My Mortgage Blog

The wait is over; the Fed announced its new stimulus program. Therefore, we will soon have the launching of QE3—phase three of quantitative easing. The stock markets (Dow Jones Industrial Average and S&P 500) responded rather gleefully with about a 1.6% rise in their indexes before 24 hours had passed; many economists, who had been strongly advocating another stimulus program, cheered; meanwhile, many politicians, among others, angrily pointed to the possibility of higher inflation rates resulting from this stimulus program.

The very word, “stimulus,” has taken on both positive and negative connotations in the past several years—mainly negative—during which time we’ve seen rather straightforward concepts wildly politicized. And serious problems may result because most people still don’t know what “quantitative easing” means and what possible bearing it may have on their lives.

Let’s look, therefore, at the ways QE, phase 3, brings new ideas to the table. Hidden beneath the arguments about whether it may really work are two rather astonishing—if subtle—changes to the program. Let’s start with a simple question. Does stimulus work in the first place?

Very early on, the current administration passed a very expensive law that has caused critics ever since to complain about its lack of effectiveness. It is an argument we don’t wish to enter here, but it’s worth noting that a recent book—The New New Deal by Michael Grunwald—asserts that the stimulus act saved the nation from a great deal of economic trouble.

Writing about the book in The New York Times Sunday Observer, David Firestone argues that, “On the most basic level, the American Recovery and Reinvestment Act is responsible for saving and creating 2.5 million jobs. The majority of economists agree that it helped the economy grow by as much as 3.8 percent, and kept the unemployment rate from reaching 12 percent.” While this doesn’t settle the rampant arguments, the numbers are striking.

In any case, what’s new about the third phase of quantitative easing is that 1) it is focused largely on real estate (because the Fed will buy up mortgage bonds) and 2) it is open-ended (because the Fed will cease its extraordinary purchasing of mortgage bonds only when the economy has displayed signs of improvement for many months. In other words, there is no pre-established time limit for this program. Thus, it provides stronger and more reliable stimulus for as long as it is needed. And as a result, the program packs a lot more authority than did past versions.

Okay, we can be upset about the fact that the Fed will buy these bonds with money it has printed into existence, and we can legitimately worry that uncontrolled inflation may result. Bill Gross, one of the world’s most famous bond experts, has quickly reduced his holdings of American national debt in anticipation of higher inflation, for example.

But the program is likely to give us even lower mortgage rates and to imply, at the very least, an endorsement of the real estate market as one of the few places where we may find strong growth in the near-term future. It is difficult to fault the Fed for standing behind the real estate market’s future.

No one expects the program to solve all the nation’s economic problems, but it may help a bit and may, in particular, boost the sales of real estate—and the needed construction or more real estate—significantly.

Or so we hope.