Ben Bernake has initiated the biggest cash infusion in Federal Reserve history -- a stunning $600 billion dollars that has been put into the US economy.
How did he do it? The Federal Reserve has been buying Treasury securities, which creates a credit on bank balance sheets and thus adds new money to the banking system. This in turn allows the banks to use the money for loans and mortgages. Plus, the Fed has been active with offering US Treasuries at auction, which have been scooped up by eager investors. Just today the "bid to cover" in the Treasury auctions was 4.4 percent. That means that there were 4 times more bids than the securities offered on auction. Investors are seeking safety in US Treasuries and are willing to accept a near zero rate of return.
So is this strategy going to work? The problem is that individual buying of US Treasuries does little to stimulate the economy. What is happening is a shift from lower quality securities into the safety of US government backed securities. A devastating side effect of these actions is that it drives down the prices of other lower quality securities.
One may guess that eventually this excess cash will work its way back into the equity markets but for now we are in a holding pattern.
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Reader Comments (Page 1 of 1)
12-26-2008 @ 12:58PM
nan said...
OK the banking system has money to loan........but people are NOT working to secure a loan. Workers are losing money, not making it. When is government realize that if people are not working the economy will go no where. No work, no income for ss or taxes.
12-26-2008 @ 1:45PM
John said...
Has the American Tax Payer been overtaxed? Where is all this money coming from?
12-27-2008 @ 6:31PM
Marvin said...
By the time the money trickles down to the average worker or consumer to be spent into the system the damage will be catastrophic. The government has given the money to the rich who are misusing and hoarding it. BIG MISTAKE!!! The banks are making it impossible for the average person to get a loan, raising interest rates on credit cards, lowering spending limits on existing lines of credit, all because of their mistakes. At this time the average individual is still trying to recover from the outrageous high fuel and medical costs. GET A CLUE!! "They have no extra money to spend." No money moving in the economy means a slower economy! It would have cured the situation much quicker if they had dispersed all that money to the poorer/average individuals who would have spent the money into the system. That would have given the economy a huge boost. They are giving very little to the huge masses who have little to spend and huge gifts to the richest of the nation and they will do very little to fix the problem. But thats our government for you! Why do think we are in this mess in the first place!
12-28-2008 @ 10:12AM
GEORGE COONERY said...
BROTHER I AGREE WITH YOU 100%.
WELL PUT!
1-24-2009 @ 4:02AM
harveydawabbitt said...
The “credit crisis” is largely a Wall Street disaster of its own making. From the sale of stocks and bonds that are never delivered, to the purchase of default insurance worth more than the buyer’s assets, we no longer have investment strategies, but rather investment schemes. As long as everyone was making money, no one complained. But like any Ponzi Scheme, eventually the pyramid begins to collapse.
http://www.newgeography.com/content/00436-blame-wall-streets-phantom-bonds-credit-crisis