Sign-up to receive our free newsletter.
By Mr. Curmudgeon:
Crazy Paul Krugman at the New York Times is elated with Fed Chairman Ben Bernanke’s open-ended bailout of Fannie Mae and Freddie Mac, and flooding the economy with more counterfeit greenbacks – a.k.a., QE∞.
According to batty Krugman, “The Fed’s response to this problem has been ‘quantitative easing,’ a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.”
That’s a left-handed way of saying that Fed actions to date have not worked and it’s time for a Hail Mary Pass.
As a last desperate act, Benny Boy will inflate the dollar (more than he has already) and re-inflate the housing bubble. In buying junky mortgage-backed securities from Freddie and Fannie, the Fed takes bad debt off their books, which lowers their capital requirements (the reserve cash they need to offset losses). This way, they can start buying up mortgages again. Bernanke will then flood the banks with new, cheap dollars through the purchase of U.S. Treasuries (“operation twist”), which forces down interest rates. Vuala! You’ve got yourself a Fed-manufactured housing boom!
QE∞ is Bernanke’s admission that the Fed’s “dual mandate” of price stability and mitigating the nation’s unemployment rate are obvious, painful flops. Looking to history, the one Fed success, if you can call it that, is its 1997-2007 inflating of America’s housing bubble.
That’s all Bubble Boy Bernanke has left.
It’s worth remembering that former Fed Chairman Alan Greenspan admitted that his low 1% Fed rate “may have contributed to the rise in U.S. home prices.”
And, as you all know by now, that didn’t turn out so well.
Bernanke’s massive purchase of U.S. Treasuries has lowered the Fed rate to near zero.
“Insanity,” said Albert Einstein, “is doing the same thing over and over again and expecting different results.”
Bernanke is building a new house of cards, but you’ll be able to buy it with 20% down at a 30-year fixed, 3.5% interest rate!