Will the Fed start to buy Treasuries?
March 16, 2009
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, 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.
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