$ from the Fed is $ you must pay back
Fed to buy $900 billion in US bonds
| The Fed won’t deposit a few thousand dollars into everyone’s bank account. The US Treasury won’t do that. But the Fed will create money that never existed before to indebt the US taxpayer. This 2010 article is from the Associated Press, Nov 3. |
by Neil Irwin
The Federal Reserve announced plans Wednesday to pump hundreds of billions of dollars into the US financial system, an expansive and unconventional new effort to try to get the sputtering US economy on track.The Fed will, in effect, print money to buy Treasury bonds -- an extra $600 billion worth by June 2011 -- in a move to lower long-term interest rates. The action should make it cheaper for Americans to borrow money, take out a mortgage or refinance their house, and for businesses to borrow money in order to expand.
The action, while widely anticipated, was somewhat more aggressive than analysts had expected. Financial markets were little changed immediately following the news of the Fed's new "quantitative easing" measure, as economists call the strategy.
"To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate," the Fed will buy about $75 billion in Treasury bonds a month over the coming eight months.
A related announcement by the Federal Reserve Bank of New York noted that, combined with Treasury bond purchases already announced to replace maturing mortgage securities on the central bank's balance sheet, the Fed will be buying $850 billion to $900 billion in bonds within that time span.
However, the statement also made clear that the Fed will keep its options open, potentially extending the purchases if the economy continues to underperform or even reducing them if growth were to spike.
"The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."
If the Fed's strategy works as planned, it will help strengthen an economy that has been stuck in a pattern of growth too slow to bring down joblessness. Yet even many advocates of the strategy stress that it is no cure-all. Its ultimate impact on the economy depends on whether consumers and businesses respond to lower interest rates by buying and investing. If they continue sitting on cash, the effect could be minimal.
Moreover, the Fed's new path comes with risks. Inflation could spike down the road, creating bubbles in the stock market or housing prices, or causing the dollar to decline rapidly. For these reasons, several top Fed officials have expressed resistance to the move, including Thomas M. Hoenig, president of the Kansas City Fed, who dissented Wednesday.
"Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits," the FOMC statement said. Hoening was concerned about "the risks of future financial imbalances" and "an increase in long-term inflation expectations that could destabilize the economy."
The action is a recognition by the central bank that it is falling short on both of the mandates with which it is legally charged -- maintaining maximum employment (the national jobless rate was 9.6% in September) and keeping prices stable. [In a somewhat Orwellian fashion, “stable” for the Fed means inflation, but slow, like a low-grade fever.]
Fed officials, including Chairman Ben S. Bernanke, have explicitly stressed that pushing inflation a bit higher is one of the goals behind the new action.
With the Fed's target for short-term interest rates near zero, the central bank has turned to unconventional means. In this case, it is expanding the money supply by essentially printing money in order to buy bonds.
Much of the effects of the policy are already being felt. As investors have anticipated the Fed action since a speech by Bernanke in late August, the stock market has risen about 12%, mortgage rates have decreased, inflation expectations have risen, and the dollar has fallen relative to other currencies.
JJS: The rich need not worry about inflation but it’s not easy for everyone else to keep up. And historically, every power that collapsed first went deeply into debt, causing rapid inflation. If the government still used the same definition it did a couple decades back, the US rate of inflation would look a lot worse.
By “buying” bonds, not with anyone’s savings but just with their own printing press, the Federal Reserve acts as an enabler, making it easier for Congress to continually live beyond its means. Politicians keep being able to roll out the pork, to lavish corporate welfare on big campaign contributors, to wage wars that enrich the owners of the military/industrial complex, and bring this nation ever closer to the brink. All that weakens the dollar’s purchasing power.
Taking action now is a way for the Fed to take credit for the recovery. The economy is at the bottom and has been there long enough to soon inch back up as it always does. If massive indebting worked, then the economy would not have fallen into recession in the first place.
What could we do instead? Do geonomics. Quit the wasteful spending. Quit taxing our productive efforts. Instead tap the commonwealth. Use taxes or fees or leases or dues to recover the socially-generated value of land, resources, EM spectrum, and government-granted privileges such as bank charters, patents and copyrights, and pollution permits. All those things are worth trillions -- trillions now flowing into very few pockets. Direct that flow into the US Treasury and then public borrowing, lending, debt, and credit would never be troublesome issues again. And neither would inflation.
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Editor Jeffery J. Smith runs the Forum on Geonomics.
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Also see: New-home sales drop to record low in January
Investigating Friedmanism at the Fed
Congress Can't Get the Fed to Reveal Much |
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