Fed Rolls Out The Same Rusty Cannon

Well the Fed has spoken and the Cliff Notes version is that the economy is starting to suck again and their plan is to reinvest their maturing MBS portfolio into Treasuries.

Note that they aren’t going to expand their balance sheet, just not let it get smaller. Basically saying this is how they’ll do QE2 if it comes to that. In the meantime, any appearance of tightening which might have been imputed to a reduction in their portfolio of mortgage securities is off the table.

The value of all of this is somewhat dubious. It’s probably as much a move to keep Congress and the administration off their backs as it is one which will add any stimulus to the economy. Should they embark on another round of security purchases, this time buying Treasuries, one is entitled to ask the question why given the singular lack of success of the first foray.

The WSJ has as usual a good roundup of economists’ reactions and this one caught my eye:

All oars are now in the water with all hands at the Fed vigorously paddling to prevent the slowing economy from going over the falls into a full-blown debt/deflation cycle. Buying the long-end of the curve alleviates to some degree the need for banks and foreign governments to finance the Federal budget deficit, but it is not clear where this freed up investment capital is going to flow. If interest rates alone were the route to recovery the housing market would now be booming rather than stagnating at “a depressed level”. Lowering the cost of borrowing at a time when no one wants to add debt in the hope of giving the economy a boost is the classic case of pushing on a string. –Steven Blitz, Majestic Research

I don’t discount the notion that the Fed’s actions at the onset as well as some of the fiscal stimulus that flowed like a river from Washington played a part in stemming a full blown collapse of the economy. Unfortunately, I think that at best those actions took the razor sharp edge off the guillotine that was descending towards our collective necks but didn’t stop it from delivering a pretty serious karate chop thereon. We’re still reeling from that blow and all of the collective medicine hasn’t done much at all to alleviate that problem.

It might be time to revisit the ’80s and try the tax elixir that worked back then.



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