>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.
Here's something:
http://www.therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=5518
HENWOOD: Yeah, well, everybody's very risk-averse right now. You know, we went from this insane situation a few years ago where all you needed was a pulse to get a mortgage, to now where you need a credit score of over 700 even to walk in the door of a bank. It went from feast to famine, or notworse than the feast [inaudible] gorging to starvation. So, yeah, the Fed is really trying to pumpthey just announced the other day that they're going to buy long-term Treasury bonds.
JAY: Explain the implications of that for people who don't get it.
HENWOOD: They normally justnormal Federal Reserve operations, they buy and sell short-term government Treasury bonds, the short-term stuff, to inject or remove cash from the system as they see fit. But they'rereally, by buying longer-term paper for a longer period of time, what they're trying to do is just pump money into the economy, support the credit markets, and to be a buyer of last resort, and in very large quantitiesyou know, they've got $1 trillion of this stuff on their balance sheet. And then forit looked like some of it was going to expire. So they had some mortgage bonds, for example, that were reaching maturity, and they had originally planned to let them just roll off as they went mature. They would then just not reinvest it, the principal, and that would be a kind of covert monetary tightening, modest but somewhat. And they've made it clear that they're not going to do that. And they're also winking to the markets that they're willing to step in and buy stuff in large quantities if necessary, because they're afraid that after. The beginning of the year, it looked like the economy was staging a half-decent recovery. We saw some decent job numbers in the first few months of the year. But starting around April and May, that started petering out, and now we're barely positive. Now, I must say that this is entirely consistent behavior with the pattern that economies take on after financial crises. The IMF [International Monetary Fund] has done a lot of work identifying financial crises over the last 30 or 40 years around the world, and this is following the pattern very closely. You have a very deep and extended recession, very large job losses, followed by stabilization and a long period of flatness, very weak recovery, not the usual textbook V-shaped thing but a realmore of an L-shaped, maybe a little bit [of] an upward angle.