Fed to Buy Back $1.2 Trillion of Debt
This is not good.
With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most - if not all - of next year.
The decision to hold rates near zero was widely expected. But the Fed’s plan to buy government bonds and the sheer amount - $1.2 trillion - of the extra money to be pumped into the U.S. economy was a surprise.
“The Fed is clearly ready, willing and able to be the ATM for the credit markets,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco.
The only way the Fed can do this is to just print the money. We’re accelerating on the road to massive inflation.
There is another theory getting some traction out there.
The conventional economic wisdom of prospects for serious inflationary pressures – as result of monetizing the bailout/stimulus/whatever else you want to call it - may possibly be overstated.
Namely so much wealth was literally vaporized by the meltdown of the housing bubble that the prospects for inflation might possibly be dampened a bit.
The problem with all of these theories is that we won’t know the answer until 3-5 years and out.
Nonetheless, what would Owen do?
Posted by Swamp Gas on March 18, 2009 at 2112 hrs
Swamp, that’s an interesting theory I’ve heard elsewhere too. Indeed under normal circumstances this might cause inlation, but in this case it will simply prevent deflation.
It may not matter anyway: it looks like I now have to divorce my wife and go gay along with everyone else, meaning no more reprduction, meaning it doesn’t matter anyway, according to some folks here:
http://wonkette.com/407091/dictionary-redefines-marriage-for-the-gays
Posted by .(JavaScript must be enabled to view this email address) on March 18, 2009 at 2128 hrs
Indeed. With all the money pumped into the economy in the early 1930s, inflation never rose above 3.5%.
Posted by .(JavaScript must be enabled to view this email address) on March 18, 2009 at 2204 hrs
Deflation is not an enemy. Unfortunately, the idiots in charge today are making the same mistake that the idiots in charge during the depression made… they battled deflation so hard that they kept the economy from recovering.
Stupid, just plain stupid.
Unfortunately, we need a bit of deflation in order to right this economy.
Posted by .(JavaScript must be enabled to view this email address) on March 18, 2009 at 2232 hrs
Um, I don’t know what statistics you’re looking at, but the economy improved under Roosevelt a great deal. GDP contracted by double digits every year until FDR took office, and the unemployment rose year after year as well. When the New Deal began to take hold, the economy improved dramatically.
Posted by .(JavaScript must be enabled to view this email address) on March 18, 2009 at 2314 hrs
This may be the smartest action a government body has taken regarding the recession since Obama took office. Actually, it might be the smartest thing under either administration.
Sure, there’s some inflationary risk, but the action will loosen credit markets, help millions of Americans to refinance their mortgages at considerably lower rates (which creates additional discretionary income), and some downward pressure on the dollar means that our exports become relatively cheaper for those who might purchase them. Would we rather have a weaker dollar that encourages domestic production, or a stronger dollar that encourages domestic consumption of foreign commodities?
And really, “accelerating on the road to massive inflation?” The only thing inflated there is the rhetoric. Methinks that someone’s spending too much time reading WND now that he’s been quoted there…
Posted by Recess Supervisor on March 19, 2009 at 0033 hrs
RS, we import petroleum. Lotsa petroleum.
That’s where the real ‘bite’ lies with the weaker USD.
As to deflation: the reason the Beltway crowd worries about it is that they want to create the “wealth effect” of high home prices.
They don’t give a shit for ‘value’ in currency. They care about re-election.
Posted by dad29 on March 19, 2009 at 0759 hrs
The economy grew under FDR, Steve-O, after it was allowed to deflate. Deflation is not the enemy, it is a symptom.
Inflation requires demand pressures. We are not real likely to see inflation anytime soon, but we are very likely to see a big currency depreciation. Expect gas prices to go up substantially again.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 0806 hrs
Some Economists have been calling for this for some time:
http://www.marginalrevolution.com/marginalrevolution/2009/03/quantitative-easing.html
http://www.marginalrevolution.com/marginalrevolution/2009/03/quantitative-easing-1.html
Although concern is well founded. This is risky. Then again, most things are risky.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 0806 hrs
My first thoughts on this is that it is less likely to cause inflationary pressure than the stimulus bill will. Maybe I’m missing something here, but my understanding is that the money is being used to buy mortgage backed securities. In doing so, it drives mortgage rates down and puts money into circulation to free up the credit markets. Within an hour of this announcement, my mortgage guy called me and told me he was able to lock my refi at 5%. So I, like millions of others I presume, will refi their houses, and free up a considerable amount in their monthly budgets will can be spent on other stuff. At the same time, the rates will drop enough that the housing market will heat up. If the housing market heats up, one could make the argument that it will stabilize the housing market, and increase the value of the mortgage securities the Feds bought, allowing them to resell them and make a profit. I would think this would mitigate the inflationary pressures. I’m probably missing something in this analysis, but I can tell you this ... just for my family, at least in the short run, this did more for us and our monthly bottom line by saving us hundreds a month on our mortgage, than anything that came out of the stimulus bill, including the goofy tax credit that put an extra 15 bucks in my pay check.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 0810 hrs
What the bond market does today will be a good indicator if this is going to implode or not.
The money supply numbers should be very interesting as well - I’d still like to see the M3 numbers.
Steve - the economy improved under Roosevelt because a bunch of workers were removed from the marketplace (ie, the war) it wasn’t anything that FDR did.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 0838 hrs
Bill, the economy improved under FDR for years before WWII started.
BVBigbro, deflation is a symptom alright - it’s a symptom of companies slashing prices, cutting jobs, and reducing wages.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 0939 hrs
The Fed’s series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion — from just under $900 billion in September. The Fed’s balance sheet could grow to $5 trillion over the next two years.The Fed has said it’s mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long. There’s the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage “moral hazard.” That’s when companies make high-stakes gambles knowing the government stands ready to rescue them.
Posted by Toronto condo on March 19, 2009 at 1040 hrs
A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, “How do I know you won’t sting me?” The scorpion says, “Because if I do, I will die too.” The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp….
Posted by Condos Toronto on March 19, 2009 at 1051 hrs
Slashing prices, cutting jobs and reducing wages is precisely what the pieces of the economy tied to deficit spending need to be doing, Steve-O.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 1221 hrs
Right, because the major problem with our economy was that things were too expensive and people were overpaid, and too many people were employed. Right.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 1553 hrs
Yes, Steve-O housing was and is too expensive. The people behind it were overpaid and too many people were employed constructing it. The misallocation of resources to housing inflated prices for all sorts of industries.
The economy is not a monolith. The mindless fight against deflation is largely a fight to protect the status quo at any cost including the well being of future generations. What is good for General Motors is not in fact what’s good for America.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 1747 hrs
Steve-O, in some cases that’s exactly right.
Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 1829 hrs
When the average house exceeded the ability of the average family to buy,t you have a problem and you wiil have an adjustment.
That is what happened and it has happened before.
For a decade people put large amounts of their money into houses cause they were advancing in value far above the rate of their stocks.
Eventually the bubble burst, as the tech stocks did when the public put too much value on internet stocks and ideas.Posted by .(JavaScript must be enabled to view this email address) on March 19, 2009 at 2307 hrs
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