Bernanke and QE3

[Jedo the Jedi]

What exactly does this do? I'm not an economist, so I don't quite understand why spending $40 billion a month stimulates the economy.
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[Zag]

What the Fed used to do is say that they were dropping the prime interest rate. I think that it is pretty clear why that helps the economy: it encourages people to buy houses, which stimulates construction; also it encourages companies who were considering borrowing money for expansion to go ahead and do so, etc.

So that's what they used to say, but the way that they actually accomplished it was to buy up the high-risk mortgage-backed securities, freeing up the lenders to be able to lend. Supply and demand of money to lend will cause the lenders to lower their interest rates. The problem with saying that you're lowering interest rates to a certain number is that you don't actually know how much of these high-risk mortgage-backed securities you'll have to buy up to cause the effect you want.

Then, of course, the lenders, being selfish pigs, would play games with the system, holding on to their cash while the Fed was in this buy-up mode, so they could unload more of their dead weight. It meant that the Fed was spending more on these dog securities than they should have, and buying more than they needed to. Ben B. changed the policy to just a declaration of how much they were going to buy up rather than the target interest rate. In reality, he knows pretty closely the correlation, if the lenders aren't trying to game the system. This approach means that the lenders now have an incentive to reduce the price they are asking for these securities, because they want to unload them and use the cash to make better investments. If they ask too much, their competitors will undercut them and they won't get to make a deal at all.

[Lepton*]

Like.

[Thok]

[The Potter]

I still feel it means one thing: buy gold and silver. Think about this: 1 oz of gold will always be valuable. It isn't an investment, it is the safe feeling of holding something valuable that makes you forever rich.

Maybe it is Alaska being shielded by isolation but I haven't seen a significant change in anything in the last 4 years. Our housing market moved down a little, food got a little more expensive and gasoline is still entirely too cheap ($3.90?/gallon). All in all, not much appears different.

I also have little faith left in our fiat currency. Just over 40 years off the gold standard was a good run. I hope people enjoyed it.

[Fried Egg]

I'm not going to comment on the specific question of whether more qualitative easing is a good idea or not however...

[Zag]

[Fried Egg]

I'm not qualified to speak about the specifics of the American situation so I am talking in generalities here.

Central governments can and do pursue a policy of continuous debasement of the currency, trying to hold the interest rates generally lower than they should be, in the misguided belief that this is always good for the economy. Since they print new money, they can do this without worrying about getting a return for their "investment" (as long as it doesn't lead to run-away inflation).

Indeed, if they couldn't do this, the policy of "inflation targeting" would be impossible because it essentially relies on the money supply growing at a rate over and above the GDP growth rate.

Also, it is not the case that zero price inflation is bad for the economy. This is exactly what the long term inflation rate (in both the UK and US) used to hover around during the period of the classic gold standard when the central banks were not free to inflate the money supply. The economy grew well enough back then.