In the latest round of government “stimulus” the Fed has announced that it will be buying $40 billion in mortgage-backed securities each month for an indefinite period of time.
The logic here:
- Buy more mortgage-backed securities (MBSs).
- This will in turn increase liquidity available for lending to people to buy houses or possibly other real estate.
- All those people buying houses will then have houses to spend money on and they will spend money at Home Depot and other places, and then the economy will miraculously recover.
The effect of this will be:
- Even less saving going on than is happening now. Why do the lending institutions need more liquidity? Because there are no real life loanable funds in the first place. No one is putting money in depository institutions, for example, because interest rates are at rock-bottom levels, but also because people have no excess money to save. So, the Fed is creating fake loanable funds through the purchase of the MBSs. Much of this will probably be newly-created money.
- It will maintain the focus on consumer spending rather than investment. The idea is to keep people spending on real estate. Thus, less will be spent on business investment.
- People will incur more debt.
We’ve heard for years from some incorrigible economists that what we need is the Fed to pump up the real estate market to get people spending again. Their answer is: more debt, more spending, less savings and investment.
This is what has been happening for years to no avail, of course, and the Fed is now just turning it up a notch. I’m sure recovery is right around the corner.
The definition of insanity/Keynesianism: Doing the same thing over and over and expecting a different result.12:40 pm on September 13, 2012 Email Ryan McMaken