OK, Good news/bad news time:
The good news: the Fed has promised to maintain a near-zero discount rate for funds banks borrow overnight until middle 2013 if the economy remains sluggish.
The bad news: the Fed has promised to maintain a near-zero discount rate for funds banks borrow overnight until middle 2013 if the economy remains sluggish?!
As futile, symbolic gestures go, this is a good one. The Fed had to do something to show it still had skin in the game, and by lifting uncertainty over whether every month we would see a rate hike, it accomplished that goal.
The markets responded appropriately. Or did they?
The initial instinct was to tank stocks. Then, as the punditry put it, the markets re-read the memo and somehow realized the import.
The initial instinct was the correct one. The second wave of buying which saw the market reverse losses yesterday and nearly make up the collapse from Monday, was merely some big money folks deciding the market needed some bolstering, some confidence building.
Why? Because there's money to be taken from the suckers yet.
I think the Fed blew it, big time yesterday, but I'm taking a macro-perspective. The Fed has a hammer and market collapses all look like nails to the Fed. Nail them down with low interest.
That low interest rate has been in place since Dec. 17, 2008. It hasn't exactly thrilled the markets, or coaxed banks into loosening up their lines of credit. Nor has it done much to keep the debt down, except to keep debt service from piling on faster.
Operative word there is "faster".
Similarly, the bond markets have manipulated by some heavy hitters, some intentionally, some just seeking a life vest in a stormy sea and watching the bond markets firm up, throwing their money there. This is how smart money becomes dumb money.
What the Fed did was the equivalent of handing us an umbrella in a hail storm. It will provide a moment's relief, buy us a little time to look around and think. The thing it will NOT do is provide anything close to long term shelter. Even a tin shed would have done that.
Here's what I'd like to see the Fed do in order to really give comfort and reassurance to the markets, and maybe even create a few jobs in the process.
That's all they have to do. No quantitative easings, buying up short-term debts with long term debts. No releasing drips and drabs from the monetary reserves hoping an increase in the money supply will coax banks to lend (altho the time for that looks like it may be long past).
We need to trigger inflation. We need to force employers into the embarrassing position of hiring people simply because their profits have a predictable rise. Right now, companies are sitting on stacks of cash, waiting for the economy to collapse again. We simply prevent that by throwing money into the system. It's called "monetizing the debt," where the Fed simply snaps up public debt. No trades, no exchanges, no "easings." You retire the debt which is now cash money in the money supply.
Without getting too technical here, this will also be a boon for the average American who owes more money than he has: debts because less valuable to the lender, and can be paid back with "cheaper" money (if need be, I'll expand on this in comments, but for a really good explanation of the process, continue the link I just posted.)
In effect, it become a transfer of wealth from the banksters and the rich to the middle classes. It's essentially a tax increase.
There are problems, of course: anyone living on a fixed income from bonds will have to make adjustments, but if they are receiving Social Security, much of the shortfall would be made up with the cost of living adjustments inflation would trigger. And there is always a significant risk of long-term inflation because deficits are extensive and extensive. However, I think at this point, something is better than nothing, and it certainly doesn;t have to be the whole $14 trillion.
Just a trillion, maybe two or even three. That's our tin shed. Then we can get serious about reducing the deficit.