I can't decide whether to be disappointed or elated about the Fed's announcement that they will be buying about a trillion dollars worth of US Treasuries and Mortgage Backed Securities. These actions, known euphemistically as "quantitative easing," are really just the modern version of printing greenbacks. A lot of 'em.
I'm disappointed for conflicting reasons. Reason #1 is that expanding the money supply leads to inflation--which is great for people who owe money, but is rotten for people like me who have no debt and save. Still, given the amount of money that is being destroyed because of the falling value of assets across the board (houses, stocks, you name it), this is the only thing the Fed can do. Indeed, it's the main lesson that we learned from the Depression: avoid a deflationary spiral at all costs. A little bit of inflation is a good thing. Even a lot of inflation is not a particularly bad thing, especially compared to deflation--which knocked this country flat on its ass for twelve years, and took a massive World War to begin to recover from. Inflation is easy to control, even if the medicine is very unpleasant. But deflation? Once it starts, it takes a miracle to stop it.
But this leads to disappointment Reason #2--a trillion dollars doesn't seem like nearly enough. This country has lost about a trillion dollars just in the value of homes, and the declines probably haven't ended yet. It seems to me like the Fed needs to print more like three trillion; anything less is pissing in the wind.
In sum: I'm still pretty scared. But I'm glad Bernanke is acting like an adult and doing what is necessary, even if it is politically unpopular.
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I don't know Roothy, inflating or maintaining already overinflated values of things doesn't seem like the answer to me. I just read an item in this morning's paper about an neighborhood in San Jose where almost 3% of the homes are in foreclosure. Three percent doesn't actually seem like a lot to me especially when you look at the pictures of the houses and find out what they were purchased for, many over $600,000.oo. These are poorly built homes over 60 years old and weren't intended to last over 40 years. They are in a gang infested neighborhood where every house has a cyclone fence around it and bars on the windows. The banks that now own these homes were predatory lenders who made these loans with no money down and interest-only payments to people who could not conceivably keep up with jobs as day laborers and McDonalds clerks.
ReplyDeleteI know you don't want to hear this but maybe this economy does need to come crashing down and start over. Yes, I am scared too but you and I will probably be OK, not great, but OK. We have not grown accustomed or entitled to a lavish lifestyle far beyond our means. A lot of my friends will THINK they are suffering because they can no longer afford to buy 5 new outfits at Ross each month, go out to lunch every day or get an expensive new car every 5 years. Yes, a number of businesses will really suffer. We will not be able to afford $40,000 dollar SUVs and may have to purchase Escorts instead. We might have to try to limit meat to the recommended 2 8 oz servings a day. We might have to squeeze families of 4 into 3 (or god forbid) even 2 bedroom houses or apartments. Yes, it will be sheer torture for most Americans but I think we can do it and realign our spending and consuming to a level this country can maintain over the long haul.