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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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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….

Ah. Channels and policy transmission mechanisms. Now we're getting somewhere. Ahead of Jackson Hole, former Minyanville editor-in-chief Kevin Depew (@kevindepew) shared this chart on Twitter:



You can see from the chart, a number of these channels by which monetary policy is transmitted are broken. Still. In Chairman Bernanke's answer to da Costa's question, we really see what the Fed wants to do: Its best chance at kick-starting a recovery right now is to make people feel wealthier. And if they feel wealthier, they will want to spend more, and borrow more money while they do it. This is all about trying to instill confidence in the broader economy and in the process, re-establish the Fed's transmission mechanisms (i.e. credit). Cullen goes on to explain why Chairman Bernanke's view is misguided, and I agree with him.
No positions in stocks mentioned.
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