Topic: FED should buy stocks instead of government bonds (Read 2149 times)

The Fed DID buy stocks - the $1.3 trillion 'given' to banks was mostly just preferred stock purchases. LiberDumbs/GoldLover/FEDHater ignorami tend to forget or ignore this fact about the stimulus package.  Most government stock holdings have been sold now at a net profit to American taxpayers.  Stock purchases aren't necessary right now, since the financial system is stable and it's really only a tactic of last resort.  Many companies are posting record profits, but there won't be much demand for equity from the average investor for a couple of years, since a lot of people got burned super heavily in 2009 by selling@bottom.

-Foo

Stock ownership  is company ownership.   There is a name for they types of  governments that own businesses and it is not   supposed to be the system the US uses.   In fact I think allowing the government pensions to buy up voting stock already perverts this too much and should be banned  instead.   The whole bailout of GM and such was just insane the way it was done.

Too many aspects I don't know which one to discuss first, but it is very interesting to be a bitcoin miner and looking at all these problems from a money provider point of view

In general FED do not want to provide more money (inflation thus destroy the currency credibility), but in a recession they would more care about the deflation (the total money supply never reduced, but the money in circulating dramatically reduced due to panic saving and tougher loaning condition). But since all the monetary action have a delaied effect, they are also careful to prevent the inflation before it worsens (in the latest FED meeting, 3 of them already started to worry about the inflation)

Saving's effect illustrated:
In mystisland, A catch 2kg fish per day and exchange for 2 shells at market, B pick 2kg fruits per day and exchange for 2 shells at market, and both of them using 2 shells to buy 1kg fish and 1kg fruit from market

As long as they are doing this, the total demand for currency is 4 shells (maximum 4 shells are needed to faciliate all the trades everyday)

Now A start to save, he save 1 of the shell of his income and use only 1 shell to buy 0.5kg fish and 0.5kg fruit, the market will accumulate 0.5kg fish and 0.5 fruit and lose 1 shell

The second day after A started to save, A and B come back to market to sell their 2kg fish and 2kg fruits, just find that market now have only 3 shells... Then the market (central bank) have to create 1 more shell to facilitate the trading

If A continously to save 100 days, then market will create 100 shell and accumulate 50kg fish and 50kg fruit (Of course these fish and fruits are not consumable after 1 day, so they were trashed)

So, with saving in action for 100 days, the total money supply of the island will be 104 shells, magnitudes higher than it normally requires (4 shells)

And later, when A start to spend these 100 shells, he will bid up the price of everything on the island

What gives value to the dollar is the goods and services you can purchase with it. If the dollar is not "credible", less people would will it.

Well, it seems to me that Bernanke has no interest in avoiding inflation, on the contrary he's avoiding deflation at all costs, even the risk of hyperinflation.
Whatever quantity of debt the market destroys to burst bubbles, it is equaled with M0 to avoid deflation. But the banks can multiply the base 10 times. They're not doing it now, but they can.


That's why I cannot understand how it should demand something specific from the market.

I don't remember any prove of that quote nor I heard a definition of "effective demand" but I don't think that many people in this forum think the statement is true.
Also, what kind of saving are you talking about? Only hoarding or also lending/leave your money in your bank account so it can be lent?
Are the banks the ones who are "saving"?

Since it doesn't matter where the resources are put, we just need to move them, maybe you agree with Paul Krugman.


If they want to rise taxes and cut spending is precisely to pay the interest on the debt they acquired to "stimulate the economy".
And if businesses don't have cash revenue, I wonder where all the printed money is and why they rise prices.
Why the bread is more expensive each day if the baker is so desperate for cash? Isn't he supposed to offer more bread for less cash?

It's the credability give dollar value, and that credability depends on how good FED is at creating/spending dollars

If you are the FED chairman, you want each dollar you create (and spend) will corresponding to the increase of goods/services traded in the whole economy. In this way, you can avoid inflation

And FED can not consume anything directly (Actually, they do not have the right to consume since they are just money printers), so they have to sell what they bought to others to get the money back, thus complete a cycle of the money flow


I mentioned Keynes since he have a very good description of "effective demand is not enough because of saving action", which I also proved after a number based analysis of a simple economy model

I agree that in general private sector have higher efficiency than government. But in a post-recession era, private sector tends to save more and invest less (due to uncertain economy conditions/dropping demand/lack of cash reserve, etc...). At such a time, only government can do investment without hesitation (backed by the FED), even those investments are bad, it will stop the downward spiral, and will buy private sector some time to accumulate enough cash and restore confidence to invest again

But if in such situation government can not get the enough money from the FED to drive those spendings, the total recession could be longer, since even in a very easy business condition like low interest rate and low tax, cash reserve is still low for many private companies, they will continue cost cutting and save until they had enough cash

But what gives value to the dollar is people using it, not some magic property that the feds puts in it.


Yes, I can sell my bond for whatever I want: euros, gold, cows, ...whatever I accept for them from the buyer.


But why the fed is worried about secure investments? No mather how much they lose, they can print more. Why did they bought the toxic assets then? I think the reason the fed is buying treasuries is because no one else wants them at that interest.
Bonds are pretty risky right now. Not because the risk of default, but because of the inflation risk. Sure they can print a ton of usd and pay all the debts, but if you pay your debts with hyperinflated dollars, your lenders are going to feel scammed the same.


But we prefer the private sector to invest rather than the public one. The public sector doesn't have the same incentive to invest wisely: if the investment is bad, the whole country will pay through taxes/ inflation.
We know who Keynes is, but I suggest you to not use an appeal to authority with him here.

Unfortunately, as long as we have "ownership" concept, FED will be the owner of newly produced money (And they can destroy money too)

The bond is the debt for US government, but you can not buy them if you do not own the money

A gold miner own the gold that he mined, so does FED. The reason they do not buy other things is because government bond is most secure investment. But if government bond can not hold its AAA rating, some of the companies might appear more attractive

Bond buying is just a way to raise the total investment, as suggested by Keynesian economics

Yes, they solve a few problems. For example, they solve all the problems associated with central banking by removing central banking.


I disagree. Numbers can be helpful to explain economic concepts in a simpler way, through examples. But economic statements must be true for any numbers (or you have to specify the ranges).


The fed is the biggest end consumer? What is it suppose to consume? Bad investments?
The fed only buys debt. What resources do they need to run a printing press? C'mon.

The biggest criticism about austrian economists is that they described lots of problem, but solved none (Just wait until the worst happens and then it will correct itself? What if the worst really happened and it does not correct itself?)

It's difficult to discuss economic without numbers.  10% income debt and 1000% income debt are totally different thing. Without numbers any kind of talk is just pure talk and not convincing at all

A simple view: FED is the biggest end customer, if they start to buy, everyone will make money, if they buy too fast - inflation, if they buy too slow - deflation

@fiatpirate

I think the fed buying stocks is a terrible idea, you don't have to convince me.
I haven't read "The Jekyll Island monster" book but I know the story. For example, it is in "the money masters". The documentary is interesting but I don't like the conclusions (going back to greenbacks issued directly by the government). Money should be a free market.
I pretty much agree with the austrian views but I think their theory of interest is not correct. I prefer the "free money theory of interest" developed by Silvio Gesell.
I guess I'm an austrian-gesellian hybrid. Kind of free market anti-capitalism anarquist. I think the basic interest on money (not the risk or the inflation premium) is the source of capitalism, not free market by itself.
If in a free market we use a money without interest, capitalism is gone (capital yields would drop to zero like other sustained profits do). Probably business cycles too.

Jjtimon, You are right. The Fed does not practice fractional reserve banking (the Ten to one stuff). Instead, they loan to banks who are allowed to practice Fractional reserve banking.

Now regarding the Fed directly buying stocks... Very bad idea. The last thing we need is a front organization for the private banking cartel creating money to purchase parts of other companies.

Even if you subscribed to the idea that the Federal Reserve is a government run institution (which it is not - it is sort of a hybrid-ish monster), it would still be a bad idea for government to buy up parts of companies. This would be a defacto move from socialism on the part of government.

Since the Fed is actually a government protected private organization (see The Creature from Jekyll Island book), this would be akin to a fascist (state controlled expansion and control of industry) move in US government policy. This is a road that may have small "advantages" early on, but has grave consequences if pursued to its ends.

In my understanding, when the fed buys 1B in bonds, the government then spends this 1B in bonds and the money enters the economy.
The bonds are the "reserve" for those 1B.
When the fed lends to commercial banks 10B, the "reserve" is an IOU from commercial banks stating "IOU 10B plus interest". But if the inflation is equal to the nominal interest, then the real interest is zero.
The fed doesn't use fractional reserve, because all its "reserves" are always debt .
You talk like if creating price inflation was a hard thing to do, but is the simplest thing in the world. Is the government of zimbawe made of geniuses because they reach hyperinflation?
No.
M * V = P * Q
You increase M, P will increase. Period.
Creating price inflation is just as easy as print (creating monetary inflation).

Fed buys bonds = no price discovery on bonds

HFC Algos front run and buy shares = no price discovery on stocks

Private Fed now monitezes over 70% of US debt = basically a default since in buying a US bond, you end up being paid back in monopoly money.

Wonder why the debt ceiling needed to be raised to avoid a debt default? They just needed to borrow more money to pay back what they had already borrowed = Ponzi Scheme.

However, as long as the people at the top don't lose money (they won't since they get fist dibs on the "hot money"), this madness will continue. Expect to lose purchasing power, also expect the economy to get *worse* due to **malinvestment** (no real price discovery to know where the money/investment needs to go).

Basically most of the West are now running a Ponzi Finance - crony capitalism system (command/socialist if you prefer) style of "economy". This is utter BS, we're living under a financial Oligarchy or Plutocracy. In Europe they are now talking about setting up a Pan-EU economic system run from Brussells (don't let a good crisis got to waste.....). Hey in 4-5 years you get to choose between 2 preselected establishment turds who have no power to do anything (even if they wanted to...). Enjoy the shit sandwitch, there's dog poop or cow poop the "choice" is yours!

Oh good.  It's about time those big corporations get a bailout!

+1 

In my understanding, FED first produce 1B money to buy bonds, and these bonds will become FED's reserve and enable FED to loan 10B money to commercial bank at 0 interest. Commercial banks are happy to borrow at 0 interest (free money), but they have a difficulty to loan out these money due to many of the companys already scared by financial crisis and are not willing to take loan due to uncertain business condition

Why would you borrow to hoard?

EDIT: And you were talking about the fed buying bonds, not lending.

Any kind of investing involve certain degree of risk, in a post-recession era, people are not risk taker, they'd rather hold the cash. If you just been hit hard by a financial crisis and many of your investments are wiped out in one night, then Bernanke print 50B USD and lend it to you, will you just save it and spend it carefully, or spend it like crazy? (I think if you spend it like crazy, we are out of recession then)

What? So you're telling me that if bernanke prints 50 Trillion USD and puts them in stocks he's not going to create price inflation?
Note that monetary inflation is just that, printing money.
Also, won't the savers use a better way of saving (say hoarding goods, investing or lending) than a currency that is being printed at an exponentially growing rate?
Will the sellers of stocks just keep the newly created money or spent it in anything else?

Printing more money must be coped with increasing demand to make inflation possible, only printing money will not create inflation.

In a recession and post-recession era, many people are saving, excessive money supply will simply convert to savings, thus not pushing any price up. Only after they have accumulated enough cash, they will start to feel safe and spend, then inflation will start to appear

Speculation will also cause inflation, for example the gold, but that is more controllable if banks do not provide gold backed loan