Fed piecing together emergency rescue plan

Straits Times ^ | Updated April 8, 6.00 am (Singapore time)

[DeaconBenjamin]

WASHINGTON -- Confronting new fears of recession, the Federal Reserve is refining an emergency economic rescue plan that includes further interest rate cuts and billions of dollars in extra cash for the banking system.

The Fed's effort would be aimed at pulling the country out of a nosedive that has seen 465,000 jobs evaporate in just the past two months, raising fears among economists that the weak recovery from the 2001 recession is in danger of stalling out altogether.

'Clearly, the Fed is in uncharted territory,' said economist David Jones. 'I think they will try some experimental moves.'

One key element hasn't been used successfully in a half-century.

Based on comments by Federal Reserve Chairman Alan Greenspan and other Fed officials, the central bank is expected to move beyond its traditional buying and selling of short-term Treasury securities held by banks to the direct purchase of longer-term securities in an effort to influence long-term interest rates.

Also, Fed officials have indicated they are prepared in the event of an unexpected shock to the system to lend massive amounts of money directly to commercial banks to make sure that financial markets do not freeze up.

And as a third policy option, Fed officials have indicated they would explicitly state that if the federal funds rate is moved below its current 41-year low of 1.25 per cent, it is likely to stay at the lower level as long as needed to get the economy on its feet -- which would help investors' worries about a sudden jump in interest rates down the road.

The fact that Fed officials have been so open in discussing these options underscores the need the central bank sees to restore investor confidence that has been shaken by the fact that the Fed's aggressive two-year campaign to cut short-term rates has yet to produce a sustainable economic recovery.

The Fed's target for the federal funds rate, the interest that banks charge for overnight loans, is now at a 41-year low of 1.25 per cent. -- AP

[irish_links]

"...Having the Fed purchase Tbills directly won't help the banking system or the economy if people are unwilling to borrow, even at very low rates. Without new loans, the multiplier effect won't kick in, and no new credit money will be created...."

A couple of comments. In a coupon pass, the Fed purchases coupon paying notes (3 - 10 year maturity), not short term bills. The difference isn't insignificant.

As for the economic impact, I stated in my post that an infusion of high powered money into the banking system will stimulate economic activity only when the correct conditions exist. In my opinion, those conditions do exist and that will become increasingly apparent in the post-war period. I hope I am right.

[templar]

Oh my...the debt that big, the deficit increasing it dramatically...not a whole lot to get excited about, is there?

The number is so big it has become amost meaningless. It's just beyond anything but theoretical comprehention by most people. divide it by the number of people in the U.S. and you get a more understandable figure, but to have real meaning you have to divide it by the number of working people in the U.S. since that's who the ultimate responsibility for paying it off falls on. Then you have to further divide it by the number of working people who are engaged in producing something that gives our money value (some government jobs, most private industry jobs in manufacturing and such, etc. basically producing anything that someone with dollars can trade those dollars for) and you start getting a real idea of what the debt means to you personally. It's hard to come up with the numbers to get the final figure since who is producing what and what workers or work gives our money value is somewhat arguable. Someone come up with a figure?

[AdamSelene235]

Boy, was I off...it was two trillion when I was still in college... At this point in time, the national DEBT is valued at $6,460,848,478,613.52.

You do understand that the basis of the American dollar is taxpayer indebtness.

I.E. if we pay off the national debt, our currency ceases to exist.

[justshutupandtakeit]

This is no Keynesian solution. Keynes' theory was devised to try and explain why interest rate cuts during the Great Depression did NOT stimulate more economic activity. He came up with the idea of the "Liquidity trap" which essentially says that a certain point interest rate cuts will be ineffective as a stimulus. This has to do with such technicalities as a flat portion on the LM curve.

Keynes description of monetary policy's ineffectiveness at combatting recession was because you cannot "push on a string."

Japan has been in a liquidity trap for years with interest rates in real terms being negative.

[justshutupandtakeit]

America's comparative advantage is the generation of new products and agriculture. There is no advantage in trying to keep other countries from producing existing products more cheaply than us. Only decline.

Protective tariffs not only don't work to protect obselete industries but hurt everyone else trying to do so.

[justshutupandtakeit]

That is not true. As deficits widen the dollar weakens.

Our currency's strength is the productiveness of the American economy.

If you want to know what the strength of the dollar is you merely have to determine what it will buy in America. That is the last valuation- what it will buy here.

Exchange rates have several components within them which can obscure the relative values of the currencies.

[plusone]

And Keynes solution was huge govt deficits to stimulate the economy (coupled with tax cuts). I don't know if taxes are any lower than they ever have been, but on the deficit side, the govt has been keeping up its end of the stick (or string, as it were). The Japanese have been running huge deficits for ten years, and to no avail. There debt has built up so much, their credit rating has been downgraded to below that of many African third world countries (from what I've read on different sites, anyway). If you want a reason why Keynsianism doesn't work, Japan is the poster child. Thanks.

[Ronzo]

You do understand that the basis of the American dollar is taxpayer indebtness.

No, this is something I don't quite understand. Any help you can provide would be appreciated.

[AdamSelene235]

http://members.aol.com/_ht_a/tma68/griffin.htm

[plusone]

Went back and read my original post. You are quite correct in your critique. I was juggling three threads at the same time and didn't put enough thought into this one. Yes, Keynes talked about the liquidity trap and pushing on a string, the uselessness of lowering interest rates to spur the economy. People tend to think of Keynsianism as tax-and-spend. Not quite correct. During recessions, he advocated deficits and tax cuts to push up aggregate demand and boost the economy. Once good times returned, and inflation returned, Keynes said that the govt must run surpluses and raise taxes to reign in demand, lower inflation, and slow the economy. Over one complete business cycle, the books would be balanced. In fairness to Keyes, govts only took half of his advice. They ran deficits and raised taxes, and never balanced the books. Would his theories have worked if followed correctly? Thanks.

[justshutupandtakeit]

Keynes economic model is essentially the same as the "monetarists" differing only in the coefficient values of the equations.

He never advocated permanent deficits and called for cuts in spending when there were inflationary pressures or gov. surpluses.

Keynes has a bad name through caricature. He never advocated half of what is claimed he believed. His magnum opus is a fascinating book unread by the vast majority of his critics. Even if wrong the writing is brilliant.

[justshutupandtakeit]

His era was facing a unique economic problem one which seemingly defied conventional Marshallian economics. He recognized that prices and wages were not performing their role of re-equilibrating the economy and attempted to determine why. His analysis brought many new and helpful tools into economic analysis. Tools still used today.

[justshutupandtakeit]

It isn't true. We had dollars when there was no debt.

[B4Ranch]

To stop spending all that money would require us to move the majority of people on welfare and other aid programs back to their home countries. Never happen with Bush in charge, he likes illegal aliens.

[B4Ranch]

Only a very small percentage of Americans will be able to resist borrowing.

[Southack]

Why are you always so darn negative?! If you are worried about inflation, then simply store your wealth in some medium *other* than in paper currency.

Besides, all that the Fed is doing is rattling their economic sword a little bit to remind various players that we can make U.S. exports more cost competitive at the drop of a hat by devaluing the Dollar.

That's hardly cause to cry that the sky is falling...

[american spirit]

A respected Dallas Morning News financial columnist did a study recently and concluded that the fedgov owes the Social Security system an astounding $ 25 TRILLION because of borrowings made from the surpluses to mask our true deficits amassed by out of control fedgov spending. If this is true there won't be enough paper and ink to print all that fiat currency that will be needed when the baby boomers retire in large numbers.

[plusone]

Possibly. The bigger question, can they repay?

[AdamSelene235]

Why are you always so darn negative?!

Why do you so tirelessly defend the status quo?

If you are worried about inflation, then simply store your wealth in some medium *other* than in paper currency.

Done. More bets against the market than commodities at this point.

Besides, all that the Fed is doing is rattling their economic sword a little bit to remind various players that we can make U.S. exports more cost competitive at the drop of a hat by devaluing the Dollar.

Clever, that Fed.

That's hardly cause to cry that the sky is falling...

The sky is fine. The dollar is falling.

[AdamSelene235]

Keynes has a bad name through caricature.

Promoting Fabian Socialism and raping children didn't help either.