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How Is Quantitative Easing Going to Get People Borrowing?

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You can lead a horse to water, but you can't make it drink. The Fed can give money to banks to lend, but they can't make consumers or companies borrow it.

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MINYANVILLE ORIGINAL

Long road to ruin there in your eyes
Under the cold streetlights
No tomorrow, no dead end in sight

-- Foo Fighters, "Long Road to Ruin"

A lot of people have already weighed in on the Fed's latest course of action, QE3. I'm going to throw my two cents in as well, because I don't think some things are being taken into account with respect to monetary policy that need to be. Honestly, I didn't want to have to write this, but given the nature of the discussion taking place, there are some things that need to be considered, even though we should already know how this story goes. It's all there in those Foo Fighters lyrics and in the title of that song.

Here's the key snippet from the Fed's announcement where they do their level best to take the Foo Fighters' lyrics and apply it to monetary policy:

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.

Based on that statement, it's obvious the money and bond markets will be subjected to QE beatings until morale improves. Time horizons and exit strategies be damned. How will the Fed know when they've done their job and won't need to do more? They're using the old definition applied to pornography: They'll know it when they see it. It's ironic -- and hilarious -- that for all the Fed's models and their data-intensive approach to understanding the economy, they're going to eyeball the success of this program. What strange times we live in.

The reason the Fed is going to commit to this policy is fairly straightforward: They want to see marked improvement in the labor market. The pace of job creation isn't quick enough and people are sick and tired of being sick and tired. But how is this supposed to work? How is quantitative easing supposed to translate into job growth? Here, Cullen Roche from The Pragmatic Capitalist pulled out this response that Chairman Ben Bernanke gave to Pedro da Costa at the Fed's press conference:
The tools we have involve affecting financial asset prices. Those are the tools of monetary policy. There are a number of different channels. Mortgage rates, other rates, I mentioned corporate bond rates. Also the prices of various assets. For example, the prices of homes. To the extent that the prices of homes begin to rise, consumers will feel wealthier, they'll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they'll make a better return on that purchase. So house prices is one vehicle. Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they'll be more likely to spend….

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