Fed Pumps $41B Into US Financial System

[patientlywaiting]

4plex, I enjoy your critical posts. I beleive it’s healthy to question the status quo. It’s important to at least understand how things work.

[Eugene]

“In hindsight would it have been better to raise rates, flush out the bad debt, over-leveraged financials, and hit the bottom quicker than slow and painfully?”

Popular sentiment … the only problem is, macroeconomics 101 says that raising rates during the period of weakening economy leads to deflation and further weakening.

That’s okay if you can turn things around soon enough. But we have an example of Japan and an even more relevant example of 1929 that failure to inflate out of a bursting credit bubble results in a painful and long depression rather than a brief bottom. You flush out bad debt (and a lot of good debt), bad companies (and a lot of good companies), your unemployment rate spikes, domestic demand falls through the floor.

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

[Eugene]

“In hindsight would it have been better to raise rates, flush out the bad debt, over-leveraged financials, and hit the bottom quicker than slow and painfully?”

Popular sentiment … the only problem is, macroeconomics 101 says that raising rates during the period of weakening economy leads to deflation and further weakening.

That’s okay if you can turn things around soon enough. But we have an example of Japan and an even more relevant example of 1929 that failure to inflate out of a bursting credit bubble results in a painful and long depression rather than a brief bottom. You flush out bad debt (and a lot of good debt), bad companies (and a lot of good companies), your unemployment rate spikes, domestic demand falls through the floor.

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

[Eugene]

“In hindsight would it have been better to raise rates, flush out the bad debt, over-leveraged financials, and hit the bottom quicker than slow and painfully?”

Popular sentiment … the only problem is, macroeconomics 101 says that raising rates during the period of weakening economy leads to deflation and further weakening.

That’s okay if you can turn things around soon enough. But we have an example of Japan and an even more relevant example of 1929 that failure to inflate out of a bursting credit bubble results in a painful and long depression rather than a brief bottom. You flush out bad debt (and a lot of good debt), bad companies (and a lot of good companies), your unemployment rate spikes, domestic demand falls through the floor.

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

[Eugene]

“In hindsight would it have been better to raise rates, flush out the bad debt, over-leveraged financials, and hit the bottom quicker than slow and painfully?”

Popular sentiment … the only problem is, macroeconomics 101 says that raising rates during the period of weakening economy leads to deflation and further weakening.

That’s okay if you can turn things around soon enough. But we have an example of Japan and an even more relevant example of 1929 that failure to inflate out of a bursting credit bubble results in a painful and long depression rather than a brief bottom. You flush out bad debt (and a lot of good debt), bad companies (and a lot of good companies), your unemployment rate spikes, domestic demand falls through the floor.

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

[patientlywaiting]

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

That's not what the World Bank/IMF recommends.  According to them, it's always better to flush out the inneficiencies and corruption.  Let the bad apples rot instead of putting them on ice.

 

[patientlywaiting]

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

That's not what the World Bank/IMF recommends.  According to them, it's always better to flush out the inneficiencies and corruption.  Let the bad apples rot instead of putting them on ice.

 

[patientlywaiting]

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

That's not what the World Bank/IMF recommends.  According to them, it's always better to flush out the inneficiencies and corruption.  Let the bad apples rot instead of putting them on ice.

 

[patientlywaiting]

The way to go is to keep pumping money into the economy and to keep inflation at a healthy rate.

That's not what the World Bank/IMF recommends.  According to them, it's always better to flush out the inneficiencies and corruption.  Let the bad apples rot instead of putting them on ice.

 

[Eugene]

In theory, the Fed can take any paper you have, including a used bus ticket, and “loan” you money for as long as they want, at whatever interest rate they want, including zero.

In theory, yes, in practice, they do that with “good” paper e.g. U.S. treasures, except in an emergency. If I’m not mistaken, they were doing repos with subprime MBS for a brief while in August, but they are not doing that any more.

[Eugene]

In theory, the Fed can take any paper you have, including a used bus ticket, and “loan” you money for as long as they want, at whatever interest rate they want, including zero.

In theory, yes, in practice, they do that with “good” paper e.g. U.S. treasures, except in an emergency. If I’m not mistaken, they were doing repos with subprime MBS for a brief while in August, but they are not doing that any more.

[Eugene]

In theory, the Fed can take any paper you have, including a used bus ticket, and “loan” you money for as long as they want, at whatever interest rate they want, including zero.

In theory, yes, in practice, they do that with “good” paper e.g. U.S. treasures, except in an emergency. If I’m not mistaken, they were doing repos with subprime MBS for a brief while in August, but they are not doing that any more.

[Eugene]

In theory, the Fed can take any paper you have, including a used bus ticket, and “loan” you money for as long as they want, at whatever interest rate they want, including zero.

In theory, yes, in practice, they do that with “good” paper e.g. U.S. treasures, except in an emergency. If I’m not mistaken, they were doing repos with subprime MBS for a brief while in August, but they are not doing that any more.

[Eugene]

That’s not what the World Bank/IMF recommends. According to them, it’s always better to flush out the inneficiencies and corruption. Let the bad apples rot instead of putting them on ice.

I’m not aware of these World Bank/IMF recommendations. After what their recommendations did to Russia in the 90’s, I’m not inclined to put much weight into their recommendations, anyway.

Bad apples will rot. Healthy levels of inflation aren’t going to bring back the subprime MBS market and aren’t going to do much to help homebuliders. The only thing that would do that is hyperinflation (double digit growth in per capita incomes year after year), that’s not what I’m advocating and that’s not what we’re getting from the Fed. Do we want Home Depot and Starbucks to go down with Countrywide and Lennar because their unemployed potential customers are forced to cut down on discretionary spending, or do we want to spread just enough money around to keep Starbucks afloat while Countrywide and Lennar declare bankruptcy?

[Eugene]

That’s not what the World Bank/IMF recommends. According to them, it’s always better to flush out the inneficiencies and corruption. Let the bad apples rot instead of putting them on ice.

I’m not aware of these World Bank/IMF recommendations. After what their recommendations did to Russia in the 90’s, I’m not inclined to put much weight into their recommendations, anyway.

Bad apples will rot. Healthy levels of inflation aren’t going to bring back the subprime MBS market and aren’t going to do much to help homebuliders. The only thing that would do that is hyperinflation (double digit growth in per capita incomes year after year), that’s not what I’m advocating and that’s not what we’re getting from the Fed. Do we want Home Depot and Starbucks to go down with Countrywide and Lennar because their unemployed potential customers are forced to cut down on discretionary spending, or do we want to spread just enough money around to keep Starbucks afloat while Countrywide and Lennar declare bankruptcy?

[Author]

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