Government Support of Economy Fading

During the onset of the Great Recession the Federal Government, along with the Federal Reserve, stepped into the U.S. economy to shore up its failing foundations.  Now the end of that artificial support is being curtailed.

I consider this to be a very good thing because, in my opinion, the Federal Reserve in particular has too much stimulus in the economy.  ‘Too much stimulus’ is another way of saying that there is too much money in the economy chasing too few goods.  That is a prescription for inflation.

Frankly, again in my opinion, it was the Fed’s easy money policy post the dot.com meltdown at the turn of the century that led to the real estate bubble.  So I want for Federal Reserve stimulus to end post haste.

Among the measures being enacted are:

• U.S. Treasury is giving permission to banks supported during the Great Recession to finally pay dividends to shareholders, or to increase extant dividends.  Cash paid out to shareholders is paying out the equity portion of bank balance sheets.  Too much debt to bad equity was what almost led to a collapse of the financial system.  So cash was king for the last three years.  That banks can now pay out cash as dividends means that the financial system is solvent.
• Additionally, Treasury is allowing banks to borrow money in order to pay back the government (i.e. tax payers) monies lent to failing institutions during the crisis.  By borrowing to pay down equity banks will become more leveraged and hence, more risky.  This step is clearly a strong sign that the various institutions given permission to do this are strong financially.
• U.S. Treasury is also making plans to sell off some of the $142 billion portfolio of federal agency backed mortgages (i.e. Fannie Mae and Freddie Mac) it purchased at the height of the financial meltdown.  By selling this portfolio the Treasury will be taking money out of the financial system – a good thing.
• The Federal Reserve is considering lowering the money supply by using reverse repurchase agreements.  The specifics of this obscure financial instrument are not important.  What is important is that the Fed feels that the economy is on sound enough footing to survive the draining away of some liquidity.
• Additionally, the Federal Reserve purchased sub-prime mortgage securities from AIG during the Great Recession.  It is making plans to sell those securities now.  Again, when folks buy those securities it will take money out of the economy.  A good thing.

All in all, this is the beginning of the end of the government’s involvement in the U.S. economy made necessary by the Great Recession.  This is important for two reasons.  First, it signals that the economy is on sound footing; and second, it will drain away excess stimulus from the economy, thus taking away the element needed in order to create economic bubbles (amen!).

Jason