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Monopoly corrupts. Absolute monopoly corrupts absolutely.





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Bernanke's economics, or: the beneficial power of Fed's announcements

From the on line edition of today's New York Times:

Among the options, he said, the Fed can start aggressively buying up longer-term Treasury securities. That would have the effect of driving down longer-term interest rates. The Fed is already doing something of that sort, by buying up commercial debt from private companies as well as mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Investors reacted to Mr. Bernanke's remarks by pouring money into longer-term Treasury bonds, which briefly pushed already-low yields on 10-year and 30-year Treasuries to new record lows. Investors appeared to be reacting mainly to the clear signal from Mr. Bernanke that the Fed was preparing to pump money into the economy by buying up longer-term bonds.

If I, the all-powerful Federal Reserve, let you know that I will soon start purchasing asset X in order to decrease its yield (i.e. drive up its price, as X is a fixed coupon bond) what will you, the private investor, do? Well, if you are not completely drunk you will purchase asset X (Treasury bonds) today and finance it by selling asset Y (stocks) in order to capture the promised capital gains that my future purchases of asset X will create for you ... oops, by selling stocks today you are forcing their prices to drop? Life is tough, honey and we are here to make money, aren't we?

Apparently they call this kind of stuff "activist monetary policy". It is supposed to make all of us better off, and support stock market's prices. Oh yeah ...


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