What the Fed's New Action this Morning Means


The Post's Neil Irwin reports that Federal Reserve just announced new steps to inject cash into the financial system, another expansion of its efforts to get banks to stop hoarding cash.

The Fed said it will immediately take advantage of authority it was granted in the financial rescue package President Bush signed on Friday. The central bank will now pay interest on the reserves that banks must keep with it. That is significant because it will give banks greater incentive to keep funds in reserve, which makes it easier for the Fed to maintain the federal funds rate, which it sets, at its target level.

That, in turn, gives the Fed more leeway for aggressive programs to try to force cash into the banking system without distorting the federal funds rate in the process. This morning, the Fed said it will double the size of planned "term auction facilities," which push cash into banks, to $150 billion, from $75 billion.

-- Michael S. Rosenwald

October 6, 2008; 9:36 AM ET  | Category:  business
Previous: Morning Briefing | Next: Stocks Down 2 Percent at Market Open

Comments

Please email us to report offensive comments.



On the one hand, the Fed uses their contention that there isn't enough liquidity in the system - so banks aren't lending money which brought the economy to a halt - to argue for the almost $1 Trillion bail out "plan."

On the other hand we are seeing 5% domestic (admitted) inflation and about 8% to 10% international inflation (caused by devaluation of the dollar against other world currencies). Inflation is caused by there being TOO MUCH liquidity in the market.

NOW the Fed wants to pay the banks to NOT lend (holding reserves = not loaning the money out). This is a good idea to fight inflation by removing some of the excess liquidity from open markets by allowing banks to ignore the "lost opportunity costs" of NOT making bad loans with the excess liquidity that the Fed says isn't there. But it's a BAD idea when it comes to encouraging the banks to loan money, which is supposedly the goal of the bail-out plan.

Good old Bungling Ben Bernanke (probably the most incompetent Fed chief in history after Greenspaz) can't seem to figure out which way to run! He's sending mixed signals that will just confuse the issue, so anything the Fed does will be discounted by the markets, reducing its effectiveness as a money-regulator.

Maybe it's time to eliminate the Fed altogether, and let Congress and the Treasury take back their Constitutionally mandated responsibility to control US Currency? At least then when we blame an administration for a bad economy - it will be the truth!

Posted by: nofluer | October 6, 2008 10:36 AM

The comments to this entry are closed.

 
 
RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company