December 11th, 2008
11:42 AM GMT
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LONDON, England - What do you if you're dealing with potentially the worst downturn in the post-war period, and the biggest financial crisis since the Great Depression?

What do you do if your job is to kick-start the world's biggest economy, but your normal tool - cutting official interest rates - isn't enough and you're fast approaching zero interest rates?

What you do is you go to unconventional means, you do what's called quantitative easing. And that's exactly what the U.S. Federal Reserve is doing.

The Fed is firefighting with several emergency programs aimed at easing the credit crisis. They include a commitment to buy $600 billion of debt tied to the housing market, and $200 billion to support business and consumer loans.

But the Fed can throw as much money at the problem as it needs, and has already more than doubled its balance sheet to $2.1 trillion. And that figure could soon rise to nearly $4 trillion, according to analysts.

Fed chairman Ben Bernanke has even been called "Helicopter Ben" after he gave a speech in 2002. In that speech he referred to the economist Milton Friedman who suggested once interest rates have been cut to zero, radical steps may be needed to infuse the economy with cash, and dropping money from a helicopter may be as good as any other method.

The Bank of Japan is the only major central bank in recent times to rely on quantitative easing. It used it to try and fight the economic malaise and deflation that plagued the economy in the 1990s - its so-called lost decade.

When consumers expect deflation they may hold off on making purchases, expecting they will be cheaper in the future, and that in turn only prolongs a recession.

The Fed, knowing what happened in Japan, is trying to make sure the United States doesn't have a similar fate. It has reacted much quicker.

It's still unclear if its strategy will ultimately work. And there are downside risks; all that extra money in the system could at some point lead to a resurgence of inflation.

That in turn could make foreigners less willing to invest in U.S. securities, which would lead to higher interest rates and a weaker dollar. There are also potential consequences for the budget deficit.

But for now, Bernanke and company at the Fed are not thinking about what happens down the road. Instead, they are focused on getting the U.S. economy back on track, and are willing to do whatever it takes to try and make that happen.

Do you think the Fed is taking the right course of action? Do you agree it could be storing up problems for later? I'm keen to hear your thoughts.

soundoff (33 Responses)
  1. Elvis

    The Fed can take any actions now to the extend of dropping money from helicopters all over the US. But the real problem of this economy namely the hidden swaps which until today, no one has the guts to bring forth is very sad indeed. Where's the clearing house for this instrument? Where's the struture to regulate the probable countless duplications of swaps deals? Unless the Feb really acknowledge the causes rather trying to cure the symptoms, the down cycle will drag alot of innocent people. Greedy executives should have been punished instance of praising them of been enterprising people.....

    December 11, 2008 at 12:48 pm |
  2. Dennis

    When after some time the world economy will get out of this slumb, the demand for oil will rise again.
    But with less investing in new oil projects now and production lowered to keep the price up, there will be an astronomical surge in oil prices we cant imagine.
    Our world economy is based on the `cheap` energy of oil. But when this is not cheap anymore, it will be fuel for war.

    At the long run money will be worthless, and will be thrown on the streets.

    Unimaginable? Just wait, its only a few years away..


    December 11, 2008 at 1:12 pm |
  3. Sam in Spain

    I think that you are aiming at the wrong people, the ordinary people like myself have no idea whether they are right or wrong.

    This is a question for the so called experts so you really can't expect the ordinary citizen to make a judgement on totally unknowns.

    Sorry but I have no idea and I don't think that the experts really know either but they have to try something.

    The only thing I would say is that the USA and the taxpayers (normal working people) will have a very serious problem for many years, which of course will effect the rest of the world.

    December 11, 2008 at 1:21 pm |
  4. John Daimon

    The nation needs a Marshall plan to rebuild our manufacturing base. The venue might be an SBA direct loan program targeted to rebuilding our smokestack industries. Currently, environmentally harmful processes are exported to China and the products made there. I personally can't conceive why polluting China is better for our global warming and ozone layer than screwing up New Jersey. It's time to bring these high tech industrial jobs home.

    December 11, 2008 at 2:18 pm |
  5. Mahmoud

    My opinion could be more of philosophical one than a sound economic theory, but here we go...I liken the situation now to a person who just jumped on a scale to try and meaure their weight...the pointer on the scale will go crazy showing all sorts of nonsense..trying to readjust the pointer will do no good when the shock is over and the pointer stabilizes because it will only stop at the wrong point...the damage to the economy has already been done...the economy has been artificially inflated and the big burst led to an artificial deflation due to lack of confidence, making people change their spending habits. Restoring the confidence to the economy and encouraging people to spend is the "natural" way of letting the pointer settle at the right place, will infusing cash into the econmy will just have the pointer end up in the wrong direction when things settle down,hence inflation!!

    December 11, 2008 at 2:30 pm |
  6. earle,florida

    I'm sorry,but the U.S. economy is in free fall ,created by 30 years of anti-regulation. The interest rate cuts will do nothing but exasberate the long-term situation. I'd like to reference (Note: AIG, JP Morgan/Chase, Bank of America, Bear Sterns,etc.) Citigroup (C) the largest US Bank with a debt/equity ratio at 55-60/1 tangible leveraged assets equity! This is a harbinger of disaster worldwide. What does Treasury Secretary (SoT) Paulson/Fed.Chair Bernanke do? They reward Citigroup with a public financed bail-out (Treasury/FDIC) worth $306 Billion Dollars. Now ,I'll remind you that the Sarbanes/Oxley Law was designed to prevent this type of financial chicanery by major firms. The major accounting firms in all good consciousness would/should have sounded the alarm bells.(Note: Regarding De-Regulation,the Ammendment of the FDIC Law 1932-93; the Glass/Steagell Law 1933-1997,was disemboweled)This Bank was knowingly holding "Credit Defaught (CDS) Swaps" worth $Trillions of Dollars(Combined US Banks Composite Q2/08 currently $15.5 Trillion Dollars) and as we all know the entire( commodities,oil,medals, raw product,etc.) world was cashing in on their Insurance/Hedge Policy! Guess who was holding the bag? You got it ,all of the above mentioned ! This is why throwing everything at the US Economy is (in all fairness you can't just blame a few people for this is systemic) sad, for as I've explained, nothing from the "Original TARP Plan" ( just a drop in the bucket of what will be actuall needed) will help the mortgage holders in America, for it's original purpose was to bail-out failure created once again by "Greed",.... P.S. Perhaps the entire world agreeing on a"New World Order/ Political Philosophy" will help prevent World War 3?

    December 11, 2008 at 3:14 pm |
  7. Luz Diaz

    This is a very uncertain issue that only time will tell....
    Most wise thing to do is: adjust- be conservative- be
    realistic about the big change from a more comforting
    way of living to the new trend which we have no idea
    how long it will last .......

    December 11, 2008 at 3:29 pm |
  8. Roberto Serrano (El Salvador)

    The Fed is destroying the value of money while attempting to encourage consumption. Consumers are now a litlle smarter and will not spend just because it is cheaper to borrow. Likewise lenders will not lend for frugal activities (rightly so finally).
    can they do better? yes; drop rates if you wish but only for productive investment activities (like manufacturing) which will create sustainable jobs whose holders will be able to borrow for purchases of manufactured goods, hence getting the ball rolling along the right path.

    December 11, 2008 at 3:34 pm |
  9. Bob

    Wow. Where do you start?

    Okay, let's go back to the 80's. Reaganomics. Trickle down. That got us nowhere. Well not Joe sixpack anyway.

    Hmm. The 90's. I think this is where we realy started getting in trouble. Remember Enron creativity? Wow!

    The turn of the century. Want to buy a house you can't afford? No credit, bad credit, little or no income? No problem.

    Come on people, wake up. Let's make products we all want to have and can afford. I'm not going to spend my hard earned dollars on a piece of junk that falls apart as soon as the last payment is made.

    I wish I had the answer. But I don't. We've just got to get back to basics. I think you all know what I'm talking about.

    December 11, 2008 at 4:22 pm |
  10. sumeet goel

    If government wants to kickstart economy, they would have to give clear instructions to government organisations and all navratnas to flow big orders in the market. Nowdays many companies are going for days shutdown like TATA MOTORS. If indian defence flow orders for themselves then it would not have been the condition. Railways are making so much profit but still our software companies like TCS stopped hiring new professionals. If you see latest railways budget they made big provision for softwares. Why orders are not coming into market?? These government organisations now should work hard to flow orders, why dont they work day and night now when is there turn to throw the ball ?? Our MNC's have got so much reserves in there balance sheet, why govt is not coming up with such lucrative policy due to which these companies spend there reserves in the market. Why govt is not taking care of price rise taking place in electric generating appliances, if u see prices of inverters, batteries, generators prices in last 1 year, it is increased 2.5 times. When there is power shortage why it is not kept at check?? Without power no one can work even in day hours. Govt should give boost to power generating sets, inverters so that large section of working peoples can work. Now a days many peoples dont like working and who wants to work for them no power. Why we made these conditions worst for ourselves??Actualy our economy boom was self demand driven but due to this power shortage we made it worst. Now problem looms on our indian stock markets I see lot of selling pressure from trapped financial institutions due to this market condition. Possibility persists that we may break lowest 3 month level too shortly.

    December 11, 2008 at 4:24 pm |
  11. Peter Kramer

    Earlier unfortunate moves by the FED have now left it empty handed, and there must be a political solution. Cutting losses, cutting war spending, increasing taxes on those who can pay, and careful investment in a infrastructure that does not depend on oil would seem the most promising solution to me. Forget about the benefit of frivolous X-mas spending for the economy, focus on the new oil-free infrastructure, and start now. If you do not, then a new rise in oil prices will put an end to any recovery as soon as it emerges.

    December 11, 2008 at 5:15 pm |
  12. earle,florida

    Interest rates are fine, in fact everything is rosie compared to a recent report I read this morning. The "Depository Trust and Clearing Corporation" (DTCC) which is responsible for all "Credit Default Swaps" (CDS) net payout on Lehman's CDS's were a mere $6 Billion dollars compared to the grossly exaggerated $400 Billion dollars exposure that was bandied about! There should be alot of questions asked, to why they were aloud to fail? PS: Percentage of market related CDS's related to mortgages (residential backed securities/related index products) have less than 1% of CDS contracts currently registered in the Warehouse.

    December 11, 2008 at 6:10 pm |
  13. ben

    The end of the development of infrustructure for the Beijing Olympics was the start of this recession. The spiral effect was that demand for commodities drop resulting into a wave of events. The development projects of the Beijing Olympics did not only fuel the Chinese Economy but also the world-at-large. I predicted this recession to happen back in 2006. What I cant understand is how the Fed and ECB missed it? While the Fed and ECB decide on the interest rate hikes, who among us is allowed to question them for their WRONG decisions? Politics & Money at the highest level is what it is! I hate to say this while many continue to suffer, I am riding high in this recession times.

    December 11, 2008 at 9:01 pm |
  14. Nam(South Korea)

    Interest rate cut is enough, but the collapse of auto bailout bill is bad.

    December 12, 2008 at 7:09 am |

    congress should give every american over 18 years of age, a million dollars and allow them to invest or just do whatever they want.

    if your going to give business, banks, car makers, etc. billions of dollars. give the american people a million dollars each.

    if every american had a million dollars(that money) poverty wouldn't exist and banks would go broke because every one needs a place to keep their money.


    December 12, 2008 at 9:15 am |
  16. Nekodemus Park

    I believe there are actually 2 profound problems to this fiscal crisis.

    1. A global economy doesn't work because any hiccups from any one partner will cause havoc throughout the globe.

    2.Lack of Govt. policies and watchdogs to make sure that public companies do not have this kind of problem.

    The absolute solution is to let it fail and start all over. The idea of bailing out something or someone with tax dollars is absurd.

    I pay taxes under the assumption that the govt. will provide better social systems for health, education, national security, and peace of mind. I don't pay taxes for any govt. body to use as a blank check to go shopping spree.

    Govt.s should be active and not re-active. Hence the problem for all mankind since day 1.


    December 12, 2008 at 9:18 am |
  17. Darwin

    "What if interest rate cuts aren't enough"

    Enough for what? A total recovery by the end of the week?

    Of course theses interest rate cuts are enough, but as always they will take their time to trickle down into the real economy. Some time in the second quarter of next year, people, assuming they have mortgages, will find a considerable increase in the amount of cash they have left in their pockets at the end of each month. I think it's safe to say that there have never been so many people with mortgages as there are now which in turn means that many more people will benefit.

    Unfortunately, the timing of these cuts were left in the hands, particularly in europe, of people blinded by dogma – I always thought they were paid to avert situations like these, not to assert political and financial dogma. I tend to view this situation alike a car speeding towards a brick wall at one hundred miles per hour but not aplying the brakes until it was only thirty yards away.

    I don't accept the view of some of these 'drivers' that they didn't see the wall ahead. I say let's get some people (drivers) in who are more capable. It's all too clear that interest rates have been either too low or too high – of course, it's easy too say that with hindsight, but central bankers are not paid to contemplate hindsight.

    December 12, 2008 at 9:39 am |
  18. Onno Frowein

    Instead of spending billions of Dollars on saving the banks and AIG invest in Fannie May & Freddie Mac so that measures are taken to stop foreclosures. The banks are only sitting on the money and are firing people anyhow.
    Save the American automakers by giving the buyer of a new car from GM, Ford or Chrysler not only a discount but also a high price for his trade-in. This would jump-start sales of American cars and to hell with foreign manufacturers in the USA. They already have received ample tax credits for establishing non-union jobs in the South. What about the 60% American content?
    Finally, Increase funding of SBA loans and support the American dream of entrepreneurship. While living in Connecticut the defence industry collapsed when the cold war ended in 1990 many lay-offs with a lot of know-how was the result. They started new companies as Gazelles in the East and the West.
    The Republicans represent the American spirit of entrepreneurship and are right not to support the bailout of the Big Three. But they should not have supported the massive bailout of the banks. These billions of Dollars have had no direct effect on Main Street. The consumer ultimately decides when he or she will spend again.

    December 12, 2008 at 10:33 am |
  19. Paul Harris

    Fixing the symptoms is not going to solve the problem. The industrial revolution brough us the industrial age and with it the automobile, now we are entering the information age and the automobile has lost its' importance. I read that even Toyota has problems in Japan because young people have lost their affection for automobiles and now the internet is their new love. Our love affair with the automobile is coming to an end (thank heavens otherwise we would all die from the exhaust fumes once the Chinese, Russians, Indians etc.,etc., all enjoy the old 'American way of life').
    America has given us the internet and should concentrate all of it's energy and investment on developing with it a new clean, healthy 21st Century 'American Way of Life' for the world to follow.

    December 12, 2008 at 4:05 pm |
  20. Ray

    Bob hit the nail on the head. Getting back to basics!

    There are certain things we do well (agriculture, manufacture PCs, bio-research and managed health care, are a few examples). There are a few other things we don't do so well (manufacture automobiles, other complex customer sensitive products). We're great as consumer products manufacturers but as the complexity increases, our short term focus on results hurts us. Americans are however very creative and technically very gifted. We need to accent (and if necessary subsidize) our strengths and let the weaknesses die off.

    The other thing we need to do is lead by example at a governmental level for our private industry. Stop focusing just on the financial result and instead use a more balanced scorecard to decide what represents a successful U.S. company. Get rid of the oversized perqs for the executive class and work on changing the business culture which is preached by greedy shareholders. How do you do this?

    Help me out here other Bloggers, I can only think of regulation at this point. This culture of sky-high profit expectations and serving only the shareholder has caused many American businesses to forget what made them world leaders in the first place. In no other country is this short-sightedness as common and accepted as okay as it is in America and in this downturn we see where it leads.

    December 12, 2008 at 8:49 pm |
  21. TJ from Main Street USA

    Every day on my car radio driving to work or on my TV after work I hear over and over that the banks, auto industry and who knows what other big business needs to be bailed out. Next get ready because then comes the media blitz on how the FEDs need to step in and help stop the foreclosure spiral. Listening to all that makes you feel just terrible that those poor auto industry executives are being asked to give up their million dollar bonus and private jets to receive main street tax payer money. I can't even imagine what is must have been like for them to have to pull up in a new car off their assembly line instead of their private jet. How embrassing! Then I reflect on those poor real estate investment gamblers that signed on credit for a home but had to walk away from it without even making a dollar on it. We also have those generous loan companies feel the pain of the subprime give away. Ah yes it feels so good to sit here on Main Street as a responsible tax payer with good credit . I reflect on the fact that I can't sell a home because the real estate and loan industry is a bust. My retirement dream is looking more like a night mare. I don't even want to take a peek at what's cooking in my retirement investment's probably down to chicken stock by now. Buy a new car, I don't think so. Sorry guys I am not feeling their pain but I am wondering if anyone is feeling Main Street folks pain? Those of us who get up and go to work everyday, pay our taxes and hope to retire before we fall over dead. I am not asking for a bail out just tired of hearing about it. Send some good news to Main Street and lower the 30 year mortgage rates to 4%. But this time we need to make sure the home buyer is gainfully employeed and has a good credit score. That will stimulate the economy! Novel Idea! Or how about the federal government just go ahead and issue a gift card to all those of us on main street for a couple thousands that can only be spent on USA goods and services for Christmas? Of course that would be kind of tacky giving us a gift card from money they collected from us. Nah, I say support those greedy corporate giants, honestly how could main street sleep at night knowing they are on the verge of having to cancel their two week christmas vacation in the Bahamas to hang out in Washington DC. Happy Holidays and to all a good night!

    December 12, 2008 at 9:19 pm |
  22. Rosemarie Tong

    Considering the amount of population in USA (306 million), why
    don't the US government use the bailout money on the population?
    Just handout without questions asked, one million to each person in the US!
    Everyone will then be a millionair, that will get the economy working and back of it's feet too!
    It's cheaper, no proverty and will benenfit every single American!!!!
    Just min opinion.........:)

    Rosemarie Tong

    December 13, 2008 at 7:14 am |
  23. Deon Joubert

    On CNN this morning, I saw them talk about the automotive industry suppliers who are going to suffer if the big three auto manufacturers go into liquidation. I think that when the first manufacturer goes into liquidation the others will sell more cars and might even survive the economic crisis. At worst, maybe two auto manufacturers will close doen, but then the surviving manufacturers (and there are many in the US), will sell more cars. The suppliers to the auotmotive industry will not sell less parts when/if auto manufactures close down, because the other manufactuers will sell more cars. The public will buy a certain number of cars next year, regardless of how many manufacturers there are. The people who make starter motors, will sell a starter motor for every car that is sold next year, regardless of how many manufaturers there are. At least some of the workers who are retrenched at the one plant will be employed at that other plant when their production increases. I light of what I said in a previous post about the baby boomers retiring, there is, and will continue to be a reduction in the demand for cars and other commodities and the manufactures will have to deal with that. Don't bail them out. Don't throw money at them – the fundamentals do not support a recovery. Let one or two of them close down.
    From by blog:

    December 13, 2008 at 8:49 am |
  24. Basel Aryan (BAHRAIN)

    To simplify the issue lets take the example of the big three. The government began by bailing out one ‎industry and now having to bail out the second! If it was going to help I would not be writing this letter. ‎I know pouring money is not going to help. ‎
    Scenario one: If one of the big three should fall then let chips fall where they may. Many may lose ‎their jobs and as a secondary effect there would be more house foreclosures, restaurants and other ‎businesses would close. On the business front; a major share of the vacuum created by the collapse of ‎one of the three, would be taken over by the remaining two and a big share would go to other foreign ‎companies. Not good. ‎
    Scenario two: The government bails out the big three. All tax payers suffer for the errors of a few. The ‎US government can not afford such unrealistic bailouts; nor does it have too. Basically this conflicts ‎with all that I was taught by your universities that the invisible hand of the market should keep ‎demand and supply in check. ‎
    Scenario three: If Japan started to export much later than the US; so why then are they more ‎successful at exporting cars worldwide? If you want to have a self sustained economy, I would bet that ‎you can. However, you must again go against the Free Trade notion and agreements. Become a ‎protective closed door economy. ‎
    Solution: The big 3 announced that they are having difficulties together and at the same time. ‎Indicating a narrow mind approach to problem solving, and strategic planning, years back and falling ‎into the same hole! Tax payers should not foot the bill for the executives who lost the race with the ‎Japanese and now everyone else. The only way out is to have everyone in his/her industry or ‎company to pay. Big 3 executives take a 50% cut in their salaries and less and less of a cut as you ‎progress down the hierarchy; low paid employees would suffer a 10-20% cut. This would undoubtedly ‎draw resentment from the likes of UAW; but any other remedy would only prolong the inevitable. ‎
    I hope my contribution is heard and adopted. ‎
    Basel Aryan
    Bahrain ‎

    December 14, 2008 at 8:39 am |
  25. Crystal Ehrlich

    Historically are most worldwide economic depressions of the scale and scope we are currently facing followed by war? If there is relationship between these two, what are the experts saying on the subject in the context of our current crisis?

    December 15, 2008 at 7:48 am |
  26. Stacy H

    I have come to the conclusion Wall Street is still betting on people and to loose their homes. The banks are not helping because it is only going to get worse. All the bailout money is not going to help anyone but Wall Street and the Banks. President Bush has the same mental affliction as Blagojevich and has no respect for Iraqi people or the average American. We will also find out probably less than a year from now we are already in a depression. Global warming is now just showing us a taste of what can happen. So please lets ask some experts what do we do now and where if anywhere can we go from here.
    Stacy H

    December 15, 2008 at 8:19 am |
  27. Matt Stott

    Goldman Sachs is expected to report a huge loss today. Is there any feeling that it's decided to clean its house at last and may even be booking all the worst on this occasion so it can get the bad news over and done with for once?

    December 15, 2008 at 2:01 pm |
  28. gatkin09

    Eventually world growth will return however the global economy will be altered just as it is after all "bubbles". The U.S economy is going to emerge from the current crisis but I suspect it will be in a weakened position.

    We must remember that one reason that the U.S economy has been so dominant is because it was basically the only major economy left standing after WW2, but now in the 21st century it is having to compete on a more equal footing with other major economies.

    Interest rate cuts alone will not be enough, what will need to happen over the longer term is that the U.S must simply spend less and adjust to a world where the country need to consume less.

    Greg Atkinson

    December 16, 2008 at 12:23 am |
  29. d. griffith

    If the interest rate cuts don't work, they should cut costs that are best for the public interest(rent, mortgage, vehicle note, food, utilities, insurance, school loans and health care).

    December 16, 2008 at 12:48 am |
  30. joe

    imagin if the president woke up one morning and said today is doubleday evrybodys salary is doubled all products and food is doubled all rent is doubled all gas and electricity is doubled everything is doubled but the debt.and new goverment regulations will be in place to stop this from happening again

    December 16, 2008 at 4:34 am |
  31. LHC

    There are known knowns – things we now know that we know
    There are known unknowns – things we know now we don't know
    but there are also unknown unknowns.......and on it goes....

    December 16, 2008 at 10:53 pm |
  32. susceptor

    we are now caught in a deflationary cycle and the fed is caught in a liquidity trap of its own making. Trying quantitative easing, a fancy way of saying printing money will only lead to stagflation.

    December 18, 2008 at 12:39 am |
  33. chuck in new mexico

    Has anyone considered the aging baby boomers impact? As they get older and income is limited– due in part to market downturn (the same impact as in Japan)– baby boomers don't need to buy a lot of hard goods like appliances and cars. They will spend money on travel or stay around home.

    December 18, 2008 at 12:54 pm |

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