Monday, December 15, 2008
Money creation finally here
Last week, the Fed took a "quantum leap," according to George Goncalves, the chief Treasury and agency strategist at Morgan Stanley. Instead of swapping assets in the banking system, the Fed started buying them. The Fed bought $5 billion of Freddie Mac, Fannie Mae, and Federal Home Loan Bank corporate debt. The New York Fed's website says the purchases are being "financed through the creation of additional bank reserves." The Fed has finally started to create money out of thin air. The market didn't flip out. And the strategy worked. The average rate on a 30-year fixed-rate mortgage fell from 5.97% to 5.53%... the largest weekly drop in 27 years. Now that the Fed sees how successful this strategy was, we can expect the government to continue with it.