Over at LRC, Ryan McMaken explains how the Fed’s latest move, i.e. continuing what it’s been doing for years now, will affect the U.S. economy:
In the latest round of government “stimulus” the Fed has announced that it will be buying $40 billion in mortgage-backed securities each month for an indefinite period of time.
The logic here:
- Buy more mortgage-backed securities (MBSs).
- This will in turn increase liquidity available for lending to people to buy houses or possibly other real estate.
- All those people buying houses will then have houses to spend money on and they will spend money at Home Depot and other places, and then the economy will miraculously recover.
The effect of this will be:
- Even less saving going on than is happening now. Why do the lending institutions need more liquidity? Because there are no real life loanable funds in the first place. No one is putting money in depository institutions, for example, because interest rates are at rock-bottom levels, but also because people have no excess money to save. So, the Fed is creating fake loanable funds through the purchase of the MBSs. Much of this will probably be newly-created money.
See the rest of his explanation of QE3 here.
UPDATE:
An oldie but a goodie, here’s a humerous and more in depth look at counterfeiting “Quantitative Easing.”
