The Federal Reserve announced Wednesday that it will buy $600 billion worth of government bonds by the middle of 2011. After the recent elections the Fed expects fiscal stimulus, and the government in general to be in gridlock. The central bank is taking economic matters into its own hands. The economic recovery has been slower than anyone anticipated in terms of output and employment. Ben Bernanke at the Federal Reserve is concerned about sustainable employment and price stability, and the bank has decided, unilaterally, that a new stimulus is the best bet. Bet being the operative word. Bernanke is sure that with Republicans controlling the house another stimulus, or fiscal funds to finance one, will never get to the President’s desk. As any central bank does, it will simply print $600 billion worth of money and use it to buy long-term Treasury bonds in the market. There is no guarantee that this new stimulus, almost as large as the TARP but this time engineered to raise the price of bonds, lower interest rates, and stimulate borrowing and purchasing power, will not send the economy further into recession. The safe option, reducing the short term interest rate, is no longer viable since the rate has been at zero since December 2008. This sounds suspiciously like spending more money that doesn’t exist. It also puts cash directly into the hands of stock, bond and property holders, not the average jobless American citizen whom this policy is intended to help. The economy is in its present state because individuals spent beyond their means and governing institutions allowed them to do it. The central bank believes this is the only way our economy will recover, by revisiting mistaken ideology, and reinstating a broken economic culture.
What do you guys think do you think the government should pass another 600 billion stimulus plan? If so do you guys think that this would really help out our economy or is it just a temporary fix that will hurt our economy in the long run?
I am having a hard time wrapping my head around this topic. How can the FED do something now that took an action of Congress to do in the past? I am not really sure that I'm too comfortable that Ben Bernake and a few advisors have the power to implement a policy that has the potential to effect the entire nation.
ReplyDeleteThis great recession of ours will continue as long as businesses are uncertain about the future. Nothing will exacerbate that uncertainty more than a belief that the government is not seriously on board. The idea that government should back down and do less may play well to some tea party-er in Kentucky, but make no mistake that the present enemy is uncertainty. There is a ton (millions of tons) of investment capital that is being sat on right now by American businesses waiting for a sign to start hiring. That sign will come in the form of increased consumer demand. Pumps don't prime themselves.
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