A reflection on our federal stimulus
By Cal Burgess
Retirement Servicing Group PLLC
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 U.S. 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 1 (QEI). On Nov. 1, 2008, Bernanke announced additional Federal stimulation that was to start on Jan. 1, 2009 in order to help ensure that another financial crisis would not cripple the U.S. banking system. The Fed promised to purchase $500 billion in mortgage bonds to act as a foundation of a volatile market.
On March 18, 209, 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 six months. The total estimated government funds for QE 1 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
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 no surprise that many of these talking heads were the same ones who went on record reassuring the strength of the U.S. 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 Nov. 3, 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 eight 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 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 21, 2011, the Federal Reserve announced a plan to sell $400 billion of Treasury securities with a maturity of less than three 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.
Today, the Dow Jones Industrial Average sits above the 13,000 mark, and disappointing jobs data and a faltering Euro are 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, especially if 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.