Below The Beltway

This morning, the Treasury Department and the Federal Reserve Board announced a new program designed to do nothing less than prop up America’s mountain of debt:

The federal government unveiled $800 billion in new loans and debt purchases on Tuesday, hoping another infusion of cash can help unfreeze troubled credit markets and make borrowing easier for homebuyers, small businesses and students.

The Federal Reserve said that it would buy up to $600 billion in mortgage-backed assets from the government-sponsored mortgage finance giants Fannie Mae and Freddie Mac. The agency would also buy up to $100 billion in debt directly from the companies and up to $500 billion in mortgage-backed securities.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Federal Reserve said in a statement.

Separately, the Fed and Treasury Department announced a $200 billion program to ease commercial lending on debts like student loans, car loans or business loans. The Fed would lend up to $200 billion to holders of asset-backed securities supported by car loans, credit card loans, student loans, and business loans guaranteed by the Small Business Administration.

The action by the Federal Reserve on buying mortgage-backed securities brings the full force of monetary policy to bear on the credit markets. Having already reduced the benchmark federal funds rate to just 1 percent, the central bank is now effectively using what economists call “quantitative easing” to reduce the costs of money.

Instead of trying to reduce overnight lending rates in the hope of influencing longer-term interest rates for things like mortgages, the Fed is directly subsidizing lower mortgage rates. It is doing so by printing unprecedented amounts of money, which would eventually create inflationary pressures if it were to continue unabated.

For the moment, Fed and Treasury officials made it clear that the sky was the limit.

The question, though, is what happens when we reach the sky.

Let’s not deny what’s going on here.

The United States Government is now directly subsidizing the very culture of never-ending debt that got us into the mess that we’re in right now. Nothing they’re doing is going to stimulate the economy; they’re simply going to re-inflate the debt bubble that had started to deflate over the past several months in the hopes that the illusion that we have money will be enough to convince consumers and businesses to begin spending like they actually had money once again. Just in time for the Christmas shopping season, in case you didn’t notice.

This isn’t a way out of the mess, it’s the creation of a financial Potemkin Village designed to convince all of us that there is no problem to begin with.

Leslie Carbone hits the nail on the head:

Profligacy has become normal, and that’s the problem. The problems triggered by fostering the notion that people are entitled to things they can’t afford will not be solved by plundering the taxpayers in order to provide more credit so that people can continue buying things they cannot afford.

That’s the system we’ve been living for quite a long time now, but we can only delay the inevitable so many times before it finally hits.