At the Times, you never find out: Binyamin Appelbaum writes the featured report on the front page of today’s New York Times.
Plainly, this is important stuff. Including a pair of bracing headlines, here’s how the news report starts:
APPELBAUM (1/14/12): Fed Ties New Aid to Jobs Recovery in Forceful Move/Plainly, this is important stuff. This leads to today's top question:
With Shift of Policy, Officials Concede Flaws in Incremental Approach
WASHINGTON—The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.
What are “mortgage bonds?”
Trust us—almost nobody knows! That includes people who read to the end of Appelbaum’s report, which runs 1441 words.
What the heck are mortgage bonds? On page B4, in paragraph 25, Appelbaum finally gives the impression that he has tried to explain.
Or something. We're not quite sure:
APPELBAUM: The decision to focus on mortgage bonds reflects the Fed’s conviction that the housing market still needs help, and that lower rates on mortgage loans will produce broad economic benefits. Buying bonds drives down rates by increasing competition for the remaining bonds, forcing investors to accept a lower rate of return or move their money into other, riskier assets.From that, a careful reader could conclude that buying mortgage bonds may lower the rate on mortgage loans. How does this happen? It seems that buying (some) mortgage bonds increases competition for the remaining mortgage bonds.
This forces investors to accept a lower rate of return or move their money into other, riskier assets!
What the heck are mortgage bonds? Very few Times subscribers would know how to answer that question. And not only that:
Even if they read all the way to end, few readers will have any idea what Appelbaum is talking about. Now will they understand the lingo they hear when this topic gets rattled on cable.
We’re not calling this a bad thing. As Paul Reiser said, we’re just saying!
Buying a bond means lending money. When the government buys mortgage bonds, there's increased competition for the remaining mortgage bonds. Other mortgage bond buyers compete harder by offering to lend money at lower rates.ReplyDelete
My main question is whether this new program will work. Past stimulus plans have a poor record. As I understand it, they're supposed to work as a "shot in the arm" for the economy. But, this one is a gradual program. Unlike the previous one-shot of $800 billion or so, this one is $40 billion per month.
The previous $800 billion stimulus utterly failed to fulfill President Obama's predictions. He said if we passed this program, unemployment would never go above 8%. He predicted a gradual decline. According to Mr. Obama, unemployment would be 5.6% by now.
According to the Times article, the Fed acknowledged that its incremental approach until now had been flawed. This comment puzzles me. This new plan is incremental. The previous $800 plan was incremental in practicer, because it took a long time to spend this money. However, the new plan is guaranteed too be incrmental.
A second question is wether this plan is being adopted to help the President's re-election. IMHO the Fed has so much power and so little transparency that there's no way to definitively know what factors motivated their decision.
The Fed has essentially promised to put economic growth *ahead* of concerns about non-existent inflation.Delete
The new language was this:
"A highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens."
The fed are expecting to remain easy on money on a very open-ended basis.
Contrary to you, DiC, it is felt that the separate fiscal stimulus provided by Congress did save many jobs, whether or not it achieved the President's goal notwithstanding.
Reasonable people think that the Fed cannot do it all on its own, and that given the current net reduction in government (including states, which employ most government employees) economic demand, combined with the very slack state of private demand, further fiscal stimulus is also needed.
Regarding your second question, the Fed have acted far too late to have significant impact on the average person's felt state of the economy before the election comes, so they could hardly have done it to help Obama.
A better question is: did they delay this necessary response so long because they didn't want to help (or to seem to help) the President?
Has the Fed only taken the necessary action now because the writing is on the wall for Romney -- he has no real hope of winning, and the window is too late for their action to affect the real economy before November?
Maybe this new Fed action will help the economy, but rating firm Egan Jones thinks not:Delete
Ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," citing its opinion that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality.
If you bet against US credit with your money, instead of your mouth, last time, at the time of the debt ceiling debacle rating downgrade -- you lost.Delete
Ten year rate then, about 2.5%, now under 2%.
You lost worse if you moved earlier, in June 2011 when the agencies put US credit on negative outlook watch.
But yeah, Egan-Jones sez.
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