Last week, the Treasury announced that it would purchase 600 billion dollars in Fannie Mae (FNM) and Freddie Mac (FRE) debt. Generally, the Treasury would need to borrow money by issuing bonds to finance such a purchase. However, the Treasury announced that the purchases "will be financed through the creation of additional bank reserves." The English translation of that is they are printing money in order to buy GSE debt.
In large part that is why Treasuries have been rallying. They are buying long term debt without issuing any long term debt, reducing the supply of long term debt on the market. There are two schools of thought on what the consequences of this will be. Some say that during the next economic expansion we will have hyper inflation as a result of the money printing. The other school of thought is that the deflationary forces are so strong that this will not make a difference.
Both outcomes sound logical and I am yet undecided on who I agree with. However, there is one outcome that I don't believe in. The one that Hank "The Tank" Paulson and "Helicopter" Ben Bernanke are betting on. That they will get this exactly right and be able to remove the stimulus before it causes inflation. They are playing with a type of fire that has never been experimented with in this country. They have proved themselves inept at dealing with more mundane issues. Bernanke oversaw the creation of this bubble as the regulator. Paulson is the one that convinced the SEC to allow the investment banks to go to thirty times leverage as CEO of Goldman Sachs (GS).
I am no monetary expert but I don't believe that the answer to this crisis is to simply print money and buy assets with it. Is life that simple? Is there such thing as a free lunch?