Many economists and market participants applauded the Federal Reserve’s decision in September 2012 to make monthly purchases of $85 billion in Treasury and mortgage-backed securities, and hold short-term interest rates at near zero until unemployment fell to 6.5 percent. Now, however, the issue of when to end bond buying is being debated both within and outside the Fed. Some think the central bank isn’t doing enough to deal with the still-fragile economy, while others argue that its actions will result in future price inflation. There is also growing concern that the rapid run-up in prices of stocks and other capital market assets reflects greater risk taking and more leverage and may be signs of yet another bubble.
After averaging annual increases of $30 billion in bank loans in the years 1998-2000, small businesses saw their access to direct bank loans wither when the dot.com crisis took hold. But as a result of financial innovation, a new credit channel opened for these non-corporate enterprises and their credit market debt grew rapidly in the period from 2001 to 2008. The primary source of funding for this sector became fast-growing mortgage securitization programs that required company owners to pledge their private residences as collateral for mortgage loans to finance their small businesses.
After its September meeting, the Federal Open Market Committee (FOMC) announced that the Federal Reserve would purchase $40 billion of mortgage securities a month in addition to $45 billion of Treasuries to address the ongoing high level of unemployment. If the labor outlook does not improve, the statement said, the Fed would continue its purchases of agency mortgage-backed- securities, undertake additional asset purchases and use other tools as appropriate in the context of price stability.
Jane D’Arista is a Research Fellow at the Political Economy Research Institute, and has previously taught at Boston University, University of Utah and the New School for Social Research. She also served as a staff economist for the Banking and Commerce Committees of the U.S. House of Representatives. Jane has published widely on financial market policy and other macroeconomic questions, including her classic two-volume work The Evolution of U.S. Finance. With Jerry Epstein (see below) Jane is co-founder of SAFER: A Committee of Economists and other Experts for Stable, Accountable, Fair and Efficient Financial Reform. In addition, Jane is also a published poet.