Understanding the Fed’s Move

By On September 13, 2012 · 2 Comments

Any major move by the Federal Reserve in the heat of a presidential campaign will bring controversy, and Thursday’s announcement by Bernanke that the Fed would consume an added $40 billion a month in mortgage-backed securities was no exception.

The move, dubbed QE3 for the third round of so-called quantitative easing by the Fed, an effort to keep long-term rates down and infuse money into the economy, raises several risks. Among them, by sending a signal to businesses and consumers that rates will stay low for years to come, the Fed could cause people to postpone spending decisions — exactly the opposite of what’s intended.

Greg Ip, U.S. economics editor for The Economist, explains how it works and why Bernanke pulled the trigger, finally deciding the economy wasn’t getting better on its own.

The markets obviously were pleased. Despite more turmoil in the Middle East, the Dow surged by 203 points to a post-recession high.

 
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2 Responses to Understanding the Fed’s Move

  1. Wils says:
    September 17, 2012 at 8:51 pm

    Well, let me explain in layman’s terms: This economy is bad. It is really really bad. By constantly buying these bonds and thereby actually printing more money, each dollar is actually worth LESS today than it was years ago. There are more of them out there, therefore that cheapens them. Remember tamagotchis? Those little digital pets? When they were ‘rare’ in toystores you couldn’t find them at all, then they became commonplace, and their value went down. Another example is real estate. Too many homes on the market equals lower (yayyy ) prices for them. The problem with the Fed’s action is that because they never let the economy actually bottom-out, they are preventing it from being able to actually heal from this catastrophic downturn. Its akin to feeding the crows. You keep feeding them, whoo hooo you get a bunch of crows flocking to your yard! Those crows are like jobs or businesses Then when you stop feeding them, they die off from starvation, and because you kept feeding them, their population increased and you inadvertently created far more misery than you would have if you did not feed the crows. Which is akin to layoffs and companies either not hiring at all or closing their doors forever. So the fed needs to stop feeding the crows and let the economy do what it needs to do to hit it’s balance once again. But everyone thinks what bernake is doing is hootatstically great. It isn’t. It is really really bad….