Posted on 09/15/2012 5:23:16 AM PDT by Son House
You just never know how the financial markets will react to the Federal Reserve and announcements from Chairman Ben Bernanke on monetary policy. Most of the time it is a big yawn bordering on disappointment, but this past week proved to be just the opposite.
On Thursday the Fed’s Open Market Committee did what most observers had anticipated: opened up the money tap with another massive infusion of funds to, as the Fed statement suggests, “put downward pressure on long-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”
The committee agreed to increase policy accommodation by purchasing additional mortgage-backed securities at a pace of $40 billion a month.
Alan Gin, an economics professor at the University of San Diego, said the move by the Fed is a positive but that the impact is likely to be small.
“As the Great Recession showed, there are limits to what monetary policy can do," Gin said. "The Fed can drive interest rates down, but it can’t make people borrow money or make banks lend it.”
He says the historically low level of mortgage interest rates has contributed to the recent rebound in housing prices and home sales.
The stock market rallied on the announcement, with the Dow Jones Industrial Average gaining more than 200 points and closing to within 4 percent of a new all-time high previously set in October 2007.
Investors must have been taking a long-term view of the impact from the Fed move. The statement released after the central bank’s two-day meeting was less than optimistic.
“The committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions," the Fed statement said on Thursday. "Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.”
Even with the latest round of quantitative easing, the Fed’s own projections for the labor market are cautious. In a supporting document with the report, the Fed suggested the unemployment rate, currently at 8.1 percent, will range between 7.6 percent and 7.9 percent next year and between 6.7 percent and 7.3 percent in 2014.
Even the Fed’s own forecast for economic growth is limited despite the massive infusion of funds. It estimates the gross domestic product will grow between 2.5 percent and 3 percent in 2013. And it sees the GDP topping out at 3.8 percent in both 2014 and 2015.
In poker terms, it appears Bernanke has gone all in to break the economy of a long, painful slump. And, that means his reputation — and job — are likely on the line.
“It will be years before unemployment gets back down to its historic norms," said Diane Swonk, chief economist at Mesirow Financial. "I doubt Ben Bernanke will still be in office to see it. But the Bernanke Fed would rather try and fail, than go down in history as not having tried at all.”
I haven’t said it here, so let me opine on this. This is the same thing as taking $100 out of your checking acount and putting it back in, but refusing to let the bank note that the withdrawal occurred...and then using part of the money yourself before you put it back, and once again forcing the bank to record a $100 deposit.
It is nothing like actual fractional banking, which is what the Fed used to do, back when they were part of the solution.
Investors may well cheer right now, because they’re being given money to which they are not entitled but which can be used to generate a momentary surge in stock prices, thus reducing their capital losses and permitting them to exit the market with more returns. That’s money that somebody not yet born will have to provide being stolen and given to somebody who took a free-market risk and who is being repaid in a socialistic game.
Just sayin’.
Though the Federal Reserve’s QE is merely a keystroke, the profits earned come from real people.
Why should they even be concerned about raising revenue through taxation with this scheme? We could print money, loan it to ourselves and pay it back with more printing!
Ah yes, inflation, and how to make that work for the individual? Simply put off debt for as long as possible to pay with cheaper dollars, in theory...
A better analogy would be a case where you lend someone $100 only to find out that he's never going to pay you back. So you have your friends convince the bank to accept your $100 "loan" document as a $100 deposit into your own account ... so you can withdraw the money all over again. The difference here is that you are going to leave the money in the bank and your friend isn't going to get another $100 (unlike a Fed purchase of Treasuries), so the "stimulus" effect is going to be inconsequential.
Because then even the NY Times would recognize the scam for what it is. They’re using that one additional step to make it seem like fractional banking.
Exactly - the big-money players have one more opportunity to suck the “non-existent” blood out of the economy and protect themselves at least a little bit from the coming collapse of the Dollar.
Fed Remains Dubious Of Economy As Investors
Fat Cat Insiders Cheer Stimulus
This is just more crony capitalism bailing out the politically connected.
Are investors really cheering, or just trying to find companies with hard assets to put their dollars that they know will inevitably decline in value?
Precious metals, oil, and other real things also went up in value.
Inflation is coming if it is not already here.
I simply don’t understand the concept. The government is going to pring more money. Where does it go? Or does “printing money” really mean selling bonds? If that’s the case the government gets the money. Someone explain to this dummy how this is supposed to work.
Fiat Money
http://www.investopedia.com/terms/f/fiatmoney.asp#ixzz26Ymn001z
Investopedia explains ‘Fiat Money’
Most of the world’s paper money is fiat money. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, the money will no longer hold any value.
But this time the money is being passed by Electronic Fund Transfers. Printing isn’t necessary for the Fed to buy the mortgage securities.
This is a politician's dream and a citizen's nightmare. The government can finance its deficits through the Fed. The resulting inflation won't appear, by most estimates, for five to ten years, well after current incumbents have left office. Presidents, Democrat and Republican alike, will say that it works, protects our jobs and that reducing the deficit would mean "austerity" and a depression. The result will be two lost decades, like Japan: minimal growth, high unemployment, disappearance of business opportunities, discouragement of individual initiative and entrepreneurship, and ultimately the loss of the American Dream. Yet these trends will be so slow-moving and subtle that it is unlikely that the average voter will be motivated to stop the process and accept the resulting pain.
A Republican President, no matter how well-intentioned, will be virtually helpless to stop this. The politics will prevent action.
I hope that I am wrong. However, I can't see a President Romney inviting us to take our medicine by inviting what is needed: a severe recession.
Big point.
you are right except for “The resulting inflation won’t appear, by most estimates, for five to ten years, “
The inflation (devaluation) began within minutes after the announcement when the price of gold shot vertically 2%.
The inflation has been with us for some time but is not total yet. Wages will lag considerably because of the unemployment condition. The spate of union strikes/threats represents realization to get ahead of the curve.
......Precious metals, oil, and other real things also went up in value......
We hear that corporations are sitting on big balances of cash. Some are investing in themselves, ie buying back their own stock. I wonder if any are buying gold?
It would seem prudent to buy gold that likely appreciate rather than hold $ that have just gone down in value and will certainly continue to slide.
Printing paper money reduces interest rates at the banks, since the amount of credit is “abundant.” It looks good in the short run, but as you can see if you are a senior, they just lowered the interest rate on your Savings Account or CD.
The policy is a wealth transfer from creditors (older folks who have savings), to debtors (people who want to borrow).
It does NOT “help” the entire economy. It is a way to buy votes from younger voters wanting cheap credit, but forces older folks to eat cat food.
Let’s remember, Obama doesn’t like “typical white people,” who are older and savers / lenders. Younger constituents may be of various victimhoods and cultures, and so who cares about the former, The President only cares about the latter. I am tying the policies to the movie 2016’s message, if that helps.
The Fed’s move lowers the interest rate (return) to savers, older generations, who are screwed. It also encourages over-borrowing, too much debt taken out by higher risk borrowers tempted by the depressed interest rates created by the Fed’s printing of money. Many of these loans won’t be repaid, and that “extra paper money” out there imposes another “tax” on both seniors and the favored constitutents as well, in the form of inflation, Prices increasing. That is a hidden tax on us all, and is caused by the numerous unpaid, bad loans encouraged by artificially low interest rates the Fed caused.
Thanks, Fed, for creating more problems and coerced wealth transfers via money printing (’monetary policy’), just to help those in office get re-elected.
Let me know if this helps,
4L
Thank you very much. You made it very understandable.
Thank you for YOUR service. I am just a lowly Econ teacher.
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