FED billions bounced depression possibilities in 2008 to save the world economy! FED Superhero Ben Bernanke, then Chair of the powerful U.S. Central bank, used massive Quantitative Easing (QE) or financial stimulation to bounce away the depression monster!
Did FED action avoid an economic depression?
Investors, The FED And Central Banks lesson 2, answers the question, did Ben Bernanke or the FED action avoid an economic depression? At the end of the lesson, links to related content help you learn more.
What you learn:
You learn the important role the FED, the U.S. Central Bank, plays in the American and world economy. The gigantic financial and economic power the FED had on full display following the 2008 financial crisis gets discussed. That includes knowing and understanding QE. Understanding the importance of the FED to markets and investors helps you build your foundation knowledge as an investor.
Quantitative Easing gets to work
In the 2008 crisis, markets declined for 6 months, then shook off the crisis and began climbing back as the 2008 crisis faded into memory. But it was QE that poured fuel on the economic fire.
QE was the FED entering the market to buy massive amounts of financial assets. The idea injects huge amounts of liquidity directly into markets to force money into the economy. The FED took bad loans from banks to revive their balance sheets and bought mortgages at the rate of $85 billion per month.
Central bank economic invention
As for who invented QE, while John Maynard Keynes, gets concept credit from some, Richard Werner, refined the thinking and coined the term. He advised the Bank of Japan that first actually used a variation of this powerful central bank tool.
Werner, a German banking and development economists, holds the view credit expansion for the funding of production growth was key to growing the economy and prosperity. In crisis, central banks clean up balance sheets of banks by taking the non-performing loans. Then, by expanding the bank reserves, the revived banks are set to lend for productive growth. By focusing on expanding growth of production, rather than the consumer consumption, the economy, employment and wealth grow without introducing inflationary pressure.
Keynes, a British economist (1883-1946), is credited with ideas that fundamentally changed economics and influenced economic policies. He is a favorite of mine for his quote:
“The market can stay irrational longer than you can stay solvent.”
Saved from the economic abyss
QE worked! It saved the world from falling into an economic abyss! Responding to the 2008 financial crisis, Bernanke billions saved trillions when the real estate market collapsed and financial disaster loomed. The immediate, bold and strong FED action pulled the world back from the brink of economic disaster, financial collapse and depression.
Saving trillions and the economy was no accident or just good luck. The right person with the right knowledge, Ben Bernanke was FED Chair. He was an expert on the economic history that followed the 1929 stock market crash. As a result, in 2008, he knew saving the economy required immediate, massive stimulation. By monthly buying a massive $85 billion of mortgages, the FED stopped that market from going to zero. The program was called, Quantitative Easing (QE). The QE stimulation supported real estate and cascaded economic stimulation through the economy pulling American and the world forward without a depression.
That bold Central Bank action contained the 2008 financial crisis which became the Great Recession but avoided complete economic collapse. It demonstrated the important role played by the U.S. Federal Reserve. FED actions play an important role in how rich you are will be or even could be. FED actions directly affect investors everywhere.
Bernanke billions saved trillions!
It was not a one man show but the actions of the U.S. FED following the Sept. 2008 crisis, showed one courageous, brilliant and patient man stood between us and the economic abyss. We were saved by an imaginative economic magician who knew the past and saw the future. He led us out of a beak economic desert to save America and the world!
The stimulus programs run by Ben Bernanke did just that. He was the ideal person with exactly the right knowledge and ability in place when the economic alarm bells sounded in 2008. He saved us from all becoming debris in a financial wasteland. Have no doubt, a wasteland is where we would be if he had not pulled us and the world back from the abyss.
From the unprecedented stimulus program, that continued for over a decade, effects will continue for multiple years. Possibly even years beyond the next decade there will be effects will continue. That puts in into a decade of FED grinding as they attempt to taper the effects and reduce the massive FED balance sheet built under the stimulus program.
Trillion dollar balance sheet!
Billions here and billions there soon add up to make the massive scale of the Fed stimulus program hard to grasp. The program and FED operations grew the balance sheet well beyond a Trillion Dollars! That is a lot of money considering it takes 1,000 billion just to get to the first trillion!
Most particularly the direct and continuing effect on housing is the greatest continuing benefit of the FED QE program. In essence America continues to fund the mortgage market. That program provided the foundation for rebuilding housing and the American economic recovery.
Fed props up the mortgage market!
Without that ongoing massive buying program that continues in the mortgage market, that market would implode. When the 2008 crisis hit all private mortgage buyers stopped. Dead. They did not trust the information so they simply did not buy.
Without FED intervention, the lack of buyers would instantly crater the bond market followed immediately by a massive stock market plunge, a paralyzed banking system and an unimaginably huge economic tsunami. Financial destruction would plunge every economy on this planet into a deep and destructive depression.
Why did the FED make QE happen?
The QE stimulus program continued as part of the Fed effort to prevent economic collapse and depression after the 2008 financial crisis. That was done because, economic depressions, once established, can stubbornly linger. When most people think prices will be lower tomorrow, they put off spending which slows the economy. Then, once entrenched, such a depression mentality becomes very hard to change. The depression of the 1930s had lingering effects for over 10 years! By using QE, a depressed economy was avoided by the massive amounts of stimulus used to change that outlook.
Inflation is the opposite of deflation
During inflationary times we are willing to spend now or soon, because we believe everything will cost more tomorrow. In the 1970’s the solution to taming the beast of inflation was found. Massive interest rate increases provided that painful economic cure. However, we leave the inflation lesson for another day.
Today we continue to look at the fright of deflation. Economists and central bankers rightly fear the long-term destructive power of deflation. That economic monster can destroy economies, societies, lives and futures.
At all costs, all central bankers want to keep any deflationary force dormant. To let it emerge or even be thought possible would rapidly freeze real estate markets and chill every capital expenditure program.
In short order such a chill would cascade through the economy and reach into every household and your pocket.
Making sure the population thinks there is no possibility of deflation is a core reason for the ongoing Fed stimulus program. The overnight credit freeze in Sept. 2008 put the world on the brink of a deflationary abyss. Thank goodness Ben knew what to do.
Ben had the answer
The Fed and other central bankers began pumping massive amounts of money into the market. That worked over the years following the Sept. 2008 economic plunge. Now the U.S. and world economy continues the recovery process.
How did the FED make credit during the financial crisis?
Simply put, a button on the FED computer creates Fed credit. That is the incredible power of the central banker at work. The Fed used that credit to buy mortgages in the market which puts the money into play. It was used to keep the mortgage market going when no other buyers were willing to fund mortgages. We got to see an economic Einstein was at work saving the world from depression!
Related content: Invention builds banking power, lesson 4, of White Top Investor course 150, Movers & Shakers of Stock Markets.
The FED, Bernanke and tapering
Ben Bernanke and the U.S. Federal Reserve Bank will self-liquidate well over $1.3 trillion massive mortgage inventory by simply letting the bonds mature.
That great pile grows larger at the rate rate of $85 billion more each month! This program will directly affect the market for at least another 5 years. Then, once this gusher of money gets turned off, what will happen? Will that huge pile of mortgages overhang the market?
Move along, nothing to see here…
In a word, no. Not much will actually happen. The Fed will sit on the inventory. Remember their purpose, to get the economy going. The current program works towards that goal through massive stimulation of the mortgage market.
Once that market establishes a new normal, the program will end. It will be a gradual or tapered reduction. That will happen over at least several months and likely extend for more than a year. However they get there, it will eventually come to an end.
When that happens, they will stand aside. No further stimulus will be needed. The Fed will be out of the market. With success they can declare victory but still have to deal with that accumulated inventory.
Only then will a true normal market exist.
Liquidation risk
But the Fed will not upset the new supply and demand balance by liquidating inventory. Fed selling into the market would be disastrous.
Doing so would have the same effect as an excessive increase in private capital becoming available. To work, a normal market uses price to adjust the balance between supply and demand. Any significant increase in either supply or demand produces price responses to balance the forces.
Keeping that basic balance requires the Fed to sell slowly or let their inventory self-liquidate. That will help maintain an orderly market. Therefore the Fed will simply let their bond inventory mature. Brilliant!
Refinancing mortgages
Essentially the inventory consists of an unimaginably large but very real pile of 5 year bonds. As each matures, normal refinancing occurs. The old bond gets redeemed or paid off. The new or replacement bond sold into a normal market to serves as the replacement.
The Fed simply stands aside from the new transaction. Like a rich wizard quietly getting the wanted outcome.
This will happen millions of times as your neighbors and millions of others go through routine mortgage refinancing. As a result the Fed quietly reduces inventory without upsetting the market and we all happily carry on to prosperity.
Well that is the theory. Being us, we humans always seem to find some way to make things more exciting in the years ahead. For now we can be content that the Fed has done an incredible, innovative and effective job. For now we are happy with the good news; the market will mend as will damaged portfolios.
Question Answered!
Credit Ben Bernanke or the FED, an economic depression was avoided by QE. That program demonstrates the important economic role the FED. The gigantic financial and economic power the FED was used to bounce an economic depression.
Lesson takeaways,
FED billions bounced depression:
FED billions bounced depression possibilities in 2008 to save the world! FED Superhero Ben Bernanke, then Chair of the powerful U.S. Central bank, used massive financial stimulation to bounce the depression monster away!
- FED stimulus power of QE used to flush depression risks
- Both FED and US Treasury actions saved the economy from the abyss
- FED balance sheet grew beyond a trillion dollars
- Mortgage market propped up by FED stimulus program action
- Bernanke was the right expert with the right knowledge
- Hard work remains to deal with the trillion dollar balance
- $85 Billion a month adds up!
- Liquidation risks are in a trillion in play
- Mortgage refinancing shifts back to to capital markets
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Investors, The FED And Central Banks, lesson links:
Central bank creation and role explained Lesson 1
FED billions bounced depression Lesson 2
FED begins Quantitative Tightening Lesson 3
FED market direction signals Lesson 4
Most powerful civil servant Lesson 5
Trillions stimulated Japanese economy Lesson 6
Central Banks of Canada, UK and Europe Lesson 7
Central bank lid and base setting Lesson 8
Next lesson:
FED begins Quantitative Tightening
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