I'm not sure I have this totally correct. If others have more insight into what is proposed, please chime in and enlighten those of us in the dark.
Normally, when introducing money into the system, the Federal Reserve Bank tries to maintain some balance. They may sell bonds to those entities that have acquired money. They then have that money to reintroduce into the system or retire. They pay interest on the bonds they have sold. They may allow the entities that hold the bonds to lend money against them as collateral, possibly many times over. They may give banks money in return for indebtedness and then let the banks use this money to make loans, not once but many times. This kind of leveraging of Federal Reserve funds, provides the system with liquidity and leaves the Fed with some control over how much money is entering the system and for how long and for what purposes.
What Bernanke is planning to do now is to purchase, at market value, US Treasury bonds already issued and outstanding within the World financial community. This would have the effect of introducing large amounts of liquidity into the system. It would maintain confidence in US Treasury bonds, insofar as there was any question that they were not easily convertible to cash. It might also decrease the availability of safe haven, government insured, investment vehicles. It is printing money, pure and simple. Then using that money to retire government debt. This would be inflationary and undermining of the value of the dollar, in the extreme.
This may be exactly what he wants. If you have been a saver rather than a spender, you will be sadly disappointed with these actions. This is what they do in Zimbabwe.
2 comments:
I think you have the gist of it. The treasury plays a part in the creation of money and buying and selling of bonds.
http://www.stls.frb.org/publications/pleng/intro.htm
The Fed also adjusts interest rates, short term mostly, at the margins. THE interest rates are collapsing now due to demand for safe money ie bonds.
If I could do one thing, I would close the Federal Reserve banks and replace them with nothing.
I wish that I did have more insight into these proposals, but I don't. The federal government is pumping so much money into so many different places with so many explanations of why, now my head is spinning. With this cadre of free-marketeers handing out money to businesses and corporations that are failing to thrive in a free-market, the financial world is being controlled (instead of regulated) by government now. They have the power to decide which institutions live and die.
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