Easing Up

Rich Walker
October 11, 2013
COLUMN : Industry Watch | Codes & Standards

As 2012 drew to a close, we were waiting for the sequestration shoe to drop. This year, we are in a similar but much less publicized situation with regard to the fate of quantitative easing.

Quantitative easing, or QE, is a federal monetary policy that the government occasionally resorts to when standard monetary policy becomes ineffective, to pump more money into the economy through the large-scale purchase of assets: mostly treasury or agency securities with long maturities. This increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Since its inception, the successive episodes of quantitative easing have become identified as QE1, QE2 and the currently in-play QE3. QE1 began in late November 2008, when the Federal Reserve started buying $30 billion in two-year to 10-year Treasury notes and mortgage-backed securities every month, using essentially manufactured funds. By June 2010, it held $2.1 trillion of bank debt, mortgage-backed securities and treasury notes. Contrary to expectations, most of those dollars were simply stockpiled as $2.03 trillion excess reserves by financial institutions, earning a whopping 0.25 percent interest from the Federal Reserve, or about $5 billion, risk-free. In essence, it enabled banks to unload a lot of risky assets on which they might have otherwise taken major losses.

In November 2010, the Fed announced the second round—QE2— by buying another $600 billion of Treasury securities by the end of the second quarter of 2011. Results were not stellar. The Fed acknowledged that the result of QE2 was that it “added about 0.13 percentage point to real GDP growth in late 2010.”

These measures likely helped to somewhat mitigate the effects of the “global financial crisis” of 2008, while avoiding the inflation that many people expected would accompany QE1. But, it has largely been a disappointment in achieving the desired results in terms of gross domestic product and job growth. It has also largely failed to spur lending, as banks remain reluctant to lend money to businesses and households, hoarding the cash instead.

A third round of quantitative easing, QE3, was announced in September 2012, consisting of an open-ended bond purchasing program of agency mortgage-backed securities at a pace that settled at $85 billion per month. However, given historically low interest rates, trillions of dollars of excess bank reserves parked at the Fed, and U.S. companies with an equally large amount of cash holdings, most economists yawned, believing that yet another round of quantitative easing would have little effect on either growth or the unemployment rate.

QE3 certainly continued to add to the banks’ coffers. In fact, the total bank reserves (commercial banks’ deposits with the Federal Reserve banks) moved above $2 trillion.

QE3 was launched to aid the housing market. However, the problem facing the mortgage market is seen not as poor liquidity; it is the unwillingness to lend to anyone but near-perfect borrowers. While a possible effect of ending quantitative easing could be to accelerate a rise in mortgage rates, some observe that higher rates would actually improve the housing market by increasing banks’ willingness to lend.

Easing Quantitative Easing

On June 19, 2013, Federal Reserve Chairman Ben Bernanke announced a “tapering” of quantitative easing activities contingent upon continued positive economic data. Specifically, he said that the Fed would scale back its bond purchases and could wrap it up entirely by mid-2014. This lack of a clear answer as to when the current round of quantitative easing would end fueled uncertainty for the financial markets, as the ensuing stock sell-off attested.

The bottom line for the housing industry and we who supply it: given the powerful forces of demographically driven demand, rising home values and prices, bottomed-out interest rates, fewer foreclosures and greater overall optimism, it appears that the fate of quantitative easing will not likely have much effect on the housing market. Indeed, as some have said, it may not have any appreciable effect at all. Easing connotes tranquility, rest and comfort. Apparently the quantity of easing has not reached those levels yet.

Rich Walker is president and CEO of the American Architectural Manufacturers Association, 847/303-5664, rwalker@aamanet.org.