Evidence puts QE3 in positive light, for now

October 23, 2012 09:30AM

Fears of market distortion inflicted by the Federal Reserve’s third round of quantitative easing are being soothed by solid performances in the housing market, Bloomberg reported.

Home prices have risen in the second quarter by the greatest amount in more than six years, following stimulus from the Fed, according to the S&P/Case-Shiller index. And that growth should continue, lifting home prices by an additional 2 percent in the same period in 2013, assuming the Fed maintains purchases of Treasuries and mortgage debt until that point, a September report by Deutsche Bank AG economists said.

However, those with a more “Alan Greenspan” mindset are concerned that government stimulus is pushing investors toward riskier assets, ultimately leading to the same kind of bubble that drove the U.S. economy into recession.

“Is there some risk you could start a new bubble and repeat the whole cycle? I suppose there is,” Robert Shiller, the Yale economist responsible for the S&P/Case-Shiller index, said, adding that “it might be economically inefficient to try to push prices up so much.”

But Federal Reserve Bank of New York President William Dudley said in a speech last week, “There is little evidence of problems or excesses, but this could change as the recovery proceeds.” [Bloomberg] —Christopher Cameron