Some Fed critics note that QE3 is to happen at a time when major equity markets are at multi-year highs and monetary policy is already incredibly loose. Some commentators also “detect” a political bias, given that this equity sugar rush could help President Barack Obama’s chances of re-election in November. Such observations, while entirely true – obvious to the point of banality, in fact – don’t get to the heart of the matter.
For the heart of the matter is that with US house prices down 25pc since their 2007 peak, between a quarter and a third of American residential mortgages are “under water”.
Millions of US home loans have gone bad. By purchasing bucket-loads of MBS, then, the Fed is basically buying up yet more of the toxic waste which the banks, as a result of their previous deeply irresponsible investments, still have smouldering on their balance sheets.
Rather than writing down such losses and taking the hit, the money-men now know that the Fed, on top of the $1,250bn of MBS it has already bought, will suck up even more of the banking sector’s mess.
Politicians are desperate for Wall Street’s campaign donations, of course. By refusing to lend, banks across the Western world have anyway got the political classes over a barrel. America’s QE3, and its Western European variants, represent the latest round in an extended game of blackmail which our elected leaders seem happy to let the banks win. Then again, money-printing helps myopic politics too, meaning they can worry less about budget deficits and spending constraints, seeing as previous bouts of QE have dampened sovereign yields.
http://www.telegraph.co.uk/finance/comment/9545441/US-cannot-continue-the-endless-sugar-rush.html?utm_source=Ray+Dalio+on+deleveraging+and+other+things+|+9-18-2012&utm_campaign=Constant+Contact&utm_medium=email
