The Fed announced today that it will buy $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month.
The intent is drive already low long-term interest rates even lower.
Economists call it "quantitative easing." It gets the name "QE2" - like the ship - because this would be the second round. The Fed spent about $1.7 trillion from 2008 through this year to take bonds off banks' balance sheets and pump cash into the economy.
Here's how it's supposed to work this time: The Fed buys Treasury bonds from banks, providing cash to lend to customers. Buying so many bonds also lowers interest rates because demand for Treasurys leads to higher prices and lower yields. Interest rates are linked to yields. Lower rates encourage people and businesses to borrow money for a mortgage or another loan...''
http://www.usatoday.com/money/economy/2010-11-03-fed-risks_N.htm
Would somebody on LBO explain the above.
It sounds to me like bullshit that will just encourage another bubble and crash. In my theory lending isn't going to business because the rate of return is lower than other uses of money.
Lending rates were too high and threatened the place I worked for, so the boss changed over just depending on receivables which were tanking. His only two options were close or sell. He lucked out and found a buyer. He cut wages to make his bottom line look better for sale. The new owner had her own money and didn't need to finance the deal. Within a few months she realized she bought a lemon and began firing people right and left. Some of the new hires at even lower wages were out at their first paycheck, others lasted longer.
The above must be going on all over the state and various parts of the country. So, from the street level, it probably doesn't matter how much the Treasury pours into banks.
The other thing to mention is that linking business tax cuts to hiring was a stupid idea. The tax cuts are lower than the cost of hiring, even at lower wages.
CG