Ben' s Big Mistake!

The Federal Reserve has been buying its own treasuries from banks. How much, where and when is up to the Ben and his buddies, and a limit is currently set for $600B.

The philosophy is this: If banks have more cash because they have reduced their Treasury Holdings, then they will lend more money. Businesses can expand and this will decrease unemployment. And the economy will improve.

This has resulted in an increase in long term interest rates (and an increase in banks profits).

A big part of the very limited recovery so far was due to low long term interest rates. It allowed homeowners to refinance and get a lower interest rate allowing more money for other things.

Leaving long term interest rates low is more likely to help the people on a residential street, while increasing long term rates is more likely to help the people on High street.
That is assuming the banks lend the money! They will not, in the way Ben hopes and that is the one flaw in his thinking. Also I am not even sure he thought the whole thing out. Did he fully realize that long term interest rates would rise?

Before any else is said, lets get one thing straight, there will be no grand recovery in the general economy without an, at least, modest recovery in the housing market. The allows the necessary mobility of people for the general recovery to occur.

And this was beginning to happen! The government tax credits allowed a lot of old inventory to clear the market. And low interest long term rates allowed people to refinance (even those in the 6%+ range. Two of the three wheels supporting the market have gone. Now there is only one wheel propping up the housing market and that is still low, relatively speaking, long term rates.... naturally compared to history. So we have gone from three wheels to one.

Sorry Ben, remember that mobility is the key. You might make it with three wheels on my wagon, but the laws of economics are defied with only one wheel. So that is a partially wasted $600B.

Think of like this: Mr Jones living in Florida (example),recent grad, married, etc cannot take that job in Illinois because he is going to lose $50,000 or $100,000 on the sale of his current property! Keeping long term rates low is the key to the general recovery.