Prior to 2008 the Federal Government remained diligent upon
separation of private business and fiscal policy. All of that changed in September of
2008. The initial federal stimulus of
Wall Street was sparked by plummeting Collateralized Debt Obligations (CDOs). Yes, we have all heard the news. However, there is still an inherent
misunderstanding of the trillions of dollars of stimulus that followed.
After the initial bailout of Wall Street that exceeded $800
billion; the Federal Reserve, led by Bernanke, remained vigilant to ensure that
a financial crisis would not be repeated again in an attempt to prevent another
financial collapse on US soil. This
“federal assistance” still continues today, and there is still no end in sight.
The first step of the Fed’s vigilance (after the initial
Federal Stimulus) was to enact Quantitative Easement I (QEI). On 11/24/2008, Bernanke announced additional
Federal stimulation that was to start on 01/01/2009 in order to help ensure
that another financial crisis would not cripple the US banking system. The Fed promised to purchase $500 billion in
Mortgage bonds to act as a foundation of a volatile market. On 03/18/2009, the Federal Government
extended the initial $500 billion to an additional $1.2 trillion. The added stimulus purchased annother$750
billion of mortgage backed securities and an additional $300 billion in long –
term Treasury securities over the next 6 months. The total estimated Government funds for QE I
came to $1.8 trillion. This extension of
Federal funds caused our 30 year fixed mortgage to fall to 4.78%, the lowest
rate on record since the mortgage interest rates were tracked in the early
1970s.
The market rallied quite considerably after QE1. During this time several talking heads were
praising the Federal stimulus, saying that the recession had finally come to an
end. It was to no surprise that many of
these same talking heads were the same ones who went on record reassuring the
strength of the US economy right before the initial Federal stimulus of
2008.
However, just as with any short term solution, the market
would eventually start to fall again throughout 2010. When the artificial foundation of QE1
starting crumbling; all market indexes fell, which caused the Fed to act again
on 11/03/2010. In the latter part of
2010, Bernanke announced the second round of Quantitative Easement known as
QEII. QEII was a promise from the Fed to
purchase $600 billion in long – term
treasuries over the span of the next 8 months.
Ironically, this Federal stimulus expired just a couple of
months before the debt ceiling had to be raised again in August of 2011. As anticipated, extreme volatility took center
stage and the realization of our nations spending came into the spotlight. Many financial professionals today argue that
the volatility brought on by the raising of the debt ceiling offset the need for
QEII, causing wasted Federal spending.
Because of the volatility of raising the debt ceiling, the
Fed acted on a new program of spending known as Operation Twist. On September 21st, 2011 the
Federal Reserve announced a plan to sell $400 billion of Treasury securities
with a maturity of less than 3 years old in order to purchase the same amount
of longer – term Treasuries having a maturity range from 6 to 30 years. The buying and selling of these Treasuries
are to extend through June of 2012. The
purpose of this Federal intervention was to help keep interest rates low, as
the Fed promised through 2014.
In the beginning of May 2012 the Dow Jones Industrial Average sits above the 13,000
mark, and disappointing data reflecting jobs data and a faltering Euro is
causing volatility in the market again.
Many argue that the market has been propped up by the Fed’s printing
press ready to intervene with QEIII at a moment’s notice.
Make no mistake about it, this trend is very likely to
continue for the next several years; causing excessive drops and gains in the
market to become the norm. Volatility
has been prevalent over the last decade because of a securities and banking
industry that revolves around a business philosophy of leveraging assets. By the end of this year the total tally of
the Federal Spending could exceed $5 trillion dollars, especially of QEIII
becomes a reality. Bottom line, the end
of this correction is nowhere in sight and our mounting debt proves it.
However, there are ways to protect your money from these
unprecedented times. Through annual
reset, core concepts of non leveraged assets can offer financial guarantees. Interest crediting methods known as indexing
will allow for moderate returns to be locked in without a threat of volatility. Investors are embracing this philosophy of
financial protection regardless of the Fed’s short term solutions of Federal
stimulus.
No comments:
Post a Comment