Business Insider

Peter Crabb: Why more easy money from the Fed won't help Idaho

The QE II is sailing next month. Don’t expect the elegant cruise ship that now serves as floating hotel to make its way anywhere near Idaho.

It is not because Idaho is landlocked. This QE II is not a ship. The QE II that has the financial markets all excited is the second round of quantitative easing from the Federal Reserve.

After the Nov. 3 meeting of the Federal Open Market Committee, the policy-setting arm of the Federal Reserve, the financial markets are expecting to hear plans for another round of quantitative easing. QE I ended in early 2009.

Quantitative easing is a monetary policy that central banks like the Fed use when they have exhausted all their other options. The easing part refers to easy money, better understood as lower interest rates.

The quantitative part refers to direct asset purchases by the Fed. The Fed will choose a quantity of bonds it wants to buy in an effort to lower the interest rates on long-term loans like mortgages. By making these purchases, the Fed increases the quantity of money in the economy.

When QE I sailed in the fall of 2008, the Fed doubled its balance sheet from $1 trillion to $2 trillion in just one month. The effect was a dramatic increase in financial-market liquidity.

With better liquidity, fewer banks were in trouble. The Fed essentially staved off what could have been a worse banking crisis. No one knows, however, just how bad it would have been. And the policy has done little to improve the real economy.

Today the Fed has more than $2.3 trillion in assets. Mortgage-related bonds, at $1.1 trillion, make up nearly half of this total. Most of the remaining balance is in U.S. Treasury bonds.

There is rampant speculation about what quantity the Fed will choose for QE II. The stock market and long-term bond markets have all risen in the past month in expectation of the return to the marketplace by this large buyer. Another trillion dollars in purchases makes for higher prices and lower interest rates.

Unfortunately, Idaho will see little from QE II. The Fed’s purchase of more Treasury or mortgage bonds will have minimal impact in our local economy because of our size and situation.

First, our size limits our ability to benefit from bond purchases. Idaho banks have far fewer mortgage assets on their books than banks in other states. In the past two years the value of Treasury bonds and privately issued residential mortgage-backed securities held by Idaho banks has been unchanged at about $500 million and $62 million, respectively, according to FDIC data.

The amount of government-backed mortgage securities owned by Idaho banks has increased rapidly since 2008. However, at just over $400 million, this amounts to only 0.05 percent of this large financial market.

The second factor reducing any local effect of quantitative easing is the condition of Idaho’s businesses and housing markets. QE II is designed to spur more lending, but the demand for loans in Idaho is particularly small.

The Idaho housing market has a supply, not demand, problem. There are too many distressed properties for sale. According to September data from RealtyTrac Inc. 1 in every 204 Idaho housing units is in foreclosure. Nationally the ratio is 1 in every 371.

The Idaho business market is equally weak on the demand side. Flushed with Fed cash, bankers are more than willing to lend but cannot find businesses in need of new financing. There have been very few new business registrations this year with the Idaho Secretary of State.

The first round of quantitative easing served its purpose. The banking industry is healthy. A second round is unlikely to help anyone, particularly Idaho.

QE II is sailing, but not from a port near you.

Peter R. Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa. He earned his doctorate in international and financial economics from the University of Oregon.