of MBS, the big bond company Pimco.  According to Zero Hedge, back in January, Pimco borrowed $88 billion to buy MBS, because they figured Bernanke would do exactly what he just did.

Regular readers of Zero Hedge know that in recent months tracking the portfolio and thoughts of one Bill Gross via the holdings of his flagship Total Return Fund (which just jumped by $6 billion in the past month and is just shy of its all time record north of $250 billion) has meant one thing and one thing only: betting on the Fed monetizing Mortgage Backed Securities or bust. Well, in January he just took it to a whole new level. The fund has now borrowed a record $88 billion, or -35% of its AUM, in cash (shows how much he thinks of the dollar) and used the proceeds (together with dumping European sovereign bonds from 18% to 11% of AUM) to bet on MBS which now stood at a whopping 50% of the entire portfolio - the highest since July 2009 when QE1 was in full force. However, in absolute dollar terms, due to the growth of the fund's AUM, the actual bet on MBS has never been bigger, and at $125 billion, represents the biggest notional bet ever made by PIMCO. Treasury holdings of just over $100 billion with an effective duration of 6.33 complete the epic bet that the fund has now put on QE3.
So will buying $40 billion worth of MBS from Wall street investors lower Mtg rates?  Probably a little, but will that cause people to go out and buy a lot more houses?  Here's what some analysts in this article from the New York Times are saying.
...
“The incremental benefit of slightly lower mortgage rates will be small,” wrote Paul Diggle, a property economist at Capital Economics, an international research firm, in a note to clients.

“After all, most borrowers in a position to refinance have probably already done so. And it’s not obvious why a would-be buyer who wasn’t tempted by a 3.7 percent mortgage rate would be by, let’s say, a 3.25 percent rate,” he wrote.

...

Jed Kolko, the chief economist at Trulia, a real estate analytics firm, anticipated a muted effect on sales.

The big obstacles for people who want to buy are saving enough for a down payment and qualifying for a mortgage, because credit is still tight,” Mr. Kolko said, saying that the Fed program would not directly address those problems.

So lowering interest rates a little won't make much of a difference.  The big question becomes, what will all those Wall Street investors do with the money they'll get from selling those MBS (after they took a big jump this week) to the Federal Reserve.  Will they invest it in new companies, or new technology, or hire a bunch of people...?  Not likely.  Corporations are flooded with cash, and Wall Street investors have recovered almost everything since the depression of 2008 began, and yet they've done nothing to help the productive economy, and have simply found new ways to place bigger and riskier bets.  

Another huge problem with this approach is, it's too little and the wrong kind of QE.  This is very similar to what happened with the stimulus.  It was too small and misdirected toward tax cuts, and although it stopped the economic slide, it wasn't nearly big enough to get the economy growing on it's own.  The Republicans are shouting about how big of a failure the stimulus was, so you can imagine what's coming when QE3 doesn't work because a whole lot of money is going to people who already have a whole lot of money.

If QE3 fails because it's too little and misdirected, which I think it is, the Republicans will shoot down any further chance of monetary policy, just like they've shot down any further chance of fiscal policy.  If these timid approaches to both fiscal and monetary policy lead to a forced abandonment of Keynesian style stimulus, we are going to be in deep, deep trouble.  The only good thing I can see with this is, the belief that it will work may very well help reelect President Obama.

Ben Bernanke will give $40 billion a month to the casino on Wall street, and he'll cross his fingers and hope they'll invest to create jobs.  I'm not betting on it.

Originally posted to pollwatcher on Mon Sep 17, 2012 at 04:16 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  The LAST bailout of the rich helped them (22+ / 0-)

    quite a bit.

    I remember the HUGE bonuses given to those who STOLE OUR FUCKING MONEY and who RIPPED OFF A GENERATION of homeowners.

    Of course, they need bailed out again.

     I really like how they manage to talk of bail outs and then make it so they only really benefit the already filthy rich.

    "Easing" is an older term for 'taking a dump'.

    After years of being trickled down upon, now they want to ease themselves on us.

    Email me when the riots finally begin.

    The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.

    by xxdr zombiexx on Mon Sep 17, 2012 at 05:01:42 AM PDT

    •  Give a gazzilion $ to people who have a gazzillion (11+ / 0-)

      will accomplish what?  Nothing that I can think of.

      Bernanke could have funneled this money from the bottom up and helped so many people.

      •  Clearly the goal will always be to bail out (5+ / 0-)
        Recommended by:
        Dumbo, kurt, Dburn, deepeco, Aspe4

        the rich. The idea of actually helping the 99% is heresy.

        The path of the righteous man is beset on all sides by the inequities of the selfish and the tyranny of evil men.

        by xxdr zombiexx on Mon Sep 17, 2012 at 11:24:08 AM PDT

        [ Parent ]

      •  We appoint people to the Fed (5+ / 0-)

        who have a top-down lifestyle and mindset.  They're not capable of thinking that way because all the "nice" people they know, other than their doormen, are just like them, and it has to be right to funnel money to people just like yourself.

        Likewise, it makes sense the next president should be just like them, so they funnel money into electing an investment banker who is nice like them.  And the political class of the Democratic Party nosh with them at parties and they know how we should pamper the very rich because they are the good people.

        •  Sorry, they are annointed. (3+ / 0-)
          Recommended by:
          Dburn, skyounkin, Brooke In Seattle

          Many of the same families have been on the board for decades.  Teh Morgan family has had their annointee on the board since it's start.  What Bernecke has done is insane.  Why don't we have hyper inflation w/all the money he's printing? And, $40B X 36 months is more than a trillion $/s to a few vulture corporations that should suffer their loses.  How many will actually get that money?....perhaps a few thousand fabulously wealthy families.  This is a scandalous transfer of wealth.  Outright class warfare.

      •  Are we REALLY repeating (9+ / 0-)

        right wing analysis of QE3? Have the Austrians become so good at argument that they cause people to embrace right win theories without knowing it?

        From Krugman:

        This is very much the kind of action Fed critics have advocated — and that Mr. Bernanke himself used to advocate before he became Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized).

        And Republicans, as I said, have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” — and declaring that “we should be creating wealth, not printing dollars.”

        Mr. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard’s N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week.

        http://www.nytimes.com/...

        The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

        by fladem on Mon Sep 17, 2012 at 05:08:47 PM PDT

        [ Parent ]

        •  Arithmetic is not Ideological. (4+ / 0-)

          None of the money under discussion will trickle down. Okay, maybe some exotic products will be doing great. Not the every-declining middle class and poor.

          The finance capitalist system is draining all the blood of the body social from every orifice and many cuts. The blood drawn is not being used to fertilize the earth, but to buy cocaine, prostitutes, and presitious things of the world.

          The bandaid on the papercut will slow this process, and the uptick on the monitor may be read as an indicator of recovery for a time. But inevitably the patient must bleed out completely. Arithmetic, not ideology. None of the money concerned will trickle down.


          The Internet is just the tail of the Corporate Media dog.

          by Jim P on Mon Sep 17, 2012 at 11:02:02 PM PDT

          [ Parent ]

        •  Don't go down that path in this diary! (2+ / 0-)
          Recommended by:
          Aspe4, ssffgr

          Because people disagree about whether this QE3 doesn't mean it's right wing anything.  So please knock that stuff off.  I welcome disagreement and a reasonable discussion because this is complicated stuff and the FED is treading on new ground.

          Krugman is my favorite Economist and I follow him carefully, but he's not God and I happen to disagree about how effective QE3 is going to be.  Krugman also said in May that Greece would be gone from the EU by the end of June. No one is perfect and I certainly don't expect perfection.

          There is room for reasonable disagreement without the name calling, so please continue and be respectful.

        •  I believe that Bernanke is honest (1+ / 0-)
          Recommended by:
          pollwatcher

          whereas Greenspan was dishonest when he said that the tax cuts were fine because he could see surplus revenues far nto the future. he should have said that when the debt is paid down then tax cuts could be considered.
          I think Bernanke is honest and is very concerned that the Republicans are blocking fiscal programs like government sponsored infrastructure spending to bring a massive jobs program to help people.
          He said as much, I think. Without the legislation for government spending to fill in while business sits on its massive cash position, he is, I believe, trying to support the mortgage market.
          He really isn't bending to wall street to do this. he refuses to say how much he will buy at any time which wall street would like for him to do

          Finally people have gotten sick and tired of being had and taken for idiots. Mikhail Gorbachev

          by eve on Tue Sep 18, 2012 at 09:12:07 AM PDT

          [ Parent ]

          •  btw i think bernanke is republican (1+ / 0-)
            Recommended by:
            salmo

            i think i read it somewhere
            and i think bernanke disappointed wall street by not agreeing to spell out exactly when the fed would buy the securities or how much at any time so wall street is unable to take advantage of advance knowledge.
            the european central bank also would not specify when or how much, i think.
            that's very good - muchbetter than showing their hand to the big banks, imo.

            Finally people have gotten sick and tired of being had and taken for idiots. Mikhail Gorbachev

            by eve on Tue Sep 18, 2012 at 09:27:03 AM PDT

            [ Parent ]

          •  Bernanke is honest, but (1+ / 0-)
            Recommended by:
            eve

            To a hammer, everything looks like a nail.  To the Federal Reserve bank, everything looks like a banking problem.

            I don't question his integrity, I think he honestly believes trickle down will work, and not in the mean spirited way that Romney/Ryan look at trickle down.  It's just that he really can't relate to working people and can't imagine a bottom up approach to a FED policy.

            •  well, I'm not sure of that (0+ / 0-)

              I agree with you that that's how Greenspan looked at things that way after watching him for years and years and seeing how he was the servant of the Republican Party and should have understood the "unintended consequences" that he achieved when he backed Bush/Cheney up.
              I get the sense, although I'm not sure that Bernanke may understand how people live their lives.
              Before going into the public sector he, I believe worked on a city council to learn how to communicate with non academics, I guess.
              He must have run into the daily problems of average people. I just don't think he's a prima donna like Romney but you may be right because there's no way for us to know unless we see proof :)
              In answer to your point about monetary policy - that is really all he has under his control as Fed Chairman. He has begged Congress to do their legislative duty on fiscal policy - taxes, and revenues.

              Finally people have gotten sick and tired of being had and taken for idiots. Mikhail Gorbachev

              by eve on Tue Sep 18, 2012 at 01:37:13 PM PDT

              [ Parent ]

      •  I really don't understand why many Democrats talk (1+ / 0-)
        Recommended by:
        Aspe4

        … as if the Federal Reserve is the fount of all financial wisdom, and are resolutely opposed to any attempt to bring transparency to its operations.

        Any criticism of the Fed is liable to be "gaslighted" by these Democrats as something only a crazy, libertarian gold bug would say, etc. etc.

        The Dutch kids' chorus Kinderen voor Kinderen wishes all the world's children freedom from hunger, ignorance, and war.

        by lotlizard on Tue Sep 18, 2012 at 10:26:50 AM PDT

        [ Parent ]

    •  fiscal (10+ / 0-)

      The proper place to help the 99% is fiscal policy--not allowed by the Republicans.  BB is doing the best he can with the tools he has--inflation is not the problem, UE is--and this will help.  Read Krugman for an explanation.

      Apres Bush, le deluge.

      by melvynny on Mon Sep 17, 2012 at 07:05:12 AM PDT

      [ Parent ]

      •  Krugman has to back Bernanke (3+ / 0-)
        Recommended by:
        divineorder, ozsea1, Jim P

        Notice how little Krugman praises Bernanke's move and how quickly he moves to criticizing Romney.  Then he throws in this big qualifier:

        True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized).
        Krugman has been pushing for the "expectation" of inflation for a long time, so he has to back Bernanke on this.  And if everyone believes buying all these MBS will deliver inflation, this will work better than I expect.  But if people don't buy into it, and we don't get some real asset inflation, this is going to fail.

        I think Krugman is making a mistake by going all in with Bernanke.  He should be saying the same thing he was saying during the stimulus debate, it's too little and misdirected.  He's going to find himself arguing in favor of inflation, but that QE doesn't cause inflation like the Republicans are claiming it will.  He's in a tough spot.

        •  tough spot (7+ / 0-)

          BB was Krugman's boss at Princeton, and he usually treats him very brusquely.  As for inflation, these are unique times.  The euro's problems have made the US$ too strong--hurting our manufacturers.  Basically, we have very little inflation because we're not in as bad shape as the rest of the world.
          Inflation lowers the cost of old debt and forces business to spend money it is now hoarding.  If we had a collegial (functioning) congress, flow of funds could be controlled more closely.  As I said in my original reply,  fiscal policy should be the most active player in this game--it isn't, it won't be, BB is doing the best he can--and yes, it isn't focused on the people in most need.  It is trickle down--and probably grasping at straws, but this sucker is still going down--and straws are all that's available.

          Apres Bush, le deluge.

          by melvynny on Mon Sep 17, 2012 at 07:34:29 AM PDT

          [ Parent ]

          •  The Euro was above $1.31 (3+ / 0-)
            Recommended by:
            pollwatcher, hmi, ozsea1

            when I checked earlier this morning. If the dollar is losing ground rapidly against the Euro it's time to rethink just how bad off the dollar is, and what sort of fairy stories we've been told, and how much of that fairy story we have internalized, even while thinking we are so clever and so critical.  QE3 might have hurt the dollar a bit, though this is not a huge factor I think.

            But I'll agree with you BB is grasping at straws.

            •  euro (1+ / 0-)
              Recommended by:
              pollwatcher

              There's always pendulum swings with the euro, depending on which way Europe proposes to "fix" the southern economies.  New proposal sends it up, realization that not enough is in that proposal sends it down.  This last looks good until the market realizes the locals aren't going to accept perpetual depression.  Eventually, my bet is Germany will leave the euro--Merkel will not spend a dime to help PIIGS.  So far, all the bailout money has gone to banks--especially Deutchebank--and no one should be surprised.

              Apres Bush, le deluge.

              by melvynny on Mon Sep 17, 2012 at 10:09:01 AM PDT

              [ Parent ]

            •  We want the dollar to go down if we want the (1+ / 0-)
              Recommended by:
              pollwatcher

              economy to grow faster. Within reason, of course.

          •  Really? (0+ / 0-)

            So you're dismissing Krugman based on some theory about his personal connection to Bernanke?

            If one more thread in the "He's connected to..." chain of logic and we're approaching Ron Paul territory.

            LOOK IT! I WROTE A COMMENT ON BIG ORANGE SEXY TIME!!!!

            by Mark Warner is God on Tue Sep 18, 2012 at 04:47:27 PM PDT

            [ Parent ]

        •  Sorry (3+ / 0-)

          but this is simply applying what we have learned from the great depression.

          The story here is that something that shouldn't be controversial is because of the rise of the flat earth society of economists (that is why my thesis advisoy called the Austrians in grad school.

          The bitter truth of deep inequality has been disguised by an era of cheap imported goods and the anyone-can-make-it celebrity myth - Polly Toynbee

          by fladem on Mon Sep 17, 2012 at 05:10:59 PM PDT

          [ Parent ]

          •  How many MBS were bought in the great depression? (0+ / 0-)

            They didn't even exist back then so your comparison isn't close to being applicable.  We are in new territory, and this is about the kind of stimulus, not whether we should have stimulus.

      •  It's far from ideal but... (10+ / 0-)

        The Fed is currently the sole entity that will step in to improve the economy.  As melvyny states, every republican other than Bernanke has fought to assure that our economy doesn't recover.  While there are probably dozens of better ways to stimulate the economy I look at this as being a reasonable contribution.  
        As for helping Main St.; many of us who were in our late 50's and early 60's and who lost our jobs over the last few years may have the shattered remains of IRA's and 401k's still and by strengthening the performance of the stock markets as QE has done has allowed for some of us to recover some of what was lost under bush's watch.
        Many, if not most of us, will never work again and for many of us this is all we have.  QE3 or whatever version we're on probably won't affect us directly but there is a large segment of the population that will benefit indirectly.

      •  Fiscal Stimulus Is Not Allowed By The Republicans- (0+ / 0-)

        which is why we need to get rid of as many of them in the November elections as possible. If Democrats can take back control of the House and hold onto the Senate, they can pass some sane stimulus/infrastructure/job creation legislation, and THEN I will be hopeful the economy can recover. If the status quo remains in Congress (even if Obama is re-elected), the economy is not going to improve, because the Republicans don't want to do anything to help it improve.

    •  All those bonuses for rich corporate plutocrrats (0+ / 0-)

      was supposed to trickle down on us because they're job-creators when they aren't smoking $100 dollar bills.  

      I feel trickled down on.

  •  Yes (15+ / 0-)

    This is a huge gift to the 1% -- tens of billions -- from the national bank.

    Unfortunately, I don't believe that Bernanke can write checks to regular people without the cooperation of Congress. This is the limit of what he can do without them.

    Ideally, Congress would pass a bill allowing the Federal Reserve Bank to print some hundreds of billions of dollars, which it would then spend into the economy in the form of infrastructure development.

    But Congress won't do that, because ...

    OH MY GAWD SPENDING ... SPENDING!!!!!1

    "I'll believe that corporations are people when I see Rick Perry execute one."

    by bink on Mon Sep 17, 2012 at 05:19:20 AM PDT

    •  There aren't many limits on what the FED can buy (3+ / 0-)
      Recommended by:
      qofdisks, ozsea1, redwagon

      I think there are a lot of creative things he could do.  He might be able to simply pay a small % of the monthly payments of underwater mtgs.  This would funnel money from the bottom up to the 1% and help deleverage private debt and help people who actually need help.  

      He could buy the crap MBS, deconstruct them, and forgive some of the debt of people who need help.

      Yes, it would be a logistical nightmare, but the FED is very good at doing very complex things.

      •  The Fed only buys assets it can dispose of later (2+ / 0-)
        Recommended by:
        Alice in Florida, Lying eyes

        for a profit.  This keeps the dollar strong (which it is - look at the Dollar Index).

        Paying underwater mortgages is out of the question.

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Mon Sep 17, 2012 at 07:32:13 AM PDT

        [ Parent ]

      •  All that can be done privately too. (1+ / 0-)
        Recommended by:
        pollwatcher

        There's a huge "if you want it done, you gotta do it yourself" component to a lot of the debt forgiveness side.

        Walk into any bank, ask to see their Nonperforming Loan portfolio, and buy it at 50-70c on the dollar.  Then do your own loan forgiveness.

        The bank takes a hit, the homeowner gets a benefit, And you see oyur policy enacted.  Win-win-win and zero government involvement.

        -7.75 -4.67

        "Freedom's just another word for nothing left to lose."

        There are no Christians in foxholes.

        by Odysseus on Mon Sep 17, 2012 at 08:50:58 AM PDT

        [ Parent ]

  •  The "fed" sucks; so does Bernanke; they don't work (1+ / 0-)
    Recommended by:
    shann

    for us. They are part of the problem, not the solution.

    tipped and rec'ed

    The radical Republican party is the party of oppression, fear, loathing and above all more money and power for the people who robbed us.

    by a2nite on Mon Sep 17, 2012 at 06:33:46 AM PDT

  •  That was exactly what I thought (6+ / 0-)

    when I heard the news breathlessly announced on NPR.

    Hmmm, let's see. Who has mortgage-backed securities for sale? I can tell you: it ain't me, babe. Forty billion more shoveled into the pockets of the ultrawealthy. Every month. (And, oh yeah, we should lower their tax rates, GOP!) I also wondered if these are the same shit securities that Wall Street geniuses conjured, along with the Great Recession.

    I appreciate that the Fed has a limited range of motion, but is this really what we want to be doing? Well, I guess so. Eleven out twelve Fed governors agree! So hooray! The wealthy just got wealthier, and the Fed guarantees to increase their wealth in perpetuity. What could go wrong?

    The GOP can't win on ideas. They can only win by lying, cheating, and stealing. So they do.

    by psnyder on Mon Sep 17, 2012 at 06:42:36 AM PDT

    •  Krugman says this isn't crap MBS (7+ / 0-)

      He had an article awhile back about how the FED was buying the good stuff.  I'm not so sure since the banks can say they're worth whatever they want.  But this brings up the question, if the banks are selling the good shit, where's all the bad shit?  If the bad stuff is still owned by the banks, it's only a matter of time before we have to bail them out all over again.

      •  I've wondered where they're hidden. (5+ / 0-)

        I'm glad to know from Krugman that, at least at present, we're not buying the toxic assets. But they remain somewhere, don't they? Where? Have they magically lost their toxicity? It seems unlikely, and it seems like we're whistling past the graveyard here. The holders don't want to take a loss, so they hold the country hostage or, at least, threaten to do so? Is that what's going on?

        The GOP can't win on ideas. They can only win by lying, cheating, and stealing. So they do.

        by psnyder on Mon Sep 17, 2012 at 07:03:29 AM PDT

        [ Parent ]

        •  Agency MBS is not toxic at all since it is (3+ / 0-)
          Recommended by:
          psnyder, jfromga, Dr Swig Mcjigger

          backed by the Treasury.

          Hank Paulson put Fannie and Freddie into receivership in 2008 effectively nationalizing them.

          "The way to see by faith is to shut the eye of reason." - Thomas Paine

          by shrike on Mon Sep 17, 2012 at 07:28:11 AM PDT

          [ Parent ]

          •  Two ways the Treasury can back MBS (4+ / 0-)
            Recommended by:
            hmi, ozsea1, psnyder, Dburn

            The good way is by very quietly gesturing in the general direction of all the homes represented by those MBS. The other is to stand and say it doesn't matter what the brick and mortar look like because we're the US Treasury and we always pay.

            When I look around at my immediate neighborhood there are thousands of condo units that have been whipsawed through owners and programs and schemes. FHA backed almost all of them. Now they stand empty or are going back to rental. Not HUD rental, which might've made some sense since all the front money and all the risk were federal, but rental through shell companies and young bank clerks who know absolutely nothing about real estate management. Instant slums.

            If the value of the MBS exceeds market value of the underlying real estate you have a problem. It won't matter how you dress it up or how the money is washed. Agency debt is destroying neighborhoods and destroying lives.

    •  Actually, anyone who lost money in the meltdown (2+ / 0-)
      Recommended by:
      psnyder, AaronInSanDiego

      from their IRA or 401K probably owned some mortgage-backed-securities, just indirectly and without knowing it. People who have retirement accounts may still have some mortgage-backed-securities hiding in there.

      "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

      by Alice in Florida on Mon Sep 17, 2012 at 10:43:03 AM PDT

      [ Parent ]

  •  yep (5+ / 0-)
    Recommended by:
    tle, pollwatcher, qofdisks, oldhippie, Dburn

    The FED just admitted its game over.  You cant have a central bank printing 25% of your gdp.  Well you can be it makes you a banana republic

    Bad is never good until worse happens

    by dark daze on Mon Sep 17, 2012 at 06:51:06 AM PDT

    •  Not Sure (5+ / 0-)

      Under FDR, we devalued the dollar by something like a third in order to get enough money into the system to cover the needs of exchange. We didn't turn into a banana republic.

      We are suffering from both a shortage of money and a problem in its distribution. We need to inject huge amounts of money into the system and make sure it gets into the hands of humans who are willing to spend it.

      Simply creating money and giving it to banks, hedge funds and private equity so they can hoard it isn't really going to solve these problems ...

      Though I suppose there will be some marginal trickle down.

      "I'll believe that corporations are people when I see Rick Perry execute one."

      by bink on Mon Sep 17, 2012 at 07:43:41 AM PDT

      [ Parent ]

  •  Who sets the prices on the MBS's? (3+ / 0-)
    Recommended by:
    divineorder, pollwatcher, hmi

    Where does the Fed get the money to make these purchases? For example, if it buys 40B each month then it must get the 40B somehow.

    What is the Fed going to do with these MBS's over the long haul?

    Might and Right are always fighting, in our youth it seems exciting. Right is always nearly winning, Might can hardly keep from grinning. -- Clarence Day

    by hestal on Mon Sep 17, 2012 at 06:53:38 AM PDT

    •  I don't think that's the case. (4+ / 0-)
      Recommended by:
      pollwatcher, hestal, hmi, Dburn
      then it must get the 40B somehow
      If I understand it, they just conjure the money out of thin air.

      I am become Man, the destroyer of worlds

      by tle on Mon Sep 17, 2012 at 07:11:24 AM PDT

      [ Parent ]

    •  The magic of the printing press (3+ / 0-)
      Recommended by:
      Odysseus, hestal, ozsea1

      The FED literally creates the $40B out of thin air, which is the point of the exercise.  Throwing $40B a month of new dollars into the economy should cause some inflation.  If people believe there's inflation coming, they'll go out and buy a bunch of stuff now, while it's still cheap, and cause the demand the economy needs.

      The price of the MBS are determined by the market, and they jumped up when the FED made it's announcement.  But because it's a wall st. insider market, and because the Fed allowed the banks to price these MBS at whatever they wanted, it's really hard to tell if the FED will actually be buying these at a "fair" price.

  •  If you don't understand something, (2+ / 0-)
    Recommended by:
    Deep Texan, FG

    then I'm sure blender analogies and back-of-the-napkin math that appears to ignore the scope of the mortgage industry and to be based entirely on what you inaccurately imagine the intended mechanics of the stimulus to be is better than nothing.

    Or not. I'll stick with Krugman's analysis, thanks.

    •  Is there something specific? (2+ / 0-)
      Recommended by:
      Argyrios, ozsea1

      I don't think a detailed analysis of the mortgage industry would be appropriate for this forum, but if you see a major error somewhere, I'd be glad to correct it.

      Krugman hasn't exactly been jumping up and down over Bernanke's move.  He has to be political about it, and I believe I've said some things here that he might be thinking, but simply can't say.

      •  Thanks -- what really caught my eye (5+ / 0-)

        were these paragraphs:

        Here's where the problem lies.  I'm sure a lot of people are thinking that because the FED is going to buy $40B worth of MBS a month, that somehow that's a lot like buying $40B worth of new mortgages a month, and that it will cause a huge amount of new houses to be built.  Well unfortunately, that's not remotely the case.

        Can you explain why you link QE3 to new home construction specifically? This appears to me to be simplistic -- based on some vague notion that both involve houses. I know you were just setting up a straw man to knock down, but it would be more useful to critique the actual intended effects of QE3 and not those that you are "sure a lot of people think."
        •  Maybe I'm wrong, but I think some people might (3+ / 0-)
          Recommended by:
          Argyrios, Odysseus, ozsea1

          believe that the FED is actually doing something like a bank does and actually issues the mtg. or has the bank issue the mtg under far less stringent conditions.  I'm guessing most people probably don't understand what a mortgage backed security is and what it means for the FED to buy them.  I was hoping to make sure people realized that the FED is several layers away from the actual issuance of the mortgage itself.

          Sorry if I didn't word that well and it misled you in any way.

          •  Well, this might make refis cheaper (6+ / 0-)

            It homeowners can refinance and reduce monthly payments, that will inject money into the consumers pockets.

            That's why Bernancke is doing this.

            It will also stop possible foreclosures that would happen if variable interest rates go up, by stopping those rates from increasing.

            look for my eSci diary series Thursday evening.

            by FishOutofWater on Mon Sep 17, 2012 at 08:54:45 AM PDT

            [ Parent ]

            •  My brother refied last year, and so did many other (4+ / 0-)
              Recommended by:
              Argyrios, ozsea1, FishOutofWater, emobile

              Yes, lower interest rates should cause more refis, which will leave more money in consumer pockets.

              But the vast majority of people refied at around 4%.  The estimates I've seen is QE3 might drop interests to 3 1/4%.  Who's left that hasn't already refied, and 3/4% on a $200,000 loan will put about $120/month in a families pocket, a little more than enough to cover the increase in gas and food prices this QE3 is going to cause if it works.

            •  Not to mention first mortgages (0+ / 0-)

              I was personally excited about QE3 because I'm just ssuming it will keep all long-term rates for a while, even for ordinary first mortgages, not just the MBS and other secondary markets.  

              My credit union posted a 30 year fixed rate of 3.375% before QE3 was announced.  My thought is the new QE will push that even lower.  Combined with current home prices, that's gotta have a positive effect on anyone who isn't underwater on their mortgage.  Unfortunately there are still a monster number who are.

              "And once again, the forces of niceness and goodness have triumphed over the forces of evil and rottenness." --Maxwell Smart

              by emobile on Mon Sep 17, 2012 at 03:13:02 PM PDT

              [ Parent ]

        •  Argyrios I don't agree with the diarist on (6+ / 0-)

          everything he wrote, but people are saying this will help the housing market so that's not a straw man.

          Here is Ezra Kline saying it in a recent article.

           " Here’s why everyone is so excited about what the Fed did yesterday"

          The way the Fed’s plan works — if it works — is that buying all these bonds will drive down long-term interest rates, which will give businesses and investors more incentive to spend now as opposed to sitting on their money waiting for later. It will make mortgages even cheaper, which should accelerate the housing market’s recovery.

          But the other part of the plan, and this part is really important, is that Bernanke just sent a signal to businesses and investors and the market and everyone else that the Fed is going to use its powers in a big, unusual way to get the economy moving. That’s a hugely important statement to make.

          http://www.washingtonpost.com/...

          Brand new favorite RSS feed of Daily Kos Radio Podcasts http://kagrox.libsyn.com/rss
          Jobs, Jobs, Jobs

          by We Won on Mon Sep 17, 2012 at 09:21:24 AM PDT

          [ Parent ]

          •  Thanks, and I don't dispute (3+ / 0-)
            Recommended by:
            pollwatcher, We Won, Aramis Wyler

            that one of the intended effects is to help the housing market. It's just that new home construction (which is itself a subset of the housing industry) struck me as oddly specific. The effects, as I understand them, are intended to be much broader -- increasing expected inflation to reduce the incentive to horde cash, making exports cheaper, etc.

    •  Is this comment HR able? personal attack with no (0+ / 0-)

      substance.

      How did Supreme Court decision ACA help the 23 million still uncovered? Ask the 18,000 Doctors of PNHP -- they're not waiting, FORWARD now to pass H.R. 676, the “Expanded and Improved Medicare for All Act .

      by divineorder on Mon Sep 17, 2012 at 07:40:21 AM PDT

      [ Parent ]

      •  Looks substantive to me. (1+ / 0-)
        Recommended by:
        Aramis Wyler

        It may be impolite, but it's a rational critique. Don't see what's "personal"...

        "All governments lie, but disaster lies in wait for countries whose officials smoke the same hashish they give out." --I.F. Stone

        by Alice in Florida on Mon Sep 17, 2012 at 10:57:13 AM PDT

        [ Parent ]

        •  pollwatcher handled it well (1+ / 0-)
          Recommended by:
          Aramis Wyler

          Indeed it was a valid critique, if expressed kind of rudely.  But his angle is worthy of discussion because a lot of people here are just assuming QE3 is another giveaway to the rich.  And that might be somewhat true, but I just want to jump in and say it will benefit someone like me personally who is fairly middle-middle class.  

          "And once again, the forces of niceness and goodness have triumphed over the forces of evil and rottenness." --Maxwell Smart

          by emobile on Mon Sep 17, 2012 at 03:24:47 PM PDT

          [ Parent ]

      •  The diarist clearly made serious mistakes. (0+ / 0-)

        Pointing them out is not HRable.

  •  The Fed is buying AGENCY MBS (6+ / 0-)

    that means GSE (Fannie Mae and the like) debt which is 100% guaranteed by the Treasury and taxpayers.

    The interest earned will be returned to the Treasury.  

    The net result is that other private investments will go elsewhere into more productive economic endeavors.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Mon Sep 17, 2012 at 07:09:53 AM PDT

    •  That would be the point, but I don't think so (2+ / 0-)
      Recommended by:
      Deward Hastings, ozsea1

      Almost all MBS these days are backed by the gov. but this shouldn't have much impact on what Bernanke is trying to do.

      Yes, the hope is that private investment will go into the productive economy, but it hasn't been, and why should it?  Wall st. has found plenty of places to gamble with the money, other than starting a productive company that actually makes something.  Since the FED move will probably cause an initial asset price inflation, my guess is that the money will go into hard assets, then somewhere else.  This just isn't any incentive to build a productive business.

      •  That is exactly the problem. (2+ / 0-)
        Recommended by:
        Azazello, pollwatcher

        A "productive business" requires customers, who themselves require money to spend.  So this move benefits "productive businesses" that sell directly to bankers and Wall Street . . . (we should all become whores, maybe?).

        Unless, of course, you're willing to take on more personal debt (at 15%, or whatever interest they charge on your credit card).  Because the only way this money gets down to the 99% is if you borrow it (and pay dearly for the "privelege").

        Fake Left, Drive Right . . . not my idea of a Democrat . . .

        by Deward Hastings on Mon Sep 17, 2012 at 08:27:45 AM PDT

        [ Parent ]

  •  Excellent post, better than Krugmans ! (0+ / 0-)

    How did Supreme Court decision ACA help the 23 million still uncovered? Ask the 18,000 Doctors of PNHP -- they're not waiting, FORWARD now to pass H.R. 676, the “Expanded and Improved Medicare for All Act .

    by divineorder on Mon Sep 17, 2012 at 07:22:47 AM PDT

  •  Also, remember, MANY of the blender full of (3+ / 0-)
    Recommended by:
    pollwatcher, Odysseus, oldhippie

    mortgages we are buying are being squatted on, in default, and have questionable title. Step one should be to sort out the legality of MERS before we pump more money into this stink hole. Time is of the essence, but blindly pumping money into a mess will never help matters.

    On this issue, the Democratic Party is not improving matters.

    I voted with my feet. Good Bye and Good Luck America!!

    by shann on Mon Sep 17, 2012 at 07:26:01 AM PDT

  •  Thank your for posting a diary (4+ / 0-)

    that gets the policy right. Not surprised it didn't make the wreck list during the Circus (election) show. At least you're in the Community Spotlight. As I said in a diary defending the policy- and a Krugman article, trying to inflate asset prices while wages are collapsing is frankly stupid and does little to help the 99%.

  •  I like the post, but I don't agree (10+ / 0-)

    Although I broadly sympathize with the diarist, that is calling it wrong that the Fed bailing out Wall Street, but not bailing out Main street. It is unfair, yet necessary in an economy that has the biggest problem of weak demand.
        By buying MBS the fed is injecting more liquidity in the system - essentially forcing investors to invest in riskier and thus higher growth assets which, it is hoped will stimulate demand in an economy caught in a liquidity trap.
        I fully agree that main street should be the target of future bailouts - in the form of aid to the states so they can rehire their teachers, extended unemployment and educational benefits, and while we are on the subject of mortgages, a more aggressive program to write down the principle of the incredible number of underwater mortgages in the housing market, so that people can not only stay in their homes, but actually pay them off AND have enough to spend on food, clothing, weekend afternoons at Chuck-e cheeze etc. Unfortunately the Fed is unable to do this; this is the responsibility of the Congress which for political reasons and economic illiteracy on the part of its members has so far refused to exercise their responsibility (And a huge huge huge reason why we need a Democratic congress on 1 Jan 2013).
        One of the things that is notable about taking this position is that I get pilloried in equal measure from progressive sites and money sites that are the home of conservative, Ron Paul types (like SeekingAlpha, Marketwatch, etc). So that tends to reinforce in me that I am on to something, and also frankly it is a position I kind of like.

    An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. -- Eric Hoffer

    by MichiganChet on Mon Sep 17, 2012 at 07:38:57 AM PDT

    •  In one sentence you nail it (6+ / 0-)
      By buying MBS the fed is injecting more liquidity in the system - essentially forcing investors to invest in riskier and thus higher growth assets which, it is hoped will stimulate demand in an economy caught in a liquidity trap.

      "The way to see by faith is to shut the eye of reason." - Thomas Paine

      by shrike on Mon Sep 17, 2012 at 07:44:12 AM PDT

      [ Parent ]

    •  I'm somewhat amazed at the responses here. (10+ / 0-)

      Not yours, MichiganChet, but others.

      It is obvious people still don't understand the limited options available to the banking system and decry their policies, when the real bitch is with Congress.

      Bernanke is not the source or the remedy of our problems.

      If you believe he is, it's time to take Macroeconomics 101 again.

      4π^3 + π^2 + π

      by Boris49 on Mon Sep 17, 2012 at 07:51:01 AM PDT

      [ Parent ]

      •  You should troll conservative and 'money' sites (4+ / 0-)

        To see really vituperative and 'zombie apocalypse is coming!!!' responses. At least we here are capable of intelligent discussions, for the most part, and I believe many here are familiar with Macro 101. Those other sites I do not engage with; I simply post, because a lot of the commenters there seem unfamiliar with Macro 101 as well as basic spelling, grammar, and how to have a productive exchange

        An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. -- Eric Hoffer

        by MichiganChet on Mon Sep 17, 2012 at 10:53:59 AM PDT

        [ Parent ]

        •  Yep, it is interesting. (2+ / 0-)
          Recommended by:
          AaronInSanDiego, MichiganChet

          I had a customer yesterday who was getting the gold bug, until I reminded him that  an ounce of protein is worth more than an ounce of gold almost every time during the zombie apocalypse.

          Even so, I keep my powder dry and practice zombie head shots frequently.  :)

          4π^3 + π^2 + π

          by Boris49 on Mon Sep 17, 2012 at 12:31:24 PM PDT

          [ Parent ]

          •  You can buy bullets with dividends (1+ / 0-)
            Recommended by:
            Boris49

            But gold doesn't make very good projectiles, nor does it buy off the zombies!

            An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. -- Eric Hoffer

            by MichiganChet on Tue Sep 18, 2012 at 06:24:51 AM PDT

            [ Parent ]

      •  Yes, you're spot on. (2+ / 0-)
        Recommended by:
        pollwatcher, Boris49

        I'm no expert in economics but I do grasp the fact that the Presidency has certain Constitutional powers, the Congress  has certain Constitutional powers and the Fed has certain powers granted by statute and charter, and the Fed cannot engage in legislative activities, they can only pull the few levers that they have.  Sure, massive infrastructure investment would be awesome.  But as you allude to, that option is way, way, way outside the purview of the Federal Reserve system and Obama can only do so much by executive order.  Fuck, he enacted a sizable part of the Dream Act through executive order, he's not scared to test the limits of his authority.  But you're right - people seem not to understand the roles of various institutions.

        The Fed is doing what they can, which is unfortunately not all that much, and sadly the GOP is simply going to block everything because they know that a pre-election economic recovery would help the President greatly.

        Sadly, I think much of the problem is that we have people here who have come to think that "Wall Street" and "bank" are dirty words.  Trouble is, not every bank is evil and not every brokerage house is evil.  Yes, bad practices caused the downturn and many banks (Countrywide comes to mind) engaged in very bad acts that weakened the economy.  And Lehman put themselves in a place of great weakness, which also harmed the economy.  But "Wall Street" and "banks" as entities are not universally evil, it is what they do that matters.  We need banks.  We need stock exchanges.  We just need them to be properly regulated.  There's a lot of baby/bathwater here.

        I'm kind of getting turned off by the economic extremism on DKos (not by you, I'm agreeing with you :) ).  Yes, you know that a Republican is wrong on the economy by looking at whether or not his mouth is moving.  That's true.  But we do not live in a tin pot dictatorship; President Obama cannot draft, enact and sign his own budget, he has to go through both  chambers.  The Fed cannot become the world's largest construction and engineering firm; that is not its role and it is prohibited from engaging in that sort of activity by numerous legal strictures.

        The answer is to throw the GOP bums out of Congress but sadly I think this election is gong to be a status quo election and we're going to keep hobbling along as hopelessly as we are now.

        I hope I'm wrong.

        "The first drawback of anger is that it destroys your inner peace; the second is that it distorts your view of reality. If you come to understand that anger is really unhelpful, you can begin to distance yourself from anger." - The Dalai Lama

        by auron renouille on Mon Sep 17, 2012 at 10:44:17 PM PDT

        [ Parent ]

        •  Can the FED buy Municipal bonds? (1+ / 0-)
          Recommended by:
          lotlizard

          Although it's never been done before, I don't see any reason why the FED can't.  Theoretically, blue states could design big infrastructure projects and float a bond to pay for it, and the FED could immediately step in and buy them.

          This is about as close to a FED jobs program as I can imagine.

    •  Where is the money being injected? (2+ / 0-)
      Recommended by:
      ozsea1, mightymouse

      I fully agree with you that congress should step up to the plate and provide the fiscal policy that is needed, so the FED can provide the monetary policy to support the congress.  I also agree we can't do it with the Tea Bagger Republicans blocking everything.

      So the real question becomes, will injecting money into the hands of the Wall Street investors cause them to provide the liquidity to the entire system so that demand by the middle class increases and businesses start expanding to fill that demand?

      Since they already have tons of money and they're not investing in the productive economy now, why should giving them tons more money cause them to invest in the productive economy?  Not only do I think they won't, I think there may be plenty of other places for them to place bets (foreign currencies, hard assets) that may have a far higher return.

      I'm sorry but this is classic trickle down, and I don't believe trickle down works.  In fact, If giving them money by buying MBS works, than why shouldn't giving them money by a Ryan style tax cut work?

      •  Your premise is wrong (1+ / 0-)
        Recommended by:
        Deep Texan

        The Fed is not "injecting money into the hands of Wall St investors".

        Similarly, if I buy $1000 worth of Apple stock another person is selling the same.  Wall St only gets my $6 brokerage fee.

        For the most part this agency MBS already exists and is in the hands of private parties.

        If PIMCO has a million $ worth of MBS and sells them for a million $ they have no net gain from the Fed - they gained from the previous sellers lower selling price.

        To date the Fed has profited from all their MBS purchases.

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Mon Sep 17, 2012 at 09:06:00 AM PDT

        [ Parent ]

        •  Sorry, but I think you are mistaken (0+ / 0-)

          It is not like buying a stock.  Yes, when I buy or sell a stock (unless it's an initial public offering), the money simply goes to someone on the other side.

          PIMCO borrowed and bought $120 Billion worth of MBS.  When they sell to the FED, it has nothing to do with the gain or loss, the FED creates $120 Billion (or whatever it's sold at) in new money which goes to PIMCO.  There is now $120 Billion added to the money supply.  Bernanke now hopes that PIMCO will invest in a company that will expand it's business and create new jobs, or PIMCO will buy something from somebody who will then invest in a company that will create new jobs...  It's trickle down in it's purest form, and consists of "new" money, unlike a stock trade on the exchange.

          •  So PIMCO repays its $120 billion loan (0+ / 0-)

            and that party invests in something else.

            That is exactly how its supposed to work - calling it trickle down does not disparage it.  Calling Bernanke 'Helicopter Ben' is meant as an insult by wingnuts.

            The Fed has $120 billion of assets for that new money and if mild inflation kicks in taxpayers gain plenty.

            "The way to see by faith is to shut the eye of reason." - Thomas Paine

            by shrike on Mon Sep 17, 2012 at 11:51:00 AM PDT

            [ Parent ]

          •  PIMFO Invests in Bonds, period (0+ / 0-)

            It 's Total Return Fund has over 200B in it right now. Over-all PIMCO manages over a trillion at last look. They can only play in very large sand lots  to move the needle on their investment results. The do not invest in business. They don't buy stocks. They don't do venture capital. You have to have a million dollars to invest in the fund. Close enough?

        •  Since Apple stock is currently $700/share, (0+ / 0-)

          your $1,000 isn't going to get you very much.

          "The difference between the right word and the almost-right word is like the difference between lightning and the lightning bug." -- Mark Twain

          by Brooke In Seattle on Tue Sep 18, 2012 at 01:16:32 PM PDT

          [ Parent ]

      •  It goes to the banks, which currently hold the MBS (4+ / 0-)

        So they then have to capital to refinance mortgages at a lower rate.

        Heck, I'll play with an open hand here (my style actually, it is why I'll never be much good in poker); I am hoping to refinance my own mortgage so I can lower my payments and thus help myself to that fed money. Which I will spend on myself, my family, my charities (ACLU, Doctors without Borders, Planned Parenthood etc) and contributions to ActBlue and my pet political causes. Doing my part, as it were.

        So in a sense you are correct that it is trickle down economics; the hope is that the money actually starts lower down, i.e with me - and really does trickle down. As Opposed to berserk Ryan style tax cuts for the piggies at the 1% which tend to start at the top and stay there, so the only trickling that the 99% feels. . . well it ain't money.

        btw, everyone who has a 401(k) - and that is a lot of people - did benefit from QE3.

        Lastly, thank you for the opportunity to engage.

        An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. -- Eric Hoffer

        by MichiganChet on Mon Sep 17, 2012 at 11:03:19 AM PDT

        [ Parent ]

        •  Juxtapose this diary, with the unemployment (1+ / 0-)
          Recommended by:
          MichiganChet

          diary on the front page

          Then look at what the banks problems have been and still are. Housing. Trillions of bad loans that are still bad. Buying MBS is what Bernanke is doing by the banks for the banks. That's all. You are not getting that lower rate unless you have a credit score of 800+ and can put down 50% and are willing to go through a background investigation tougher than a FBI investigation. Try it. See if EVERYONE can get that arte or even more than say 1%.

          Finally, the housing situation has not improved. There is still a huge inventory of houses that are still unsold unoccupied and yet are shown as performing loans on bank balance sheets. The 40 Billion dollar MBS program is a cash for trash program for the banks and only for the banks. This has been the modus operand of the Fed in QE1, and in QE2. The difference between Part One and Part 11, is based on a worsening situation. Bernanke is  simply replacing toxic waste with printed money. The next effect will be a slight increase in the value of share holdings and the final nail in the coffin of people who expected to retire on savings.

          They will now be forced to invest in risky assets, which the flow of retail funds into the markets shows is not happening. We have computers trading with Computers . It accounts for 70% of the volume of the stock market . It increases each year. Soon that's all it that will be left.

          It's long past time that people understand that the news from the Fed, is good news if you are wealthy , in particular it's good news for those who hold bank stocks. It's very bad news for those who hold insurance stocks. It's even worse news for people who buy insurance for protection. It isn't just Health Insurers denying claims these days.

          For rabid partisans, this is terrific news. They don't care about anything but election results. Many of the people that don't like this diary, are people that make tremendous amounts of money in the business of politics. There is nothing left the govt can do for the economy. The only thing that the Fed has done is said to "Hell with inflation" we will not raise interest raises. The big banks will not suffer. This year will be a record bonus year. Bernanke's job will be saved.  Yes!

          If they had to quell inflation, it would be a unmitigated disaster if interest rates rise as the Govt Interest payments will double if not triple. That would be well over a trillion dollars a year.

          This is the new normal. As the front Page Diary indicates; a 15% unemployment rate and programs designed for discredited trickle down theories of economics that at one time, at least on this blog, were a big "no-no" to even discuss with the VSP who  live and die by Keynesian economics.

          That's what a win at any cost attitude buys you. Nothing at all.

          •  I can only repeat that (1+ / 0-)
            Recommended by:
            pollwatcher

            The problems you allude to - and I agree are real problems - lie with the congress to solve. In fact, if pressed, I think this roughly 15% un and underemployed rate is substantially the biggest problem the country is facing, both in the short and long term. Further, as I see it, this is the bill for 30 years of largely misguided economic policy, so there are no quick fixes here.

            But I do differ with your assertion that this is the 'new normal'. It is only the normal if nothing is done. And so the first order of business, in my view, really is a win as the alternative is so much worse.

            An empty head is not really empty; it is stuffed with rubbish. Hence the difficulty of forcing anything into an empty head. -- Eric Hoffer

            by MichiganChet on Tue Sep 18, 2012 at 06:32:13 AM PDT

            [ Parent ]

            •  Part of the new normal (0+ / 0-)

              Is not only to do nothing, but to sound like people give a shit when they really don't. It's the new economic philosophy that trumps Keynes, The Chicago School of Economic  and the Austrian Theory of Economics:

              It's called "Better you than me" .

              It's "Uniquely American"

              It's not going away.

              It's going to get much worse.

              There is nothing resembling a jobs plan because there is no way to generate jobs in a world wide economy that is all geared towards supplying 3% of the world's population that at one time consumed 25% of it's resources. We're broke. No Money-No Business. No Business=No Jobs. No Jobs=No Tax revenue, No Tax Revenue=Even Less Jobs=Less Education.

              But we are printing 40 Billion dollars a month to make Bankers bonuses bigger and get that Toxic waste once known as assets on banks balance sheets way  the hell out of view.

              That's the plan. There never was a plan by either side that would have done anything more than kick the can down the road or in most cases off the road, into the sewer, down into the sludge and out into the ocean.  

              That's the whole truth and nothing but the truth. Not one side has come up with a short term fix and more importantly a long term engine of commerce that will somehow extricate us from the threat of rising interest rates and what they will do to a national interest bill that will double every 25 Basis points.

              The funniest part is the shortest term solution is to go and collect the taxes that are due. No new taxes. Think that will get done with billions of dollars paid each year to specialists who once used to work for the IRS to get them out of paying taxes?  Right.

      •  They can't buy riskier assets (1+ / 0-)
        Recommended by:
        shrike

        These MBS are Fannie and Freddie securities which were already guaranteed by the Treasury in September 2008. So the Fed is treating them as US government debts, which it can legally exchange for dollars.  

        This works mainly because it influences housing and stock market prices.  You are right that trickle down wouldn't work, but housing especially is broadly held; the middle class has much more of their balance sheet in housing than do the rich.  And the stock market is at least somewhat broadly held.

        http://krugman.blogs.nytimes.com/...

        Paul Krugman points out "at this point it’s not at all clear that we have an overhang of excess housing capacity; we might even have a shortfall" and:

        And we’re seeing a modest housing recovery starting

        This means that we actually can hope that the Fed’s new policy will boost housing as well as operating through other channels, and therefore that it can act more like conventional monetary policy in fostering recovery.

        The bottom line, we don't have much control over the Fed, so it's good they are actually doing the right thing, even if it won't help much.  Yes, fiscal policy would be much better.  But we do have some influence over congress; we get to decide in 7 weeks whether we have a congress that will do it's part and help out as well or not.  
  •  oh goody (1+ / 0-)
    Recommended by:
    hmi

    they're printing some more money.  

    I guess we should thank Europe for ensuring that we don't yet know the joys of hyperinflation.

    "None are more hopelessly enslaved than those who falsely believe they are free." - Goethe

    by jlynne on Mon Sep 17, 2012 at 07:58:11 AM PDT

    •  Austerity is working as planned. (6+ / 0-)

      Workers are being crushed from Ireland to Italy, from the U.K. to Greece.

      Massive deflationary forces are at work.

      The Fed cannot counteract European austerity by QE3.

      look for my eSci diary series Thursday evening.

      by FishOutofWater on Mon Sep 17, 2012 at 08:10:31 AM PDT

      [ Parent ]

      •  I know (1+ / 0-)
        Recommended by:
        ozsea1

        that's  my point.  Europe's failure is working to our benefit.  The Euro crisis has left the dollar strong and is offsetting the inflationary effect of the Fed printing money with abandon.

        We should thank Europe.  Their pain is our reprieve.

        "None are more hopelessly enslaved than those who falsely believe they are free." - Goethe

        by jlynne on Mon Sep 17, 2012 at 08:29:12 AM PDT

        [ Parent ]

        •  U.S. Wages have been going down (2+ / 0-)
          Recommended by:
          pollwatcher, acerimusdux

          If the Fed tries really hard it might create another asset bubble but with wages under downward pressure it's unlikely to create much inflation.

          Europe isn't really helping the situation. Bernanke wouldn't feel the need to try QE3 if the jobs situation were better.  The downturn in Europe is one factor in the weakness in demand for American products.

          look for my eSci diary series Thursday evening.

          by FishOutofWater on Mon Sep 17, 2012 at 08:50:26 AM PDT

          [ Parent ]

          •  He better create inflation (3+ / 0-)
            Recommended by:
            ozsea1, acerimusdux, FishOutofWater

            I think that's one of the main reasons for the move, and is why Krugman is so supportive.  Krugman has been calling for at least the expectation of inflation to get people to start spending now.

            But I fully agree with you, with wages steady or falling I don't see much inflation in the cards and this why I have big doubts it's going to work.

  •  Good post (0+ / 0-)

    And I think you are exactly right.

    Conservatives want to shrink the size of government until it will fit in a vagina.

    by rmonroe on Mon Sep 17, 2012 at 08:22:14 AM PDT

  •  Great article, thanks! (1+ / 0-)
    Recommended by:
    ozsea1

    This article is a solid overview.  There are several discussion points that I want to comment on and will move into their own threads.

    -7.75 -4.67

    "Freedom's just another word for nothing left to lose."

    There are no Christians in foxholes.

    by Odysseus on Mon Sep 17, 2012 at 09:00:17 AM PDT

  •  Were these exposed to Joe Sixpack? (2+ / 0-)
    Recommended by:
    Deep Texan, acerimusdux
    Here's one example of a Wall Street type that owns a lot of MBS, the big bond company Pimco.  According to Zero Hedge, back in January, Pimco borrowed $88 billion to buy MBS, because they figured Bernanke would do exactly what he just did.
    If these funds are openly available, I have no problem with this.  I do not own any PIMCO funds in any of my accounts, but it's theoretically possible that I could have bought and played along.

    If these particular funds were restricted to "qualified investors" or other high net worth individuals, I have a huge problem with it.  Then it really is nothing but a giveaway to the 1%.  I believe that this move was substantially predictable, as PIMCO obviously did.

    Also, Zero Hedge is really not credible.  They publish a lot of wacky conspiracy theories, and little bit of solid reporting.

    -7.75 -4.67

    "Freedom's just another word for nothing left to lose."

    There are no Christians in foxholes.

    by Odysseus on Mon Sep 17, 2012 at 09:03:55 AM PDT

  •  Fixed (1+ / 0-)
    Recommended by:
    acerimusdux
    If QE3 fails because it's too little and misdirected, which I think it is, the Republicans will shoot down any further chance of monetary policy, just like they've shot down any further chance of fiscal policy.
    I'm curious what you think the Fed could do, since Republicans in Congress refuse to do anything?  One of their jobs is to maximize employment.

    Occupy the voting Booth!

    by anonevent on Mon Sep 17, 2012 at 09:31:12 AM PDT

  •  inflated stocks commodities (2+ / 0-)
    Recommended by:
    pollwatcher, hmi

    if I was a wealthy guy or a corporation,  why would I invest or expand my business,  there is no demand.  heck,  I will just play the Wall St Casino hedge fund, commodities,  drive the prices of stocks and oil, coffee, wheat, meat, cotton, steel, higher and higher as large as the bubble can carry.  so what if it drives prices of Basic goods higher and higher so that the average American does not have anymore extra disposable income to buy what my company is selling.  I am getting wealthier.  my company may have to downsize and lay off workers but I stii would get large bonuses.

    it is really time for non bankers to run this economy

    wall Street Casino is the root of the problem. Don't call them banks.

    by timber on Mon Sep 17, 2012 at 09:51:52 AM PDT

  •  If only someone in government had the (0+ / 0-)

    power to stop Bernie and this madness.

    NOW SHOWING
    Progressive Candidate Obama (now - Nov 6, 2012)
    Bipartisan Obama returns (Nov 7, 2012)

    by The Dead Man on Mon Sep 17, 2012 at 09:56:18 AM PDT

  •  Uhhh you might want to take a look see . . . (1+ / 0-)
    Recommended by:
    acerimusdux

    Rather than back into a dollar amount of MBSs issued, monthly or annually, the way you did by calculating it with census data, why not just use the actual amounts that have been issued so far this year?  

    You included only new home sales and omitted resale properties, which is the majority of the market.

    FreddieMac has actually issued mortgage backed securities at the rate of $36 billion a month so far this year.  I didn't bother to look up FannieMae's number but it would have to be added to Freddie's and the total would be well over the $40 billion a month the Fed announced.  

    The Fed also said that it would purchase long-term treasuries and I didn't see you mention that before you concluded that the Fed will buy old issue MBS.  

    "Those who deny freedom to others, deserve it not for themselves." - Abraham Lincoln

    by leftreborn on Mon Sep 17, 2012 at 10:26:33 AM PDT

    •  Sales of existing houses doesn't help jobs much (0+ / 0-)

      The whole purpose of the QE3 is supposed to be to create jobs.

      Building a new house creates construction jobs and lots of other jobs.  Creating a new mortgage by selling an existing house, or refinancing,  doesn't accomplish much directly to create jobs.  Those mortgages simply get converted to MBS by FREDDIE or FANNIE or one of the big banks, and then the FED buys them.  I see this as equivalent to buying what I broadly called the "OLD" MBS.  It just shovels money to Wall St. without creating jobs directly.

      •  Let me argue the other side . . . (0+ / 0-)

        I don't want you to misunderstand.  You're partly right and partly wrong.  

        The whole purpose of the QE3 is supposed to be to create jobs.
        This is literally not a true statement.  That’s certainly not “the whole purpose.”  Picture QE with concentric rings around it. The innermost ring, closest to QE in the center, is its first, and some say only,purpose:  to nudge interest rates lower.  If interest rates go lower, QE is a success.

        Observers attach additional motivations which may or may not show up as an outcome.  It's important to be very precise because even if your steering is off by a tiny fraction, you'll end up far from where you should be once you've gone some distance.  You'll be in a different place completely.

        If the Fed reduces interest rates, in this case mortgage interest rates, it may have an effect on the real estate market, the next ring proceeding outward.  It could restore some liquidity.  One of the dangers of illiquidity in the real estate market is deflation which truly robs the middle class of equity.  Even people with fully paid homes lose equity when there is deflation.  Liquidity can overcompensate for deflation and become inflationary too.  It’s generally accepted that there’s enough pent up supply so that inflation isn’t a worry.  Illiquidity is a worry, because it has other unfavorable consequences too, apart from deflation.

        If the market becomes more liquid sellers leave the transaction with a liquid asset.  What becomes of that liquid asset is key.  It can lead eventually to job creation.  When the sales proceeds are circulated back into the economy, the increase in demand creates jobs.  Don’t ignore resale homes because they don’t produce construction jobs.  There may not be a need for new homes in some parts of the country.  In states like Arizona with a rapidly growing population, new homes and construction are an important part of the real estate market.  In the Northeast, the need for new building is probably limited.

        "Those who deny freedom to others, deserve it not for themselves." - Abraham Lincoln

        by leftreborn on Mon Sep 17, 2012 at 12:31:35 PM PDT

        [ Parent ]

  •  This costs nothing (4+ / 0-)
    Recommended by:
    shrike, FishOutofWater, FG, leftreborn

    You are missing the point here.  The Treasury has already guaranteed all those Fannie and Freddie MBS.  So there is no risk here being taken on by the Fed.

    They aren't giving money to anyone, they are just going into the market and buying at market prices debts which have already been guaranteed by the Treasury.  It makes no difference who is selling them.  It's just replacing government debt with freshly printed dollars.  

    The end result will actually be to help support asset prices, both in the housing market and stock market.  That will provide at least some support to consumer spending.

    Of course it's correct that fiscal policy would be much better,  but the Fed can't do fiscal policy.  They are doing exactly what they should be doing.  You can't blame them if Congress isn't doing what it should be doing.

    •  The risk is that this isn't going to work (0+ / 0-)

      and the Republicans get the American people to believe that monetary stimulus can't work.

      Whether it's backed by the government or not isn't that important. Since the government is borrowing huge amounts of money to run the government we have now, if any of the MBS went bad, it would force the deficit even higher, no matter who owns them.

  •  It seems to me that the FED is pretty limited (1+ / 0-)
    Recommended by:
    pollwatcher

    in what it can do, right? I mean, the FED is actually the banking industry even though its chair is appointed by the President. All they can do is monetary policy unless I have missed something.

    For if there is a sin against life, it consists perhaps not so much in despairing of life as in hoping for another life and in eluding the implacable grandeur of this life. - Albert Camus

    by Anne Elk on Mon Sep 17, 2012 at 10:46:50 AM PDT

    •  Yes, the FED is limited. (0+ / 0-)

      I certainly sympathize with the limitations the FED faces because of Republican obstructionism in the congress.

      The question becomes, will this work, and was it the right approach?  I think the answer is no.  Technically the FED really has a lot of options, maybe politically those options are limited, but I think they could have taken several other approaches that would have been more bottom up and would have helped Main Street far better than this will.

      •  You would prefer they do nothing then? (0+ / 0-)

        A little confused.

        For if there is a sin against life, it consists perhaps not so much in despairing of life as in hoping for another life and in eluding the implacable grandeur of this life. - Albert Camus

        by Anne Elk on Mon Sep 17, 2012 at 11:33:37 AM PDT

        [ Parent ]

        •  I would prefer a different approach. (0+ / 0-)

          Here are some things the FED could have done.

          1) They could simply have bought Treasury bonds instead of mortgage backed securities.  The Democrats are arguing that NOW is the time for another fiscal stimulus program because U.S. treasuries are paying such low interest rates.  This would have put enormous pressure on the Republicans to go along with a jobs program, and at the very least would have reduced the cost of borrowing to the Federal Gov.

          2) Buy only specially structured MBS.  They could have bought only MBS that consists of underwater mtg's and restructured those mtgs for the benefit of the borrowers.

          3) Buy a combination of municipal bonds, state bonds, school bonds, special development bonds...  Something that would go directly to preserving and creating jobs.  This would be a way to bypass congress on infrastructure projects.  

          We are in a very dangerous situation, and the FED has to be more aggressive than they've ever been before.

  •  I don't see much helping (1+ / 0-)
    Recommended by:
    pollwatcher

    What needs to happen is for the min wage to be raised and the unions to become strong again so wages for workers go up.

    Short of that all the gov't can do is to tax the rich more and subsidize the low wages of the middle class to give them more money they are spending on bills to spend.

  •  Krugman's position has been very clear & Ezra (1+ / 0-)
    Recommended by:
    pollwatcher

    Klein is an idiot. With the Congress in gridlock, fiscal stimulus (a Jobs Bill)is not possible even though it is the only serious way to deal with the problem--slack consumer demand.
    The idea that this will do anything meaningful to restart our economy is just wishful thinking--but it is the only tool available until we can take back control of the Congress.

    Warren is neither a Clintonesque triangulator nor an Obamaesque conciliator. She is a throwback to a more combative progressive tradition, and her candidacy is a test of whether that approach can still appeal to voters.

    by chuck utzman on Mon Sep 17, 2012 at 01:08:52 PM PDT

  •  Fed is buying agency MBS (1+ / 0-)
    Recommended by:
    mightymouse

    that are already guaranteed by Treasury. There are 7 trln worth of them out there so 40 bln is not that much. It will boost their price so investors who hold them now (e.g. PIMCO) will likely make some money. Btw, PIMCO is a mutual fund where a lot of pensions etc. are invested. So it's not just rich people benefiting from it.

    What you want is fiscal stimulus or some form of mortgage modification. Fed has no power to do any of that. So it's simply printing money and using it to buy the assets that are already guaranteed by the government. It's not particularly effective but it's not like Fed has a lot of choice.

  •  These MBSs to be bought at mark-to-market values, (1+ / 0-)
    Recommended by:
    pollwatcher

    right? HaHa. Just kidding.

    It seems to depend on where you live exactly, and how you count things, but last I heard housing prices in general were down anywhere from 10 to 40%. The MBS being held by bankers now, when created, turned out to be overvalued by some percentage. Again, depending on various factors, but almost certainly worth less than when issued.

    So if Ben is buying these up, paying say 100 cent on the dollar, when they have to be worth 90, 60 or 50 cents of face, then this business is really about getting the Banks out of the red, no?

    Not that that's the only tool used, but using the essays figures, $30B a month toward old MBS, that's a good chuck of a trillion dollars each year.

    Then the question becomes: who is liable for the Feds spending in the end. Can the Fed go bankrupt, or does something back it up? Because a day will come when they have to liquidate their already-overpriced instruments, and I've heard very little to show that we've even hit bottom on the housing market.

    So, in the end, who is paying for this gift to the Racketeering and Corrupt Organizations we call "Big Banks."

    Maybe it's just that money isn't real. In which case, if the Fed and the Banks don't have to worry about it, why do we, and our landlords and grocers care so much about not having it?


    The Internet is just the tail of the Corporate Media dog.

    by Jim P on Mon Sep 17, 2012 at 10:54:03 PM PDT

    •  Mark-to-fantasy price for MBS (0+ / 0-)

      Remember when the FED back in 2009 gave permission for the banks to change the value of those MBS from market to whatever they wanted?  So who knows if the FED is paying a fair price or not.

      If we think this is complicated now, we might find it's going to get a lot more complicated when the FED has to dump those MBS.

  •  Because these matters are beyond me, I must lean (1+ / 0-)
    Recommended by:
    shrike

    on someone I trust who knows what is going on.  That person is Paul Krugman.  He seems to think this action is one of the better actions the Fed can take, so I'll trust Krugman on this. And if it pisses off the Republicans, then that's a good sign as well.

    "Those who can make you believe absurdities, can make you commit atrocities" Voltaire.

    by JWK on Tue Sep 18, 2012 at 03:19:25 AM PDT

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