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Paul, can you help me

Started by Michael Koons, 11/05/2010 02:03AM
Posted 11/05/2010 02:03AM Opening Post
understand the Fed buying the Treasury's bonds. I heard it likened to a Ponzi scheme. Are we just printing money to buy the bonds? The money supply then must be screaming and perhaps the Gold bugs are on to something.

I just don't get it.

Posted 11/05/2010 03:07AM #1
If I may.

Central banks are responsible (bad word here) for maintaining a low inflation rate and a high employment rate, and to be the borrower of a last resort to another (hopefully) financial institution. The Fed has held interest rates low since the financial mess, in order to help banks recapitalize their balance sheets, this is probably better than just giving them complete bailouts. Although some of that did go on. The banks borrow from the Fed at near zero and lend to others at higher rates (or they speculate and trade with our tax dollars and pay themselves billions of bonuses and pat themselves on the back for a job well done, donate monies to the politicians who will bring legislation to help them make more money and so the cycle goes. cynical off)

It can be debated and rightly so that a government should not interfer with markets, however, from time to time when the government does something really stupid, like allow banks to become too big to fail, force the GSEs to make silly loans to increase home ownership or other tomfoolery, the govenrment must and should act to temper job loss and or financial crises. Over a year ago the Fed decided to start to buy large blocks of treasuries because they knew they could not get rates much lower AND because the White House and the congress went nuts spending on their 'stimulus' bill (read election payback) that created no jobs, and then increased spending on many government programs which created no jobs. As the fed statement said yesterday, because of the lack of fiscal policy by the current administration and congress, the Fed will underatke the purchase of 600b of longer maturity bonds and notes. (paraphrased).

The Fed feels like it must act in order to keep the economy from really struggling and to try to boost aggregate demand enough to stave off the really dreaded defaltion. The buying program will probably lower rates by half to 3/4 of a point AND make holding assets less costly. Look at it this way, in the 60s and 70s we as a country spent tr(b) illions on social programs, housing projects the Dept of Energy, the Dept of Education and still have more homeless, and lesser educated people than many countries on the planet. BTW the housing projects are torn down, and we still have an energy crisis etc. At least by buying treasury securities there is an asset that pays 2-4%.

In the 90s the RTC bailout cost roughly 2.5% of GDP. So far this mess has cost less. The Fed is very smart a lot smarter than the bloggers and self proclaimed gurus on TV (the head economics reporter for CNBC is a Journalism major from Columbia, be careful to whom you listen, though he is pretty good, I was merely making a point). IF and WHEN the fed undertakes the sale of the treasuries, guaranteed it will be slow and orderly. In fact it will act as a way to slow down the economy and stave off inflation, because they will be removing $ from the system.

One other thing the gurus leave out of there arguments, in order for us to have inflation we need velocity of the money. Bank one lends it to customer a who buys a piece of equipment from company c who deposits the profits from sale in bank one who relends it to company d and so on. There is no velocity now, banks are not lending on anything. And there is a lack of demand due to so much uncertainty in govermental policy. Cap n Trade, health care, taxes, more financial regulation, etc.

hope this helps.