QE, or quantitative easing, is the action the Federal Reserve takes to buy mortgage and treasury bonds in the open market with the hopes of pushing down interest rates to a point that will jump-start the economy. QE also has a great effect on the stock market because it artificially boosts stock prices, giving the economy a chance to come around.
The Federal Reserve has already implemented two rounds of quantitative easing, which has swelled their portfolio of mortgage and treasury bonds to a record $1.8 trillion. The treasury also recorded over $70 billion in trading profits in 2011 from their purchases.
Should the Fed start another round of purchases, it could push record low rates even lower and maybe give the stock market a little jolt, but in the end, QE3 will not work and I will tell you why.
Lower- to middle-class Americans will not benefit from lower interest rates or from higher stock prices.
Lower rates will help them if they can refinance and improve their monthly cash flow, but it is not enough to lift the whole economy. High stock prices will also have a limited effect on lower- to middle -class Americans because most the equities that these two classes hold are in their 401Ks if they have any left.
For individuals that have lost their jobs, they may have already exhausted these funds in an effort to get by. So the QEs of recent years are only helping the top earners in America and the world.
What will work and what has been a pillar of the economy for years is the real estate market. The real estate market touches so many industry and business sectors and so many people. According to the National Association of Realtors. more than $50,000 is generated from each home purchase when calculating who gets paid at closing and money that is spent and generated after closing.
But there is so much real estate available and so few buyers. It is estimated that Fannie Mae and Freddie Mac have 1.6 million properties that they have accumulated from foreclosures, and ahve not yet brought to market yet. They eventually have to bring these properties to market, which will drive real estate prices down even further.
My plan for all of this is to give an incentive for investors to soak up all of the excess real estate. (Click on the link below for more.)
What the government should do is eliminate the capital gains tax on any real estate that is purchased by individual or corporations for a period of 12 to 24 months and held for a minimum of three years. Most of these properties need a lot of work and a lot of raw material to be put into them. This would employ countless Americans and would increase retail sales of materials that need to go into these properties. It would also allow for real estate inventory levels to decrease, which could and would stabilize real estate prices.
This could also help people who are sitting on the sidelines and not buying because they feel that prices will continue to go down. These individual would also jump in, which would create demand and begin to boost a deflating sector of our economy.
We need to be engine for the world, or things could get much worse from here.
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