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

[AdamSelene235]

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

Emphasis on *had*. This is no longer the case today. Extinguish the debt and you extinguish the bonds that "created" and the money supply.

Amusingly, paying off the national debt is deflationary as it takes money out of circulation.

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s. Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933. This is the exchange that followed.

ECCLES: We created it.

PATMAN: Out of what?

ECCLES: Out of the right to issue credit money.

PATMAN: And there is nothing behind it, is there, except our government's credit?

ECCLES: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

[AdamSelene235]

should read

bonds that "created" the money supply.

[AdamSelene235]

Keynes has a bad name through caricature.

Mind you, I think he should first and foremost be remembered as an economic not a child rapist.

He raped far more economically than he did physically.

[plusone]

My main objection to any of the monetary systems is the presence of a central bank. Why should a small committee of men get to decide short term interest rates, abd by default, the relative values of the world currencies?

[AdamSelene235]

. 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.

Well, in fairness to Marx, he believed Communism would lead to a wasting away of the State.

Fat chance. This is *politics* and what matters is the results not the intentions.

Furthermore, I suspect Keynes knew the second half of his plan would be unworkable.

[plusone]

Good response!

[templar]

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

Yeah. But if we don't pay it off the number of dollars available to pay it off has to keep increasing infinitely just to service the debt without collapsing the economy (taxing the people beyond their abiliby to have enough left to continue buying new stuff and causing new employment and growth). The private debt is a huge factor as well, but not as easily tracked or discussed (it originates as government debt anyway). Money (effectively wage) inflation allows us to pay off old debt with new debt that is worth less than that which was borrowed (It's like paying off ounces of borrowed gold with the same number of ounces, but ones that have been diluted with base metal). Unfortunately as the debt is paid by new money, the new amount is always larger than the old amount (to cover interest) and the debt keeps going up, making the dollar worth less and less and the taxes have to go higher and higher to cover it.

I have a series of stamps from the Weimar Republic and Third Reich. They reflect the danger of financing the public debt with new and unbacked money. The first in the series is a 2 mark stamp. The inflation hit full swing about the time these were printed and by the time they got from the printer to the post office they had been overstamped 2 million marks, and then a few got overstamped again for 5 million marks. The next issue was back to 1 mark and has a photograph of Adolph Hitler on its face. (actually, I think there may have been a few stamps issued in between , but I don't have them in my collection. The points still the same.)

Then, we could always start paying down the debt, thereby reducing the money supply. this would be deflation. This also sounds good (getting out of or reducing debt, both public and private) till the effect on existing debt payments are considered. Less debt means less money available to buy things (money becomes more valuable if the amount of things stays the same or increases). It also means less money to pay wages. We end up paying off our 250,000 dollar mortgage, for example, with dollars that are effectively worth much more than the 250,000 we originally borrowed (as in your wages have dropped from 8 thou a month to 2 thou but you still are obligated for the 2.5 thou mortgage payment). the result of this is collapsing real estate (also stock, autos etc. of course, but that's too much to consider at once) prices leaving people owing much more than the value of the house. This leads to bankruptcies, forclosures, etc. that reduce further the amount of money available and we have a decending spiral into a crash like the Great Depression.

Of course, the Fed is in charge of regulating this money supply so that neither scenario happens. As long as the Fed is headed by someone with the wisdom of Solomon and the power of God we have nothing to worry about and can just go along in the bliss of unconcern. OTOH,.... well I have no suggestions. But, then, I'm not an economist or banker: I'm sure they have these things well under control.

IMO, FWIW.

[Southack]

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

I suppose that it goes without saying that an inflated, devalued Dollar tends to make asset and equity valuations increase...

[AdamSelene235]

I suppose that it goes without saying that an inflated, devalued Dollar tends to make asset and equity valuations increase...

Yep, that's what they are counting on.

[ColdSteelTalon]

"The Creature From Jeckle Island" will open your eyes.

[AdamSelene235]

I suppose that it goes without saying that an inflated, devalued Dollar tends to make asset and equity valuations increase...

Funny it doesn't seem to be working anymore. Well, like any heroin addict we simply need to increase the dose.

Am I correct in thinking that *you* just admitted that we are engaging in currency debasement to prop up our equity markets?

[justshutupandtakeit]

Small groups of men have always decided those things or tried. After the Panic of 1907 the financeers realized that they were fortunate to have stopped the Panic before it did too much damage and without the presence of JP Morgan there would have been huge economic losses. This changed the view of many of them who had been adamently opposed to the call for a Central bank. After all that was the demand of the radicals from the West, the Populists and Grangers, not the banking class.

While the money center banks liked having all the power they realized that after Morgan was gone there would be no one who could protect the interests of the finacial system. No one with the means to stop the liquidity flows which could bankrupt all of them and millions more.

Your question is similiar to "why use antibiotics against disease?" Modern tools for modern economies.

BTW no one can control foreign exchange values. That was why fixed exchange rates were dropped and floating adopted. Even influencing these rates is difficult if not futile.

[justshutupandtakeit]

Har-de-har har.

[justshutupandtakeit]

Sure but no one would "extinguish" the bonds. If the government BOUGHT them back then the money spent on buying them back goes to the seller. It is NOT deflationary and, in fact, is the way the Open Market Committee affects changes in the money supply. SELL bonds- deflation. BUY bonds- inflation. Ignorance of such simple matters could lie at the heart of your complaint against Central banks. You really should study these matters before trying to defend theoretic attacks on mainstream thinking.

Eccles comments also seem lost on you. He did NOT say that debt was backing the dollar but America's CREDIT. Credit is the ABILITY to service debt and the source of value NOT debt itself.

When the nation had no money supply to speak of but near worthless Continental currency the genius of Hamilton created one through the capacity of the American nation to fulfill its word. NOT through debt. There was already debt issued by the Confederation and the States. It was worthless as an asset and as money.

It is our WORD which creates the value not the debt per se.

[justshutupandtakeit]

Your interpretation of Weimar monetary history is lacking. The treasury authorities DELIBERATELY created inflation partially as a way to abrogate the costs of the Versailles Treaty. This was irresponsibility and in no way an argument against currencies not backed by metals. Your argument is similiar to saying no one should have cars because Gunther drove his into a brick wall at 150 mph.

No one would argue that paper currency can not be abused but the arguments for metallic backing are without merit if not impossible to implement without immense suffering.

You do not have the process fully understood if you believe paying down debt causes deflation. That is done by the Open Market Committee regularly and is INFLATIONARY. SELLING debt is DEflationary. This a simple point and no one will take you seriously in financial discussions if you cannot grasp the fundamental laws of economics.

Our greatest living economist, Milton Friedman, does not say we should get rid of the Fed but remove much of its discretionary power by putting it on autopilot. i.e. it increases the money supply at a fixed rate, say 3% a yr. Who am I to argue this point with him?

[AdamSelene235]

It is our WORD which creates the value not the debt per se.

Translation, America has created a system where it can reliably pledge the labor of its subjects to any project the rulers desire. See: Social Security, the Great Society, Medicare, etc.

[plusone]

Interesting historical analysis, but I completely disagree. The panic of 1907, and the crash of 1929 were mpost likely orchestrated by the banking powers and the monied interests to coerce average people into believing that a central bank was needed. I think there is enough circumstantial evidence to that effect. Not that panics can't happen on their own without intervention. There is a fascinating study about this very thing, "The madness of crowds" (or words to the effect). But when it is convenient for their own best interests, the small clique that run things behind the scenes can prod things along. As for the exchange rates, they are influenced by the relative levels of interest rates. So if the central bank can raise its rates relative to that of other countries, there will be upwards pressure on that currency as money flows into their banking system.

[AdamSelene235]

The treasury authorities DELIBERATELY created inflation partially as a way to abrogate the costs of the Versailles Treaty.

Funny you should mention that. Now Germany was trying to pay retribution to the Allies.

The Allies were trying pay back the American banks, especially JP Morgan for the funny money debts incurred in WWI.

Now JP Morgan just about lost its loans to the Allies when it became clear the Allies would lose WWI without American intervention.

Lucky thing the Lusitania went down, huh? I mean its military escort was withdrawn at the last second, and the Germans ads run in American papers to warn US citizens not to get on it were suppressed, and it was ordered to run at 1/4 power in sub infested waters. ....But it wasn't a sure thing.

JP Morgan nearly lost a bundle of fiat.

Remind me why William Jennings Bryan resigned again?

[justshutupandtakeit]

No. Hamilton created a system whereby the rest of our world could trust the word of the government. Unlike the former government which was untrustworthy, powerless and contemptible. Immediately American debt became the equivalent to that of long established European powers.

Unlike you, he understood the role of debt in a capitalist economy and the role of banks. Hamilton was a Master of the REAL world as opposed to that of currency cranks and financial fantastizers.

Realizing that we had NO specie to speak of, and no money worth anything he pushed his system through a Congress filled with hostile fools from the South. Upon implementation it created millions in new capital and provided the basis for our economic system. A system dependent upon the Rule of Law and security of debt and other property. And a realiable money supply.

The project he desired was the establishment of a strong UNION to protect Liberty. He succeeded so well that Jefferson could not disrupt it and his intellectual heirs could not destroy it through force of arms.

His other projects were the creation of a powerful military, the spread of the USA over the entire continent and the establishment of the rule of law.

I'll ignore the Red Herrings and straw men you tossed out.

[Southack]

"Am I correct in thinking that *you* just admitted that we are engaging in currency debasement to prop up our equity markets?"

When I wrote that the Fed was rattling its economic sabre, I meant to convey that we are *threatening* to debase our currency, not that we are already engaged in doing it.

Moreover, that our *reason* for so doing was to make U.S. exports more price competitive, not prop up the exchanges.