Fed To Spend $1.2T On Ailing Economy

Federal Reserve Will Buy Billions In Bonds And Securities In Hopes Of Lowering Rates On Consumer Debt

(AP)  With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy.

To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most - if not all - of next year.

The decision to hold rates near zero was widely expected. But the Fed's plan to buy government bonds and the sheer amount - $1.2 trillion - of the extra money to be pumped into the U.S. economy was a surprise.

"The Fed is clearly ready, willing and able to be the ATM for the credit markets," said Terry Connelly, dean of Golden Gate University's Ageno School of Business in San Francisco.

Wall Street was buoyed. The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.

And government bond prices soared. Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent - the biggest daily drop in percentage points since 1981.

The dollar, meanwhile, fell against other major currencies. In part, that signaled concern that the Fed's intervention might spur inflation over the long run.

If the credit and financial markets can be stabilized, the recession could end this year, setting the stage for a recovery next year, Bernanke has said in recent weeks. The Fed chief and his colleagues again pledged to use all available tools to make that happen, and economists expect further steps in the months ahead.

Since the Fed last met in late January, "the economy continues to contract," Fed policymakers observed in a statement they issued Wednesday.

"Job losses, declining equity and housing wealth and tight credit conditions have weighed on consumer sentiment and spending," they said.

The Fed's announcement that it will spend up to $300 billion over the next six months to buy long-term government bonds was something that in January it had hinted it would do. But some officials had seemed to back off from the idea in recent weeks.

Such action is designed to boost Treasury prices and drive down their rates, as it did Wednesday. Rates on other kinds of debt are likely to fall as well.

"This is going to help everybody," said Sung Won Sohn, economist at the Martin Smith School of Business at California State University. "This might help the Fed put Humpty Dumpty back together again."

The last time the Fed set out to influence long-term interest rates was during the 1960s.

The Fed's decision to buy an additional $750 billion in mortgage-backed securities guaranteed by Fannie and Freddie comes on top of $500 billion in such securities it's already buying. It also will double its purchases of Fannie and Freddie debt to $200 billion.

Since the initial Fannie-Freddie program was announced late last year, mortgage rates have fallen. Rates on 30-year mortgages now average 5.03 percent, down from 6.13 percent a year ago, according to Freddie Mac. The Fed's decision to expand the program could further reduce rates, analysts said.

"This is not only going to keep mortgage rates low for a long period of time," said Greg McBride, a senior financial analyst at Bankrate.com. "The mere announcement may produce a honeymoon effect and bring mortgage rates down to even lower levels in the coming days."

The goal behind all the Fed's moves is to spur lending. More lending would boost spending by consumers and businesses, which would revive the economy.

The Fed also said it would consider expanding another $1 trillion program that's being rolled out this week. That program aims to boost the availability of consumer loans for autos, education and credit cards, as well as for small businesses.

Where does the Fed get all the money? It prints it.

The Fed's series of radical programs to lend or buy debt has swollen its balance sheet to nearly $2 trillion - from just under $900 billion in September. Sohn believes the Fed's balance sheet could grow to $5 trillion over the next two years.

The Fed has said it's mindful of the risks of pumping more money into the economy, bailing out financial institutions and leaving a key rate near zero for too long. There's the potential to plant the seeds for higher inflation, put ever-more taxpayer money at risk and encourage "moral hazard." That's when companies make high-stakes gambles knowing the government stands ready to rescue them.

The Bank of England last week began buying government bonds from financial institutions as it turned to new ways to help revive Britain's moribund economy. The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.

Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.

The Fed is taking the new steps as the U.S. economy sinks deeper into recession. Businesses are facing weaker sales prospects as customers in the United States and abroad cut back, the policymakers said.

Still, the Fed said it hoped its actions, the government's bank rescue effort and President Barack Obama's $787 billion stimulus of increased government spending and tax cuts eventually will help revive the economy.

"Although the near-term economic outlook is weak, the committee anticipates that policy actions .... will contribute to a gradual resumption of sustainable economic growth," the Fed said.

But even in this best-case scenario, the nation's unemployment rate - now at quarter-century peak of 8.1 percent - will keep climbing. Some economists think it will hit 10 percent by the end of this year.

The recession, which began in December 2007, already has snatched a net total of 4.4 million jobs and has left 12.5 million searching for work.

[sjc_1]

Let's see, Reagan ran up $2 trillion in debt, GHW Bush ran up $1 trillion and GW Bush rand up $5 trillion in debt. That makes $8 trillion in Republican debt, but somehow this is Obama's....right.

[maakahill]

Renegade.Rivers

Great comment! You nailed it.

Regards, M

[dougnshannon]

So America is now in a depression not a recession. These measures seem very excessive for a recession and its likely to get worse before it gets better.
Posted by Chris_Butler at 6:01 AM : Mar 19, 2009
****************************************
The interest alone on this money he is borrowing will be in the billions each year...and when we default the Chinese will be coming to collect...

[Chris_Butler]

So America is now in a depression not a recession. These measures seem very excessive for a recession and its likely to get worse before it gets better.

[dougnshannon]

I'm looking for the first 1 trillion dollar bill with Eddie Murphy's picture on it...destined to be a collectors item...

[Renegade.Rivers]

Once again the Fed is attempting to pull the wool over the eyes of the American people. They are buying nothing, as the article says, they are only printing more worthless paper. Of all the ludicrousness ideas that this will stimulate the economy, by decreasing the debt. Whose debt you may ask are they buying? They are buying the debt of the banks, and other lending institutions. Whose going to pay for it, you may ask? The American people are, in a few generations, lol.

The Fed is buying the debt of the same banks that we through the government have already bailed out, again and again over the last year plus. The truth is that this is nothing more than a Ponzi scheme very similar to the one that that Madoff pulled. This time the buyer instead of being investors is the government, through the Fed, who has no money, of its own, but uses the the tax dollars of the American people, in order to pay the interest on the money that the Fed prints.

Its not a bad deal really, the Fed prints the money, and then charges the government interest on the paper that it prints. The Fed has no cost in the matter, because the government printing office prints the money, at taxpayer expense, money that is borrowed from the Fed, which has no money invested in anything, but instead lives off of the money that the IRS collects. Most people do not realize that all of the money that is collected from taxpayers at the federal level does not go into the government treasury, but instead to the Fed, who then loans it back to the government at interest.

As long as this Ponzi scheme is allowed to continue, the government can never really get out of debt, because all of the money in circulation, and that owed by the government is owned not by the United States, but instead by the Fed, a private banking cartel. The only way that the United States can ever get out of this never ending cycle of borrowing money and paying interest to the Fed, is to do away with the Fed, which is owned by the world bankers.

This is exactly what leaders like Jefferson, Franklin, Andrew Jackson, and JFK warned the American people of. As one of the Rothschilds said, "I give not a care who runs the government, because if I control the money supply, I control the country. In order for the American people to ever hope to have any control over the country, it must first do away with the Fed.

[vancouverboo]

" A trillion here, a trillion there, and pretty soon you're talking real money"

[platteman]

Where is my bailout?? Obambi promised!! Another lie.

[despido]

Anyone with debt and a job needs to work like H-E-L-L to repay their debts and begin to become investors rather than borrowers. Remember - investors ARE lenders.
++++++++++++++++++++++++++++++
Bond or note investors are lenders, capital investors are owners. But the majority of damage done is psychological. The longer this lingers, it'll feed on the lost confidence of everyone, from the lender to the investor to the shopper. Frugality will become the watchword for years out - as it did after the 'Great' depression.
These loans, bailouts and stimuli are fueling the fire - not dousing it. Pessimism is rampant, fraud is apparent and confidence is becoming extinct. For the 12 or so Trillion that the FED has loaned, donated, promised or otherwise committed, every mortgage on every private home in America could be paid off. THAT probably would have worked.

[perk235]

As other people have commented ,the Federal Reserve ever since 1913 has been a private bank,as the Fed Govt only own's 20% of the shares. Person or persons unknown own the rest (The controlling interest.)
Posted by farnorth5 at 7:27 PM : Mar 18, 2009
---------------------------------------

I found out yesterday that when people buy stocks online, they are actually owned by CEDE & COMPANY, not by the individual. The individual is a "beneficiary" of the stock. Sounds like another "wool over the eyes", just like the Federal (not) Reserve (not).

[pensacola8-2009]

Anyone with debt and a job needs to work like H-E-L-L to repay their debts and begin to become investors rather than borrowers. Remember - investors ARE lenders.

[despido]

The Fed agrees to borrow another Trillion from the Treasury and, as expected, the dollar just hit a new low since Obama's inauguration. Way to go Big O!

[farnorth5]

The one big mistake Pres Obama made was to give the impression the Federal Govt controls the US banking system and can "correct"the current credit imbalances internally and between China and the US and by doing so stop the recession.
As other people have commented ,the Federal Reserve ever since 1913 has been a private bank,as the Fed Govt only own's 20% of the shares
.Person or persons unknown own the rest (The controlling interest.)
This credit crash the banks are dealing with was made by them and is International in scope and requires serious International action by the Banks themselves.
No one should be given the idea that the White House controls the International Central Banks.With rare exception they are privately owned and not controlled by governments.

[TheStolenGiraffe]

"...So by increasing the money supply thru the purchase of gov't bonds, the FED is actually decreasing interest rates. Get it???...---TheStolenGiraffe

I do. However, the next question I have then is when those bonds mature, then I assume the FED goes back to those same securities dealers that they bought the bonds from, and redeem the bonds for money --Posted by tmittelstaed at 4:24 PM : Mar 18, 2009

I think you're misunderstanding the concept of bonds...bonds are the debt of the issuer. In this case the issuer is the U.S. Gov't, so they can only be redeemed at maturity to the U.S. gov't...not the gov't bond dealer.

Each bond carries a face value that is given at maturity, this is what the issuer says the bond is worth. the bond holders incentive for purchasing the bond is the interest payment known as the coupon that's attached to the bond...the coupon affects the price you pay for the bond because of the interest rate risk (the current interest rate may be lower or higher than the coupon) so you can purchase/sell them at a discount/premium.

The Fed trades these notes with the gov't to print the money we use...so they have a stockpile of them lying somewhere in Washington. Of course, they profit from the sale of them...that's their incentive for printing the money in exchange for the bonds. They get to sell them in the market...buy them back when they're cheaper b/c they use that to increase the money supply...and redeem them to the gov't when they mature. How else do you think they can afford all their members and the machines they use to print the money?

[farnorth5]

Well,success at last !!!!! Congratulations to the Federal Reserve Staff are in order.
The Federal Reserve is now the unofficial "BAD BANK"
Any Major Company needing cash can now phone them up and one way or another cash will appear
Hurray we are all saved (I Think)
Now if it would only work for us poor TAXPAYERS that way.
Oh wait a minute ,I think i read somewere that our children and grandchildren will have to pay the bill !!!!!
Some how this bailout stuff isnt working right.Or is it just me who thinks there is a total legal scam at work here.
Why are the people who invested in these Insurance /Investment Banks getting bailed out again ?????? Can someone please explain again,my memory seems to be going.....

[tmittelstaed]

"...I am no expert but I feel the American consumer has been forever changed by this mess and will not return to the reckless spending habits anytime soon...." --jd2408

That actually is what happened as a result of the Great Depression. Of course most of that generation are dead now, but I recall lots of stories that my Dad used to tell of people he knew who had survived through the Great Depression who forever after that, would be extremely stingy with money, always buying used cars, secondhand clothes, stuff like that - even when they were loaded with money.

Kind of interesting when you think about it for a moment - it's been 80 years since the 1929 stock market crash, the depression was most of the 30's. Someone in their teens or twenties during the 1930's would have been raising kids in the 40's and those kids would have had it drilled into them to pay cash for everything - that second generation is pretty much exiting the financial scene right now - seems like the 3rd or 4th generation are the ones who caused the current mess - which is right around the time that generational stories tend to get lost.

[tincup356]

the majority of the middle classes debt is credit card debt.......consumers are forced to pay 24-30 % interest rates while the banks are getting from the fed at 1/2 %..........and these same banks cannot do their part and pass on lower rates to consumers?......The middle class will never dig out of debt because of the greed of those at the top,,,who are getting taxpayer monies to stay afloat................When will the fools realize that if the people can only pay so much and survive.....if we spend all we have to cover the greed of the banks and Wall street,,,,,,they will soon find themselves without customers.....Corporate America is finding out what the cost of overpricing their products has done,,,,,,,,,,Left them with no customers to sell their goods,,,we are broke.

[tmittelstaed]

"...So by increasing the money supply thru the purchase of gov't bonds, the FED is actually decreasing interest rates. Get it???...---TheStolenGiraffe

I do. However, the next question I have then is when those bonds mature, then I assume the FED goes back to those same securities dealers that they bought the bonds from, and redeem the bonds for money - the bonds are worth more now, so more money has to be paid back to the fed - and the bank deposits the securities dealers made then have to be tapped out to pay for the bonds, reducing the demand deposits in the bank, and reducing the money supply - interest rates go up, and your right back to where you were before - except worse since even more money had to be pulled back out of the deposits to pay the interest on the bonds so there's even less money than before.

Kind of like, you want to lower interest rates today so you are going to raise them even more tomorrow to get things to balance out.

Obviously, you can't just leave the extra money out there forever - since that would just create inflation due to the laws of supply and demand (more of something that is out there the less it's worth, right?) Otherwise if the fed does this, it's basically just printing and giving away money for free - if so, how do I get in that line for free money?

Wouldn't it be better to simply leave things alone? Right now people are worried about losing their jobs so they are saving money - socking it away in the bank - and after a while those bank accounts will have lots of money in them that the banks can then loan out.

[jd2408]

The Fed seems desperate to get the American consumer to start spending again. They seem to very much want us to return to a financial, consumer driven, credit burdened country. I am no expert but I feel the American consumer has been forever changed by this mess and will not return to the reckless spending habits anytime soon.

As always, Corporate America is trying their best to help us. Ford Motor proudly announced their new hybrid will get 41 miles to a gallon. Built in Mexico .

Hershey Company is moving most of its production to Mexico and may pay a wage of $ 2.50 per hour.

I voted for President Obama believing in his message of change. So far I have not seen it.

It is early yet. I hope and pray it will come.

[johnb8888]

Like lowering the rate banks can borrow at will lower credit cards rates! Ha!

And low mortgage rates are nice until you realize you need to have some equity, most of which just washed away like a sand castle at high tide.

All for the Great God Raygun's mantra of "deregulation".

Since the U.S. government will never have the balls, under either Dem or Repig, to take on the Walstreeters and bankers, the only possible solution is to avoid Walstreet and banks--use credit unions. Do private microloans. don't spend on credit cards.