WASHINGTON — Any more stimulus spending by President Barack Obama and Congress is dead, after this week's election blowout by the Republicans. Yet, Federal Reserve Chairman Ben Bernanke's "Hail Mary" pass to pump $600 billion into the banking system is really stimulus spending under another name.
The Fed won't be spending taxpayer money or borrowing from China. It will be doing the electronic equivalent of creating dollars out of thin air. The central bank will then use the new money to buy longer-term government bonds. The Fed's plan will initially increase the supply of dollars held by banks, hopefully spurring more lending.
If all goes according to Bernanke's script, the bond purchases – $75 billion a month for eight months – should force down yields, taking with them interest rates for homeowners, consumers and businesses. It should also help make U.S. goods more competitive overseas and keep alive a stock market rally that began in August.
All of that should boost economic growth, help the ailing housing market and encourage more hiring.
It may not work. And there are risks.
Printing so much new money could lead to runaway inflation down the road. Lower interest rates could also produce speculative bubbles in the price of oil and other commodities and in risky high-yield investments. It could also take pressure off the White House and Congress to confront the long-term deficit crisis.
Thomas Hoenig, the president of the Federal Reserve Bank of Kansas City, calls it "a pact with the devil." He was the only dissenter in the Fed policy committee's 10-1 vote for the Fed effort, also known as quantitative easing.
rest at http://www.huffingtonpost.com/huff-wires/20101104/us-the-fed-s-stimulus/
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