Thursday, March 19, 2009


Well, that didn't take too long, did it? Yesterday I noted that the Fed was wondering which of a number of options to take, and by midday they opted for a few of them, deciding to add an astonishing $1.2 trillion to its already burgeoning balance sheet. $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac. These are, of course, "toxic assets," unlikely to retain anything close to their book value. And the Fed also announced it will purchase $300 billion in long term treasuries, thereby finally taking the long-awaited and long-feared leap into direct debt monetization.

This latter step is especially frightening for many reasons. One consequence is that the cost of treasuries will therefore rise, while the yield will drop. I can't see that China -- which has already expressed concern about the health of the American economy -- will like this. Yet we need them to keep buying US debt. It's too soon to say for sure but I think one part of the Fed's decision reflects a fear of on-going Chinese reluctance to purchase treasuries.

Apart from the more obvious strategy of artificially "stimulating" the economy. Which will eventually lead to nothing but price inflation.

Bernanke and friends just added another brick to the pyramid.
Update -- Yves analyzes some of the economic causes and consequences of the Fed's decision.

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