Jackson Jambalaya

Bernanke finally did it and printed up $300 billion to buy up more treasuries. Such an action is important as the treasury yields could wreck the economy as they set interest rates for numerous industries as well as the rates the government must pay those who are financing our deficit. The Wall Street Journal reported yesterday:
"The Federal Reserve ramped up its effort to revive the economy, declaring it would buy as much as $300 billion of long-term U.S. Treasury securities in the next few months and hundreds of billions of dollars more in mortgage-backed securities.
The Fed had already cut its benchmark interest-rate target to near zero. Unable to go lower, the central bank now is essentially printing money to raise the supply of credit and thus push down the longer-term rates paid by families and companies on mortgages and other key loans. The impact was immediately felt..."

Some such as the chief economist at New York Mellon Bank applauded the move:
"This is a very powerful and aggressive move,” Hoey, chief economist at Bank of New York Mellon Corp., said in an interview with Bloomberg Television. “One of the reasons I’ve been arguing we won’t have a depression is we’ve got a Fed chairman who understands the problem and is going to come with the right diagnosis and the right medicine.” Bloomberg: Rambo Fed buying treasuries

However, the Fed's decision to print money to purchase so many treasuries in an attempt to cap interest rates drew much criticism from financial bloggers. Here are some of the comments from around the web:

Karl Denninger of The Market Ticker penned the headline "Ben inserts gun in his mouth" as he wrote with acid in denouncing the Fed's action:
"We've got over a trillion in trash on our balance sheet now, which we promised would fix the problem but it didn't do jack. That's because nobody in their right mind will borrow money when the economy is in the tank and debt levels are above sustainable maximums. The only borrowers are people who are deadbeats, and that doesn't help. Instead of clearing this out by forcing the bankrupt to take their medicine our "solution" is to attempt to devalue the currency by explicit monetization. We have little choice in this matter because the most-recent TIC data that has been published, along with what hasn't been published (yet) but which we have, shows that foreigners have given us the finger in buying any more of our agency, corporate and sovereign debt. In short, we're screwed - within months - and we know it. .." Kevlar anyone?

and a little more soberly in this analysis:
"Ultimately The Fed winds up owning all of its own government's bonds, having destroyed the private capital market for sovereign debt (just as it has done for other securitized debt by threatening to overpay for those issues!)
The difference is that if this happens for sovereign debt then deficit spending becomes impossible on an instant basis; this would in turn force a nearly 75% contraction of government spending...." Quantitive Easing

Calculated Risk pointed out contrary to expectations, mortgage rates may not fall even though such is part of Bernanke's intent:
"Based on this historical data, the Fed would have to push the Ten Year yield down to around 2.3% for the 30 year conforming mortgage rate to fall to 4.5%.
Currently the Ten Year yield is 2.58%, suggesting a 30 year mortgage rate around 4.7%.
If the Fed buys Ten Year treasuries with the goal of 4.0% mortgage rates, they might have to push Ten Year yields down under 2.0%, maybe close to 1.5.." How far will mortgage rates fall?

Bernanke will have to buy many more treasuries to push the rates that low. Naked Capitalism stated pros and cons in a couple of succint paragraphs:
"it's a gamble. The Fed's purchasing power is not made in a tree by elves. It comes from, essentially, printing more money. If the world's biggest danger is deflation, as Bernanke and a number of economists believe, then this action is wise. The trick to price stability is "reflation" not tight-fisted central banks. If conditions are different, however, it bakes serious inflation in the cake. Thus today's market gyrations, which at the moment have the dollar down, gold and oil up and stocks falling. This is less a fear of raging inflation, than a fear of uncertainty itself, to paraphrase FDR.
But the Fed is out of the conventional tools it has used in post-World War II recessions. Interest rates are virtually zero. So now it's a step into a risky undiscovered country. Among the risks is how our overseas creditors react if they believe this will dilute the value of their dollar-based assets, including Treasuries. Then there's the danger that Bernanke is creating yet another Fed-made bubble, with an even worse crash to follow. If it works, however, it may finally get credit moving. Stay tuned..." Road to Reflation

Option Armageddon was rather curt in its opinion:
"The Fed will be creating money electronically out of thin air to finance these purchases. When you buy a bond, its price rises and its yield drops. Buying another $750 billion of MBS along with $300 billion worth of Treasurys with printed money is a simple trade-off, debasing the currency so we can put a lid on the public’s and home buyer’s cost of debt finance.
This is terrible monetary policy. Keeping interest rates artificially low will encourage credit expansion when what’s needed to actually heal the economy is credit contraction. This sounds counter-intuitive, isn’t more lending what’s needed to “get the economy going?” No, too much credit is what got us into this economic mess in the first place. Asset values of all kinds are still over-inflated relative to their intrinsic value, the value of their discounted cash flows.
Credit is a drug. And the Fed is America’s dealer. We know we need to quit the stuff, but we’ll worry about that tomorrow. What we need right now is another fix in order to get through today. Our dealer, of course, is happy to oblige."
Fed crack anyone?

Finally, leading finance blogger Mish minced no words in calling this policy a failure:
Please note that Bernanke has already failed. "It" (deflation) has arrived. And deflation has arrived in spite of the fact that Bernanke has slashed rates to 0%, instituted numerous lending facilities that have all failed, squandered $trillions in taxpayer money, and has already implemented phase II (or do I mean phases 2 through 20) of his plan, that being the "offer fixed-term loans to banks at low or zero interest, with a wide range of private assets as collateral...
The Fed has become the lender of only resort as opposed to the lender of last resort. Bernanke cannot force banks to lend nor can he force companies to hire or if they do hire the wages that will be paid.Wage destruction continues unabated, and if Bernanke does succeed in driving prices higher, he just might ask himself, how anyone is going to pay the bills..." Bernanke's Grand Experiment

Bernanke's "Grand Experiment" is going to cost us dearly as he tries to manipulate the bond markets. This will force potential buyers (including the Chinese who have already done so) to sit on the sidelines as they will no longer trust the market. As demand dries up, the governmnet will then print more money to keep the yields down, opening up the inflation can of worms. At some point, consumers will face interest rates that have gone up, a weakened dollar, and inflation that threatens our livelihood. Already, the dollar is falling as reflected in the Wall Street Journal about oil today: "Crude-oil prices surged above $50 a barrel Thursday, a day after the Federal Reserve said it will inject billions of dollars into the U.S. economy.
The surprise action sent the dollar plunging against the euro, reviving long-dormant investor interest in using crude-oil futures as a hedge against weakness in the U.S. currency..."

The Fed is playing with matches and unfortunately there are no adults around in case they catch the house on fire.