The Fed is Sucking Wind

In the wake of continued disturbing economic news, the Fed announced an unprecedented cut in the federal funds interest rates from 1% down to a  range of between 0 and .25%.  Additionally, they made clear that they intend to keep these low, low rates in effect for the foreseeable future:

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time."  Bernanke then added "these interest rates are INSANE!"

The Fed is also contemplating purchasing longer term treasury securities in what I believe is an effort to encourage investors to purchase corporate bonds and stocks in the hopes of higher returns.  (I am reaching the limits of my economic knowledge right about there.)

All of this leads me to believe that Bernanke is seriously worried about economic fundamentals, particularly the threat of deflation and the continued deterioration of the housing markets.  It looks like 2009 could be a very challenging year for President Obama.  Hopefully, the risks may lead to commensurate political rewards.       

Comments

[Stephen]

They're afraid of deflation; consumer prices fell for the 2nd month in a row. Problem is, Japan tried this for I think over a decade, and it didn't do squat. I suspect that Bernanke thinks Japan's problem was their excessively high savings rate among the population - that basically this strategy's failure in Japan can be explained by cultural differences outside of economic considerations.

Well, that's stupid. A lot of what was happening in Japan is happening now, such as a general loss of faith in banks and increasing numbers turning toward gold as an investment.

Krugman has a paper on Japan and the liquidity trap here, which if we can do it without sinking into paralyzing depression, we whould all read.

I can't believe the Fed has already given up; were I a crazed blogging conspiracy theorist, I would wonder if having the Fed step off the abyss right before Obama takes office is yet another poison pill from the current administration.

And yes, I know the Fed is "independent" and blah blah blah.

I say we get Krugman and DeLong together and just do whatever they want us to.

[drip]

Here are some over simplistic but accurate (I hope) observations: Bernanke is about to do something that almost everyone will hate and few will understand. At long last he will reinflate the economy. Neither the TARP nor cutting interest rate affects the number of dollars in circulation. But Bernanke will increase the money supply by purchasing mortgage backed securities. This is the same as printing money, in practical terms. There has been none of this to date despite statements to the contrary. All efforts have gone into reigning the inflation that resulted from 7 years of deficit spending on non-productive military procurement.

There are two major struggles going on. One is the finance/business roundtable types vs. small business. Since the end of the depression these folks have centered in the republican party of big government. The other is debtors vs creditors. Creditors hate inflation because it devalues their assets. Conversely, They love deflation because by holding cash and performing loans they grow richer. Unfortunately, the rock ribbed anti-deficit main street small businessmen (a combination of doctors, lawyers, car dealers and tradesmen (like an actual Joe the Plumber) are now debtors. So far, the creditors have won. First, Congress magically turned the insolvent (debtor) banks into creditors with the TARP and then watched in disbelief as they did what creditors do. This is killing main street and the economy. Soon the credit card CDO's will start to waiver, what little consumer credit there is left will disappear and the liquidity trap (don't spend, save buy later prices will be better) will blossom.

The problem, as Krugman has noted,is that private moral good is bad public policy. So Bernanke will pull the second to last trick out of his bag. We'll see how small business reacts to the intentional inflation. If we start hearing "Helicopter Ben" or "we need to run the government like a household (or worse, my small business)" we will know that things are starting to work. If the stupids actually try to balance the budget (after pouring a trillion down the military rat hole) we'll be in the Japan Krugman describes in the paper Stephen cites.

[Toast]

Bernanke then added "these interest rates are INSANE!"

That merited a BLOSD (Belly Laugh of Sustained Duration).

[drip]

I'd laugh too, except its like when Bush said he didn't know what the shoe thrower's beef was, it's true -- the rates are insane.

[Sir Charles]

drip,

I don't think anyone is going to worry about the deficit for awhile. I think Bernanke has looked into the abyss and is sore afraid.

[drip]

I can guarantee that Mike Pence and Jim DeMint and many of the other stupids will be talking about the deficit The House Blue Dawgs and the Senate Newer, Bluer, Dawgs will be baying right along side them. "A billion dollars for [trains, food, schools, houses, medicine, clean water fill in your own] we just can't afford that." They will quote Evrett Dirksen. Shit, I can write the whole speech now. Then Harry Reid will say "I've only got 60 votes. What can I do?"

Bernanke is afraid, Frank and Dodd are afraid, but the stupids are running things.

[drip]

I can guarantee that Mike Pence and Jim DeMint and many of the other stupids will be talking about the deficit The House Blue Dawgs and the Senate Newer, Bluer, Dawgs will be baying right along side them. "A billion dollars for [trains, food, schools, houses, medicine, clean water fill in your own] we just can't afford that." They will quote Evrett Dirksen. Shit, I can write the whole speech now. Then Harry Reid will say "I've only got 60 votes. What can I do?"

Bernanke is afraid, Frank and Dodd are afraid, but the stupids are running things.