Can one of the board economics gurus put this in plain speak for me?

philipkw said
I don't have near the economic credentials of the folks that you mention but I'll take a stab. Caveat emptor.

It's my understanding that the auction is a new way for the Fed to get money to stressed lenders in order to facilitate the flow of funds to borrowers. Previous to the auctions, the way that stressed lenders would get funds would be to go to the Fed discount window but apparently lenders were reluctant to use it post mortgage meltdown. I <i>assume</i> that the lenders can get better rates via the auction.

Or something like that.

In the very simplest of terms, it's yet another mechanism for the Fed to flood the economy with dollars in an effort to keep the economy growing.

Pretty much dead on.

The fact that this wasn't in the 2008 budget which is already projected to be a trillion dollars over budget and we are in debt 9 trillion bucks means the Federal reserve has to print or borrow the money. Since the Federal reserve can print money cheaper than it can borrow it then it will print 100 billion dollars.

The reason they have been doing this is to make "cheap" money available to the banks to increase the willingness of the banks to lend money. The idea behind this is if the fed gives the banks cheap money to lend they will lend it out cheaper and the people would be more willing to borrow. The reason the people borrow is to SPEND.

Just because we print $100 billion dollars and loan it out to people doesn't mean it will actually get there. Several economists claim that a very small percentage of the money actually goes to spending in the economy because so many are using the borrowed money to pay off debt and the banks are not using the auction to increase lending to consumers. Some estimates have been as low as 15% that actually trickles out to the economy and a large portion of that goes to imports.

In reality this is the US government and the federal reserve lending out cheap money to the banks to save them, aka a bailout. Each time the Fed lends out a 100 billion the dollar drops a little, inflation goes up a little and the person saving money and living within their means get punished to help those that are living on borrowed money and help the fat cats in the banking world. Basically everyone pays more to make things worse.

On the other hand, we can't afford to let the entire financial system to fall flat on its face or we will be looking at a very severe depression and with the dollar as weak and unstable as it is now a probrable currency crash. Their is no easy fix but we are simply compounding the problem instead of changing our ways.