Lopez Island Driftwood

The Dow Jones industrial average spiked more than 200 points on Thursday and cleared 13,500. This brings this index to within 625 points of its all-time high. What prompted yesterday’s rally was Ben Bernanke’s announcement that the Federal Reserve would commence QE3. QE or Quantitative Easing is a Fed program that buys equities in order to boost liquidity in the markets. In practice this means that the Fed buys assets that no one else will and prints the money that it uses to make these purchases. The number three pertains to the fact that this is the third such program that the Fed has embarked upon.

The Fed has run these three QE programs because; TARP and the stimulus program were insufficient to pull the country out of the Great Recession. That and since 2010 the Republicans have been unwilling to support any further economic recovery measures, shutting down any legislative remedies. The Fed’s QE programs represent a backdoor stimulus, a door that was left open by Congress a hundred years ago.

The only problem with the Fed’s efforts is that it is primarily benefiting the banks, the same banks that precipitated the recession. The big banks have taken the money from the Fed, pocketed it and used these taxpayer dollars to fatten their balance sheets. They were supposed to lend out this money and generate business. Greedy bankers pocketing the money, go figure. Since banks figure prominently in the Dow, it shouldn’t come as too much of a surprise that more Fed money leads to higher stock prices. The Fed doesn’t have too much choice in this though; because its charter limits it from doing more. That is the providence of Congress.

This is an election year and any Fed involvement becomes highly political. These QE programs have been characterized as a sugar rush for the markets. This one is different then its predecessors. It is open-ended. The Fed will pump $40B a month into the market, for as long as it takes. IMHO, I view this move by the Fed as a throw down for Obama. Bernanke has already cast his November vote. QE3 won’t affect the jobs numbers before the election, but it will provide a floor for the markets, a cushion in the event of an October surprise.