QE3 and QE4 – what for?

Posted by ProTradingIndicators on

In two of their latest meetings, the Federal Reserve decided to launch 2 new stimulus packages, AKA QE3 and QE4. QE3 Is a 40 billion dollars per month pack, that goes directly into MBS (mortgage backed securities). QE4 is 45 billion dollars per month pack – that goes into long term treasuries.

Let’s zoom out
During the first 2 stimulus packs, QE1 and QE2, the focus was on treasuries as a whole. The target as explained – was to bring unemployment down and inflation up. Today in hindsight we can say that it partially worked. Inflation went higher, unemployment did drop, but the participation in the work force dropped as well.

And yet, some sectors in the economy recovered nicely. Technology, commodities and some Services rebounded sharply. Others recovered slowly, but still, made a nice comeback. Two sectors that didn’t really recover as much are Finance and Real estate. These two were the backbone of the crash in 2008, and even today they are still very weak, and not even close to where they were in the peak of 2006-7.

S&P 500 financials index is still far away from its 2007 highs (source : bloomberg)

Recovering Real estate and finance

QE3 and QE4 are there to push these two sectors back up. As QE3 focuses on MBS it lowers the rates on mortgages and pushes more people to buy a house. QE4 pushes the long term treasury rates lower and also giving the same effect.

But why is this good for financials as well as real estate? The normal person’s biggest life investment will be Real Estate. There is no bigger investment, no larger asset, in most people’s lives. Therefore, when real estate prices rise, the general nominal wealth of the public increases. When that happens, more people can take more mortgages, and banks can lend out more to the public, and of course get their coupon.

housing prices already started to rise

Will it work?
Some may argue with some sense that printing money cannot push the economy back to where it was in 2007. They are right. Popped bubbles are most likely irreversible. And yet, the idea in general (as part of a top-down approach) is logical. If the biggest asset a person has gains and becomes more valuable, that person will be wealthier.

To sum it up:
QE3 and QE4 are here to help recover the two last sectors that are still struggling: finance and real estate. How? Through pushing housing prices up, back to the 2006-7 highs, tempting the public to buy houses in extremely low rates.

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