Helicopter Ben
| Wed Mar. 18, 2009 6:58 PM PDT
Ben Bernanke has long said that even with interest rates near zero, the Fed still has plenty of monetary ammunition left to stimulate the economy. Today he put his money where his mouth is and announced that the Fed would be buying up a trillion bucks worth of treasury bills and mortgage securities. This is known as quantitative easing, aka printing money. The Wall Street Journal rounds up some reaction:Guy LeBas of Janney Montgomery Scott provides the basics: "Even today’s announcement that the Federal Reserve plans on purchasing everything in America that isn’t nailed down raised relatively few eyebrows on our end....Effectively, the Fed is monetizing the Treasury’s debt, a strategy that appears in the encyclopedia under the heading 'how to trigger inflation.' "
David Greenlaw of Morgan Stanley says the purchase of mortgage securities is designed to drive down interest rates: "In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year."
Paul Dales of Capital Economics isn't sure that $300 billion of Treasury purchases is enough: "This could just be the opening salvo....Overall, no one knows whether these measures will work. Much depends on whether banks loan out the cash they raise from selling Treasuries and whether households and businesses spend, rather than save, any extra borrowing....At the least, no one can say that the Fed isn’t trying."
So there you have it. $300 billion in new money, another $200 billion over time from lower mortgage rates, and a clear message that the threat of deflation is being taken seriously.
That's what the adults were up to, anyway. Back in make believe land, meanwhile, it was AIG bonus time 24/7. Gotta keep Congress busy with something, I guess.
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Comments
Something we don't know
Submitted by g. powell on Wed Mar. 18, 2009 7:09 PM PDT.
Clearly Bernanke knows something we don't that is scaring the crap out of him. The AIG bonus fracas might have something to with this, it's hard to see at this point how Obama gets more money to fix the financial system. It also highlights that Obama & co. are totally clueless about how to go about fixing the financial system and the politics that surround that issue.
And please, no hand wringing about inflation. That's so 1980s. Japan conducted quantitative easing earlier in the decade, and they're still worried about deflation.
But this is really frightening. Still, I'm a big admire of Bernanke, he has totally re-invented central banking.
Helicopter Money
Submitted by Don the libertarian Democrat (not verified) on Wed Mar. 18, 2009 7:42 PM PDT.
I've been for this. I sure hope it works. It's risky. If it doesn't work, I'm not going to make any excuses. I preferred Buiter's plan, but this should help.
G.Powell - what Bernanke
Submitted by Art Eclectic on Wed Mar. 18, 2009 8:56 PM PDT.
G.Powell - what Bernanke knows is that credit card defaults are going through the roof, commercial real estate is melting down and the big wave of Alt-A and Option ARM loans starts to reset in just a few months -- and that particular mess doesn't even peak until 2011. The more jobs the economy sheds, the more people default on loans/credit cards. The more defaults, the bigger the sinkhole gets.
Well if they've decided to
Submitted by Jay (not verified) on Wed Mar. 18, 2009 9:15 PM PDT.
Well if they've decided to reverse that age-old adage that money doesn't grow on trees, I wonder if they'll pass 68,000 my way to pay off my student loans. Not like being a physicist contributes to society or anything. -shakes head-
The Old One-Two
Submitted by Quaker in a Basement (not verified) on Wed Mar. 18, 2009 10:00 PM PDT.
Nothing like giving everyone's 401k the old one-two punch. First, the Dow falls by half. Then the Fed pumps inflation so the half that remains is worth less. Or worthless.
How long does it take to develop a taste for cat food anyway?
Regarding the panic over
Submitted by jonas (not verified) on Wed Mar. 18, 2009 10:13 PM PDT.
Regarding the panic over inflation -- yes, under normal circumstances the Fed's action would be inflationary. But things are most certainly not normal and from my armchair economist perspective, g. powell up in the first post makes sense. There's been so much wealth destruction and deflationary pressure over the past six months that injecting a trillion -- or two -- into the system probably isn't going to spark much inflation. If in a year or two things look like they're heating up, the fed can just sell the treasuries back and counteract what it did today by raising interest rates.
Selling treasuries back
Submitted by TheWesson on Wed Mar. 18, 2009 11:30 PM PDT.
If the price of the treasuries goes down (there is less demand for them for some reason), then the Fed can't pull all the money back out of the system and the net result would be inflationary.
I'm not sure if that is a large consideration on their radar or not.
Rinse and repeat
Submitted by DevilDog on Thu Mar. 19, 2009 12:29 AM PDT.
This is great. We didn't learn any lessons about encouraging consumers to take on excessive debt. Let's induce homemoaners to re-fi and crank up the old ATM again. Instead of trying to replace the debt-growth economic model with a more sustainable system, Bernanke promises more of what got us into the current mess.
Your cartoon graphic
Submitted by Anonymous (not verified) on Thu Mar. 19, 2009 3:58 AM PDT.
Your cartoon graphic perfectly depicts the cheapest solution for correcting pockets of poverty in our country that I've been advocating for the past 20 years. Fill a helicopter with $1s, $5s, and $10s (no $100s!) and fly over the impoverished area (like Detroit). Scatter the money and someone will certainly pick it up and spend it. The area's economy will quickly improve with the money going to those who need it most.
Wall street doesn't qualify as an impoverished area. Instead, drop those responsible for our incredible economic collapse from the helicopter.
Helicopter
Submitted by Nils (not verified) on Thu Mar. 19, 2009 5:30 AM PDT.
This is the kind of helicopter Ben is using on the economy:
http://www.youtube.com/watch?v=QQ7cTI623Vg
Is this a surprise to
Submitted by Sock Puppet of the Great Satan (not verified) on Thu Mar. 19, 2009 7:45 AM PDT.
Is this a surprise to anyone? Too many people with too much debt, so reduce the real value of said debt by getting some inflation mojo (hopefully). Also helps people to shift their investments out of cash.
Also, it's remarkable how a lot of folks policy thermostats are set to the late 1970s-early 1980s. If Obama and Bernanke were given an option to swap this economic crisis for the inflation of the 1970s or the early 1980s Volcker recession to quench that inflation, they'd take it in a heartbeat.
This is different. Wake the f**k up.
Helicopter Ben
Submitted by MarkH on Thu Mar. 19, 2009 8:36 AM PDT.
Great graphic Kevin! I always wondered why he was nicknamed "Helicopter Ben". Now I know.
Bernanke and the administration have been tackling this beast every way they can and a lot of it goes unnoticed because the Fed doesn't make public announcements of every detail of it's work.
Something I'm wondering about is who administers the HOPE for Homeowners program and whether it's administration has been improved since Bush. Things have changed a lot in the last few months and I'm wondering if there aren't more firms interested in getting toxic mortgages off their books through the program.
Anyway, I agree there are still a lot of bad mortgages coming at us and Bernanke is doing a lot to mow 'em down.
No more obfuscator in chief
Submitted by SRW1 (not verified) on Thu Mar. 19, 2009 11:59 AM PDT.
I am more and more leaning towards the conclusion that if there is a person among the motley crew currently in charge who might have the ability to engineer a solution out of the financial mess, it is likely to be Bernanke rather than Geithner or Summers.
The 60 Minutes interview Bernanke did suffered from an unfortunately rather common 'problem' with American TV in that everything always has to be embedded in a narrative and therefore all kinds of context and biographical stuff had to be sprinkled in between the question and answer segments. However, what came through quite clearly for me is that Bernanke is of the opinion that the political responses so far has been, if anything, to timid (this is of course before his helicopter mission).
I am aware of the fact that Bernanke has studied the Great Depression as an academic and has thought long and hard about how to deal with such a situation. If there is anybody who can be considered to be prepared, it is probably him. Nonetheless, the current situation must be daunting even for the best prepared person.
The two things I found most encouraging among Bernanke's responses was his answer to what he sees as the biggest risk at the moment, to which he he clearly stated a lack of political will and commitment to solve the problem, and his indication that while he is not prepared to allow one of the big banks to fail and cause a crash, he sees a winding down after stabilization as a possible solution.
Compared to the obfuscator in chief that his predecessor was, Bernanke answered in a refreshingly straightforward manner. Plus he is not a creature of Wall Street.
Maybe there is hope after all.
QME
Submitted by TalithaTwoBlade (not verified) on Sat Mar. 21, 2009 8:10 PM PDT.
Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!
http://fargoneworld.blogspot.com
Although the recession has
Submitted by CampbellP on Wed Jun. 17, 2009 1:06 AM PDT.
Although the recession has made many products and services cheaper, a handful of costs have gone up -- this is the time when people should learn the value of budgeting. Honestly, American budgeting was not existing in the government. However, it is making a bit of a comeback, as the savings rate has increased and more people are concerned with unemployment and protecting themselves. You have to admit it is a shame that Congress hasn't gotten the idea about how to balance a budget. The deficit is growing – and the stock market is starting to make some rebound as the stimulus plan might be conceivably working. Ben Bernanke, Chair of the Federal Reserve, predicts recovery beginning in late 2009, but also predicts there will be depleted Social Security funds. If only our elected leaders, many of them educated, could have practiced a bit more American budgeting instead of making short term loans.
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