Bankruptcy

Fed Running out of Options

By J. Michael McBride

As the federal reserve takes the primary rate closer to zero, it will not acknowledge that it may soon run out of options. Instead, the Fed continues to expand its powers by “expanding liquidity (as if that had not been tried over the last year!). “The last time the Fed detached money creation from setting interest rates was in 1979, when former Chairman Paul Volcker oversaw a violent upward move in borrowing costs. Dubbed the ‘Saturday Night Massacre,’ the effort was aimed at reining in inflation, which exceeded 13 percent that year.

Bernanke, a scholar of the Great Depression, indicated in a Dec. 1 speech that policy makers will need to focus on ‘the second arrow in the Federal Reserve’s quiver -- the provision of liquidity,’ including options such as purchasing Treasuries to inject more cash into the economy.

A formal commitment to expand the balance sheet would constitute ‘the most extraordinary policy approach we have seen’ so far, said Brian Sack, a former economist at the Fed’s Monetary Affairs Division, who is now senior economist at Macroeconomic Advisers LLC in Washington.”

Here is a link to one good article on this topic:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aJOGrevCE.M4&refer=worldwide

Michael

Full post as published by Texas Lawyer Blog on December 16, 2008 (boomark / email).