As you are likely aware, the financial crisis that hit the United States (housing in particular) precipitated quantitative easing. As the magnitude of the crisis became more apparent, drastic actions were taken in an attempt to control the contagion.
Fannie Mae and Freddie Mac were quickly seized by the U.S. Treasury who injected cash to save the crippled mortgage companies. Later in September, 2008, AIG was bailed out to the tune of about $85 billion. As the Treasury had to make decisions and could only do so much, so fast, Lehamn Brothers was left to their own devices.
By the end of October, the FED had cut the key interest rate to 1 percent in an effort to spur the velocity of money and climb out of a very tenuous economic situation. Some experts have indicated that we were much closer to the brink of collapse than most Americans are aware.
The FED then implemented a plan to purchase mortgage backed securities and cut the interest rate to almost zero. This was announced on November 25th, 2008. The rate cut went into effect on Dec. 16. Initial purchases of mortgage backed securities totaled $500 billion. In addition the FED purchased around $100 billion in debt from Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks.
Seeing that their efforts were failing to spur the economy, the FED took additional action in what would later be the second part (and considered successful by some) of QE1. In March of 2009, another $750 billion in mortgage backed securities were purchased. Furthermore, $100 billion was used to purchase Freddie and Fannie debt as well as $300 billion of longer-term Treasury securities over the next six months.
By the time QE1 had come to an end in March, 2010, a total of $1.25 trillion in mortgage backed securities and $175 in debt had been purchased by the FED. The announced expectation was that lower interest rates would result in more cash available for homebuyers. This was expected to buoy the housing market and strengthen financial markets.
Mortgage rates did drop, though there is much debate on how successful QE1 was. From an immediate perspective, it very well may have saved our economy from collapse. But is that what is best? From a macroeconomic perspective, the debt accumulated by holding off a much needed correction will only make matters worse in the long run. Eventually these forces will break any efforts to control them.
We’ll see how this worked and what happened next as we consider QE2 tomorrow.
For your prosperity,
J. Keith Johnson
The Gold Informant