Intervention, Not Wisdom

In a recent post at Financial Armageddon, I took issue with the claim by Paul Krugman, Dean Baker, and others that low yields on U.S. Treasury and other bonds can be seen as validation of Washington’s aggressive policy of spending and borrowing to “rescue” the crisis-torn U.S. economy.

Aside from questioning the alleged wisdom of the (trading) crowd, I argued that credit markets are being distorted by a variety of temporary and artificial influences, including massive intervention by the Federal Reserve.

As it happens,  Brian Sack, who runs the markets group of the New York Fed, helped bolster that argument in a speech he gave last night to the Money Marketeers of New York University (from a recap by Real Time Economics):

Mr. Sack’s group estimates that the Fed’s purchases of $300 billion in long-term Treasury securities earlier this year helped to push yields on 10-year Treasury notes down by about half a percentage point. Some critics have argued that the Treasury purchases didn’t have the intended impact of pushing rates down. But Mr. Sack – a long-time proponent of such purchases – said his estimate is supported by regression analyses by the Fed. Purchases of mortgage backed securities, he says, pushed those rates down by a full percentage point.


The Fed’s Expanded Balance Sheet
Brian P. Sack, Executive Vice President
Federal Reserve Bank of New York, Dec. 2, 2009

The Fed’s Market’s Guy Eyes Asset Sales and Rate Increases
Jon Hilsenrath
Real Time Economics, Dec. 2, 2009

Economists: Wrong Again
Michael Panzner
Financial Armageddon, Nov. 21, 2009

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