no third solution

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FED to Buy Commercial Paper

October 8th, 2008

However the FED chooses to “stimulate” the economy, it’s all going to wind up as inflation. It’s all going to hurt the small, non-institutional investors and market participants. That means you, and me.

According to Financial Times, the FED will buy commercial paper, and “potentially unlimited amounts.”

This can not be good.

The Fed’s plan, which involves setting up a special purpose vehicle to buy potentially unlimited amounts of three-month debt from banks and non-financial companies, would expand its role as lender of last resort.

Unlimited amounts of commercial paper? Great! Let’s send false signals to everyone who is trying to plan and save for the future. As the Fed begins buying these securities, the demand (and hence, the prices) of these securities will be artificially overstated. This allows those with enough inside information, to sell into the artificial demand and profit handsomely, or at least, avoid incurring further losses. The vast majority of us do not have enough inside information.

“Mr Bernanke indicated that lower interest rates could be necessary,”

Necessary? Necessary for what?

Lower interest rates got us in to this mess, in the first place!

Lower interest rates, established by the government or a quasi-governmental agency like the Federal Reserve, encourage taking on additional debt at a time when many people have a great deal of uncertainty about the future. During these times, their inclinations are (rightly) to save money as a precautionary measure.

If we really need to take on additional debt, merely to stay above water in servicing the already-existing debt, then we’ve got one hell of a problem on our hands.

Comments

2 Comments

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  • Mike says on: October 8, 2008 at 6:13 am

     

    …and they just announced a 50bp rate cut to 1.5%.

  • Gilligan says on: October 8, 2008 at 6:23 pm

     

    Lender of the last resort? Or donor of the first?

no third solution

Blogging about liberty, anarchy, economics and politics