Tuesday, December 16, 2008

This is why the stock market surged today:

From the NYTimes: (emp add)
  • The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

  • ... the central bank said it had cut its target for the overnight federal funds rate to a range of zero to 0.25 percent, a record low, bringing the United States to the zero-rate policies that Japan used for six years ...

  • ... the Fed bluntly declared that it was ready to move to a new phase of monetary policy in which it prints vast amounts of money for a wide array of lending programs aimed at financial institutions, businesses and consumers.

  • The central bank acknowledged that recession is more severe than officials had thought at their last meeting in October.

    Ben S. Bernanke, the chairman of the Federal Reserve, has already outlined a range of unorthodox new tools that the central bank can use to keep stimulating the economy once the federal funds rate effectively reaches zero.

  • All of the new tools amount to printing money in vast new quantities, and the Fed has already started the process. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as the central bank has created new money and lent it out through all its new programs. As soon as the Fed completes its plans to buy up mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.
And there's this:
“At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating,” said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve, said the central bank. “Right now, the crisis is created by the huge demand by banks for hoarding cash. The Fed is providing cash, and the banks want to hoard it. When things start returning to normal, the banks will want to start lending it out. If that much money is left in the monetary base, it would be extremely inflationary.”
So why are we giving the banks any money at all?


So slap the banks with a 50% reserve requirement when the going gets good. It's not like we own them any favors.

By Anonymous Anonymous, at 12/16/2008 7:37 PM  

I keep waiting for somebody to mention the inevitability of inflation after the Treasury prints all that new cash.

By Blogger gmoke, at 12/16/2008 7:47 PM  

Yeah, it'll be the 70's all over again, or worse. Possibly the only thing that could prevent it would be ultra low oil prices but OPEC is about to cut production so forget that.

By Anonymous e. nonee moose, at 12/16/2008 8:07 PM  

Willie S. advised "neither a borrower nor lender be." The banks continue to borrow but not to lend. Willie S. might ask: "To be or not to be a bank, that is the question." Does Ben have an answer?

By Blogger Shag from Brookline, at 12/17/2008 3:49 AM  

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