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FED to print trillions more for mortgages-lenders and banks

18 March, 2009

from the BBC:

Fed pumps $1.2tn into US economy

The US Federal Reserve says it will buy almost $1.2 trillion (£843bn) worth of debt to help boost lending and promote economic recovery. It said it would start buying long-term government debt and expand purchases of mortgage-related debt.

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The biggest surprise was the announcement that the Fed would buy up to $300bn worth of government debt, known as US Treasuries, over the next six months.

It also said it would buy an additional $750bn of mortgage-backed securities to boost mortgage lending, bringing total purchases of this type to $1.25 trillion.

It added that it would buy a further $100bn in debt issued by government-sponsored agencies like Freddie Mac, which supports the mortgage market.

You can find the same information on the Wall Street Journal, in a report from something called “the federal open market committee,” but it is embedded in a paragraph of other details.   (Fed Statements on Rates, Details of Treasury Purchases)

Personally I prefer the forthright explanation from the BBC.   Wherever you get this news it isn’t good unless you are a bank or mortgage company or an investor.

The Dow Jones industrial average gained 90.88 points, or 1.23%, to end at 7,486.58 points, reversing early losses.

The move boosted banks and financial shares, with Citigroup up 23% and Bank of America vaulting 22% higher.

Here’s the problem as I see it. Where does the FED get this extra money?  It prints it – out of thin air.   It can create $2.5 billion dollars without anything to back it up.  The money get lent to the government at interest and the government [HINT: this means your and me] pays it back when it can.  The banks and mortgage companies get more money to pass along to us in the form of lower interest rates.  Right, I think we all saw where our money went when the TARP and Economic Recovery Act were passed along to us.

Make no mistake, when the FEDS create money to add to the economy, they are deflating the value of money already out there.   Of course, since our money is not backed by anything objective anyway, I suppose they think that doesn’t matter.  Here’s a bit of proof.

However, the announcement hurt the dollar, which hit a two-month low against the euro on fears that the measures would undermine the currency.

In Europe, and much of the rest of the world, no one else is willing to keep spending until they see whether spending actually helps end this economic crisis. As I mentioned in an earlier post (14 March) on the G20 meeting in England

Several countries expressed concern that the U.S. plan to spend, spend, spend will not lead us (nor them) out of the current economic crisis. China, of course, had wasted no time on Friday, expressing worries that the U.S. is weakening the dollar by its stimulus plans and thereby weakening the value of its investments in U.S. “bad assets.” Others wanted to take a wait and see approach, rather than just continue throwing money at the problem.

We are the guinea pigs the world is watching.

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