The Fed is at it again: printing money and buying up additional mortgage-backed securities from Fannie plus a slug of treasuries. The Fed’s surprise move was a heart-stopper for its sheer size. From Yahoo News:
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.
As another report in the International Herald Tribune states, this is new money created out of ‘thin air’. The polite academic term for this is ‘quantitative easing’ - otherwise known to the rest of us as ‘printing money’. Saints preserve us.
In related news, consumer prices jumped on higher gasoline and clothing prices. According to the economic boffins, this is supposed to be good news, showing that deflation is in check. However, the more obvious concern is inflation in the next year or so – assuming, of course, that the economy picks up. If it doesn’t pick up, we could still be in for serious stagflation – that 70s show. Those of us who lived through it remember both the inflation and the lousy economy – the worst of both worlds.
The enormity of this move is a signal. But of what? Desperation? Even $1.2T is a drop in the bucket, considering the bad asset pool. And what does the Fed do for an encore? Interest rates are, practically speaking, below zero, with the federal government fully intervening in the economy. One thing is very clear, however: our government is monetizing its own debt and printing the money to do it. No government has ever successfully played this game. And the whole world is in the same boat.
Fed intervention is one thing. Congressional intervention is quite another. Welcome to the world of industrial policy set by the likes of Chris Dodd, Barney Frank and Chuck Schumer. The very people who got us into this mess now claim the wisdom to get us out.
Please God, save us.
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