Fed Pledges Top $7.4 Trillion to Ease Frozen Credit

http://bloomberg.com/apps/news?pid=20601109&sid=arEE1iClqDrk&refer=home

by robg • 18 years ago

22 31 18 years ago

robg4• 18 years ago

Can one of you more economically-savvy hackers explain to me why $10,000 to every American, at a cost of $3 trillion, wouldn't bailout the economy as well? Seems like that would lead to an broad injection of capital into almost every market sector. Some would choose to save (banks), some spend (retail/autos/mortgages/loans), and some would invest in stocks, and/or all of the above. What am I missing? Instead of these top-down strategies, why not go completely bottom-up?

Retric3• 18 years ago

Because that would help poor people.

PS: That may or may not be a joke I can't tell.

dpapathanasiou2• 18 years ago

10k to each person wouldn't unfreeze the credit markets, though.

Credit is "frozen" now b/c banks won't lend, in some cases not even to each other, over fears that the borrowing institution is not going to be able to pay back the loan.

So the $7.4 trillion posted by the government is more about restoring confidence than anything else.

There are some good papers on the subject by Stephen Figlewski at http://pages.stern.nyu.edu/~sfiglews/FinCrisis.htm particularly the one titled "Viewing the Financial Crisis from 20,000 Feet Up".

Retric3• 18 years ago

They are lending, but they are not willing to take as much risk so they are charging more interest which is slowing down the economy.

robg4• 18 years ago

Sorry, I'm not sure I buy that explanation. It's what the top-down folks are saying, but plainly, and perhaps naively, I just think of what credit is used for - to buy what you can't with cash. Giving everyone cash would filter up to businesses; mortgage payments to brokerages, savings to banks, investments into the stock market and bonds, and purchases to retailers including automakers. Americans would have to do something with that money and there wouldn't be the huge management/distribution fees that are now going to get collected. In effect, you'd be giving the American people a vote about where the money should go based on their everyday needs. And that huge of a sum wouldn't be as easy to fritter away as a $300 "stimulus" plan. Heck, at $7.4 trillion you could give every man, woman, and child over $20,000 (for argument's sake, ignoring infrastructure which would be a mistake).

mindslight• 18 years ago

Because people will either save it (I would) or foolishly spend it, thinking christmas has come early. Then we'd be right back where we are now.

Granted, the only thing that will fix anything is time. The $7.4G is a handout for bonuses and capital for the well-connected to position themselves for the next bubble (snatch up all assets while they are undervalued). Increasing the debt only hurts the economy as a whole.

azharcs2• 18 years ago

Its about time, Federal Reserve was brought under some regulation. They are just printing too many dollars and lending.

jotto• 18 years ago

the system they exist in requires continual printing. if we don't prop it up, we will likely see a deflationary spiral.

jambarama• 18 years ago

There is concern about inflation from the level of Fed lending & rate of M1 creation. However the bigger inflationary threat is when banks start lending again and this huge amount of money starts moving. There is also a threat of deflation though, offsetting this inflationary pressure, at least to some degree. For example, falling house & stock prices do wipe out a lot of wealth (real or otherwise, and perhaps good or bad) - which adds deflationary pressure.

So it is a balance between inflation & deflation. Clearly the fed sees deflation as a bigger issue right now - the fed can fight inflation, negative interest rates that plagued japan for a decade are much harder for a central bank to fix. They've cut short term lending rates as much as they can, effectively wiping out interest rates. Personally, I don't know if they're lending too much or too little, and I'm sure Congress doesn't either, so I'm not convinced regulation (and the attendant political pressure) would be a net gain.

azharcs2• 18 years ago

I would say transparency is very important, for the government as well as Federal Reserve. Fed is responsible for the nations money supply, they are responsible for printing currency as well as deciding at what rates it should be lent(even to US Government). To me these are the powers with which you can control the whole country and its people.

Print more currency, make it easy to borrow which results in people borrowing to buy overpriced things(due to inflation as money supply increases) which sooner or later results in Bubble. When the bubble bursts, people lose their jobs and the value of overpriced things comes back to normal and people end up with Debts. We are in the phase where people are in debt and are losing jobs every quarter, by giving them more money or to the corporations which fired them, it does not make sense at all. In Simple words, It was a Bubble, it Burst. It really does not make sense when someone is infusing more money in the markets assuming prices of houses will go back like they were during Bubble or corporations will hire people assuming 40 or 50% growth every quarter, It's time to wake up now and think rationally. If growth is not organic, its not growth at all, It's Bubble.

crabapple2• 18 years ago

why the "concern" about inflation? this is a "gimme" get-rich scheme for anyone who understands how inflation works. gold at 4000, oil at 500...it will be a triviality to make money as hyperinflation works through the system

DaniFong• 18 years ago

They had better do this right, or this recession is going to become a serious, serious depression.

tl• 18 years ago

According to the article, the Fed wants to make trillions of dollars in loans but they won't disclose who gets what or what terms / collateral is being offered. Why haven't we thrown these jokers in federal prison yet?

tc• 18 years ago

Especially since neither the Fed, nor the Treasury actually have $7.76T.

What people keep forgetting is that the problem isn't what we're seeing now. The problem is NOT that consumers aren't spending 'enough' money, or that banks aren't making 'enough' loans, or that people aren't buying 'enough' houses.

The problem was that (induced by a loose monetary policy) consumers were spending too much relative to their incomes, banks were making loans to wealth-destroying ventures, and developers were building condos that no one needed.

The symptoms we are observing now are part of the correction. The government is attempting to move us back into the situation that caused the problem in the first place.

paddy_m• 18 years ago

Another problem is consumers, and investment in general has been made on frivolous things that don't increase are productivity.

I guess the easiest way to explain this is by looking at how people invest their time. We would be better of if the nation invested time in becoming a better worker, learned a skill, fixed things than if the the nation spent that time watching tv, drinking, or destroying things (war).We have spent our money on houses that are bigger than we need, cars that are bigger and less fuel efficient than we need rather than plants that we need, investment in companies building new products, even arguably infrastructure.

biohacker42• 18 years ago

This may indeed be the crisis that we can't spend out way out of.

First they will try to borrow all that money, when that doesn't work they will start printing money, that still won't work but it will have the added "benefit" of destroying savings thanks to hyper inflation.

vaksel2• 18 years ago

this is such bullshit, why not give the money to actual tax payers?

That 7.4 trillion, divided by 300 million people(babies included), would mean that every person in the country would get $24,666, so an average family would get $100K to spend.

Don't tell me, that wouldn't stimulate spending.

Instead they give it to banks, who will just use that money to buy some other banks, while they are cheap

robg4• 18 years ago

I got an answer to my same question below. It's a loan to the banks. It wouldn't be a loan to ordinary Americans.

crabapple2• 18 years ago

excellent. i am ready for hyperinflation. are you?

jsmcgd2• 18 years ago

If I was the Chinese et al I honestly wouldn't write the cheque. At what point does national debt drown an economy? Does crippling debt not normally precipitate war with the debtees? I'm a little worried.

rms• 18 years ago

The Chinese would never do something so rash... they know they have to keep loaning us money, because it's either that or have their debt become worthless. They would also never go to war with us, outside of a battle over Taiwan that has become increasingly unlikely. What's the point? No one wins with war.

And yeah, crippling debt is normally a bad thing, but you have to remember that we are making up economics we go along. As long as economists keep saying that crippling debt is ok, everything functions. As soon as the theory changes, then we're all screwed.

jsmcgd2• 18 years ago

I would also like to believe that everyone will behave rationally but sometimes people don't especially when they get panicky. Here's hoping they do.

Prrometheus• 18 years ago

This was done to avoid a recession which would have likely reduced GDP by 5% or so for a year. Not smart, but that's political decision making for you. Politicians always benefit when they spend more money, so they do.

Edit: There has been no year of >2% GDP decline since the end of WWII. The Great Depression saw an annual drop in GDP of 13.0% in real dollars.

Just to let you know what we're risking 50% of GDP for (some portion of which will actually be spent).

GavinB2• 18 years ago

The Federal Reserve (NYSE: FED) is becoming highly leveraged. They may be next in line for a bailout, hopefully Bernanke will know to sell the jet before the congressional hearing.

micks56• 18 years ago

NYSE:FED is not the Federal Reserve Bank of the United States. It is a bank in California.

And the US cannot bail out the Federal Reserve. The United States borrows from the Federal Reserve and pays the Federal Reserve interest on that money. In other words, the US gets its money from the Fed.

A bailout of the Fed would require the US to borrow money from the Fed, who doesn't actually have any money because they need a bailout.

GavinB2• 18 years ago

My joke was just meant to illustrate that taking on too much debt was exactly what got us into this mess.

Fed Pledges Top $7.4 Trillion to Ease Frozen Credit

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