Like something caught between being the Great Oracle and the Wizard of Oz (ignore the man behind the curtain), on Tuesday, the Fed met and has now spoken about the lousy economic numbers of late last week and the general morass in which we find ourselves. The Fed announced Tuesday morning, that it will use the proceeds from the Fed’s own gigantic (and getting bigger all the time) mortgage-bond portfolio to buy long-term Treasury securities.
So what, you ask?
The dismal economic performance of late (can you spell DoubleDipRecession) has, in the Fed’s inscrutable judgment, required it to now continue, as it has done since 2007, pumping vast amounts of US Dollars into our gasping economy, to prop up the housing and financial markets.
So, are we building a giant Potemkin Village out of our economy?
And, what, pray tell, you ask, is a Potemkin Village?
Let’s go back to the Russia of the late 18thC – Empress Catherine II visited Crimea in 1787 and, to prepare for her visit, Russian Minister Grigory Potyomkin, great hero of the Crimean military campaign had a plan for fooling the Empress into thinking that the newly conquered area was incredibly valuable, in order to boost his ‘street cred’ or standing, with the Empress and her court. Because the reality was that the banks of the Dnieper River were anything but impressive, Potyomkin constructed hollow Hollywood-style facades of entire villages along the banks of the river that the Empress would float past, to impress her. It apparently worked. Caveat: some say this whole story is made up, fantasy – but, the name Potemkin Village lives on.
So, our housing and financial markets are being supported by the Fed’s money, intensively buying great gobs of various Treasury paper in order to make all things economic seem better than they really are. One wonders how bad it truly must be if this has been going on since 2007 and we are now approaching ¾’s of the way through 2010, and, even worse, how long this must continue in order to give the Potemkin Village appearance that everything economic is just going along swimmingly. It obviously is not.
So, how bad is it?
In March [boxcar number alert!] the Fed bought some $1.25 Trillion (with a "T") in mortgage-backed securities, plus (you definitely need the bigger Costco pallet) yet more, another $200 Billion in debts, mostly owed by those loveable and quite broke twins, Fannie and Freddie. The plan, buoyed on talk of a recovery gaining hold, was to gradually pay these down by now, but, in view of the misery continuing unabated, the Fed announced that it will reinvest those payments on principal into longer-term Treasury securities. And, as those mature, the Fed would continue to roll over its other Treasury securities.
That’s a whole lot of money tied up and continuing to be tied up in maintaining this financial Potemkin Village. And, those "mortgage-backed securities," would they include some of that derivatives junk that nobody can value because the security for those mortgages, along with the whole real estate market, has gone to hell in a hand basket, or better yet, has drowned in a sea of foreclosures? The ones that the big banks still won’t come clean about?
The Fed also left the "benchmark short-term interest rate" in the zero to 0.25 percent range, where it has been since Dec. 2008. We aren’t worried about inflation, despite all these Treasury funds sloshing around; it’s deflation we are really worried about. Not too many dollars chasing too few goods – it is goods worth less and less as time goes on. By the time you read this, we will know Wall Street’s reaction as I am writing this as the news just came over the wires – fiber optic cables, to be perfectly accurate about it.