On September 22, the Fed announced that it will re-weight its $2.65 trillion securities portfolio to favor long term debt holdings and mortgages. This will have the effect of lowering short term borrowing rates while increasing the government's exposure to (and backstopping) housing market risks. It is hoped that lower interest rates will encourage more borrowing while simultaneously sending a signal of the Fed's confidence in the future of the country.
The activism of the central bank, using monetary policy to influence consumption, rather than to simply regulate capital flows in the economic system, is breathtaking. More critically, these moves ignore a basic problem. That depressed capital investments is not the result of low interest rates or the lack of cash (both are at historic lows and highs, respectively), nor because of a lack of long term optimism (corporations have maintained or increased R&D). It is that entrepreneurs and corporations have lost confidence in the ability of the government (right and left) to protect the conditions for wealth creation. The mounting weight of new regulations, uncertainty over taxes, anti-capitalism rhetoric, and takeover of the free market demonstrate an arrogance that belies the ineptitude on display in D.C.