Fed helpless in its own crisis - saving the markets at the expense of the economy

[Dover]

I posted the Pt.2 portion of this Asia Times article (look on this forum's page for it).
This is Pt.1 Both parts are quite long, but well worth the read.

Page 1 of 3
THE ROAD TO HYPERINFLATION
Fed helpless in its own crisis
By Henry C K Liu

After months of denial to soothe a nervous market, the Federal Reserve, the US central bank, finally started to take increasingly desperate steps to try to inject more liquidity into distressed financial institutions to revive and stabilize credit markets that have been roiled by turmoil since August 2007 and to prevent the home mortgage credit crisis from infesting the whole economy.

Yet more liquidity appears to be a counterproductive response to a credit crisis that has been caused by years of excess liquidity. A liquidity crisis is merely a symptom of the current financial malaise. The real disease is mounting insolvency resulting from excessive debt for which adding liquidity can only postpone the day of reckoning towards a bigger problem but cannot cure. Further, the market is stalled by a liquidity crunch, but the economy is plagued with excess liquidity. What the Fed appears to be doing is to try to save the market at the expense of the economy by adding more liquidity.

The Federal Reserve has at its disposal three tools of monetary policy: open market operations to keep Fed Funds rate on target, the discount rate and bank reserve requirements. The Board of Governors of the Federal Reserve System is responsible for setting the discount rate at which banks can borrow directly from the Fed and for setting bank reserve requirements. The Federal Open Market Committee (FOMC) is responsible for setting the Fed Funds rate target and for conducting open market operations to keep it within target. Interest rates affects the cost of money and the bank reserve requirements affect the size of the money supply.

The FOMC has 12 members - the seven members of the Board of Governors of the Federal Reserve System; the president of the Federal Reserve Bank of New York; and four of the remaining 11 Reserve Bank presidents, who serve one-year terms on a rotating basis. The FOMC holds eight regularly scheduled meetings per year to review economic and financial conditions, determine the appropriate stance of monetary policy, and assess the risks to its long-run goals of price stability and sustainable economic growth. Special meetings can be called by the Fed chairman as needed.

Using these three policy tools, the Federal Reserve can influence the demand for, and supply of balances that depository institutions hold at Federal Reserve Banks and in this way can alter the federal funds rate target, which is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight. Changes in the federal funds rate trigger a chain of effects on other short-term interest rates, foreign exchange rates, long-term interest rates, the amount of money and credit, and, ultimately, a range of economic variables, including employment, output, and market prices of goods and services. ...>

http://www.atimes.com/atimes/Global_Economy/JA26Dj04.html

[Harkpark]

1. You mean at the expense of your kids

Money need to come from somewhere you know.

[leftofthedial]

2. how come the "free" market rules

until it starts to decide that most stocks are not worth their current value

then it needs subsidies


the whole thing is a con game

[jimlup]

3. "Free market" is only a code for...

Screw anyone who isn't in the club of wealth investors. The US isn't close to a "free market". Massive Government intervention in the economy is assumed and factored in by the "market". Free market capitalism is a myth for the consumption of the naive.