So, the Fed continuous the huge credit expansion that the ABCT predicted will happen before, or during every recession.
http://www.ft.com/cms/s/0/801479f4-ef70-11dc-8a17-0000779fd2ac.html
Of course, with the current minimum reserve rates of around 10% in America, credit expansion of $200bn actually yields a potential expansion of $2 trillion, ten times more. It seems that the rest of the world is intent on following the same inflationist (monetarist) policies that Friedman seemed to advocate. He said the Great Depression was caused by a lack of liquidity, so now the ECB, the Swiss National Bank, the Bank of England, Canada, and a few others are all printing money. It's worth noting that England doesn't have any minimum reserve ratio at all.
I guess by the time they finish, we'll be in for one hell of a recession. Funny thing is, looking at the graph for share prices, the announcement hiked the price of shares for a few hours, only to resume their fall as before. This ignorance and incompetence would be comical, if not for the disastrous consequences.
What happened was not a monetary injection but, as I struggle to understand it, a swap of bad bank collateral for good treasury collateral. The monetary injection is actually zero, so the operation is very clever on anti-ABC grounds. However, if the bad bank collateral does not pay off, as some of it probably will not, then the taxpayer appears on the hook for the difference. That strikes me as being a pure subsidy or bailout, although somewhat diluted and obfuscated. The operation still reduces demand for money in the long run and so may still be mildly inflationary, but not in the direct, add-to-supply way you describe.Also, I thought the same thing until someone corrected me today ;-)The question remains concerning how much interest rate cuting (if any) the FED will do going forward, and some observers opine that the market has a certain expectation, but the fact that they are trying something different is at least a mildly hopeful sign. Don't think it solves the problem that should be solved by allowing bad paper to clear, but maybe this is a less-bad intervention.
Sorry to reply to my own post, a friend has helpd clarify this for me, so I feel I should pay it forward.The FED sells treasuries and uses the proceeds to loan to the banks against their (iffy) collateral, so it's not a direct swap. Two other things to note: 1) much of what the FED is taking as collateral is stuff it is backing implicitly anyway, but this action is less direct and keeps certain markets markets liquid a while longer in hopes that more of the swapped vehicles can work themselves out. 2) The loans are being made at 1.15 to 1, i.e., the banks have to swap 1.15 units of paper for 1.0 units of money (from the FED, generated by selling treasuries). If a loan from the FED is made good, the bank gets its full collateral back. If payback of the FED loan fails, the FED is partially insulated from the fact that the collateral might not be worth full face.
It's a poor excuse to say that they are buying it for a slight discount so the FED is protected.
The FED is in fact injecting money into the market... why? Let's assume that most of this paper would sell for 25 cents on the dollar (there has been some paper that has sold for under this, and going forward it's a decent assumption to say it will become worth less and less) - if the federal reserve is buying it for say 85 cents, that's 60 cents that would otherwise not be obtained by these banks by selling this paper (which they would have to do without further support from the fed, whether this takes the form of auction rate treasuries, low rates at the discount window, or low fed funds rate, all artificially low by virtue of monetary expansion) - 60 cents that has been created out of nothing.
To say that they are exchanging treasuries instead of money (deposits) at the fed for these 'loans' is just a slight of hand. The effect is the same, as the way they bought the treasuries in the first place was just buying them with a deposit at the fed of money that didn't exist before. Or to put it another way, if they wanted they could buy treasuries from banks with one hand with money that didn't exist before, while selling them back in exchange for subprime or whatever securities.
ok, but do these bad collateral exchanges have inflated values to begin with?
I am hardly attempting to say that the FED is fully protected. Their point is to be at least partially protected, and as a practical matter the premium is almost just for show. If they can make a market for some of this stuff so it can be cleared, then great. If they can't, then the whole house of cards collapses, and they (meaning we) eat a lot of it anyway. Whether the 'premium' sought to borrow funds raised from treasuries is +$0.15 on the dollar or -$0.65 is, to me, just a quibble in the larger scheme of things.Also, I did try to clarify that the swap wasn't treasuries for securities, but money raised from the sale of treasuries for securites. Money is needed, and treasuries are not money. Forgive me if I was unclear.