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Thread: Fed to Spend $600 Billion to Speed Up Recovery

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    Fed to Spend $600 Billion to Speed Up Recovery

    The Federal Reserve feels the economy needs another stimulus package but knows it won’t happen with the Republicans controlling the House of Representatives.

    www.nytimes.com


    November 3, 2010

    Fed to Spend $600 Billion to Speed Up Recovery

    By DAVID E. SANGER and SEWELL CHAN

    WASHINGTON — The Federal Reserve, getting ahead of the battles that will dominate national politics over the next two years, moved Wednesday to jolt the economy into recovery with a bold but risky plan to pump $600 billion into the banking system.

    A day earlier, Republicans swept to a majority in the House on an antideficit platform, virtually guaranteeing that they would clash with the Obama administration over the best way to nurture a fragile recovery.

    The action was the second time in a year that the Fed had ventured into new territory as it struggles to push down long-term interest rates to encourage borrowing and economic growth. In a statement, the Fed said it was acting because the recovery was “disappointingly slow,” and it left the door open to even more purchases of government securities next year.

    The Fed is an independent body, its policy decisions separated from the political pressures of the day. But it acted with a clear understanding that the United States, like many other Western countries, seems to have taken off the table many of the options governments traditionally use to give their economies a kick, particularly deficit spending.

    The Republicans regained control of the House for the first time in four years in part by attacking the stimulus plan — begun by the Bush administration and accelerated by President Obama — as a symbol of government spinning out of control, contributing to a dangerously escalating national debt.

    This political reality has left Washington increasingly reliant on the Fed to take action, though its chairman, Ben S. Bernanke, has said the Fed cannot fix the problem alone.

    But in stepping in so aggressively, the Fed is taking risks. The action not only expands the Fed’s huge portfolio of Treasury bonds, it makes it a target of a Congress whose new members include some who are hostile to the Fed’s independent role.

    On Wall Street, analysts said the move appeared to be a balancing act that met expectations and stock prices rose.

    Ordinarily the Fed’s main tool for spurring economic growth is to lower short-term interest rates. But those rates are already near zero. With no more room to go, it has to find another route to stimulate demand.

    That route is to buy government bonds, which increases demand for them and raises their prices, pushing long-term interest rates down. “Easier financial conditions will promote economic growth,” Mr. Bernanke predicted in an essay for Thursday’s Washington Post.

    Representative Mike Pence of Indiana, the outgoing chairman of the House Republican Conference, said shortly after the announcement that the Fed was overstepping its bounds. “Diluting the value of the dollar by continually increasing the supply of money poses an incalculable risk,” he said. “Instead, Congress needs to embrace progrowth fiscal policies to stimulate our economy rather than masking our fundamental problems by artificially creating inflation.”

    In making that argument, Mr. Pence and his allies are replaying a dispute that permeated Washington in the mid-1930s, when the economy was crawling out of the Great Depression. Conservative Democrats pushed Franklin D. Roosevelt to cut back on spending, and argued for tight monetary policy. Many economists argue that the result was a second downturn just before the outbreak of World War II, but others say the conditions today differ in so many ways that the comparison is misleading.

    While the Fed step was telegraphed to the markets in recent weeks, most experts had expected $300 billion to $500 billion in purchases of Treasury debt. Still, the pace — $75 billion a month for eight months — disappointed some investors.

    The Fed said it would also continue an earlier program, announced in August, of using proceeds from its mortgage-related holdings to buy additional Treasury debt, at a rate of about $35 billion a month, or $250 billion to $300 billion by the end of June.

    So in total, the Fed will buy $850 billion to $900 billion, just about doubling the amount of Treasury debt it currently holds.

    If the Fed’s bet is right, lower long-term rates should ripple through the markets, pushing down rates for mortgages and corporate bonds. That could encourage homeowners to refinance into cheaper mortgages, though it would not help the millions of Americans facing foreclosure. It could push businesses to make investments instead of sitting on piles of cash.

    In a sign of its willingness to do even more, the Federal Open Market Committee, the central bank’s policy arm, left open the possibility of even more purchases beyond June, saying it would “adjust the program as needed to best foster maximum employment and price stability.”

    Only one committee member dissented, for reasons that are similar to the complaints that some Republicans are likely to raise. Thomas M. Hoenig, an economist who is president of the Federal Reserve Bank of Kansas City, said he believed the decision could create more risk for the financial system by enticing too much borrowing.

    There are other risks, as well. The actions are likely to further drive down the dollar. That could worsen trade and exchange-rate tensions that have threatened to unravel cooperation among the world’s biggest economies.

    Moreover, the Fed is exposing itself to the risk that the assets it has acquired could shrivel in value when interest rates eventually rise. That could reduce the amount of money the central bank turns over to the Treasury each year, and expose the Fed, already vulnerable for its failure to prevent the 2008 financial crisis, to even more criticism.

    On Wednesday, the standoff between the parties was on display as the two sides argued over tax cuts and the desirability of government investment to create jobs.

    It was this impending gridlock that might have pushed Mr. Bernanke to move, said Laurence H. Meyer, a former Fed governor. “Bernanke has said that fiscal stimulus, accommodated by the Fed, is the single most powerful action the government can take for lowering the unemployment rate, when short-term rates are already at zero,” Mr. Meyer said. “He has nearly pleaded with Congress for fiscal stimulus, but he can’t count on it.”

    But Leonard J. Santow, an economic consultant, said he feared that the Fed was reacting to one mistake — the failure of fiscal policy — by adding another. “The main problem is on the fiscal side, and there is nothing wrong with the Fed chairman making budget recommendations and admitting there is not a great deal left for monetary policy to achieve when it comes to stimulating the economy,” he said.

    One of the main questions raised by the Fed’s action was whether it had waited too long. While economists disagree on that, the Fed’s announcement completed a U-turn. Earlier, speculation was that the Fed would gradually raise interest rates and tighten the supply of credit, as it would normally do after a recession..

    But this downturn and its painful aftermath have been anything but normal. Markets were set back in the spring by the European debt crisis. By late summer, as continuing high unemployment, slow growth and low inflation became clear, Mr. Bernanke became convinced that the Fed needed to act again.

  2. #2
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    Personally, I think we should just bite the bullet and spend $1,000 Trillion. I mean let's really jumpstart this thing and leave the recession in the dust!

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    Why do we need the Fed again?

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    Let's just give EVERY person a check for $1,000,000. That should work. OR....EVERY person gets a government job with full civil service union protection , benefits and pension.

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    sarcastic comments are fun

    meanwhile in the real world

    deflation is a real concern. not inflation. We actually _want_ inflation.

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    Quote Originally Posted by jetstream23 View Post
    Personally, I think we should just bite the bullet and spend $1,000 Trillion. I mean let's really jumpstart this thing and leave the recession in the dust!
    monetizing your debt is always a good thing and is a proven winner...keynesian economics is usually a winner- just ask the half dozen keynesians out there...

    oh yeh- and buy gold or get into a good natural resource mutual fund now...

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    Quote Originally Posted by Come Back to NY View Post
    monetizing your debt is always a good thing and is a proven winner...keynesian economics is usually a winner- just ask the half dozen keynesians out there...

    oh yeh- and buy gold or get into a good natural resource mutual fund now...
    Never trust a Keynesian. At least that's what a Ugandan told me.

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    Quote Originally Posted by southparkcpa View Post
    Let's just give EVERY person a check for $1,000,000. That should work. OR....EVERY person gets a government job with full civil service union protection , benefits and pension.

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    Quote Originally Posted by bitonti View Post
    sarcastic comments are fun

    meanwhile in the real world

    deflation is a real concern. not inflation. We actually _want_ inflation.
    What is the real world?

    Real stuff, food, energy, metals, cotton and wool, paper, plastics, chemicals and fertilizers are all inflating in the 6 to 12% range annually.

    My utility bills have all gone up. My medical Insurance has gone up, postage, transportation and other core essentials are all inflating at realitively high rates.


    What isn't inflating-Housing, electronics, services and labor.

    The dollar is falling fast and as it does core essential goods, the things we use everyday are going up in price. What we are getting back for that is a growing export market for manufactured goods. Unfortunately manufacturing is a small part of the US econonmy and having factories sold out isn't likely to make a big dent in US labor needs, particularly since technology continues to reduce the need for labor in manufacturing.

    The Fed has been pushing on a string for a long time now. I guess the current stradegy is to inflate the stock market and push a wave of new refinancing of homes at lower rates that make enough middle class and upper middle class people feel wealthier. If they feel wealthier they will spend more pushing the economy forward.

    The danger of course is another period like we had when Carter was President. High unemployment combined with double digit inflation.
    Last edited by Winstonbiggs; 11-04-2010 at 10:45 AM.

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    Quote Originally Posted by Winstonbiggs View Post
    What is the real world?

    Real stuff, food, energy, metals, cotton and wool, paper, plastics, chemicals and fertilizers are all inflating in the 6 to 12% range annually.

    My utility bills have all gone up. My medical Insurance has gone up, postage, transportation and other core essentials are all inflating at realitively high rates.


    What isn't inflating-Housing, electronics, services and labor.

    The dollar is falling fast and as it does core essential goods, the things we use everyday are going up in price. What we are getting back for that is a growing export market for manufactured goods. Unfortunately manufacturing is a small part of the US econonmy and having factories sold out isn't likely to make a big dent in US labor needs, particularly since technology continues to reduce the need for labor in manufacturing.
    Very astute, sensible observations. Now, turn in your JI Wargglbarggl card please.

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    Quote Originally Posted by bitonti View Post
    sarcastic comments are fun

    meanwhile in the real world

    deflation is a real concern. not inflation. We actually _want_ inflation.
    Inflation is bad it causes the price of everything to go thru the roof. The price of food is going up already!

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    Quote Originally Posted by Winstonbiggs View Post
    What is the real world?

    Real stuff, food, energy, metals, cotton and wool, paper, plastics, chemicals and fertilizers are all inflating in the 6 to 12% range annually.

    My utility bills have all gone up. My medical Insurance has gone up, postage, transportation and other core essentials are all inflating at realitively high rates.


    What isn't inflating-Housing, electronics, services and labor.

    The dollar is falling fast and as it does core essential goods, the things we use everyday are going up in price. What we are getting back for that is a growing export market for manufactured goods. Unfortunately manufacturing is a small part of the US econonmy and having factories sold out isn't likely to make a big dent in US labor needs, particularly since technology continues to reduce the need for labor in manufacturing.

    The Fed has been pushing on a string for a long time now. I guess the current stradegy is to inflate the stock market and push a wave of new refinancing of homes at lower rates that make enough middle class and upper middle class people feel wealthier. If they feel wealthier they will spend more pushing the economy forward.

    The danger of course is another period like we had when Carter was President. High unemployment combined with double digit inflation.
    such a good post!

    btw see gas prices to check your falling dollar, but BO already told us he thinks gas should be at least 4 dollars a gallon

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    Quote Originally Posted by MnJetFan View Post
    Inflation is bad it causes the price of everything to go thru the roof. The price of food is going up already!


    The Fed is currently more worried about deflation (and unemployment) than it is about inflation. Current inflation is low, many (Ben Bernanke and the Fed) say too low.

    Bernanke is a Republican. He does not hold elective office this gives him the freedom to do what he feels is best for the economy and not what is best for his political career.

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    if there's no inflation, businesses don't give out wage increases. if there's deflation then no one buys anything big, cause the price can always be lower 6 months from now. believe it or not we need inflation right now. Inflation is a problem we want to have. Deflation would be a disaster.

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    Quote Originally Posted by bitonti View Post
    if there's no inflation, businesses don't give out wage increases. if there's deflation then no one buys anything big, cause the price can always be lower 6 months from now. believe it or not we need inflation right now. Inflation is a problem we want to have. Deflation would be a disaster.
    What you really want is stable core prices and low unemployement so that wages will go up with or slightly exceed a low, reasonable rate of inflation. When that happens society actually gets wealthier, wages keep up with or exceed inflation and people have incentive to both make purchases and save and invest with a return that likely beats long term inflation.

    Inflation with high unemployement, the current situation we find ourselves in can devestate the working middle class much like it did when Jimmy Carter was President. High unemployement means even though we have inflation, the supply for labor exceeds the demand by so much wages stay low and don't keep up with inflation. As inflation increases those workers whose wages aren't keeping up become significantly poorer and have no incentive to save and invest ultimately becoming wards of the State if they find themselves unemployed at some point down the road.

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    Meanwhile as services, labor and real estate costs drop the price of education and tuition continues to rise. Those books must be made of gold!

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    Thumbs down

    get ready for $5 gasoline

    so much for economic recovery!

    This is a grand plan to transfer wealth from the low/middle class to the upper.

    We're gonna have food riots in the 3rd world so the bankers could stay on top here in the US

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    Quote Originally Posted by bitonti View Post
    if there's no inflation, businesses don't give out wage increases. if there's deflation then no one buys anything big, cause the price can always be lower 6 months from now. believe it or not we need inflation right now. Inflation is a problem we want to have. Deflation would be a disaster.
    communist.

    in a capitalist society, inflation and deflation both must be allowed to happen.

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    Quote Originally Posted by jetstream23 View Post
    Meanwhile as services, labor and real estate costs drop the price of education and tuition continues to rise. Those books must be made of gold!
    Health insurance?

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    Quote Originally Posted by cr726 View Post
    Health insurance?
    ahh, the white elephant, cut back on Obamacare and what does that do for the wealth of an average taxpayer

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