Fed gets the money flowing

Scripps Howard: Economists have been calling for the government to be bigger and bolder in tackling the recession, and this week the Federal Reserve Board complied.

To keep interest rates low and pump more money -- a lot more money -- into the mortgage and consumer debt markets, the central bank announced that over the next six months it will take the rare step of buying up $300 billion in long-term Treasury bonds.

And it also announced that it would buy up $750 billion in mortgage-related securities in addition to the $500 billion worth it is already buying. In addition it will double to $200 billion its planned purchases of Fannie Mae and Freddie Mac debt.

And next week it will formally announce, and maybe expand, a planned $1 trillion infusion into car, education, consumer and small business loans, and credit card debt.

And government interest rates will remain low to encourage lending transactions -- 0.5 percent for the Fed’s principal interest rate and 0 percent to 0.25 percent for the overnight rate among banks.

Printing presses

And where, you may well ask, is all this money coming from? “Out of thin air” is perhaps a little strong, but basically the government is going to run the printing presses.

Normally, this would be a recipe for instant inflation, but high unemployment, weak consumer demand and low factory output will prevent that. Clearly, the Fed thinks it’s worth the risk to achieve its goal of ending the recession this year and getting the economy back on the road to recovery in 2010.

And that’s when the tricky part comes in. At the start of the financial crisis last summer, the Fed had just under $900 billion in assets on its books. That will rise to more than $3 trillion and some believe perhaps as high as $5 trillion.

With all that money sloshing around the system, a robust recovery could be a prescription for a classic inflation spiral -- soaring prices as too many dollars chase too few goods and services. Just those fears caused the dollar to weaken on the Fed’s announcement.