As QE2 Fades, Debate Swirls Around QE3

LOS ANGELES-As blogger Dr. Sam Chandan recently pointed out, concerns about the lackluster pace of the domestic recovery and spillovers from disruptions to growth in Japan, the Euro Zone, and the Middle East, coincide with the planned conclusion of the Federal Reserve’s second quantitative easing (QE2) program. Chandan, who is president and chief economist of the newly formed Chandan Economics, points out that, as a result of this upcoming end to QE2, questions about the usefulness of policy intervention are receiving new attention. Should we extend the Fed’s purchases of Treasury securities? And if so, what are the attendant risks of growing the central bank’s balance sheet even further? Would QE3 be a waste of money?

The question is material for the commercial real estate markets. Guy Johnson, president of locally based Johnson Capital, tells’s Natalie Dolce, “No one will really know how much of a waste the $600-billion QE2 was, because maybe we avoided a complete disaster.” Despite whatever QE2 did or didn’t accomplish, unemployment remains a persistent problem, along with lack growth in both wages and consumer confidence.

Johnson points out that if QE3 is a go, it will continue to erode the dollar, “which will make US real estate appear comparatively cheap for foreign investors.” Also, he says, it may allow more stimulation to foster employment growth, which is good for CRE.

According to John Strockis, president of Mar West Real Estate in Tustin, CA, QE2 will go down in history as a “panic” response to a rapidly decaying US financial system. “While Congress may have seem prudent to support this economic stimulus, the reality is that many average Americans lost jobs and their homes while big banks and auto companies were bailed out,” he tells “In this regard, QE2 was a substantial failure.”

Hugh Finnegan, a partner at law firm Sullivan & Worcester, based in New York City, agrees with Johnson, pointing out that that QE2 did not do anything for the industry except that it “delayed the inevitable because one result was that the banks did not unload their bad loans in a meaningful way.” Finnegan also “highly doubts” that there will be QE3. “The reasons are less economic and more political,” he says.

Another New York City attorney, Stuart Saft, agrees with Finnegan that QE2 did nothing for the industry. “The biggest problem facing the real estate industry is the dearth of financing,” says Saft, who is partner and chair of the global real estate practice at Dewey & LeBoeuf LLP. Says Saft: “This is adding to the concern about the economy that tenants and buyers have, who are willing to take a chance on buying and leasing space, as well as lenders willing to finance either new or old real estate deals. QE2 did nothing to alleviate those concerns.”

Moreover, Saft says, “The anti-business provisions of Dodd-Frank and the pressure placed on Fannie and Freddie, as well as the likelihood that taxes are going up are further stifling the ability of the real estate industry to improve.” But what is important to remember, Saft says, is that between 2012 and 2013, more than $1.3-trillion of securitized commercial real estate has to be refinanced. Adding to this, he explains, are talks of new capital requirements for the banks, “which will force them to stop making the few loans they are currently making without being able to raise regulatory capital.”

Therefore, Saft says, the Feds buying $600 billion of government paper did nothing to improve the situation because it does not matter if interest rates are low when no one is lending money. In addition, he adds, “because of our tax laws, foreign buyers are also sitting on the sidelines and not buying real estate other than a few trophy properties.”

Although the $600-billion was not as big a waste as the $800 billion that was part of the stimulus bill, Saft says, it did nothing to stimulate the private sector to create jobs, “It was nice that interest rates stayed low, but if no one is lending it does not matter.”

Neither QE3, nor any other step by the Fed or the White House will work without a coordinated approach that deals with the underlying problem, says Saft. That problem, he says, “is an absence of confidence in the government’s ability to get us out of this malaise we are finding ourselves in.”

Source:  Globest


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