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Will the Fed start to buy Treasuries?



March 16, 2009 – Comments (8) | RELATED TICKERS: F , ED


Regardless of your opinion on whether the Federal Reserve should intervene in the markets time and again in an effort to prop up a broken economy, the Fed, previously under Alan Greenspan and now under Ben Bernanke, has certainly proven that it is going to.  Everyone knows that the Federal Reserve has already slashed the Federal Funds rate to about as low as it can go.   If they feel the need to do any further intervention to help lift our slumping economy, the Fed will have to engage in what is known as "quantitative easing."

One form of quantitative easing (technically the Fed calls this sort of action “credit easing”) would be for the Federal Reserve to start to purchasing long-term Treasury notes.  Doing so theoretically would bring down long-term interest rates on things like mortgages.  I have said in the past that I don't really think that the government should intervene in the economy as much has it has, but if it is going to do so...the least it could do is do it right.  To me, getting mortgage rates down to at least 4.75%, if not lower, would be the single most effective way for the government to temporarily fix things.  I don't think that this is a long-term solution to what ails the U.S. economy, but clearly very few in the government are thinking long-term at this point.

If the Fed was successful at getting mortgage rates down to between 4.0% and 4.75% and guaranteeing that people could refinance their mortgages, regardless of whether they were upside down or not they would put hundreds of dollars per month back in the pockets of American consumers each and every month for the next thirty years.  This would be much more simulative for the economy than tossing ten bucks per paycheck at everyone or spending all sorts of money on pet pork projects, many of which aren't scheduled to start until 2010.  Heck, including all homeowners as part of the solution would even be more fair than just bailing out homeowners who are nearing foreclosure, many of whom over bought or acted irresponsibly. 

Again, I am not advocating government intervention.  I actually am against it.  But its making me sick seeing hundreds of billions wasted on the ineffective measures that Uncle Sam has been taking when this plan would likely work better.  Of course, I am talking my book as well.  If the people who are at the very top, like the bonus boys at AIG and Goldman, and the people at the very bottom who are losing their homes are benefitting from all of the carp that's going on, then why shouldn't responsible people who bought homes that they can afford benefit as well...especially when helping them would be more effective at proping up the economy.

I'm sure that I'll get a ton of comments from people who don't currently own homes whining this post.  Feel free to vent and talk your book just like I'm talking mine.  I'm not saying that this is the right thing to do or that it will be effective long-term just that it will be more effective than the stuff that the government has tried already and less unfair than the terribly unfair policies that it has been implementing.  I didn't say that it was perfect.

Keep a close eye on the Federal Reserve's statement on Wednesday after its latest meeting concludes.  It has hinted in the past that it would begin to buy Treasuries if it felt that it would help the economy.  So far the Fed has been all talk and no walk attempting to jawbone rates down without actually taking any action, sort of like a father saying "Don't make stop this car!" in the hopes that his children will behave and he won't actually have to.

For a clue as to how this sort of policy might work, one can look across the pond to England.  On March 5th, the B of E started openly purchasing U.K. government bonds.  Since that date the yield on 10-year U.K. bonds has fallen from 3.64% to 2.94%.

I will be paying close attention to the Fed's statement Wednesday afternoon and so should you, regardless of whether you are for or against this sort of action.

Bernanke May Buy Treasuries After Gilt Yields Fall

Will the Fed go long?


8 Comments – Post Your Own

#1) On March 16, 2009 at 5:03 PM, TMFDeej (97.71) wrote:

Consumers, particularly aging Baby Boomers, will likely increase the percentage of their disposable income that they save over the next several years.  The only way to prevent this part of the economy from slowing, approximately 70% of GDP, is to increase the amount of disposable income that consumers have.  Lowering mortgage rates would do that.


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#2) On March 16, 2009 at 5:29 PM, dudemonkey (53.27) wrote:

Nice picture to go with this blog entry!

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#3) On March 16, 2009 at 6:48 PM, Imperial1964 (94.31) wrote:

What is the difference between the Federal Reserve buying Treasuries and "printing money"?  Correct me if I'm wrong, but wouldn't they be "spending it into existance" by buying Treasuries so that the Treasury can spend the money into circulation?

If that's the case, couldn't that spark fears of currency devaluation and spook the bond market?  If I held long-dated Treasuries (which I wouldn't right now anyway) and the Fed started buying to artificially suppress interest rates I would sell immediately.

Disclosure:  I own my own home.

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#4) On March 16, 2009 at 7:45 PM, WillSurfForFood (64.99) wrote:

Hey Deej, as I've stated in the past I'm a big fan of your blog but your solutions to fixing the economy make me want to vomit. It sounds like you are really bummed that the value of your house has dropped and it would make you feel better if it stopped dropping and you had more money. Perhaps the government should send you on a trip to a nice spa somewhere to help you feel better about it, it worked for the AIG execs. The tax code already unfairly favors home owners. In the end it does nothing for housing affordability because the prices adjust upward, it just shifts the tax burden around and helps the banks earn money because people need larger loans. I'm a renter and already support you home owners enough in my opinion, the problem with being a renter is we don't have good enough lobbyists (the banks) working for our interests. I would rather have the 10 bucks per paycheck sorry for being so selfish. 

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#5) On March 16, 2009 at 7:58 PM, whereaminow (< 20) wrote:

Do we remember when Ron Paul was talking about the Moral Hazard of the first bailout? Here it is. Now that we've handed our cash over to the financial elites, there is no way to justify withholding it from the defaulting homeowners. And once they are bailed out, it will move on to the next....

I think it might be time we start listening to this guy.

That being said this is a good post. I can't support the idea, as the Cantillon Effect of monetary base expansion will end up screwing the very people that the recommendation is attempting to help, but it will screw them less than those who didn't get the beneficial policy. Such is democracy.

David in Qatar

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#6) On March 17, 2009 at 1:03 AM, tonylogan1 (27.67) wrote:

How about this...

How will you know when the Fed starts buying long dated treasuries? Are you counting on them actually saying that they are doing it?

How do we know that they are not already doing it, and that is why we have such low rates as it is, despite all the evidence that would suggest rates should be rising (and be much higher than they currently are).

If you were the Fed, woud you want to be the one that crushed the world economy on the day you announce you are taking this action?

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#7) On March 17, 2009 at 5:57 AM, TMFDeej (97.71) wrote:

Thanks for reading Will Surf.  I knew that this plan would be unpopular with non-homeowners.  I actually am under no illusion that it will be able to stop home prices from finding their proper equilibrium point in the long run.  Home prices will likely continue to fall, regardless of whether interest rates fall or not.  This move might slow that decline, but that's not the real purpose behind it anyhow.

The main goal of this action would be to prop up the economy, nearly 70% of which consists of consumer spending.  Several hundred dollars per month in the pockets of millions of Americans would do a lot more to stall the eventual necessary correction than anything the government has done so far.  Again, I certainly don't think that this is the best solution just that it will be more effective than the random carp that the government has been running all over the place trying.


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#8) On March 17, 2009 at 12:56 PM, WillSurfForFood (64.99) wrote:

I'm sorry about the tone in my previous response. I hear what you are saying but if you want to prop up consumer spending why does that have to be tied to home owners. Why not give money back to people who were either too poor or too responsible to buy a house they couldn't afford over the last 5 years. Wouldn't that have the same effect on consumer spending? I'm not sure how I spend it but I promise not to waste it on granite counter tops or stainless steel appliances. The problem with propping up housing is eventually you have to undo it. The sooner a non artificial bottom in housing occurs the better in my opinion. And why give people who already have a rediculous tax break more?

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