Quantitative Easing Explained - DPChallenge Forums

11/16/2010 01:25:29 PM · #26

Originally posted by DrAchoo:

The money was supposed to increase the banks' willingness to lend, but instead we saw the banks more or less sit on it. Stimulus was meant to spend when the consumer could not, but many states used the money to shore up existing budgets rather than spend even more.

BTW- that wasn't quite the purpose of QE1. The vast majority of that money went to stabilize the collapse of mortgage-backed securities that had crippled big banks as a liquidity trap. While one could hope that these banks would turn around and lend money, the primary goal was merely to prevent their collapse (a much uglier economic scenario). The "stimulus" you mentioned was a different program altogether (ARRA): 37% was specified for tax incentives, 18% went to state and local fiscal relief (over 90% of state aid went to Medicare and education), and the remaining 45% went to federal spending programs and unemployment benefits. The purpose was not necessarily for states to spend more, but:

To preserve and create jobs and promote economic recovery.
To assist those most impacted by the recession.
To provide investments needed to increase economic efficiency by spurring technological advances in science and health.
To invest in transportation, environmental protection, and other infrastructure that will provide long-term economic benefits.
To stabilize State and local government budgets, in order to minimize and avoid reductions in essential services and counterproductive state and local tax increases.

QE1 began in October 2008- months before Obama took office- and was not completed until a little over a month ago. I say that not to assign political blame but to emphasize again that these programs aren't instantaneous. It can take years to allocate the resources and feel the subsequent effects. QE2 is more tailored to increasing the banks' willingness to lend, but it could take years to see it.

Remember all the pundits who claimed cash for clunkers would be a failure since it would burn through the available buyers leaving the market to collapse when the program ended? Surprise- the action allowed car manufacturers to survive the worst of the downturn and now they're posting big profits... exactly as it was intended to do. The same thing happened with TARP, so let's not be too quick to label these things as failures, OK?

Message edited by author 2010-11-16 13:31:52.

Nikon AF-S NIKKOR 24-70mm f/2.8G ED

11/16/2010 02:45:39 PM · #27

I'm not sure where you missed me Shannon. I certainly understand the difference between QE1 and the stimulus package. It's possible you are confusing QE1 and TARP, but i'll give you the benefit of the doubt.

I really don't think it's fair to blame the "minority effect". The democrats have been as much in power as any party since I've been alive. If we are still able to blame the reps for the last two years, then when couldn't one party just blame the other for any failures.

Anyway, you didn't mention the fact that the government thought we were going to top out at 7% unemployment. If they can't predict something like that even 12 months into the future, why am I trusting them to know what the big answers are? Good question.

Dr.Confuser

Nikon D800

11/16/2010 03:34:00 PM · #28

[tongue-in-cheek]
There's a site I follow where economic experts discuss monetary policy. They have forums like DPC where someone can start a thread and others discuss it. Not all threads are economic in nature.

You should see the occasional thread on digital photography.

In a current thread, an economist is touting the advantages of destructive editing of jpg's captured in camera => Saves lots of disk space.

And there was a thread asking why anyone would ever take pictures off their digital camera since the camera's LCD screen is the most convenient way they've found to share pictures with friends.

To add insult to injury, there's a thread mocking a certain photo website where they're debating monetary policy like a bunch of noob's.
[/tongue-in-cheek]

11/16/2010 04:32:25 PM · #29

Originally posted by DrAchoo:

I didn't miss you anywhere. You mentioned QE1 and the stimulus in the same paragraph (two different programs) and I provided an explanation of each.

Originally posted by DrAchoo:

I really don't think it's fair to blame the "minority effect". The democrats have been as much in power as any party since I've been alive. If we are still able to blame the reps for the last two years, then when couldn't one party just blame the other for any failures.

As much in power, sure, but there's a big difference between a minority debating policy for the benefit of the country and one bent on obstructing ANYTHING- even if it was originally their own proposal- for the benefit of their party.

Originally posted by DrAchoo:

Anyway, you didn't mention the fact that the government thought we were going to top out at 7% unemployment. If they can't predict something like that even 12 months into the future, why am I trusting them to know what the big answers are?

You didn't mention the footnote to that forecast in your own source: "Forecasts of the unemployment rate without the recovery plan vary substantially. Some private forecasters anticipate unemployment rates as high as 11% in the absence of action." Indeed, Moody's estimate, posted at the same time, was pretty darn accurate and addressed the same basic point: we would be much worse off without the stimulus, and that's turned out to be true. As the nonpartisan Congressional Budget Office said in August, the American Recovery and Reinvestment Act "[l]owered the unemployment rate by between 0.7 percentage points and 1.8 percentage points" and "[i]ncreased the number of people employed by between 1.4 million and 3.3 million." While I would expect unemployment to be relatively UNpredictable, like forecasting hurricanes 12 months in advance, I still trust economists and meteorologists to have a better grasp of their respective fields than armchair quarterbacks like us.

11/16/2010 07:39:10 PM · #30

Well, I don't disagree with you there, but economists this time seem a lot more split on whether QE2 was a good idea. Here's my understanding of the big programs. I'm not using wiki, but my own brain so I'm open to correction here.

TARP- The program used to prop up the banks and prevent things too big to fail to fail. The govt bought ownership in some banks and gave/forced money in the form of loans to the big banks. Almost all banks have since paid this back with interest and no new money was created.

QE1/QE2- The policy in which the fed buys mortgage-backed securities from institutions to do two things. 1) keep mortgage rates artificially low and 2) provide new, created money to make money cheap. In essence, the fed is buying these securities with freshly printed money. The hope is that institutions will have these risky securities off their hands and be flush with cash willing to lend it out to people.

Stimulus- the congress passed bill which both provides cash to states to spend on things like infrastructure and, thus, hopefully create jobs. It also provided tax cuts and credits. This is not new money, but is deficit spending.

Hoping that my understanding is correct, I think I elucidated what I thought happened. The QE1 money did not prime the system because banks held onto it and would only lend to people with excellent credit. Stimulus money did not create as many jobs as hoped because many states spent it in job-inefficient manners.

The worry I have is that the hole filled by QE1 will eventually be filled and then QE2 or QE3 will truly make cash cheap, but will overkill and we will be faced with strong inflation. That's my worry and why I anticipate continuing to profit by owning gold.

11/16/2010 08:49:29 PM · #31

Originally posted by DrAchoo:

The QE1 money did not prime the system because banks held onto it and would only lend to people with excellent credit. Stimulus money did not create as many jobs as hoped because many states spent it in job-inefficient manners.

As noted, QE1 was an essentially forced reaction to stabilize the banks. Additional (and spreading) failures the size of Lehman would have been intolerably catastrophic. It was hoped that banks would open up credit once their risk exposure was reduced, but in practical terms the Fed didn't have much choice- the banking collapse had to be stopped regardless. According to the CBO in August, the stimulus increased the number of full-time-equivalent (FTE) jobs by 2.0 million to 4.8 million compared with what those amounts would have been otherwiseâ�� not too shabby considering employment is always the slowest to recover and that was only one part of the goal anyway (see statement of purpose posted earlier).

Originally posted by DrAchoo:

The worry I have is that the hole filled by QE1 will eventually be filled and then QE2 or QE3 will truly make cash cheap, but will overkill and we will be faced with strong inflation. That's my worry and why I anticipate continuing to profit by owning gold.

Given the Fed's extremely vocal anxiety regarding inflation until Lehman's collapse, they're going to be wary of that, too. The more immediate risk for you is that any strong sign of recovery could spark panic selling of commodities like gold and silver as people rush to get out near the top. When you hear novice investors at the barbershop talk of buying Qualcomm in 1999, flipping real estate in 2004, speculating in oil futures in 2008, or buying gold today, it's a pretty good indication that the fat lady is warming up the ol' vocal cords.

Carl Zeiss 50mm ZE f/1.4 Planar T for Canon

11/16/2010 09:42:12 PM · #32

Prudent advice about gold.

Perhaps we could hear from you as to how the plans have NOT worked? If you tell me they are doing exactly what they planned, then I think you are idealogically blinded.

yanko

Canon EOS-5D Mark II

11/17/2010 02:06:50 AM · #33

I was sort of expecting this to be a discussion on Bush's first term economic policy after browsing to it from the ~~wayback machine archive~~ front page. Now I'm confused. Who's Obama?

12/03/2010 02:27:37 PM · #34

Well, oil and gold hit fresh highs and the unemployment rate just went up. Now we're cooking with gas.

Of course we have the Republicans acting like six-year-olds on the school playground. They are going to cram a bunch of tax cuts down our throat and just make things even worse. We probably deserve our fate...

Carl Zeiss 50mm ZE f/1.4 Planar T for Canon

08/04/2011 07:56:35 PM · #35

Originally posted by DrAchoo:

Interesting to follow up after 8 months.

Gold is now near $1700, unemployment is barely lower at 9.2% (and hopfully doesn't go up tomorrow). Nobody uses the word "deflation" in the news anymore, but "inflation" is frequently mentioned.

I hate to say the last year has supported my position, because I'd love to be wrong. But....

yanko

Canon EOS-5D Mark II

08/04/2011 09:55:59 PM · #36

Originally posted by DrAchoo:

I'd love to be wrong.

I call BS.

Carl Zeiss 50mm ZE f/1.4 Planar T for Canon

08/04/2011 11:43:32 PM · #37

Originally posted by yanko:

Originally posted by DrAchoo:
I'd love to be wrong.

I call BS.

LOL. No, honestly! I'd much rather unemployment was at 6%, gold was at $800, and the economy was growing at 3.5%. People definitely put up with a stuffy nose without going to the doctor if they have no job and spend all their money on food and gas.

yanko

Canon EOS-5D Mark II

08/05/2011 01:16:02 AM · #38

Originally posted by DrAchoo:

Originally posted by yanko:

Originally posted by DrAchoo:
I'd love to be wrong.

I call BS.

LOL. No, honestly! I'd much rather unemployment was at 6%, gold was at $800, and the economy was growing at 3.5%. People definitely put up with a stuffy nose without going to the doctor if they have no job and spend all their money on food and gas.

Maybe we'll see those numbers when DrAchoo's zombie week airs next time? Btw, when I saw that lighting thread pop up and saw you created it, I knew it had nothing to do with photography before I started reading it.

08/05/2011 01:35:15 AM · #39

Originally posted by DrAchoo:

People definitely put up with a stuffy nose without going to the doctor if they have no job and spend all their money on food and gas.

That's precisely why tax breaks for "job creators" is an economic disaster. Nobody is going to expand business and hire workers in this environment because the middle and lower classes can't afford to spend. Whether the top tax rate is 20% or 70%, if there's money to be made, business will grow to meet that demand. Until then, the rich will simply hoard the extra cash.