In response to the news that Fannie Mae (FNM) and Freddie Mac (FRE) had been given complete blank checks, Paul Krugman offered a reasonably sensible defence, which was basically:
Look, they’re going to do what the Fed’s been doing — launch an aggressive mortgage-buying campaign for the purpose of pushing down rates. Quantitative easing, basically, except through fiscal policy.
That’s almost certainly true (though others have theorized that they’ll do much more, including an aggressive push into principal reduction and measures like that).
Still, we think Krugman’s basically correct, except we’re not sure this is a welcome development or a compelling defence.
Everyone loves to talk about Fed independence, and how Congress shouldn’t meddle with it, and how it should be vigilantly protecting the dollar as a check against the insane spending of the Congress.
But the situation is becoming reversed. It’s the Federal Government that’s becoming an arm of the Fed, as every agency can perform its own version of “quantitative easing,” buying up whatever it wants in order to push down rates or prices.
By opening up the spigots so wide, Bernanke has given the greenlight to spend on everything, and the easiest thing to spend on — especially if we can’t find enough suitable projects — is financial assets.
So watch other arms of the federal government, whether in the automotive, infrastructure, housing, educational, or agricultural areas, step up their purchase of financial assets, all as part of some gigantic quantitative easing scheme.