Like you, I’ve been reading a lot to try and figure out what the deal is with QE2, the second round of Fed Chairman Ben Bernanke’s $600B “quantitative easing.” There are a number of theories circulating now that attempt to explain what Bernanke is trying to accomplish and if it will work. Here are some of the most interesting links I’ve found.
According to the Dallas News, “The way it’s supposed to work is that the Fed buys securities in the open market, paying with a government “check.” (That’s how the money is created.) The sellers deposit those checks into their banks. The banks redeploy those deposits as loans to consumers and business. The money supply expands and, in turn, so does the economy.
“Or so the theory goes.”
Others, like Michael Pento, senior economist at Euro Pacific Capital, says “Hello Weimar Germany,” and believes QE2 is a complete failure for the seven things it does not do:
- Lower U.S. corporate tax rates.
- Reduce regulations that are “crippling” U.S. firms.
- Make U.S. workers more competitive vs. foreigners.
- Improve the U.S. education system.
- Lead to a balanced budget.
- Doesn’t lower unemployment
- Doesn’t stop long-term interest rates from rising.
Others, like the Wall Street Journal with its recent business-class fear of inflation open letter to Ben Bernanke, beg discontinuance of QE2 for a number of reasons.
Tracy Holloway at Seeking Alpha believes QE2 is another backdoor bank bailout. Ellen Brown thinks QE2 is a way to fund the deficit without raising taxes, just to keep the government’s doors open for day-to-day business!
Perhaps the darkest theory is the notion that QE2 is a way to recapitalize banks ahead of the coming second housing crash. The thinking here is that banks still have way too many toxic assets on the books. QE2 is the first step along the way of helping the banks to right off those bad loans and start fresh with new capitalization subsidized by the Fed.
Let us know what you think, or plausible ideas you’ve read.