What can $40 billion a month get you these days?
It’s official. The Fed has announced its open-ended, $40-billion-a-month bond buying program to help stimulate the economy even further. The aim is to spur job growth and increase the housing market.
For those who can do fast math, you may have already calculated that this amounts to nearly a half-trillion dollars a year in bond purchases, assuming the Fed were to purchase bonds for a year. And the bond buying will continue until the Fed feels that it has achieved its goal of a more stable economy.
Fed Chairman Ben Bernanke explained what the Fed hopes will be the result of the purchase. He feels that by buying the bonds, the Fed would push interest rates even lower (30-year rates can be found currently as low as 3.55 percent). The lower rates would hopefully spur additional housing purchases and more construction, and with greater housing demand, we could see prices pushed higher.
This could relieve some homeowners who are currently under water (homes that are worth less than the mortgage). And banks may be inclined to refinance existing mortgages to lower rates.
Homeowners that save some money on their monthly mortgage might just start spending more, which might drive employers to hire more people, which in turn would lower the unemployment rate.
Whew, that is a lot of hoping.
But I wonder how many consumers are not buying a house right now because they feel that 3.55 percent is just too high? Also, did we not learn what rampant spending did to our bank accounts just a few years ago?
Yes, spending helps the economy, but overspending hurts the individual.
We shouldn’t forget that we are sitting with a current debt of $16 trillion. We just added $1.3 trillion to our deficit, and have been dodging the elephant in the room known as Medicare, which is currently facing unfunded liabilities of $55 trillion.
I want the economy to improve just as much as the next guy. I want my community to continue to prosper and my kids to have a healthy country to grow up in. But I am not sure that adding a half-trillion dollars a year to our already-bulging debt is the best solution.
Joe Wirbick is the president of the Lancaster financial services firm Sequinox. Joe specializes in retirement planning and distribution. This allows him to concentrate on developing strategies that help address the unique issues that confront retirees and those approaching retirement.