Fed starts printing press: $1T+ in additional purchases

[cjppjc]

Re: Fed starts printing press: $1T+ in additional purchases

IYou're not wrong. The only thing I would add is that the Fed can't just create money. When they create money, the way they do it is to buy something -- Treasury securities, etc. They basically have a bottomless checkbook, and new money is created when the checks they write are deposited.

Ugh. As someone on this board is posting with his avitar; We are toast.

[Slimprofits]

Re: Fed starts printing press: $1T+ in additional purchases

Some more balance sheet news from William C. Dudley, President and CEO of the Federal Reserve Bank of New York:

"The point of the stress assessment is not to pick winners or losers, but instead to ensure that the banking system and all the major banks have sufficient capital to withstand a very adverse environment. Following the conclusion of the stress assessment process, the government is committed to supplying whatever amount of capital is needed to ensure that all the major banks will remain viable."

http://www.cfr.org/publication/18743...m_c_dudley.htm

[ASH]

Re: Fed starts printing press: $1T+ in additional purchases

With the advent of sweeps, reserve requirements don't have as much impact as they once did.

True... What I meant to say is that the rules governing reserve fraction requirements could be changed. Sweeps originated from a change to those rules which created categories of account with no reserve fraction requirement; they can just as easily be undone by changing the rules back. I think the big picture is that our monetary system isn't constrained by anything other than man-made rules, and in mid-crisis, the authorities can change the rules as necessary. This is essentially the mirror image of iTulip's argument for why the government can always choose to create inflation -- by the same token, the government can always choose to drain reserves from the system because they make the rules up as they go along.

[ASH]

Re: Fed starts printing press: $1T+ in additional purchases

I don't think the Fed is authorized to pay higher than market value for the MBS. I recall a big flap along those lines from the CBO recently. So the purchases will take the securities off of the books of the banks, but it won't replenish their capital like TARP did. At least that's my understanding. TARP was Treasury-directed purchases that resulted in new capital being added to banks. Actions by the Fed don't do the same thing.

Would the purchase of $1.25T of MBS at market prices be large enough to shift that market price?

[Sharky]

Re: Fed starts printing press: $1T+ in additional purchases

True... What I meant to say is that the rules governing reserve fraction requirements could be changed.

Agree.

Would the purchase of $1.25T of MBS at market prices be large enough to shift that market price?

Part of what the banks are struggling with is that the market for MBS has basically evaporated. I suspect what will really happen here is that the Fed will become the market for MBS. Probably the only half-way honest approach to making that work would be to have some kind of outside ratings agency put a price on the securities. Since they would have to do that before the Fed bought them, it's hard to see how it would affect prices.

In fact, it's beginning to sound as though the Fed is going to become the "bad bank" that people have talked about -- it will buy up all the crap so that the other banks can start to get back to normal. Mark my words, though, they're going to need TARP v2 before too long. The hemoraging of bank capital is the real risk in the system, not their balance sheets. In fact, the Fed itself will have the same problem soon too.

Side note: if the Treasury "injects capital" into banks -- basically giving them a bunch of money and getting nothing in return -- why isn't anyone calling that nationalization? Is it only because the existing stockholders still have equity? Shouldn't there be some outrage about that?

[hayekvindicated]

Re: Fed starts printing press: $1T+ in additional purchases

Have you read the book? Seriously, dude, that's a review. It's basically a history of nation-building policies since the sixties with an eye toward reforming the leadership's (or the counter-revolution's) economics bent by sending in the "Chicago Boys" and then reforming the country by means of economic distress or "shocks." There are times when he will mention the loss of social programs in the process, but social programs has nothing to do with what the book is about. There's also a bit of black magic she employs in drawing the direct line between economic shocks and state violence (in some cases, like Pinochet, it's more effective; in others, like Yeltsin, not so much IMO), but much of the book is solidly grounded in policy research. She does fall into the left-of-liberal camp, but at least they're willing to condemn Clinton alongside Kissinger.

I have better things to do with my time than read some pea brained imbecile's "research".

[Chomsky]

Re: Fed starts printing press: $1T+ in additional purchases

Agree.



Part of what the banks are struggling with is that the market for MBS has basically evaporated. I suspect what will really happen here is that the Fed will become the market for MBS. Probably the only half-way honest approach to making that work would be to have some kind of outside ratings agency put a price on the securities. Since they would have to do that before the Fed bought them, it's hard to see how it would affect prices.

In fact, it's beginning to sound as though the Fed is going to become the "bad bank" that people have talked about -- it will buy up all the crap so that the other banks can start to get back to normal. Mark my words, though, they're going to need TARP v2 before too long. The hemoraging of bank capital is the real risk in the system, not their balance sheets. In fact, the Fed itself will have the same problem soon too.

Side note: if the Treasury "injects capital" into banks -- basically giving them a bunch of money and getting nothing in return -- why isn't anyone calling that nationalization? Is it only because the existing stockholders still have equity? Shouldn't there be some outrage about that?

There is no market for MBS right now, but banks argue that the securities aren't valueless because they are still performing via cash flows. It seems to me that a big part of the drive to relieve banks of their "troubled" MBS is that as time goes on, even the plausible rationalization for their value is being eroded, as more and more homeowners default. (Same situation for other asset-backed securities, like credit-card ABS, commercial MBS, etc.) Dropping the fundamentally depreciating securities on the Fed at least stops the bleeding, from the banks' point of view.

[we_are_toast]

Re: Fed starts printing press: $1T+ in additional purchases

In fact, it's beginning to sound as though the Fed is going to become the "bad bank" that people have talked about -- it will buy up all the crap so that the other banks can start to get back to normal. Mark my words, though, they're going to need TARP v2 before too long. The hemoraging of bank capital is the real risk in the system, not their balance sheets. In fact, the Fed itself will have the same problem soon too.

Side note: if the Treasury "injects capital" into banks -- basically giving them a bunch of money and getting nothing in return -- why isn't anyone calling that nationalization? Is it only because the existing stockholders still have equity? Shouldn't there be some outrage about that?

Yep! If the Treasury does it, the U.S. deficit goes sky high and they have to pay interest on the notes, if the FED does it, it really doesn't look so bad and there is no interest to pay. Right now they're basically fully nationalizing Freddie and Fannie and recapitalizing them at the same time, only without having to take managerial control.

As soon as some new legislation is passed, they'll do the same to AIG, Citi, BOA, and anyone else that needs it.

The big question is, why won't this work? They can hold on to all the trash for as long as they need, even to maturity. They can resell it into the market if too much inflation starts up. They have a lot of room in raising interest rates to dampen inflation. And they have many other tools to fight inflation. I'm just not seeing why this isn't going to work.

[The Outback Oracle]

Re: Fed starts printing press: $1T+ in additional purchases

When they have to raise interest rates to kill inflation, it will kill everything worse than this time. Then they will lower interst rates to zero again and print even larger amounts of money etc. etc etc
They are trying to rescue the old system without changing anything. There must be an engineering equivalent of some kind. I was watching a clip of a huge bridge somewhere in Europe being blown about by the wind. The oscillations start off small and just increase in intensity until the whole thing is swinging wildly in the wind, Then finally it just breaks apart and crumbles into the valley below.
That's essentially what will go on here. Each swing will be bigger until the whole thing simply falls apart.

[Southernguy]

Re: Fed starts printing press: $1T+ in additional purchases

I remember Steve Keen´s work, published in ITULIP some time ago. Basically there´s a problem of too much debt, and too little money to pay for it. So Keen says the stimulus plan at the time was pathetically small. Esentially, what´s going on now is an enlargement of such plans. Inflation is the other way round of debt liquidation. Instead of the politically unfeasable debt trimming proposed by Keen and M. Hudson, they liquidate debt via inflation.
So they´re going step by step in the same way. Now it seem´s they had some information that new bad news were about to surface from the banks, generating a new wave of stock selling.
These news give new impulse to stock markets.
The rest of the world follows enthusiastically, they have no other choice.
Inflation and more inflation.
I really don´t think at this point that there shall be another bout of deflationist pressures.
The CB´s won´t let it happen. The FED is showing the way.
As debtors see their debt diminish in relative terms, there shall be a moment in which they´re again able to buy stuff.
Interesting and dangerous times.
Very difficult to make money, just try not to be wiped out.

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

They are trying to rescue the old system without changing anything. There must be an engineering equivalent of some kind. I was watching a clip of a huge bridge somewhere in Europe being blown about by the wind. The oscillations start off small and just increase in intensity until the whole thing is swinging wildly in the wind, Then finally it just breaks apart and crumbles into the valley below.
That's essentially what will go on here. Each swing will be bigger until the whole thing simply falls apart.

I call it the death wabble. Anybody that has learned how to ride a bike with no hands (on the handlebars) knows it. Wabble...wabble, wabble, wabble... splat.

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

So how do they keep inflation expectations from driving prices down while using funny money to buy them back up? I dunno...guess thats why the called greenspan "miestro"

Scare tactics - who wants to be on the opposite side of the bet? Even if you're ultimately right, the timing will most likely kill you before you get there. They'll out last you.

US$300 billion isn't huge in the current scheme of things, they're wetting their beaks as a signal. But, the size of the beast behind that beak is what people are looking at. People should be smart enough now to know that the us treasury market is not really a market.

That said, re: inflation premiums: in the coming years, when you look up "collateral damage" in the dictionary, they should have a bigarse picture of corporate debt/bond holders.

[c1ue]

Re: Fed starts printing press: $1T+ in additional purchases

US$300 billion isn't huge in the current scheme of things, they're wetting their beaks as a signal. But, the size of the beast behind that beak is what people are looking at. People should be smart enough now to know that the us treasury market is not really a market.

My how the power of the billion has faded.

This is from the Department of Treasury's Q1 2008 Refunding report:

Q12008Treasury.bmp

Does it look like a $300B direct purchase will be insignificant?

[The Outback Oracle]

Re: Fed starts printing press: $1T+ in additional purchases

I call it the death wabble. Anybody that has learned how to ride a bike with no hands (on the handlebars) knows it. Wabble...wabble, wabble, wabble... splat.

Beautiful!!!!!

[WildspitzE]

Re: Fed starts printing press: $1T+ in additional purchases

My how the power of the billion has faded.

This is from the Department of Treasury's Q1 2008 Refunding report:

Does it look like a $300B direct purchase will be insignificant?

It has, hasn't it? billions-shmillions.

Perhaps my tongue in cheek tone came across wrong. My point - based on the context of the question - was that the signaling in this case will have a greater effect than the actual numbers.

That said, 300 billion in an 11 trillion market isn't crazy huge in it of itself. They are not only buying newly issued Treasuries but they are supporting the existing debt (and the potential flight from such existing debt). Also, Q1 2008 is a lifetime ago based on what has transpired.

All that said, I wasn't trying to diminish the magnitude of this move and my response was based solely in the context of the question.

Personally, I believe that this move is huge, because it crosses pschological barriers, and it is a key step towards hyperinflation. It is the necessary step that allows us access to those dreaded feedback loops.

Seriously though, of course billions still matter... Especially as these 300 will show up here:
http://research.stlouisfed.org/publi...usfd/page3.pdf