Wednesday, September 1, 2010

A License to Print Money

I've heard a lot of complaints recently about the Federal Reserve, some of it pointy headed econobabble about quantitative easing and interest rates, and some of it Wookie-suit hysteria about conspiracies and Bilderbergs and the Trilateral Comission and so on.

I tend to be suspicious of both jargon I can't understand and large conspiracy theories, but there's something just not right about this story I heard on NPR (I try to keep an open mind) about the Fed's plan to buy up mortgage backed securities. .

The team spent six weeks coming up with a plan of attack, and 15 months actually buying mortgage-backed bonds, all of which came with a government guarantee that they’d be paid back even if the borrowers defaulted.

The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market.
"It's possible I was buying the mortgage on my own house," says Nathaniel Wuerffel. "Very possible."

In the end, they came very, very close to their target: They told us they were just 61 cents short. (In other words, they bought $1,249,999,999,999.39 worth of mortgage-backed bonds.)
The Fed was able to spend so much money so quickly because it has a unique power: It can create money out of thin air, whenever it decides to do so. So, Dzina explains, the mortgage team would decide to buy a bond, they’d push a button on the computer — "and voila, money is created."
Does anyone else feel like maybe it shouldn't be quite that easy to create money?


Atom Smasher said...

I've been re-reading a LOT of Heinlein this last month, so my answer wouldn't be unprejudiced. :)

Anonymous said...

Hey. Where do you think inflation comes from?
Prices don't go up, the value of the dollar goes down...constantly. It's the hidden tax.

Not that you two don't already know this...or most of your readers.

Atom Smasher said...

Wait, if you make more of something its value goes down? [Scooby]Hrrunhh?[/Scooby]


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