Tuesday, September 29, 2009

A New Bubble Of the Fed's Creation

As it was printing all that money, the Fed was also lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn't change was the interest rate banks charged everyone else. As a result, "spreads" between what banks pay for money and what they charge are near record highs.

So who is borrowing? By and large, it's not households and businesses, which are reluctant to borrow during a recession. Rather, it's hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.

...Alan Blinder, the Princeton economist and former Fed vice chairman, may be right when he says it's too early for the Fed to begin raising interest rates. The economy is still too weak, he says, the threat of deflation still too real.

But it is certainly not too early for the Fed, at the conclusion of its meeting Wednesday, to warn Wall Street that its current policies cannot, and will not, continue indefinitely -- particularly if the money is used to inflate bubbles rather than finance real, sustainable economic growth.

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