Tuesday, October 07, 2008

Fed Plans To Buy Commercial Paper

The Fed has launched so many schemes now to reignite inflation since the beginning of the economic downturn and financial crisis last year that I have lost track of how many they have been. Can anyone remember how many schemes they have launched?

Anyway, the latest one, announced today calls for the Fed to buy commercial paper, in order to reduce the widening yield spread between Treasuries and commercial paper.

This is indeed a smart move in the sense that if you want to increase the size of the commercial paper market and lower yields, there is no better way of achieving it then by buying commercial paper directly.

This will likely not be the end of it as the financial distress will likely continue. This in turn means that the Fed will launch even more schemes of this sort and so continue to expand its balance sheet.

The end result of all of this will likely be that the U.S. government directly or through the Fed will end up socializing an increasing share of lending to anything perceived risky, while the private sector (and foreign governments) will increasingly only save in the Treasuries used to finance these schemes. A nearly completely government controlled system in other words, differing from a socialist system mostly in that it provide subsidies for a few private financial institutions.

2 Comments:

Anonymous Anonymous said...

TAF
TSLF
PDCF
TARP

12:09 AM  
Anonymous Ralph said...

Isn't this a good move by the US Fed?

Given the inability or unwillingness of banks to roll the debt of sound businesses this should save some of those businesses of closing needlessly.

There must be some down side results to this I assume; but without CP, isn't the real economy going to hit a wall very quickly (weeks).

At the very least they are buying some time.

12:29 AM  

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