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SPDR S&P 500 Message Board

  • markschvva markschvva Mar 14, 2013 12:18 PM Flag

    serious...help me understand QE

    when the FED buys US Treasuries, they cannot buy direct. They have to use an agent such as a major financial institute. The financial institute then gets to call the bond purchase an asset under management and can leverage it to buy equities. Am I correct in this?

    If the US Treasury has trouble selling Gov debt, they turn to Ben, who then expands QE...hence, the market rockets higher. Tour thoughts, thanks.

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    • "The financial institute then gets to call the bond purchase an asset under management"

      The financial institution in your example is SELLING a bond, and no, they don't call it an asset under management (there is no need for such labeling):

      When the Fed buys government securities, the SELLER of said securities gets a credit of the appropriate amount applied to its account at the Fed. Yes, this is what's known as HIGH POWER MONEY, because it can be lent out (subject to reserve requirements), and that diminished amount can be lent out again (of course also subject to reserve requirements), and this can go on forever, and it approaches asymptotically the money multiplier times the amount of the bond.

      This stuff is not a big secret. This is elementary stuff and is covered in any basic course on money and banking. I haven't looked, but I suspect this is also explained on the Fed's website.

      Of course the money can end up in the stock market. Anyone claiming anything to the contrary is as misinformed as these morons who claim the Fed is buying stocks or futures directly.

      The magic involved is the basic premise of money creation/destruction via central banking, and as I said, it's not a secret.

    • The banks"agents" and fed are one in the same.

    • You have a better grasp then a lot of people on this board. Thumbs up.

      The financial institutes involved are referred to as the primary dealers. You can find a list of them on the internet.

      The primary dealer gets cash for the bonds. He may then use the cash any way he wishes. He may buy stocks, or he may leave the cash on deposit with the FED, or he may loan the funds.

      And yes, QE does boost the market as well as the economy.

 
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