Login Form
| Fed 2 Buy Treasuries =“Cheesy Bill of Goods” | | Print | |
|
What exactly is going on With our Economy & the Fed Right Now? Timothy Geithner “The Federal Reserve's expertise and powers are indispensable for preventing and managing financial crises" Managing is most certainly an appropriate choice of words.
First lets ask: What is the Fed doing? Wall Street Journal, MARCH 20, 2009 It's important to understand the historic nature of what the Fed is doing. In buying $300 billion worth of long-end Treasurys, it is directly monetizing U.S. government debt...... It is also monetizing U.S. debt indirectly with the huge expansion of its direct purchase program of mortgage-backed securities (MBS). It was $500 billion, and now it will add $750 billion more "this year." American Banker, March 24, 2009 Monday the Treasury Department said the Fed would accept the toxic assets on bank balance sheets as collateral for loans under the Term Asset-Backed Securities Loan Facility. The shift could spell more risk for the Fed while further stripping it of the political independence that has made it a Washington powerhouse. "The Fed is doing what a central bank should never do: take on many highly risky assets," said Allan Meltzer, a professor at Carnegie Mellon University and a noted Fed historian. "The Fed sacrificed its independence earlier in this crisis, so it did not have much more to give up." (more on why this is important below)
Why? Bloomberg Jan. 20 NEW YORK -- The Federal Reserve's inability to narrow the gap between consumer borrowing costs and government interest rates is driving investors to the longest-maturity Treasuries. Bloomberg March 25 “Clearly the Fed has credibility and buying power at the moment, so they can force prices up” on Treasuries, said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “Taboo” but True: 2009 Fed Monetized Debt when Foreign Debt Holders Stop Buying Wall Street Journal, MARCH 20, 2009 Foreign governments have been getting out of Fannie and Freddie MBSs in recent months and going into Treasurys. Thus the Fed is essentially substituting as these foreign governments finance U.S. debt by buying presumably safer Treasurys. The case for doing all this is that the Fed needs to supply dollars at a time when money velocity is low and the world demand for dollars is high amid the global recession. As long as the world keeps demanding dollars, the Fed can get away with this extraordinary credit creation. Why Not? “Over the short-term, the Fed purchases of Treasuries will lower rates, but the need to issue over $2 trillion in securities over the next 18 months will make this less than effective,” said Mark MacQueen, who helps oversee $7 billion as co-founder of Sage Advisory Services Ltd. in Austin, Texas. Fed Governor Mariner Eccles told Congress: “As long as the Federal Reserve is required to buy government securities at the will of the market for the purpose of defending a fixed pattern of interest rates established by the Treasury, it must stand ready to create new bank reserves in unlimited amount. This policy makes the entire banking system, through the action of the Federal Reserve System, an engine of inflation." Jay Mueller “In the long run, I’m afraid they’re simply monetizing the debt and that we’re going to end up getting inflation down the road,” Bear in mind that the Fed's balance sheet has more than doubled since August -- to $2.3 trillion from $800 billion. These latest commitments mean it may more than double again, close to $4 trillion. That would be about 30% of GDP, up from about 7%. Alex Merk a currency guru says: “After all, the massive stimuli under way should be highly inflationary; but if the Fed helps to engineer that markets cannot price inflation into bond prices, there has to be a valve. This valve, in our view, will be the U.S. dollar; we cannot see the dollar hold up in face of the types of intervention that are under way and that we see play out. Incidentally, a substantially weaker dollar may be exactly what Fed Chairman Bernanke wants.” Wall Street Journal, MARCH 20, 2009 With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. The other great, and less appreciated, danger is political. The Bernanke Fed has now dropped even the pretense of independence and has made itself an agent of the Treasury, which means of politicians. With its many new credit facilities -- the TALF and the others -- it is making credit allocation decisions across the economy. If a business borrower qualifies for one of these facilities, it gets cheaper money. If it doesn't, it's out of luck. Thus the scramble by so many nonbanks to become bank holding companies, so they can tap the Fed's well of cheap credit. The question is how the Fed will withdraw from all of this unchartered territory now that it has moved into it. How will it wean companies off easy credit, especially since some companies may need it to survive? What happens when Members of Congress lobby the Fed to keep credit loose for auto loans to help Detroit, or credit cards to help Amex? What Happens Next? Will the Fed with it’s “independence threatened” be told which companies and/or sectors to assist? Not Likely. Could their actions to “Nationalize” which apparently have jeopardized their “independent status”, have been planned from the beginning? Hours after the initial statements by Timothy Geithner (who is now asking for more power) at the beginning of this article, the Fed and the U.S. Treasury said in an unusual joint statement “the Federal Reserve must maintain its independence and focus on the stability of the economy as a whole, rather than specific sectors or types of institutions” They then go on to tell you their future plans: "In the longer term," however, the Treasury aims to remove from the Fed's balance sheet, or liquidate, the assets the U.S. central bank has taken on its efforts to assist American International Group and help JPMorgan buy Bear Stearns. (Reuters)March 23 "Government decisions to influence the allocation of credit are the province of the fiscal authorities," it added. The statement follows criticism from some regional Fed presidents, including Philadelphia's Charles Plosser and Richmond's Jeffrey Lacker, that carrying non-traditional assets on the Fed's balance sheet could make the central bank more vulnerable to political pressure and risk its independence. Do you see where all this is going Yet? If not, look at how 'vocal' Volcker has been about the need for a larger regulatory body. IMF poised to print billions of dollars Bernanke himself has vehemently supported efforts to create a global regulatory framework that would act as the vehicle for the introduction of a new global currency to replace the dollar. He has echoed the sentiments of Blair, Brown, Merkel, Sarkozy and others in calling for a new world economic order and “A strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” Bernanke told a CFR audience at a speech earlier this month. UK Business Secretary and top Bilderberg member Peter Mandelson has also pushed for a “Bretton Woods for this century,” to help build the “machinery of global economic governance”. While publicly denouncing a move towards a global currency yesterday, Obama has conversely announced that he will pursue a new world economic order, a “new global deal” in alliance with British Prime Minister Gordon Brown.
The only way to re-capitalize the world is to provide incentives for people to work hard and save money. Money that is based on Wealth - not Debt, which is what caused the problem in the first place. Did I Miss anything? Leave a comment. Related Article Misdirected “Bailout Rage” Sets Pretext For New Financial World Order |
