Fed Cuts Interest Rates to Near Zero, May Resort to Throwing Shoes at the Economy

In a dramatic turn of events, yesterday the Federal Reserve slashed its federal funds rate target* from 1% to 0.25%. And since banks are afraid to make loans to each other, on account of all the banks failing, in practice the Fed funds rate is down to about, let's see here… oh, zero.

So what's a central bank to do when interest rates have gone low as they can go?

"The Federal Reserve will employ all available tools [ed. note: Har har, yes, I get it] to promote the resumption of sustainable economic growth," it said. Those tools include buying "large quantities" of mortgage-related bonds, longer-term Treasury bonds, corporate debt and even consumer loans….

All of the tools involve borrowing by the Fed, which amounts to printing money in vast new quantities, a process the Fed has already started. Since September, the Fed’s balance sheet has ballooned from about $900 billion to more than $2 trillion as it has created money and lent it out. As soon as the Fed completes its plans to buy mortgage-backed debt and consumer debt, the balance sheet will be up to about $3 trillion.

"At some point, and without knowing the timing, the Fed is going to have to destroy all that money it is creating," said Alan Blinder, a professor of economics at Princeton and a former vice chairman of the Federal Reserve.

Mr. Bernanke, if you're reading this, please let me know if you need help destroying all that money. I have a few ideas for getting rid of it, like investing in Morgan Stanley and burning it to stay warm.

You've done so much for me, it's the least I can do for you.

*Also known as the "overnight rate," because it is the rate at which banks have one night stands** with each other.
**Use protection. You don't know what's on that balance sheet.