Banks biggest winners after QE3

It will be important that banks pass on lower mortgage rates to end consumers and not simply pocket the differences. In a perfect competition free market, that should never happen as different banks will drive their rates lower and lower until it becomes not profitable to do so. However, to use a perfect competition economic model in today’s context is certainly debatable. Even without the banks colluding with one another, we could still potentially see banks not willing to lend at a lower rate simply due to their risk aversion.

Also, very little has been mentioned about how this round of QE will help to boost the manufacturing industry, the main backbone of all developed nations and a large employment generator. Opponents of QE has always been critical of this point, as benefits on Manufacturing and also job creation appears to be a by-product of QE, which main intention is to lower interest rates, and let the economy recovers from there.

All is not doom and gloom though, with US Manufacturing growing slightly in September. Perhaps the indirect benefits of QE1 and QE2 and the “Twist” have slowly seep into the economy? Or perhaps this is simply due to cyclical changes or the dreaded “dead cat bounce”? We have perhaps 1-2 years to find out, but should QE3 fails to get the desired result, the Fed might not be able to do anything more then.

Bank profits from new mortgages have soared since the Federal Reserve began its third round of bond purchases two weeks ago, fuelling the debate over the fallout of the latest dose of quantitative easing.

The extent to which QE3 drives down new mortgage rates and helps homeowners or is pocketed by banks will be crucial to the success of the policy and the prospects for growth in the U.S. and global economies next year.

The rise in profit earned by banks from creating new mortgages came as Fed chairman Ben Bernanke sought to defend QE3 against attacks from Republican presidential candidate Mitt Romney and other critics. Mr Romney said last week the Fed was keeping interest rates “artificially low”.

Speaking in Indianapolis on Monday, Mr Bernanke said it would be “inappropriate” and “ineffective” for the Fed to raise interest rates to put pressure on Congress to tackle the deficit. QE3 would not lead to long-term inflation, he said, adding that stronger growth would help savers in the long run despite low interest rates today.

Although the average rate on a fixed 30-year mortgage reached 3.4 percent this week – a record low – mortgage rates could be lower if banks passed on the full drop in their funding costs.

Via – CNBC

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