New York Times: Meet the POMO desk

[vinoveri]

Re: New York Times: Meet the POMO desk

Another frequently misunderstood point is that the Fed can only create debt-based money (credit). They cannot create capital -- either for themselves or for the banking system. Only the Treasury can do that (ala TARP).

Imagine the following scenario: as the Fed begins to reverse the transactions that brought the bank's bad debt onto their balance sheets (which do, after all, have nominal time limits associated with them), it suffers huge losses. To prevent the Fed from collapsing, the only cure would be a multi-trillion dollar capital infusion from the Treasury. To do that will require an act of Congress, along with an associated increase in the debt ceiling. Given the mood in Congress today regarding things like the debt ceiling and the unaccountability of the Fed, what's the likelihood of such a bill being passed?

Also, let's not forget that the Fed is not the first US central bank.... Why would anyone think it's the last?

I think this is where the rubber meets the road, and in fact they do not have time limits - consider what's going on now with QE via POMO, that would be PERMANENT open market operations. This money will not be called back. The bad debts of the banks are being slowly written off and the increased money allows them to stay afloat via the "borrow low, lend or speculate high routine". This is the wealth transfer - from the savers who lose principal purchasing power via 0% interest rates and the inflation generated by those who receive the new money first. Additionally,there is no reason why the Fed needs to "unwind" its balance sheet (whatever that obfuscating expression actually means.) The new normal will be a permanent Fed balance sheet of +$3 Trillion, and no one will notice; the spikes in commodities and associated cost food and energy will be blamed on speculators and/or growth in China. Give us a break.

What bothers me about the graphic from the NY times is it glosses over the "money is injected into the financial sector" and fails to detail how this money is employed by same, which if it did would bring more clarity to the status of the privileged in this corrupt system.