Quantitative Easing

[Bienes Raices]

The Fed has announced it plans to buy $600 bn worth of bonds over the next several months to plug money into the system, stimulate lending, etc. Do you think QE2 will work, or just create inflation?

[Ron Nawrocki]

Mitch is correct ... they buy bonds from banks, other institutional investors, or the Treasury.

If they buy from banks it doesn't change anything since the bonds were assets just like cash ... and in the best case they'll buy more bonds.

If they buy from PIMCO, PIMCO might go and buy some new T-Bills or bonds and thus keep interest rates low. Although PIMCO just launched an equity fund ...

Either way the money helps fund the deficit or may help corporations borrow more, which is useful since banks can't lend (separate thread on that topic going).

The velocity of money has tanked since banks aren't lending. When they lend, each $100 lent leads to another $700 of more loans that can be made ... that increases velocity.

Until banks sell off their toxic assets (REO's & short sales) at reasonable prices (via the TACT Program) vs. trying to dump them to cash buyers at 35-40% discount, we won't see money velocity pick up ... and we'll see a continuing downward spiral in real estate prices.