Extraordinary Measures
The Federal Reserve announced plans to buy $600 billion in Treasury bonds.
This ... really worries me. Government bond purchases are one of the things that the Federal Reserve can do to stimulate the economy. The Fed's biggest weapon is interest rates. In 2008, when the market was in freefall meltdown, the Fed lowered its target rate range to 0-0.25%.
It's stayed there ever since.
They also bought, over the last two years, $1.75 trillion in bonds.
Now, the economy currently sucks. Unemployment is high and while the economy is technically growing, this is mostly because it's shrunk so much in the last couple of years that getting bigger is no longer challenging. So I understand why the Fed feels presured to Do Something. It would be nice to fix the problem by Doing Something.
But ... glah. I don't know how to explain this. In the fall of 2008, I was afraid that the market was going to crash worse than it had in 1929. It felt like the entire world was terrified and running in a panic that was going to destroy the entire market-based economy, with devastating results. I wasn't afraid of the Great Depression II, which was crappy but survivable: I was afraid of something much worse. I was not the only one who saw the potential for an unparalleled disaster. When the Federal Reserve and the Treasury started twisting arms and forcing deals, lowering interest rates and buying bonds, when Congress authorized TARP, I hated it ... but I understood it. They were the leaders. They needed to show confidence when everyone else was scared. They needed to say "We will make our stand. We will make sure that the system does not fall." And because they stood behind it with the full faith and credit of the US government, it didn't fall. I don't know if everything they did then was necessary -- I never will -- but it wasn't TEOTWAWKI, and that by itself is something.
The economy today remains wretched, but it's no longer teetering on the precipice. Yet the Federal Reserve is keeping its target interest rate near 0%, and still buying Treasury bonds to boost the economy. And these things are ... gimmicky. Or maybe addictive is the better word. They don't really fix anything. They give the market a chance to fix itself and discourage people from making rash decisions. People are not making rash decisions right now. And the market is not the problem with the economy. The market is, if anything, too healthy given the state of the underlying economy.
I'm not sure what the underlying economy needs. A sense of stability and that the future -- in terms of taxes, regulations, mandates -- is predictable, maybe. But I really don't think that it's rock-bottom interest rates and the Fed buying government bonds. I don't think it's anything the Fed can do. One of the causes for the housing bubble was a long period of low interest -- and the rates then were higher than they are now. This is like, I don't know, taking uppers to make yourself forget that you're out of shape when you really just need to exercise more.
And worse, if we do have another crisis of confidence, when lowering interest rates would be the best thing to do -- how is the Fed going to drop rates below 0%? Sure there are things they can do ... but at some point, taking drastic measures sabotages confidence, rather than boosting it.
I hope they know what they're doing. I really do.
This ... really worries me. Government bond purchases are one of the things that the Federal Reserve can do to stimulate the economy. The Fed's biggest weapon is interest rates. In 2008, when the market was in freefall meltdown, the Fed lowered its target rate range to 0-0.25%.
It's stayed there ever since.
They also bought, over the last two years, $1.75 trillion in bonds.
Now, the economy currently sucks. Unemployment is high and while the economy is technically growing, this is mostly because it's shrunk so much in the last couple of years that getting bigger is no longer challenging. So I understand why the Fed feels presured to Do Something. It would be nice to fix the problem by Doing Something.
But ... glah. I don't know how to explain this. In the fall of 2008, I was afraid that the market was going to crash worse than it had in 1929. It felt like the entire world was terrified and running in a panic that was going to destroy the entire market-based economy, with devastating results. I wasn't afraid of the Great Depression II, which was crappy but survivable: I was afraid of something much worse. I was not the only one who saw the potential for an unparalleled disaster. When the Federal Reserve and the Treasury started twisting arms and forcing deals, lowering interest rates and buying bonds, when Congress authorized TARP, I hated it ... but I understood it. They were the leaders. They needed to show confidence when everyone else was scared. They needed to say "We will make our stand. We will make sure that the system does not fall." And because they stood behind it with the full faith and credit of the US government, it didn't fall. I don't know if everything they did then was necessary -- I never will -- but it wasn't TEOTWAWKI, and that by itself is something.
The economy today remains wretched, but it's no longer teetering on the precipice. Yet the Federal Reserve is keeping its target interest rate near 0%, and still buying Treasury bonds to boost the economy. And these things are ... gimmicky. Or maybe addictive is the better word. They don't really fix anything. They give the market a chance to fix itself and discourage people from making rash decisions. People are not making rash decisions right now. And the market is not the problem with the economy. The market is, if anything, too healthy given the state of the underlying economy.
I'm not sure what the underlying economy needs. A sense of stability and that the future -- in terms of taxes, regulations, mandates -- is predictable, maybe. But I really don't think that it's rock-bottom interest rates and the Fed buying government bonds. I don't think it's anything the Fed can do. One of the causes for the housing bubble was a long period of low interest -- and the rates then were higher than they are now. This is like, I don't know, taking uppers to make yourself forget that you're out of shape when you really just need to exercise more.
And worse, if we do have another crisis of confidence, when lowering interest rates would be the best thing to do -- how is the Fed going to drop rates below 0%? Sure there are things they can do ... but at some point, taking drastic measures sabotages confidence, rather than boosting it.
I hope they know what they're doing. I really do.