Is the Fed creating trillions of dollars out of thin air?
*The Economist, March 18, 2008:
"The Fed finds innovative ways to pump hundreds of billions of
additional dollars into the economy
A few days ago Ben Bernanke, chairman of the Federal Reserve, was asked
to identify the biggest obstacle to economic recovery. That 'we don’t
have the political will,' he replied.
Mr Bernanke showed his own will on Wednesday March 18th, when the Fed’s
policy panel said it would purchase $300 billion in Treasury debt,
mostly maturing in two to ten years, starting next week. It will also
boost its purchases of mortgage-backed securities to a total of $1.25
trillion from a previously announced $500 billion, and its purchases of
debt issued by Fannie Mae and Freddie Mac, the mortgage agencies, to a
total of $200 billion from $100 billion.
The Fed had already said it was considering Treasury purchases, but
expectations had waned in recent weeks. The announcement electrified
investors, sending the Dow Jones Industrial Average up by 91 points, or
1.2%, and the ten-year Treasury bond yield down a stunning 50 basis
points to 2.51%.
The plans are awe inspiring in their scale, but they are different only
in degree rather than kind from the steps the Fed has already taken. In
December, it exhausted its supply of conventional monetary ammunition
when it lowered its short term-interest rate to between zero and 0.25%.
At that time it had already started unconventional operations:
expanding loans to banks and other financial institutions; buying
private commercial paper; making enormous and controversial loans and
loan guarantees to AIG, Bear Stearns, Citigroup and Bank of America;
and setting up a facility, capitalised by the Treasury, to buy
securities backed by car, student and small-business loans, and
mortgages. By the time its new steps are done, the Fed’s balance sheet
will reach $4.5 trillion, or about a third of GDP, up from less than $1
trillion a year ago, Capital Economics estimates.
All these steps were aimed at reducing credit spreads on private loans
and increasing the supply of private credit, currently constrained by
fear of counterparty default, illiquidity and banks’ depleted capital.
They have worked to some extent, as spreads on private debt have come
down, though they remain well above pre-crisis levels.
Taking the added step of buying Treasuries made some inside the Fed
uncomfortable. It amounts to monetising government debt—in essence,
allowing the government to finance its spending with newly printed
money rather than higher taxes. That raises two fears: that it would
eventually lead to inflation, or even hyperinflation, and that it would
compromise the Fed’s independence."
*This information is solely a highlight of the opinion of a third-party publication and is incomplete. Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.
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