Tim Duy - Director of Undergraduate Studies of the Department of Economics at the University of Oregon and the Director of the Oregon Economic Forum - noticed an amazing sentence in the minutes of the most recent meeting of the Fed Open Market Committee:
Yves Smith has the definitive last word on the issue:As has already been widely noted, the minutes of the most recent FOMC meeting reiterated the Fed’s eagerness to reverse, not extend, policy:
Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.
Read that carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting?
I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?
These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?
The only goal of the Fed, despite what they may say in public, is to save the "chosen" banks and their executives. There is no secondary goal. The Fed will pursue this goal until it is achieved or until it is disbanded.
ReplyDeleteLet's leave aside for a moment the greater likelihood that demand for credit is much diminished. The banks cannot lend if there are few or no borrowers.
ReplyDeleteThrift is so in!
Let's also consider the possibility that the reserves are in fact not anything more than bank IOU's. If this is the case, where is the money?
Where are the reserves?
If the reserves are not there, what can the banks lend? If the banks have no cash reserves and Fed knows this, then the statement makes sense.
Since the same Fed has funneled cash to Goldman- Sachs and JP Morgan- Chase through its various proxies during the AIG/Lehman and Bear fiascos - with no accountability - what makes anyone think this process hasn't become standard Fed procedure?
I personally believe the Fed and the Treasury are simply providing base money to finance insiders to allow them to 'cash out' of their illiquid and presumably worthless securities. There are likely no reserves.
You can look at the Fed not as a large and omnipotent commercial bank whose clients require funds to rebalance the books after redemptions. In this role the Fed is lender of last resort.
Better to look at the Fed a s giant investment bank whose direct clients are seeking to redeem their defective securities for cash dollars. The Fed helps 'create' the market into which many of these can be sold by high- velocity algorhythmic trading on the part of its primary dealers, it lends into existance the funds that are swapped fot the securities at inflated prices. It also directly swaps illiquid garbage from various insiders for highly liquid Treasuries, and provides a highly liquid cash market for these.
PIMCO has been swapping mortgage junk for Treasuries to the tune of tens of billions.
The key to me is the Fed and its counterparts have no interest in future repurchase or repayment for the securities it takes onto its balance sheet, a long- running 'oversight' that has been the Fed's method of operation since the collapse and sale of Bear- Stearns.
John Hussman remarked:
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“The troubling aspect of the Fed's action was not that it lent to a non-bank entity. That ability is clearly authorized by Section 13(3) of the Federal Reserve Act. The problem is that it made its “loans” as “non-recourse” funding – meaning that it would not stand to be repaid if the collateral itself was to fail.” This is still what the Fed seems determined to accomplish.
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http://www.hussmanfunds.com/wmc/wmc091116.htm
I've written more over here:
http://economic-undertow.blogspot.com/2009/11/bernankes-money-laundering-operation.html
There are items from Zero Hedge, more from Hussman, Bloomberg and others sketching the outline of what appears to be a gigantic money- laundering scheme as the Wall Street rats abandon the sinking ship of finance.
Don't forget, the seminal act of this crisis was Goldman shorting its own mortgage paper. The smart money always gets out first. It's getting out right now, under our noses.
Not surprising at all. It is the same policy as the Fed pursued under Greenspan in attacking crises due to falling asset prices. The strategy is to keep inflation low by not feeding the real economy while pumping up asset prices with low interest rates, encouraging hedge funds (and the TBTF banks are essentially hedge funds) to leverage up asset and debt markets to pre-crash levels, thereby making the toxic debt on their books (and hidden off the books) good. This was obviously the plan from the get-go.
ReplyDeleteYou dunce. If you actually read the entire paragraph, the fed is saying that this could cause inflation unless it is "offset" by Federal Reserve steps to withdraw liquidity as the economy recovers. They go on the emphasize that it is important they they, therefore, withdraw monetary accommodation "at the appropriate time."
ReplyDeleteThat doesn't mean that's what they'll do, but that's what they said.
What did you suppose, that this sentence was some kind of "Freudian slip?"
I am not surprised by what they said. They want the banks to curtail their lending because they anticipate a second wave of mortgage defaults with the big commercial real estate bust comming in 2010. They want the banks to have more collatoral to buffer an anticipated decline in commercial real estate values. Already the FDIC has gone bust and borrowed billions more. They don't want the Fed to lose anymore money. They want to cut their loses and close down as many banks as they can.
ReplyDeleteIn the mean time they need to withdraw all that liquidity that was injected into the economy before the end of 2010 or face hyperinflation. They can't do this without risking an economic collapse.