Federal Reserve boss Ben Bernanke's first two "quantitative easing" programs, designed to stimulate loans and business expansion by forcing interest rates still lower, served merely "to print money to buy government securities" instead, writes veteran bank analyst Richard X. Bove'
By contrast, Bernanke's "QE3" takes "a totally different approach" -- investing $2 billion a day or more "until the economy revives" in mortgage-backed securities. "Let me shout, the Fed is buying mortgage paper to stimulate housing," and it "will work," writes Bove'. "Follow the dollars."
The Fed has moved backwards into the future, Bove' writes in a report to clients of Rochdale Securities. Until about 1970, the government controlled (corrected) Fannie Mae and Congress would "appropriate additional funds" in recessions so it could "buy more home loans" and stimulate "recovery in housing that would lead the economy out of the recession."
That ended with the Nixon-era reaction to the 1960s urban riots. The Emergency Home Finance Act of 1970 created or resulted in the creation of Freddie Mac, Ginnie Mae, private mortgage insurance, and especially the mortgage-backed securities market -- the whole independent (but government-backed) modern housing finance machine that separated housing growth from the government's "counter-cyclical" policies. The result was the housing boom and bubble of the 1980s-90s-2000s up until the collapse of 2008-09.
But the financial collapse, the foreclosure explosion, the Dodd-Frank bank restrictions, the tougher approach to weak loans by federal bank examiners, the lawsuits over sloppy automated loans and foreclosures, and the international Basel 3 capital limits have now reduced the home loan industry to its pre-1970 prostration.