The Federal Reserve acknowledged on Tuesday that its confidence in the economic recovery had dimmed, and announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.
Saying it would buy relatively modest amounts of government debt, analysts said the Fed signaled that it had no intention to back away from steps that it took, starting in 2007, to prop up the financial and housing markets. While the central bank held off on taking more aggressive steps, like a new, huge round of asset purchases, it left open the possibility that additional easing of monetary policy could take place in the fall if the recovery were to continue to weaken.
The Fed’s new stance marked the completion of a turnabout from a few months ago, when officials were discussing when and how to eventually raise interest rates and gradually shrink the $2.3 trillion balance sheet the Fed amassed through its response to the 2008 financial crisis.
If you go back and read Bernancke’s famous [url=http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm]”helicopter” speech[/url] from 2002 at the National Economists’ Club in DC, you’ll notice — if you’re paying attention — that they have attempted every single one of his approaches … without success.
Based on the Cleveland Fed’s monthly CPI numbers from January ’08 through June ’10, we are already in deflation. For stats geeks, R-squared on the regression is 78%.
M3 “money” is collapsing at a remarkable rate as businesses and individuals deal with debt. For “printing” money to succeed in overcoming deflationary forces, people must be willing to borrow, and banks must be willing to lend.
What’s really happening is that the velocity of money recycling through the banking system has crashed. The Fed is attempting to push on a string.
How does that affect you? Deflation punishes debtors and rewards the patient. Eliminate your debt as fast as you can.
Bernancke flat out stated the sub prime crisis would not spread, why he has retained his authority since then makes no sense.
#1, what is going to happen to the economy, with all that money sloshing out there, when the velocity picks up? If there is no confidence in Treasuries, the Fed won’t be able to sop it up unless they offer exhorbitant rates, and then will investors believe we can pay those off? This seems to look ugly……..
Well, first of all, for velocity to pick up, people have to be willing to borrow aggressively and banks have to be willing to lend aggressively. You see that happening anytime soon? I sure don’t.
Once balance-sheet corrections get started they continue until all the bad debt is washed out of the system. All of it. We have a long way to go.
For example, the commercial real estate shoe hasn’t even dropped yet. CRE vacancy rates nationwide are 17% but there’s always a lag built into a CRE collapse because commercial occupants’ leases expire at different times, delaying the owner’s ultimate cash-flow crisis. We’re presently at the phase when leases are not renewed and replacement occupants do not materialize. Crazier still, new CRE projects are being built, but sit nearly empty upon completion.
Presently the only folks benefiting in any way from all the “printed” money sloshing around are political allies of the current administration — teachers, bureaucrats, unions and so on. Look where all the “bail out” money goes.
For quite a few years it will all be overwhelmed by deflation, consolidation, and hunkering down in the private sector. They won’t be borrowing any time soon.