YEAH! INFLATION! YEAH!

Barry the Bank Manager can suck it.

@Ingram81: WTF is with this privatizing the profit and socializing the risk crap...

The logic is that by making credit easier, and by reducing the yield on treasuries, "it will make it more likely" for banks to loan money to everyday customers.

I'm not a macroeconomic type person, but it raises a few questions in my mind. (And good answers?)

1. You have to know those banking types are creative. Can't they find a better investment some other place? Say, overseas? Anything preventing them from investing in foreign government securities? It just doesn't seem like their only option is treasuries, or US bank customers.

2. Also, if we're dropping the rate on the treasuries, aren't we cutting off any further incentives for foreign investors to come in and buy our treasuries (China), which has been used to finance the wars in Iran and Afghanistan? Who will want to keep on financing US debt if the yields are so low? Are we cutting off the US government's access to capital?

3. If banks have been buying 10 year treasuries at 2%, wouldn't that imply that banks expect inflation to be very low for the next 10 years? (Actually, I don't think so, but I thought I'd ask.)

4. Aside from the quantitative easing, isn't the 0-0.25% interest rate (a catchy way not to say 0%) a very thin veil for giving near risk-free profit to the major banks? 0% interest is, in itself, a bailout, unless we go into deflation, right?

@mantari: One more note regarding Treasuries...

My ARM is set to change in June (5/1). The current "teaser" rate is 5.125%, and until 2008, the reset would have made it higher--as you would expect with an ARM.

However, since my index is the 1-yr Treasury plus 300, I will actually be going DOWN more than 100 basis points. This can't be good for bank profits, even if the cost of funds is down. It's weird that my ARM reset is going to be much cheaper than going out and getting a new mortgage.

@mantari:

1.) Correct. Though banks are obviously under political pressure to lend domestically. And virtually every other investment seems riskier than the US right now - from BRIC to Eurozone.

2.) Yes.

3.) No. They're under no obligation to hold those assets to maturity.

4.) No, not even close.

@The Name's Ash78, Housewares:

If you don't refinance out of that arm soon you're going to get hurt.

@ADismalScience: I assume you are being facetious (or just didn't read my post). My payment is about to go DOWN when it resets, assuming Treasury rates don't magically spike in the next 6 months.

Are interest rates going to zip back up when the inflation hits?

This is just another hit of the monetary cocaine that got us in this mess that we find ourselves in. When the Fed lowered rates to 1% back after the last bubble burst,everyone had to find a better return for their savings and investments. Enter shit mortgages rated AAA by the crooks/incompetents at the rating agencies and you have high octane fuel for a hell of a runaway speculative frenzy.

How bad was it ? I personally talked to a couple in Fort Lauderdale that had deposits in on 8 condos that were not even 40% complete that they planned to flip before the first payment was due and pocket big $$$ while using OPM (Other Peoples Money). Worked great until the music stopped and they were stuck with 4 of those condos .

How bad was it ? Go to WSJ.com and take a gander at the $103,000 house in Avondale AZ that was condemned as being unfit for human occupancy.These people (and their lenders) are now being bailed out with the money you will earn this year.

How bad was it ? IndyMac , Washington Mutual , National City , Lehmann Brothers , Bear Stearns, and hundreds of smaller banks NO LONGER EXIST. They have been put out of business by the greedy bastards on Wall Street that fed this mess.

Okay, here we are again. The Fed is lowering interest rates to unsustainable , unrealistically low levels because....Because the political pain has gotten too great. What will be the speculative bubble that inflates this time ? Treasuries ? Stocks ? Gold ? With too cheap money , you can bet that there will be another bubble expandng soon .

@nytmare: Yes, to levels not seen in decades. When we get out of the recession inflation will hit big time and interest rates will need to be raised to very high levels to compensate. I would expect the return of double digit interest rates.

Sounds more like it ought to be the Grocery Shrink Ray.

@mantari:
1. If the dollar is being devalued, then it is unlikely that they will invest overseas. In order to make foreign investments, bankers will have to buy foreign currencies. With the dollar suppressed, this will be very expensive for them. Then, when the dollar bounces back, he will lost a good deal in the exchange of foreign currency for dollars. The exchanges will likely cause a net loss in money unless he sees a huge return to his investment.
2. Again, here exchange rates will be foreigner's friends, but it will likely discourage foreign investment. However, it will encourage foreigners to buy American goods since they are now cheaper. While there may not be investment to cover the deficit, the government should pick up more tax revenue as foreigners buy American goods, increasing the US GDP. (note that it likely won't balance out, but every plan has downsides).
3. No, they probably will try and dump the bonds at some point. What's going to be an issue is a while from now the Fed will have to come up with a creative way to take the new money out of circulation as this will likely lead to high inflation once credit markets get rolling again. Remember that what they're doing is basically adding hot water to ice. For a while you'll have a adequate amount of water, but when the ice (frozen credit markets) melts you will have way too much water. This excess supply of money will cause inflation.
4. It's a very loose interpretation of it, but I guess you could say that. Also, 0-0.25% isn't a thinly veiled 0%. If you've done some reading, the Fed chose to target this band because it would be very difficult to peg 0%. It's simply being more honest about what they expect to see.
In reality, I think the Fed is trying to buy time until Obama takes over and is able to start spending on infrastructure. Quantitative easing is definitely not going to save anything, especially when we're dangerously close to a liquidity trap. This just seems like a way to get some money out there until a better plan is put in place.