A new chapter in the financial crisis

[gonegolfin]

The significant Fed monetization of government debt that I have been expecting and writing about for several years is now upon us. Today, the Federal Reserve announced that late next week a program of purchasing $300 billion of longer dated treasury debt will commence. Given that the Treasury will need to issue well north of $1 trillion (and maybe $2 trillion) in government debt over the next 12 -> 18 months, this is assuredly the opening salvo for the Fed. Foreign official institutions will not have the reserves to consume such supply and domestic savers will not fill the gap. Enter the Fed with a program to purchase massive amounts of longer term Treasury debt in the open market. The program will target the purchases of Treasury issues mostly with maturities between two and ten years.

And so there is no confusion here ... contrary to what many information sources would have you believe, the Fed does not lend directly to the Treasury/Government. The Fed has no authority to lend directly to the Treasury and thus cannot participate in Treasury auctions or purchase government debt directly from the Treasury (except in the case where maturing issues in the Fed portfolio need to be rolled over into new issues). When the Fed makes outright purchases of Treasury debt, it does so through its team of primary dealers usually via competitive auction.

If that is not enough, the Fed has increased its commitments to purchasing mortgage-backed securities backed by Fannie Mae and Freddie Mac (Agency MBSs). The Fed earlier announced a program to purchase $500 billion of these securities. That has now been upped $750 billion to a staggering $1.25 trillion. Additionally, purchases of Agency debt have been retargeted to $200 billion from $100 billion. The combination of the purchases of long term Treasury debt along with signification subsidzation of the mortgage securitization market will result in artifically low mortgage lending rates for a period of time and an artificial floor under housing prices.

Gold saw over a $60 reversal from its lows today.

I will write more about this in the coming weeks as it unfolds. Of particular interest will be how quickly and how much of this new reserve creation makes its way into both narrow and broad money supply.

Fed to Buy $300 Billion of Longer-Term Treasuries (Update4) - Bloomberg.com
Statement Regarding Purchases of Treasury Securities - Federal Reserve Bank of New York

Brian

 

[wimpy77]

brian, most economist think in the short term what the fed did was a good thing but will pose problems down the line mainly with inflation which i agree with. how long will the fed institute this program and you predict a dollar collapse like some people jim rogers are predicting today.

 

[editec]

What if our government did nothing, as so many here think would have been the best course to follow?

Would most (if not all) banks collapse?

I suspect they might

Are they doing it right now?

I am truly not well informed enough to know.

My instricts tell me that they are saving part of the economy (SOME SMALL SEGMENT of the monied classes) and foisting the cost of doing that onto the backs of ALL of us, rich and poor alike

 

[PoliticalChic]

brian, most economist think in the short term what the fed did was a good thing but will pose problems down the line mainly with inflation which i agree with. how long will the fed institute this program and you predict a dollar collapse like some people jim rogers are predicting today.

Yes, it seems that a number of sources are worried about the current tripling of the money supply, and the coming inflation.

Where is the foresight? What is going to happen to morgages of those elderly and others who still have a mortgage, and are faced with rampant inflation?

And how do you counter inflation? Yup, government induced recession.

 

[Paulie]

Where is the foresight? What is going to happen to morgages of those elderly and others who still have a mortgage, and are faced with rampant inflation?

And how do you counter inflation? Yup, government induced recession.

People with debt are not necessarily hurt all that much from inflation. Inflation can help to eat away at the debt, and the interest particularly, and can help save you money. The problem is all the other things that need to be bought. What you can do to counter it is since you KNOW it's coming, stock up on what's cheap now. Build a supply so that when prices go up you don't need to purchase as much at that time.

And buy precious metals.

 

[Neubarth]

And buy precious metals.

How do you cook precious metals if you are hungry and there is no food to be had? I say use your precious metals and diamond rings and anything else you can sell now to get title to some farm land out in the country far away from any Big City and any highways leading to and from same. Fortify that land with a redoubt and stock it with plenty of ammo and explosives to be used for self defense.

Civil order will break down within a year. If the rampaging hordes of pillaging and raping and murdering beasts from the decaying cities come out to your land, kill them and use their bodies for fertilizer for fruit trees that you plant.

Remember, you will be the king of your land. In your kingdom trespassers can be shot on sight unless they be fair maidens interested in being one among your many wives.

Now, Paulie, since you are Gay, I guess you can have your boyfriends.

 

[wimpy77]

brian, most economist think in the short term what the fed did was a good thing but will pose problems down the line mainly with inflation which i agree with. how long will the fed institute this program and you predict a dollar collapse like some people jim rogers are predicting today.

Yes, it seems that a number of sources are worried about the current tripling of the money supply, and the coming inflation.

Where is the foresight? What is going to happen to morgages of those elderly and others who still have a mortgage, and are faced with rampant inflation?

And how do you counter inflation? Yup, government induced recession.

inflation can be countered by raising interest rates among other things

 

[wimpy77]

And buy precious metals.

How do you cook precious metals if you are hungry and there is no food to be had? I say use your precious metals and diamond rings and anything else you can sell now to get title to some farm land out in the country far away from any Big City and any highways leading to and from same. Fortify that land with a redoubt and stock it with plenty of ammo and explosives to be used for self defense.

Civil order will break down within a year. If the rampaging hordes of pillaging and raping and murdering beasts from the decaying cities come out to your land, kill them and use their bodies for fertilizer for fruit trees that you plant.

Remember, you will be the king of your land. In your kingdom trespassers can be shot on sight unless they be fair maidens interested in being one among your many wives.

Now, Paulie, since you are Gay, I guess you can have your boyfriends.

you are just a down right asshole.

 

[Terral]

Hi Gone:

Maybe you will teach me a thing or two about what the illegal FED is doing here . . .

The significant Fed monetization of government debt that I have been expecting and writing about for several years is now upon us. Today, the Federal Reserve announced that late next week a program of purchasing $300 billion of longer dated treasury debt will commence.

In other words, you are talking about the privately-owned FED printing up more paper to purchase Treasury Debt, when the U.S. Government is broke and the U.S. Treasury (chart) says the US Debt exceeds 65.5 Trillion Dollars (story). However, the real story is that the USA was 99.2 Trillion Dollars in debt as of August 11, 2008 of last year (story); and the real Debt is obviously higher than 100 Trillion Dollars as we speak. The illegal FED is not ‘buying’ anything at all, because printing money only creates more DEBT and devalues all the dollars in our pockets. Ron Paul knows what is really going on:

[ame="http://www.youtube.com/watch?v=MpQlB3f9Al4"]YouTube - Ron Paul "The Federal Reserve Is the Culprit![/ame]

Given that the Treasury will need to issue well north of $1 trillion (and maybe $2 trillion) in government debt over the next 12 -> 18 months, this is assuredly the opening salvo for the Fed. Foreign official institutions will not have the reserves to consume such supply and domestic savers will not fill the gap. Enter the Fed with a program to purchase massive amounts of longer term Treasury debt in the open market. The program will target the purchases of Treasury issues mostly with maturities between two and ten years.

The idea that the FED is going to ‘purchase’ anything is amusing, especially when this privately-owned central bank is not even supposed to exist and the Treasury itself is supposed to be in the business of printing US money by authority of Congress under Article 1 Section 8 of the U.S. Constitution (link). The FED pays itself ‘interest’ for lending out OUR OWN MONEY and creates NO WEALTH for anyone but FED shareholders who have been siphoning off U.S. wealth since 1913. My uncle (rip) handed me a copy of Gary Allen’s book entitled “None Dare Call It Conspiracy” (link) in the early 1970’s, so I have been watching these cartoon characters rape and pillage and steal wealth from Americans for over thirty years. I bought my first home for 20,000 dollars in the mid 1970’s and the same house today sells for about 150,000 dollars. Do you know why? :0) I do.

Everything costs more because the FED continues charging interest on the same money each time our currency circulates through the system. If the prime rate is five percent, they take out five cents on every dollar at loan origination and the market gets 95 cents for paying a seller for the borrower. The seller puts the money back into the bank, which is shipped back to the FED, and here we go again and again and again, until the FED must print up even more worthless dollars to resupply the system ‘and’ devalue all the dollars. Then the same international bankers lend us back OUR OWN MONEY against the National Debt to receive interest for the ‘second’ time. :0) The USA cannot compete with other countries in the Global Market (like China), because they have no bloodsucking FED siphoning off their wealth. In fact, these countries without a FED must continuously print money, to keep up with our illegal FED, or suffer the consequences of a ‘strong’ currency that reduces export potential. Now that the owners of the FED (they pulled off 9/11) have stolen all of your wealth, they are coming to enslave you and your children once this U.S./Global Economic Implosion Cycle is complete.

And so there is no confusion here ... contrary to what many information sources would have you believe, the Fed does not lend directly to the Treasury/Government. The Fed has no authority to lend directly to the Treasury and thus cannot participate in Treasury auctions or purchase government debt directly from the Treasury (except in the case where maturing issues in the Fed portfolio need to be rolled over into new issues). When the Fed makes outright purchases of Treasury debt, it does so through its team of primary dealers usually via competitive auction.

The FED prints up money that is backed BY NOTHING. The ‘purchasing’ you are talking about is nothing more than an elaborate Ponzi Scheme (Wiki = I explain here) based upon suckering new buyers in to invest their private capital, so our creditors can receive interest payments on loans against our out-of-control National Debt. You are describing how the FED is about to place more ‘debt’ on our children and grandchildren by printing up even more worthless dollars for lending out to somebody for even more interest . . .

If that is not enough, the Fed has increased its commitments to purchasing mortgage-backed securities backed by Fannie Mae and Freddie Mac (Agency MBSs).

So, who gets caught holding the ‘bad paper’ bag, when housing prices slide another 50 percent? These people are privatizing profit and socializing risk and our children are left holding the check. All of these FED retards (Bernanke and the whole lot) need to be stood against the wall and shot . . .

The Fed earlier announced a program to purchase $500 billion of these securities. That has now been upped $750 billion to a staggering $1.25 trillion.

Really? The FED is just going to ‘purchase’ trillions of dollars of debt by printing up worthless paper and charging We The People even more interest, when 1 Trillion dollars is about 1/100th of the National Debt. The reason we are talking about the FED finding a way to place this debt on our children is because everyone else is broke, because of the cotton-picking FED. :0)

Additionally, purchases of Agency debt have been retargeted to $200 billion from $100 billion. The combination of the purchases of long term Treasury debt along with signification subsidzation of the mortgage securitization market will result in artifically low mortgage lending rates for a period of time and an artificial floor under housing prices.

I disagree 100 percent. The biggest problem we have in the USA right now is most people are focusing on the ‘symptoms’ and not the real cause of the Mortgage/Foreclosure Crisis; which in reality has nothing to do with the banks at all (explained here and here). These idiots in Washington DC and Wall Street have been dumping trillions of dollars into the banks and the unemployment numbers keep escalating higher and house prices continue going lower. Offering lower rates to people does not good when they have no JOB and you allow too much outsourcing and too many Foreign Nationals (legal and illegal) to run around ‘displacing’ U.S. workers from JOBS. The USA will import another 1.5 MILLION foreigners into the country this year and next year and the next year, because Congress and the Obama Fascist/Socialist Regime are apparently destroying the US middle class on purpose . . .

Gold saw over a $60 reversal from its lows today.

I saw a “For Sale” sign on the side of the road yesterday for a house selling for “44,000 dollars.” The Economy is IMPLODING and people are becoming more desperate and housing prices are definitely going DOWN no matter what the FED does to inflate the money supply. This deflation spiral in housing prices has NOTHING to do with monetary policy at all. Zip, zero, nothing. The bottom rungs of the US Consumer Base have already imploded and we are seeing the service sector collapsing now, which in turn will lead to fewer professional JOBS ‘and’ these are the people who are supposed to be making offers on your house that is for sale. The value of your house has NOTHING to do with what Bernanke does at this point, but how much disposable income the ‘buyers’ for houses have in your own neighborhood in the collapsing economy. Imploding house prices mean a higher percentage of homeowners are going under water every day, which means fewer and fewer potential buyers in your neighborhood. Why should I pay 350,000 dollars for your house, when I can buy the one down the street for 44,000 dollars? :0)

I will write more about this in the coming weeks as it unfolds. Of particular interest will be how quickly and how much of this new reserve creation makes its way into both narrow and broad money supply.

New reserve? Lordy . . . All of this money comes with a price tag adding more DEBT to the economy, because all of those FED retards you see on the TV actually create no wealth at all. These bankers are figuring a way to get ‘toxic assets’ off of their balance sheets and onto the National Debt that is now over 100 Trillion dollars and heading towards 200 Trillion dollars. I do not believe that the FED can print money as fast as the real National Debt is climbing ‘and’ eventually those holding our debt will figure that out ‘and’ start dumping U.S. dollars; until the ones in your pocket are worth less than the paper itself.

My two cents,

GL,

Terral

 

[raceright]

And buy precious metals.

How do you cook precious metals if you are hungry and there is no food to be had? I say use your precious metals and diamond rings and anything else you can sell now to get title to some farm land out in the country far away from any Big City and any highways leading to and from same. Fortify that land with a redoubt and stock it with plenty of ammo and explosives to be used for self defense.

Civil order will break down within a year. If the rampaging hordes of pillaging and raping and murdering beasts from the decaying cities come out to your land, kill them and use their bodies for fertilizer for fruit trees that you plant.

Remember, you will be the king of your land. In your kingdom trespassers can be shot on sight unless they be fair maidens interested in being one among your many wives.

Now, Paulie, since you are Gay, I guess you can have your boyfriends.

you are just a down right asshole.

Na he is pretty fuckin funny but as in all humor there is a degree of truth

 

[Bern80]

What if our government did nothing, as so many here think would have been the best course to follow?

Would most (if not all) banks collapse?

I suspect they might

Are they doing it right now?

I am truly not well informed enough to know.

My instricts tell me that they are saving part of the economy (SOME SMALL SEGMENT of the monied classes) and foisting the cost of doing that onto the backs of ALL of us, rich and poor alike

Well that is the big scare tactic. You probably didn't let it fly when Bush tried to do it with Iraq and WMDs. Why do yo you find the same argument so much more palatable now?

I have yet to see much convincing evidence that the economy was going to spiral into a bottomless pit if we didn't let these what these irresponsible companies reap what they had sewn.

What I am quite certain of giving the above article and this one:

90 Bonus Tax Way to Destroy Our Economy: Tech Ticker, Yahoo! Finance

is that our government is only making things worse. They aren't screwing just the little people, they are screwing everyone. it isn't enough to do just do something, anything rather than nothing. You still have to get it right and the democrat controlled government isn't even close to getting it right.

 

[wimpy77]

do you even know what the 90% tax bill is about? anyways it hadn't even come to a vote in the senate because of constitutional complaints.

 

[Paulie]

And buy precious metals.

How do you cook precious metals if you are hungry and there is no food to be had? I say use your precious metals and diamond rings and anything else you can sell now to get title to some farm land out in the country far away from any Big City and any highways leading to and from same. Fortify that land with a redoubt and stock it with plenty of ammo and explosives to be used for self defense.

Civil order will break down within a year. If the rampaging hordes of pillaging and raping and murdering beasts from the decaying cities come out to your land, kill them and use their bodies for fertilizer for fruit trees that you plant.

Remember, you will be the king of your land. In your kingdom trespassers can be shot on sight unless they be fair maidens interested in being one among your many wives.

Now, Paulie, since you are Gay, I guess you can have your boyfriends.

I notice you capitalized the word gay. Apparently you hold it in higher esteem than I, which probably makes you MUCH gayer than you hope I am.

 

[gonegolfin]

brian, most economist think in the short term what the fed did was a good thing but will pose problems down the line mainly with inflation which i agree with. how long will the fed institute this program and you predict a dollar collapse like some people jim rogers are predicting today.

What the Fed did will provide shorter term relief, but will create bigger problems in the future. Bigger than the problems created by the reflation effort earlier this decade.

The Fed will continue such operations until they see the grow they want. The problem is that they will be too late (as they always are) in draining reserves from the system.

No, I do not think that the Dollar will collapse. I do think that many of the major currencies will be debased in a reasonably significant way. I do expect a healthy bout of inflation for the Dollar (somewhere between 15% and 40%).

Many folks that are predicting a Dollar collapse (Ex. Schiff) are ignoring the significant problem other currencies are facing. For example, the Euro.

Brian

 

[gonegolfin]

brian, most economist think in the short term what the fed did was a good thing but will pose problems down the line mainly with inflation which i agree with. how long will the fed institute this program and you predict a dollar collapse like some people jim rogers are predicting today.

Yes, it seems that a number of sources are worried about the current tripling of the money supply, and the coming inflation.

These sources need to understand the difference between the monetary base and the money supply. The money supply has not tripled. In fact, neither has the monetary base, but the base has had impressive growth. The money supply is actually up only modestly since extensive bank reserve creation has commenced (last September).

Brian

 

[Paulie]

The main problem those other currencies are facing is the central banks controlling them. If not for their help in debasing their currencies in lockstep, the Dollar probably would have collapsed a while ago.

 

[Indiana Oracle]

There is too much inside the previous string to address all of it succinctly, so I would like to come at it from a different angle.

Dialogue is Good
It is really important right now for each of us to think through what is going on with the economy and what Washington is and is not doing about it. There is a short post in this regard on my blog (trackbacks).

From the perspective of needing a dialogue, we on this site, and with this string, in my view at least, are doing very much the right thing.

Congress and the President
As I have said here more than once, I am not a defender of the Congressional membership and have some real doubts about the capabilities and philosophies of this administration.

But Obama, despite media hype, is a time traveler, as all Presidents were before him. Yes, Presidents put their own people in place for cabinet positions and the like, but the economy is older than all of that and it has its own history and mechanisms as well. Many of which are not fully understood by us or by any senior elected official.

This is important. It is one reason why Barney Frank, despite what kind of representative he may be in practice, holds so much sway. It is widely accepted that at least he knows something. I will give him that much.

Fat Cat Disgust
It is really difficult, given the foregoing, for most people to be anything but disgusted or worse with the financial institutions that Washington is bailing out/otherwise assisting. And, at the same time, to not be as focused on the culprits in the Congress and the details of what all of this is about there and within the financial system.

Personally what the Fed and Treasury are doing also makes me sick from multiple standpoints, but, while the economic troubles we are experiencing are a bit more extreme than I anticipated, given the mix of no-consequences behavior models, our natural instinct toward greed (that counts all of us), under regulation, and broad incompetence in Washington (everybody, across all administrations), a general economic correction was hardly a surprise.



The Bottom Line

1. Fed and Treasury have to do something - big - and probably more of it will be coming just as gonegolfin outlines. All the Congress can do is grandstand and rely on their Finance and Banking members (and noise coming from us).
2. Washington and the media would like nothing better than for us to focus on surface issues.
3. Washington needs, to quote Obama, be more transparent, and to explain what it is doing and why. Bernanke on 60-Minutes was a good move.

In our hearts of hearts we want these people to succeed. They need to help us support them. That is not really happening. All these fools in the Congress and the media know how to do is entertain - if you can attach that name to what is going on right now.

But keep it coming. We need to get right about this and apply pressure to Washington.

 

[Hum Dinger]

This whole crisis is nothing but an international billionaire free liberaterian rebellion against the recently elected liberal government. The whole thing is a fraud.

Strong international banking regulations with currency devaluation is exactly what's needed to turn this around.

Yup, you'd betterinvest and buy, buy, buy, 'cause pretty soon massive inflation is coming.

For the debt ridden, it will be a blessing.

A political will for government action will mandate indexing of salaries and wages, if needed, so most workers will do O.K.

The people who are gonna be screwed are those who've horded massive amount of savings, especially in overseas 'Tax Havens'. They're either going to have to pull their money out and invest it or they're gonna lose it.

Devaluation will force them into a 'least bad investment' mode.

Currency only has theoretical value, what matters is investment that stimulates production.

Use it or lose it.

 

[wimpy77]

i look forward to reading more brian.

 

[gonegolfin]

What if our government did nothing, as so many here think would have been the best course to follow?

Would most (if not all) banks collapse?

I suspect they might

The absence of all of this government intervention would put us on the path to a much quicker and sounder recovery. This is all simply another attempt at reflation and punting the problem down the road. Except that each cycle of reflation results in more money spent and a weaker recovery/growth cycle (in terms of length and depth). Allowing the free market to be free and adjust on its own would result in short term pain, but in the end it is the prudent course of action. But we are taking an alternative course of action. One day (either in the present cycle or probably in the next cycle), the reflation will fail and the economy will be forced to take its medicine. And it will be worse than had we originally taken the correct course of action.

My instricts tell me that they are saving part of the economy (SOME SMALL SEGMENT of the monied classes) and foisting the cost of doing that onto the backs of ALL of us, rich and poor alike

Certainly the banks and financial institutions are at the top of the list of beneficiaries. But some of the cost of this intervention is being spread internationally. All Dollar holders are required to ante up.

Brian