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Will the Federal Reserve Pay You to Borrow Money?

As strange as that sounds, many moons ago I mentioned that the Fed, led by Ben Bernanke, would love nothing more than to pay people to borrow money and a study released yesterday proves I was right. The fact is that Big Ben wants inflation so bad that he would be willing to pay others to borrow money if he could actually do that.

The study that was released yesterday morning stated that the Federal Open Market Committee (FOMC) was presented with the suggestion that the optimal interest rate would be –5%. That’s right, supposedly the best interest rate would be to pay others 5% to borrow money, despite the fact inflation is near 2%, so the net loss on money lent would be around 7%. That’s OK though, they don’t have to take the loss, they just pass it on to every American with increased taxes down the road. Oh, and don’t be naive, those higher taxes will be coming, it is just a question of when.

Nevertheless, since the Feds know that they cannot go negative and they are already sitting near zero percent, they recommend keeping up, even stepping up, other unconventional policies that have the same effect as negative interest rates, such as the announcement of the stepping up of MBS (mortgage backed securities) purchases to $1.15 trillion. The research the Fed was acting upon actually suggested an even greater amount, but the Feds decided to play it “conservative” as one Fed governor defined it.

Why am I bringing this up right now?

Easy, the FOMC is meeting again as this is posted so be prepared for more of these "unconventional” policies to be released. What worries me is that Big Ben himself already stated that inflation will be an issue after the next FOMC meeting, so we are likely in for a shock as the Fed makes their announcement tomorrow. There is even talk that the Fed may up their MBS purchasing yet again. Remember that the Fed’s Policy Statement has a much greater impact on mortgage rates than their actual decision, so I will give you a rundown once it is released today at 2:15 over at Florida Mortgage Report.

Posted by Florida's #1 Mortgage Planner on 04/29/2009 06:05 AM

Comments (6)

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6 Comments on Will the Federal Reserve Pay You to Borrow Money?

APR

All I can get from Bernanke's statements is that he's bored and wants something to do.

More than anything the FEd hates inflation . So I cannot agree with you. But the policies enacted may lead to inflation that is true

Robert,

"play it "conservative"

Brings to mind "a wolf in sheep's clothing" or maybe the wolf in "Little Red Ridding Hood." People don't understand the system, they are just as vulnerable as the sheep unable to recognize the threat! But, they should remember the other wolf's answer! When ask why he had such big teeth!

"...they don't have to take the loss, they just pass it on to every American with increased taxes down the road. Oh, and don't be naive, those higher taxes will be coming, it is just a question of when."

Good information!

Bill

You know inflation can kill our mortgage rates. So the simple word hurts me inside (haha). But I like your statement about taxes - really, how can we push it under a rug and think the day will never come to "make things right". Its like polution or hidden "sins" - there will be a day, it is simply a matter of sooner or later, but there WILL be a day when the hammer hits.

Lenn - I doubt he is bored. I think he is running out of options on how to create inflation and release the credit dogs of war on the American public to get the economy going again.

Charlie - The Fed hates deflation and will even create hyper-inflation to avoid it. As far as hating inflation, they actually love it, though in "moderation". Just look at this quote from Big Ben himself in a speech back in 2002...

“…the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Still think Big Ben doesn't like inflation?

Bill - As always, you find the little "hidden messages" I input and highlight the realities. Thanks for the inputs as always.

Steve - Snuck that comment in while I was commenting. Your right on the higher taxes being inevitable. You are also correct on inflation driving mortgage rates higher. Why do you think the Fed stepped up their commitment to purchasing mortgage backed securities? That is also why there is talk about stepping up that commitment even further, creating the term I coined many moons ago, the "mortgage rate bubble".

They know that market forces will want to drive mortgage rates higher, thus they have to purchase more and more to artificially maintain steady mortgage rates. They don't really care about driving mortgage rates down to 4.0%, or even 4.5% as the media makes people believe. Rather, they are simply trying to maintain steady mortgage rates in a vane attempt to stimulate the housing market, which isn't working as the data shows. At the same time, government spending, increased Treasury supply, etc. are all acting to the selling pressures on MBS, and thus rising mortgage rates. This afternoon will likely hold a big surprise, the question is what.

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