Feelin’ Stimulated?

posted by Nima

December 15, 2008 · Posted in General Economics 

The Federal Reserve is planning to press rates toward zero, as Reuters writes.

The U.S. Federal Reserve is expected to drop interest rates close to zero on Tuesday, but anticipated remarks on unconventional methods to dispel a year-old recession are what will really matter.

Economists forecast a clear statement that the U.S. central bank will aggressively deploy so-called quantitative easing measures to shelter the economy from a steepening downturn, but do not expect details of what steps it will actually take.

I’m not sure what else Bernanke wants to announce. Bank reserves with the Fed have exploded. They will trickle through eventually. Give it a few weeks already! It is obviously Bernanke’s objective to destroy the Dollar. But the impatience with which the media cheers him on in his endeavor is truly disturbing.

The announcement is expected around 2:15 p.m. on Tuesday at the end of a two-day meeting. The gathering had initially been scheduled for a single day, but was extended so policy-makers could study options for unusual steps to spur the economy with little room left to lower borrowing costs.

To make a little guess: I think the Fed will announce the 0.5% cut and markets will tank as a response. I don’t see what other surprising measures the Fed can announce at this point that have not already been priced in during the phony rally on Friday.

“From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy,” said former Fed Governor Lyle Gramley, who expects the Fed to spell this out.

Anyone feelin’ stimulated already? Fells more like fatigue to me.

[Bernanke] emphasized the Fed would use all the weapons in its arsenal to protect the economy, and identified direct purchases of government and mortgage-related debt as possible options.

…like what the Fed has been doing for almost 100 years now? The policy it employed during the Great Depression? A Glass-Steagall Act 2.0? The interested reader should also look into what happened when the Federal Reserve first began allowing mortgage backed securities into its arsenal in 1999. Right, it accelerated the US Housing Bubble. They have learned absolutely nothing. Bernanke knows and understands nothing. Be prepared for hyperinflation. Watch gold and silver soar.

The Fed has already embarked on quasi-quantitative easing by allowing its balance sheet to more than double in size after pumping over $1 trillion into financial markets to prevent them from seizing up completely in the face of mounting losses.

This is of course complete nonsense. The credit markets are completely frozen up because of the intervention and the bailouts. Why should a bank lend money when all it needs to do is wait for yet another bailout and in the meantime maintain interest-bearing deposits at the Fed.

“The focus will be on purchasing assets to affect spreads. All of their policies are aimed at driving down borrowing costs to consumers and businesses,” said Dean Maki, co-chief U.S. economist at Barclays Capital in New York.

Whether or not they are intervening, spreads will most likely keep coming down anyway. But once the impending hyperinflation comes full circle, all rates will go through the roof. All the printing and intervention will have brought about the opposite of what was desired. Treasuries, especially treasury bills are a bubble waiting to burst. Treasury bills have for the first time returned a negative (!!) interest rate in the December 9th auction.

“We don’t think that the best use of the Fed’s balance sheet is to further reduce the risk-free rate,” he said. U.S. Treasury bonds are said to offer a risk-free rate of return because the U.S. government, with the ability to print dollars via the Federal Reserve, would never default on dollar debts.

It will virtually default, however, once hyperinflation destroys the dollar entirely.

More madness along the exact same lines can be read in Top economists talk unconventional Fed policy.

As if that wasn’t enough, it appears as though Mr. “Change” Obama’s stimulus could reach $1 trillion:

President-elect Barack Obama’s team is considering a plan to boost the recession-hit U.S. economy that could be far larger than previous estimates and might reach $1 trillion over two years, the Wall Street Journal reported on Saturday.

Obama aides, who were considering a half-trillion dollar package two weeks ago, now consider $600 billion over two years “a very low-end estimate,” the newspaper said, citing an unidentified person familiar with the matter.

The final size of the stimulus was expected to be significantly higher, possibly between $700 billion and $1 trillion over that period, it said, given the deteriorating state of the U.S. economy.

Officials with Obama’s camp have declined to comment on media reports about the size of the boost his administration might seek to give the economy through increased public spending and tax cuts.

Obama is due to take office on January 20.

Battered stock market investors around the world have taken heart from previous indications of how Obama’s administration may seek to kickstart growth in the world’s largest economy.

Obama has promised he will launch a massive public works program to help lift the U.S. economy out of recession.

The president-elect is likely to be briefed by his aides on the outline of the stimulus plan next week with a view to getting it passed by Congress by the time he is sworn in next month, the Journal said.

Economists have previously said they expect Obama to quickly sign a multi-year spending package that could be worth up to $750 billion, or almost 5 percent of U.S. gross domestic product.

The administration of President George W. Bush has been given authority by Congress to spend up to $700 billion in taxpayer money to rescue the nation’s banking system.

The money was originally set aside to buy up toxic mortgage-backed securities but is now being used to recapitalize banks and induce them to lend more freely.

So the “change” Obama wants to bring is larger stimulus packages than the ones we already got. What a mess! Where is Paul Volcker’s viable experience from 1980 inbetween all this madness?

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