Thursday, September 13, 2012

Keep blowing into the bubble

Another huge shot of cash to keep up the appearance of a normal economy through the end of the year. I'd venture to say that's what the Federal Reserve announced today.

On September 13, 2012, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to begin purchasing additional agency mortgage-backed securities (MBS) at a pace of $40 billion per month.  The FOMC also directed the Desk to continue through the end of the year its program to extend the average maturity of its holdings of Treasury securities as announced in June and to maintain its existing policy of reinvesting principal payments from the 
Federal Reserve’s holdings of agency debt and agency MBS in agency MBS.
The FOMC noted that these actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
Interest rates are near zero. Just ask anyone who's trying to live off savings and a fixed income. Keeping interest rates obscenely low distorts the economy by discouraging savings, and encourages risky speculation.

Driving home today, I heard a commentator on the radio say low interest rates will encourage businesses to hire more people, and expand their operations. But cheap money is only part of the equation. Only a fool would seek to expand a business seeing how weak true economic fundamentals are. What businesses need to justify expansion are solid prospects of showing more profit. But the only time you hear the word profit from our current policy makers is when it's used in disparaging terms.

I'm also intrigued today's move comes when it did. The announcement comes when those Americans who actually follow current events are perhaps focused on the Middle East to the point they might overlook what the Fed is pulling here.

Buying up more iffy mortgage securities isn't going to put a floor under the economy. Neither is the shell game of buying up more Treasury bonds. This is just more window dressing, a new coat of whitewash on the Potemkin recovery. While the Fed insists today's move will move economic recovery forward, it strikes me as admission that economic tinkering has failed, but that the Fed doesn't want to admit it prior to the election.

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