Crisis Economics: New rules for a new economy
Today's Financial News - Posted March 18, 2009
The government is desperate for a solution. After huge promises and with trillions of dollars on the line, all Washington can do is go into crisis mode. Scandals, fear and protests are dictating national policy. Is this what we pay our taxes for?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Just when we thought the government was backing away from the economy and letting it naturally heal itself, it goes and makes a move that shatters the expectations for the day. The news that Washington has managed to unearth yet another trillion dollars to spend – or more accurately, lend to itself – sent the equities market significantly higher today, that is until Wall Street contemplated the deal.
Ben Bernanke and the boys down at the Federal Reserve have been tossing around the idea of buying Treasuries as a last-ditch effort to help force interest rates even lower, but now that Obama says the economy really isn’t that bad makes today’s announcement that the Fed is going to purchase up to $300 billion in long-term Treasuries seem sort of contradictory.
The news is sending a cornucopia of thoughts through my head.
The first is what’s next? What happens when slightly lower interest rates do not entice enough consumers, who have had the wits spooked out of them, back to the world of borrowing? Maybe the government will force us to borrow.
More importantly, how are lower interest rates going to get banks to open their vaults?
Oh you lost your job and you’re upside down on your mortgage. No problem. Take the money at 3% instead of 6%.
That makes sense. The credit risk that has banks refusing to lend is still at record high levels, yet the Fed wants banks to lower their required return.
Crisis economics
Sure, it goes against every economic principle, but this is a “crisis.” Remember? Besides, if the government owns the bank, what does it really matter? If it can retroactively take our bonuses and cancel our contracts, it can cancel our dividends and tax away our profits.
What is even more questionable is what the nation’s biggest lenders are thinking of this news. With $300 billion worth of increased demand for Treasuries, China, Japan and the slew of other countries fueling America’s debt are going to see less return on their dollars. Just last week, China was hinting it may require more for its investments. Bernanke could not have had worse timing.
The long-term ramifications of today’s news are countless and honestly unknowable. Sure, we can all rant about this trillion dollars or that trillion dollars, but only our grandchildren will know what the true impact will be.
All that matters is today’s news sent the Dow surging… at least for a couple of hours.
Next Article: Best Investment: Stay out of the trap
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