|
First, the Fed has printed a ton of money of the
last several years. The monetary base at the Fed is 43% higher today than it
was in 2000. No wonder gold and oil are higher.
Over
the last several years, the Fed has tried to slow the rate of growth of the
monetary base (through higher interest rates). The growth rate of the
monetary base has slowed significantly, which is probably what led to the
recent credit crisis. Everyone was getting used to such a fast growing
monetary base and got caught on the wrong side of momentum.
Over
the past couple of months, the Fed has changed course again – but in a
very interesting way.
Today,
they are providing liquidity via auction facilities (repos), but they have
been sterilizing these moves by buying treasuries (to keep the Fed Funds rate
from collapsing below the target rate).
The
net of all this is that the Fed is taking the mortgage paper as collateral
and giving the banks cash. They are then debiting the banks’ reserves
with an IOU (“I understand you are in immediate trouble, so you can pay
me back later”). This is why banks’ balance sheets are growing so
quickly.
The
idea is that bank collapses can be prevented and the banks can
“earn” their way out of this mess moving forward. Of course, with
the repos and the now high level of borrowed reserves, the banks will have to
charge extremely high interest rates (wide spreads) to earn their way back.
Do you think this situation is at all politically acceptable to the general
populace? Look at the demonstration at Bear Stearns yesterday. Look at the
Senate opening up an investigation into the Fed’s role in Bear Stearns.
Look at Obama calling for the government to bailout subprime borrowers in
North Carolina. Look at Clinton’s massive mortgage rescue plan.
The
banks earning their way out of this crisis will be onerous to the average
American. The banks will be saved but the middle class and poor of this
country will be decimated.
Knowing
what I know about Washington, I fully expect the next chapter is this drama
to be two highly inflationary moves:
1) The
Federal Government will start spending a ton of money to bailout people left
and right. They will ask the Fed to monetize the new debt created by the
Federal Government, thereby increasing the monetary base (printing money!).
2) The
temporary repos will morph into permanent repos. To save the value of these
holdings (so as not to have bank failures and have embarrassing writedowns),
the Fed will monetize mortgages, again increasing the monetary base (printing
money!).
Do
you really think the Fed and Federal Government will sit by and let the banks
earn their way out of this mess off the backs of working-class America?
Already, the anger and frustration levels are growing.
Now
it is simply a debate of whether we put more money into (1) or (2) because
each rewards different political classes in different ways (essentially, who
gets the newly printed money first? Creditors or borrowers?).
Thanks
my two billion cents (how they will say it in the future).
Fake Ben
Bernanke
FakeBen.com
FakeBen is a blog to
monitor the Fed and its actions and encourage community participation. At
FakeBen, we believe that the Fed policy of the last two decades has created a
credit bubble as large as that created in the 1920s. This bubble will lead to
either inflation, a recession, or both.
| 
