The Fed’s QE3 and the Bank-Stock Connection

AMA6-5-15The Federal Reserve’s third round of Quantitative Easing, that massive stimulus program intended to boost the economy in the years following the housing collapse of 2008, officially ended in October 2014. But as the dust settles, some financial experts point out that it may have been banks and stocks that benefited most.

The much-publicized housing bubble burst with a vengeance in 2008, sending the US housing market into a massive collapse that rippled out into the entire economy. Recession quickly followed, with all major sectors of the economy struggling to gain traction in the years following the housing crash.

To boost the recovery and get more money flowing into the economy, the Federal Reserve, arbiters of US money matters for nearly a century, initiated several rounds of “quantitative easing,” a plan to pump money into the economy and keep interest rates low by buying up massive amounts of mortgage backed securities and other bonds.

The latest and most ambitious of these, dubbed QE3, began in 2012 and involved buying a staggering $85 billion in securities and bonds each month, with no clear end date in sight. By early 2014, the Fed began hinting at a possible taper off of QE3 while keeping an eye on the performance of key economic sectors like employment and housing. Finally, after months of scaling back $10 billion at a time, QE3 was declared done at the end of 2014.

In all, QE3 turned out to be the biggest stimulus boost in US history. It added $3.5 trillion to the Fed’s ledgers and inspired imitators in other regions of the world, particularly the European Union. Thanks to the stimulus, US interest rates stayed at or near historic lows for much of that time, which was intended to encourage consumer confidence and boost sales of houses and other large purchases.

Not surprisingly, market watchers feared that the end of QE3 would see a steep rise in interest rates as well as inflation. That hasn’t happened. But while most financial experts acknowledge that the Fed’s ambitious plan did what it set out to do, others point out that QE3 actually provided its biggest boost to the banks and the stock market.

As QE3 was getting underway in 2012, financial and money management experts at The Motley Fool among others argued that although the intent of QE3 was to help borrowers get good rates on loans and encourage borrowing, banks themselves were reaping the benefits of the Feds’ bond purchases, but weren’t passing those benefits on to consumers. While interest rates did in fact stay low, banks were still charging the same fees for originating loans and other financial products.

While banks continued to originate mortgages, they didn’t hold them – they sold the majority of those loans off into the bond market, benefiting from differences between the bond yields and actual mortgage rates.

Now, it turns out that QE3 may also have played a role in the stock market’s surging recovery. According to a recent article from Business Insider, financial analyst Byron Wien of The Blackstone Group notes that the market’s rally since the housing recovery began has been boosted by a large shot of QE3 money.

According to Wien, the Fed contributed nearly $3 trillion toward the overall $13 trillion surge in stocks from 2009 to 2014. And now that QE3 is over, investors look toward a future without that so-called “easy money.”

The Fed’s foray into bond buying established connections with banking, stock markets and even international money markets, where it affected exchange rates and foreign monetary policies. Though the outcomes have largely defied the most pessimistic of predictions, questions still linger about whether the bold plan of QE3 gave a jumpstart to the economy as a whole, or to big money sectors like banking and stock trading. (Top image:flickr/EGlobeTravel)

Read more from The American Monetary Association:

Can big Banks Be Trusted With Pensions?

China’s New Silk Road Challenges the West

The American Monetary Association Team

AMA logo

Share and Enjoy:
  • Print
  • Digg
  • StumbleUpon
  • Facebook
  • Yahoo! Buzz
  • Twitter
  • Google Bookmarks