The Federal Reserve was widely expected to hold the short-term bank lending rate at between zero and 0.25 percent, so it came as no surprise when it did. The decision to dump money into the economy to try to buy us out of the recession was only slightly more surprising, but the amount — $1.2 trillion — took everyone by surprise. Hoping to lower mortgages rates and consumer debt, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Market reaction
The immediate market reaction was good: the Dow bounced 90 points, the S&P soared, and all market indicators were generally positive. Government bond prices leaped too, since mortgage rates will be going down even further than before. If, and it’s a great big if, this can help stabilize credit markets and get us all spending, the economy may start to climb out of recession this year. But is there a catch? You bet.
Inflation
Some economists — the ones with more than 10 minutes training in economics 101 — say the $3.9 Trillion slated for the budget can’t help but create galloping inflation the minute the economy starts to recover. In fact, inflation may not even wait for the recovery; the dollar took an immediate tumble against other major currencies with the Fed announcement. The Wall Street Journal’s Judy Shelton doesn’t mince words: “How can capitalism find its footing when the monetary foundation is shifting with each new government bailout — each new infusion of deficit-financed government expenditure? American families deserve better than to be punished by wasteful public spending and ruinous inflation.”
More free eco-cash
So you didn’t qualify for freebies from the mortgage bailout? Cheer up — Washington is on a spending spree, and you can get up to $19,000 in upgrades to your house. Expanded tax incentives in 2009 and 2010 for energy-efficient and renewable-energy home improvements include $1,500 in tax credits for qualifying windows, doors, insulation, roofs, heating and cooling equipment, water heaters, and even wood and pellet stoves. You’ll get a tax credit of 30% with no upper limit through 2016 for installing qualifying solar technology, small wind-energy systems, or geothermal-well systems.
AIG again
The House will vote today on a bill to levy a 90 percent tax on bonuses paid to employees with family incomes above $250,000, who work at companies that have received at least $5 billion in government bailout money. Edward Liddy, brought in last year by the government to run AIG, told a House subcommittee Wednesday that the company was contractually obligated to pay the bonuses but added that many of them had already returned part of all of the bonuses. The saga continues.
