How can QE2 help the economy?

In anticipation of the QE2, the stock market and the bond market have been rising since late August when the Fed chairman Ben Bernanke revealed his intention.

When the actual plan was announced on Nov.3, the market didn't move much either way. The amount of asset purchase ($600 billion in about 8 months) was in line with expectations. The trillions of paper wealth gained since August is now solidified. Could it translate into more spending power? If so then QE2 would be looking good.

There are other likely channels where QE can work. Bernanke published an op-ed piece on Washington Post today, which lays out clearly what he thinks how QE can help spur economic growth:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Housing market is in disarray. Home sales are at the rock bottom. Can lower rates help much? We'll have to see. One way to look for clue is again in the home building sector. Home builder stocks are moving up. So perhaps investors are buying into the QE2 story.

Lower corporate bond rates looks like are supporting new issuance. Bloomberg reports that

Corporate bond sales surged to $15.9 billion, the busiest day in almost two months, as the Federal Reserve’s move to stimulate the economy ignited a rush of issuers tapping credit markets at record-low interest rates.

Many big corporations are taking advantage of the lower rates. Will the cheap money then find its way into more hiring and more production? It's likely, but we'll have to see over the next few quarters.

It's quite interesting that he writes "And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." Anyone with a 401k account would certainly understand the implications. One can argue about how likely the increased financial wealth can help consumer spending, given the skewed distribution of stock ownership, and the hard-to-establish relationship between financial wealth and consumption.

I think one likely group of consumers who will be able to borrow and spend more are the credit-worthy and asset-rich households. Their spending powers are likely to show up in luxuary good sales and other highend consumptions. We should be looking for evidence in those sales figures.

If the wealth effect kicks in, depneding on how strong it'll be, it can help increase GDP and income, thereby generate more hiring.

Contrary to all the Fed bashing out there, the rationale in Bernanke's QE move doesn't seem so hard to see. How effective it'll be is the real question. But given the observation that the fiscal side is at a deadend in terms of creating more supports to the economy, the Fed's latest effort is probably the only game in town.

What do you think?