Bernanke’s Magic Show: Watch Me Make $300 Billion (and What’s Left of Our Economy) Disappear


In a little-publicized move yesterday, Federal Reserve Chairman Ben Bernanke made a decision that will likely have a profound impact on the US Economy and anyone foolish enough to still be holding US dollars. 

From Bloomberg.com

U.S. central bankers decided yesterday to buy as much as $300 billion of long-term Treasuries and more than double mortgage-debt purchases to $1.45 trillion, aiming to lower home- loan and other interest rates. The Fed kept its main rate at almost zero and may keep it there for an “extended” time.

The moves sparked the biggest drop in 10-year Treasury yields since 1962, rallies in the stock market and gold and a plunge in the dollar against the euro. Economist Richard Hoey said Bernanke has created the “Rambo Fed,” referring to the Sylvester Stallone character skilled with weapons.

“This is a very powerful and aggressive move,” Hoey, chief economist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.”

With the purchases of Treasuries and housing debt, Bernanke is effectively using the Fed’s powers to print money and aim it where he and other officials believe it will have the greatest impact in lowering borrowing costs.

Is there, perhaps, another way of looking at this? Could it be the US is no longer able to find lenders willing to loan us money? Has China “cut us off?”  Or have they raised the interest rate out of fear we can no longer (or will soon no longer be able to) pay our bills? Michelle Malkin refers to Bernanke’s move as straight out of the “David Copperfield School of Economic Recovery.”  Yes, but at least with Copperfield you get some cool background music.

I get nervous whenever I hear the solution, “Let’s print more money! LOTS AND LOTS OF IT!” and then “aim it where (they) believe it will have the greatest impact in lowering borrowing costs.”

The literal translation, as I see it, is we are simply going to print more of our money to pay our bills.  Now while that’s a luxury we would all like to have, it does not come without a cost. The value of the dollar will plunge even further. That will weaken our economy and will likely trigger inflation. If, indeed, that trigger has been pulled, watch out, boys and girls. The value menu at McDonald’s could soon be a luxury item.

But hey… let me be the first to admit I am not an economist.  I DID balance my checkbook once back in the ’80s, so I’m not totally without an eye for the economy. But I decided to skip lunch today and eat antacids instead when I continued reading the Bloomberg article:

Yesterday’s decisions will add $750 billion in purchases this year of mortgage-backed securities issued by government- sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae, for a total of $1.25 trillion. The Fed has already announced $217.1 billion in net purchases out of $500 billion planned through June, under a program unveiled in November.

The central bank will also double to as much as $200 billion this year its planned purchases of debt issued by Fannie Mae, Freddie Mac and Federal Home Loan Banks. The Fed bought $44.4 billion of the so-called agency debt as of March 11.

But then I saw what might just be a ray of hope (and, as hope goes at times like this, even a ray is worth checking out):

The $1 trillion Term Asset-Backed Securities Loan Facility, which is opening this week to jumpstart consumer and business lending, “is likely to be expanded to include other financial assets,” the FOMC statement said, without elaborating.

“Our objective is to improve the functioning of private credit markets so that people can borrow for all kinds of purposes,” Bernanke said at a Feb. 24 Senate hearing. “We are prepared, and we want to keep the option open to buy Treasury securities if we think that is the best way to improve the functioning or reduce interest rates in private markets.”

Oh, wait… so you mean this may loosen up credit to make it easier for people to get loans to buy new cars and keep the auto industry afloat in this country? Well whaddya know! That would be a GOOD thing, right? Right? The ray of hope turned out to be the lit end of the joint whoever thought of this plan must have been smoking…

“Don’t get your hopes up” according to Doug Dachille, chief executive officer of New York-based First Principles Capital Management:

“The Fed is ‘naive’ if officials think the move will lower borrowing costs,” Dachille said. “The ‘historic precedent’ of when the Treasury Department was buying back debt amid the budget surpluses of the Clinton administration show it may fail to do so,” he said.

I’d love to think this is a bold brush stroke by Bernanke, one where his years of experience and his study of the great depression will steer us carefully through troubled waters. More likely,  this is a move based on desperation. I hope it’s the the former, but any time I see them installing a turbo-charger on the treasury’s printing press, I get concerned.

Very concerned.

 Stay tuned.

Gerry Ashley

7 Responses to Bernanke’s Magic Show: Watch Me Make $300 Billion (and What’s Left of Our Economy) Disappear

  1. zachbreakpate says:

    It’s true, and the markets for stock and gold prove it so. Hold on to your hats!

    http://culturalcapitol.com/2009/03/19/aig-execs-were-crooks-washington-post/

  2. […]  Here is another blogger with similar but more coherent […]

  3. Stoutcat says:

    Oh Bullwinkle, that trick NEVER works!

  4. Joe Sax says:

    I think so. You print more money = money loses its value.

    However that is not the point. The point is who has more money in the end.

    If i print money and you don’t print money, well, in the end i will be richer than you, and the economic balance will be restored. (I’m rich, you are not, you work for me now).

  5. Gerry Ashley says:

    Sorry, Joe, but your take on this misses the most important point. It’s not individuals who print money, it’s countries (or, more to the point, the TREASURIES of countries).

    If we print a few extra trillions of dollars without anything to back it, we’ve essentially told the world, “The net worth of all we are has been watered down by this much additional money” since there is no new backing of the money (like gold).

    If the other country doesn’t print up extra un-backed money, then a specific amount (let’s call it “x”) of their money is now worth more than the amount of dollars it used to be worth since we have watered down our economy by printing extra money with nothing to back it. So “X” might now be worth “X” + 50%.

    In the end, an imported item that used to cost $100 might now cost $150.00 simply based on nothing more than the fact that there are now billions of extra dollars floating around in our economy. And if you just think you can print more money, guess what? The price of that item continues to rise.

    The Dip-wad Democrats in Washington saw Obama’s election coupled with their majority in both the House and Senate and the economic crisis as Carte Blanche to pass whatever crap they want and were too busy doing thair little “Nyah! Nyah!” dance to realize they were dooming our economy in the process.To be fair, there were a couple of Republicans who thought, “Hey why don’t WE get some of this gravy before it’s all gone!” too. So within a single piece of legislation (stimulus/crapulus), they managed to punk America with what they might have normally spent an entire term in office to try to get passed. Only one problem: Someone has to pay for all this pork. That’s where YOU and I come in.

    This is also where we and our children and THEIR children get screwed for the next 30 years paying for all this pork that we no longer have the money for. It’s akin to someone down to their last $23 in the bank going out an buying new summer outfits for the kids, tickets to a round-the-world cruise for the family and a new car for when you get home. Only AFTER you commit to buying these things do you think of how you might be able to pay for it. But you don’t worry about it because you know that there’s a lot of money in your town and somehow, it will be up to them to pay for your projects. And as long as you continue to have that mind-set, you will continue to spend in a similar manner. Welcome to the United States Congress!

  6. Bill Cash says:

    I just stopped by your blog and thought I would say hello. I like your site design. Looking forward to reading more down the road.

  7. Gerry says:

    Hi Bill,

    Thank you for your kind comments. We invite you to search through our entire site and check out the various posts we have on a variety of topics. We take a great deal of pride in anything we post because it reflects significant research before we do so. We also welcome your opinion whether you agree or not. All we ask is for people to back their positions with supporting research.

    Our goal here at Grand Rants is to always back up our positions with research you can view to verify.

    Again, thanks for visiting. I look forward to your views as well.

    For the Grand Rants Crew,
    Gerry Ashley

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