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03-19-09, 01:25 PM #1
The Next Nail in the Economic Coffin?
Reading our history, learning from our past, there are those who look incredulously upon this next action by the government...
Fed to pump another $1 trillion into U.S. economy
By Edmund L. Andrews
Wednesday, March 18, 2009
WASHINGTON: The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.
Having already reduced the key interest rate it controls nearly to zero, the central bank has increasingly turned to alternatives like buying securities as a way of getting more dollars into the economy, a tactic that amounts to creating vast new sums of money out of thin air. But the moves on Wednesday were its biggest yet, almost doubling all of the Fed's measures in the last year.
The action makes the Fed a buyer of long-term government bonds rather than the short-term debt that it typically buys and sells to help control the money supply.
The idea was to encourage more economic activity by lowering interest rates, including those on home loans, and to help the financial system as it struggles under the crushing weight of bad loans and poor investments.
Investors responded with surprise and enthusiasm. The Dow Jones industrial average, which had been down about 50 points just before the announcement, jumped immediately and ended the day up almost 91 points at 7,486.58. Yields on long-term Treasury bonds dropped markedly, and analysts predicted that interest rates on fixed-rate mortgages would soon drop below 5 percent.
But there were also clear indications that the Fed was taking risks that could dilute the value of the dollar and set the stage for future inflation. Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on Wednesday.
In its announcement, the central bank said that the United States remained in a severe recession and listed its continuing woes, from job losses and lost housing wealth to falling exports as a result of the worldwide economic slowdown.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the central bank said.
As expected, policy makers decided to keep the Fed's benchmark interest rate on overnight loans in a range between zero and 0.25 percent.
But to the surprise of investors and analysts, the committee said it had decided to purchase an additional $750 billion worth of government-guaranteed mortgage-backed securities on top of the $500 billion that the Fed is already in the process of buying.
In addition, the Fed said it would buy up to $300 billion worth of longer-term Treasury securities over the next six months. That would tend to push down longer-term interest rates on all types of loans.
All these measures would come in addition to what has already been an unprecedented expansion of lending by the Fed. The central bank also said it would probably expand the scope of a new program to finance consumer and business lending, which gets under way this week.
In effect, the central bank has been lending money to a wider and wider array of borrowers, and it has financed that lending by using its authority to create new money at will.
Since last September, the Fed's lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.
Despite a trickle of encouraging data in the last few weeks, Fed officials were clearly still worried and in no mood to cut back on their emergency efforts.
Fed policy makers sharply reduced their economic forecasts in January, predicting that the economy would continue to experience steep contractions for the first half of 2009, that unemployment could approach 9 percent by the end of the year and that there was at least a small risk of a drop in consumer prices like those that Japan experienced for nearly a decade.
The Fed rarely buys long-term government bonds. The last occasion was nearly 50 years ago under different economic circumstances when it tried to reduce long-term interest rates while allowing short term rates to rise.
Ben S. Bernanke, the Fed chairman, has been extremely cautious in recent weeks about predicting an end to the recession, saying that he hoped to see the start of a recovery later this year but warning that unemployment, a lagging indicator, would probably keep climbing until some time in 2010.
In contrast to several recent Fed decisions, with the presidents of some regional Fed banks dissenting, the decision at Wednesday's meeting of the 10 members of the Federal Open Market Committee, the central bank's policy making group, was unanimous.
Jan Hatzius, chief economist at Goldman Sachs, said the Fed had adopted a "kitchen sink" strategy of throwing everything it had to jolt the economy out of its downward spiral.
But while Mr. Hatzius applauded the decision, he cautioned that the central bank could not solve the economy's problems by expanding cheap money.
"Even if the Fed could make interest rates negative, that wouldn't necessarily help," Mr. Hatzius said. "We're in a deep recession mainly because the private sector, for a variety of reasons, has decided to save a lot more. You can have a zero interest rate, but if you just offer more money on top of the money that is already available, it doesn't do that much."
Fed officials have been wrestling for months with the fact that lenders remain unwilling to lend and borrowers are unwilling or unable to borrow. Even though the Fed has been creating money at the fastest rate in its history, much of that money has remained dormant.
The Fed's action is an expansion of its effort to bypass the private banking system and act as a lender in its own right.
The Fed and the Treasury are starting a joint venture this week called the Consumer and Business Lending Initiative in their latest effort to thaw the still-frozen credit markets. The program will start out with $200 billion in financing for consumer loans, small-business loans and some corporate purposes.
Fed officials have said they hope to expand the program next month, possibly to include the huge market for commercial mortgages, and both the Fed and Treasury hope the program will eventually provide up to $1 trillion in total financing.
"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."
- Alexis de Tocqueville, Democracy in America
Tell me not, Sweet, I am unkind,
That from the nunnery
Of thy chaste breast and quiet mind
To war and arms I fly. - Lovelace
The opinions expressed by this poster are wholly his own, and should never be construed to even remotely be in representation of his employer, its agencies or assigns. In fact, they probably fail to be in alignment with the opinions of any rational human being.
03-19-09, 05:40 PM #2
Well, CB...you got the coffin nail analogy down pat. I just don't get it.....it appears they are completely ignoring the evidence of the past 50 years. You just can't spend phantom money to dig your way out of this kind of mess. Both my retirement and Social Security are pretty much immune from all this nonsense but my kids and grandkids will be stuck with this mess for decades. Assuming that Obama doesn't start messing with Social Security, I can survive on my retirement but so few people are in my position these days. I look into his eyes and I don't see anybody home.
Car 4I would like my country back. I used to believe that one man could never destroy this country. Not so sure anymore!
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