From the Finan­cial Times Alphav­ille blog:

The Fed’s run out of money

Seri­ously. It’s broke. Here’s the state­ment from the US Treasury:

The Fed­eral Reserve has announced a series of lend­ing and liq­uid­ity ini­tia­tives during the past sev­eral quar­ters intended to address height­ened liq­uid­ity pres­sures in the finan­cial market, includ­ing enhanc­ing its liq­uid­ity facil­i­ties this week. To manage the bal­ance sheet impact of these efforts, the Fed­eral Reserve has taken a number of actions, includ­ing redeem­ing and sell­ing secu­ri­ties from the System Open Market Account portfolio.

The Trea­sury Depart­ment announced today the ini­ti­a­tion of a tem­po­rary Sup­ple­men­tary Financ­ing Pro­gram at the request of the Fed­eral Reserve. The pro­gram will con­sist of a series of Trea­sury bills, apart from Treasury’s cur­rent bor­row­ing pro­gram, which will pro­vide cash for use in the Fed­eral Reserve initiatives.

Announce­ments of and par­tic­i­pa­tion in auc­tions con­ducted under the Sup­ple­men­tary Financ­ing Pro­gram will be gov­erned by exist­ing Trea­sury auc­tion rules. Trea­sury will pro­vide as much advance noti­fi­ca­tion as pos­si­ble regard­ing the timing, size, and matu­rity of any bills auc­tioned for Sup­ple­men­tary Financ­ing Pro­gram purposes.’’

The upside? Ha, don’t be silly, no upsides today. But at least the flight to safety means that the government’s only going to be paying 0.2% in inter­est for all the new money it’s printing.

The super-​scary down­side? It now costs 0.3% a year to insure your­self against the U.S. gov­ern­ment default­ing on its debts, which means that the CDS mar­kets now believe that a default on its oblig­a­tions by the U.S. gov­ern­ment is now 15 times more likely than it was a year ago.

From a U. of Chicago email announc­ing the estab­lish­ment of the Milton Fried­man Institute:

The Milton Fried­man Insti­tute will occupy build­ings that cur­rently house the Chicago The­o­log­i­cal Sem­i­nary on the north side of 58th Street between Wood­lawn and University.

In this week’s New Repub­lic, Joshua Rosner raises a good ques­tion vis-à-vis the mort­gage crisis: “Did so many people need to own homes in the first place?” He writes,

The dream of home own­er­ship has long been part of the Amer­i­can expe­ri­ence, but, as the fed­eral gov­ern­ment steps in to arti­fi­cially sup­port bor­row­ers and lenders with tax cred­its that encour­age more spend­ing or with public spend­ing that keeps over-​indebted bor­row­ers in unaf­ford­able homes, we ought to con­sider whether it’s time to wake up from that dream.

Indeed, we ought to con­sider what role the fed­eral gov­ern­ment has played in cre­at­ing this mess. By stim­u­lat­ing home own­er­ship while fail­ing to account for the rea­sons home own­er­ship is valu­able to soci­ety, Wash­ing­ton has simply sought to buy our votes with our own debt.

One thing Rosner doesn’t do in the arti­cle is to look at why the gov­ern­ment was so inter­ested in pro­mot­ing home own­er­ship. I have to believe that a large part of that answer has to do with Wall Street’s appetite for mort­gage debt. As Michael Lewis nar­rated in Liar’s Poker, the boom in mort­gage lend­ing in the 1980s was almost single-​handedly engi­neered by Salomon Brothers’ Lewis Ranieri, but it prob­a­bly never would have taken off were it not for a tax break that Con­gress passed on Sept. 30, 1981, which sav­ings and loans could take advan­tage of only by sell­ing their mort­gages. As Lewis writes, “It amounted to a mas­sive sub­sidy to Wall Street from Con­gress. Long live moth­er­hood and home ownership!”

But there’s another, odder reason why cer­tain people in the gov­ern­ment might have been eager to pro­mote home own­er­ship. The key evi­dence for this comes from Alan Greenspan’s memoir, The Age of Turbulence:

I believed then, as now, that the ben­e­fits of broad­ened home own­er­ship are worth the risk. Pro­tec­tion of prop­erty rights, so crit­i­cal to a market econ­omy, requires a crit­i­cal mass of owners to sus­tain polit­i­cal support.

For a dis­cus­sion of just how bizarre this rea­son­ing is, see my analy­sis here.

There’s a pretty sur­pris­ing mis­take in today’s NYT story about yesterday’s interest-​rate cut. The offend­ing sen­tence comes in the second para­graph of Steven R. Weisman’s article:

The Fed’s action brought the fed­eral funds rate — the rate it charges banks for overnight loans — to 2 per­cent, from 2.25 per­cent, the lowest level since Novem­ber 2004.

The prob­lem is that clause between em-​dashes. The “rate [the Fed] charges banks for overnight loans” is not the fed­eral funds rate, it’s the dis­count rate. The fed­eral funds rate is the rate that banks charge each other for overnight loans, which rate the Fed is able to con­trol through open-​market operations.

As the head­line of this post indi­cates, I was about to put this down to a brief slip of edi­to­r­ial atten­tion, but look­ing back through the NYT archive, it looks like a fairly common error on the paper’s part. Here’s a sim­i­lar sen­tence from an arti­cle Weis­man wrote a few days ago:

The com­mit­tee also low­ered the fed­eral funds rate, the rate it charges banks for overnight loans, by three-​quarters of a point, to the cur­rent 2.25 percent.

And here’s another from an arti­cle in March, this one writ­ten by Edmund L. Andrews:

The cen­tral bank low­ered its fed­eral funds rate — the rate it charges banks for overnight loans — by three-​quarters of a per­cent­age point, to 2.25 per­cent, and left the door open to addi­tional rate cuts in the months ahead.

In case you don’t trust me on this, here’s how Reuters (cor­rectly) described the fed­eral funds rate in a story about yesterday’s cut:

The cen­tral bank’s action takes the bell­wether fed­eral funds rate target, which banks charge each other for overnight loans, to 2 per­cent — the lowest since Decem­ber 2004.

And for good mea­sure, here’s the AP’s version:

The latest Fed move brought the fed­eral funds rate — the inter­est that banks charge each other — down to 2.25 per­cent, the lowest since late 2004.