The Federal Reserve's announcement that it will sell $400 billion of short-term Treasury securities and buy $400 billion of longer-term government bonds as a way of locking low interest rates and stimulating the economy is a good idea. Unfortunately, it is far from sufficient.
The government should be borrowing at least a trillion dollars at today's very low interest rates and investing the money in infrastructure projects as a way of jump-starting a catatonic private economy. But that idea, of course, is off the table. Republicans would block it, and not even President Obama, despite his newly assertive progressive self, is proposing it.
So financial markets took the Fed's announcement not as a sign that help is on the way but as a sign of just how bad things are.
The Fed didn't really want to do this. Its open market divided 7 to 3 on the move. The more fiscally conservative regional Reserve Bank presidents oppose the central bank's program of buying more government bonds in general.
The fact that the Fed made this decision is being interpreted in financial markets as a sign of deep gloom. Wall Street commentators seized not on the potential stimulus but on the fact that the Fed's move suggested that our central bankers are truly alarmed at how weak the economy is.
One typical comment came in a financial industry "research note" quoted by the Times:
"The initial and follow-up reaction from the equity market is likely the realization that the Fed has little left to offer, that Washington is a mess, and their only hope is to 'ride it out' over a long period of time," said Kevin H. Giddis, the executive managing director and president for fixed-income capital markets at Morgan Keegan & Company.
"This is about to get ugly and there is very little anyone can do about it," he added in a research note."
The conventional wisdom is that nothing can be done to stop the slide into deeper deflation. That's nonsense. But nothing can be done within the bipartisan conventional wisdom.
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