Saturday, May 23, 2009

Fed Corporafornication Grows


The Federal Reserve's Vice Chair indicated the central bank would buy larger amounts of financial instruments. Bloomberg reported:

The Fed is in the process of buying $300 billion of long- term Treasuries through September, as authorized at the March meeting of the Federal Open Market Committee. Policy makers also at the time more than doubled planned purchases of mortgage- backed securities to $1.25 trillion this year and boosted federal agency debt purchases to $200 billion from $100 billion.

That totals $1.85 trillion, most of it corporafornication. Treasuries and agency debt are new, thus they can impact the economy. How much mortgage-backed securities are new vs. legacy assets? They don't say. Here's where things get less clear.

Purchases may increase nominal gross domestic product as much as $1 trillion “over the next several years,” Kohn said in a footnote to his remarks.

GDP fell from $14.4 trillion in the third quarter of 2008 to $14.1 trillion in the first quarter of 2009. Trillions in interventions occurred during this period of GDP decline. Yet, GDP fell.

Alan Blinder, a former Fed vice chairman who is a Princeton economics professor, said Kohn’s estimate of the effect on GDP from the mortgage-bond purchases is “believable.”

“It was supposed to reduce the risk spread between mortgage rates and other rates, and I think it has,” Blinder said in an interview. “You get these multiplier effects” on the economy from spending on housing, said Blinder, a panelist with Kohn at the conference.

You get these multiplier effects? I expected a little more logic to the estimate.

Kohn reiterated his view that the U.S. economy “is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households.”
Let's say GDP grows a trillion over the next few years. How much of that is inflation? How much is hyper-inflation?