Tuesday, December 09, 2008

What's next in the Fed's Bag-o-tricks?

Folks, this economic crisis of the century just keeps getting better - The story below is further proof that reality is far better than fiction... But then again, maybe I'm wrong... Maybe the Fed, alongside with their huge disinformation staff, is home to numerous top-notch fiction writers - whose wild-eye, far-fetched ideas are harnessed into increasingly dubious, yet executable monetary activities that get the obligatory rubber-stamp from our bought and paid for Congress - thus shaping our future and becoming our new reality. Hmm, so maybe fiction = reality?

WSJ 10 Dec - Fed Weighs Debt Sales of Its Own

Move Presents Challenges: 'Very Close Cousins to Existing Treasury Bills'

The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.

Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

It isn't known whether these preliminary discussions will result in a formal proposal or Fed action. One hurdle: The Federal Reserve Act doesn't explicitly permit the Fed to issue notes beyond currency.

Just exploring the idea underscores many challenges the ongoing problems are creating for the Fed, as well as the lengths to which the central bank is going to come up with new ideas.

At the core of the deliberations is the Fed's balance sheet, which has grown from less than $900 billion to more than $2 trillion since August as it backstops new markets like commercial paper, money-market funds, mortgage-backed securities and ailing companies such as American International Group Inc.

The ballooning balance sheet is presenting complications for the Fed. In the early stages of the crisis, officials funded their programs by drawing down on holdings of Treasury bonds, using the proceeds to finance new programs. Officials don't want that stockpile to get too low. It now is about $476 billion, with some of that amount already tied up in other programs.

The Fed also has turned to the Treasury Department for cash. Treasury has issued debt, leaving the proceeds on deposit with the Fed for the central bank to use as it chose. But the Treasury said in November it was scaling back that effort. The Treasury is undertaking its own massive borrowing program and faces legal limits on how much it can borrow.

More recently, the Fed has funded programs by flooding the financial system with money it created itself -- known in central-banking circles as bank reserves -- and has used the money to make loans and purchase assets.

Some economists worry about the consequences of this approach. Fed officials could find it challenging to remove the cash from the system once markets stabilize and the economy improves. It's not a problem now, but if they're too slow to act later it can cause inflation.

Moreover, the flood of additional cash makes it harder for Fed officials to maintain interest rates at their desired level. The fed-funds rate, an overnight borrowing rate between banks, has fallen consistently below the Fed's 1% target. It is expected to reduce that target next week.

Louis Crandall, an economist with Wrightson ICAP LLC, a Wall Street money-market broker, says the Fed's interventions also have the potential to clog up the balance sheets of banks, its main intermediaries.

"Finding alternative funding vehicles that bypass the banking system would be a more effective way to support the U.S. credit system," he says.

Some private economists worry that Fed-issued bonds could create new problems. Marvin Goodfriend, an economist at Carnegie Mellon University's Tepper School of Business and a former senior staffer at the Federal Reserve Bank of Richmond, said that issuing debt could put the Fed at odds with the Treasury at a time when it is already issuing mountains of debt itself.

"It creates problems in coordinating the issuance of government debt," Mr. Goodfriend said. "These would be very close cousins to existing Treasury bills. They would be competing in the same market to federal debt."

With Treasury-bill rates now near zero, it seems unlikely that Fed debt would push Treasury rates much higher, but it could some day become an issue.

There are also questions about the Fed's authority.

"I had always worked under the assumption that the Federal Reserve couldn't issue debt," said Vincent Reinhart, a former senior Fed staffer who is now an economist at the American Enterprise Institute. He says it is an action better suited to the Treasury Department, which has clear congressional authority to borrow on behalf of the government.


GK said...

I agree with Denninger that this is strictly treason.


f this report is real and Congress does not immediately disavow this attempt - publicly - we no longer have a Constitutional Republic.

That The Federal Reserve would even discuss such a thing with Congress is, in my opinion, grounds for instantaneous revocation of The Federal Reserve Act of 1913 and a return of the control of our monetary system to Congress where it belongs.

It is my considered opinion that any attempted usurpation of the Constitutional power to obligate the citizens of this nation to pay debt via taxation, which under the Constitution of The United States must originate by specific bill in The House of Representatives (all spending bills must originate in The House), is a blatant attempt to overthrow by chicanery The Government of The United States and must be treated as such by The FBI, The Department of Homeland Security and the citizens of this nation.

Let me be clear. This is not "reflating" or "inflating" or "hyperinflating" or anything of the kind, although I'm sure some people will pipe up and make all sorts of noise in that regard.

In my opinion this "discussion" constitutes an attempted coup - period.

Bernanke must resign.


jerry said...

Republican PA Senator Arlen Specter, a constitutional lawyer, and the most learned one in the senate, no doubt, would be very much against any attempt by Bada Bing Bernanke to create new syndicate currency to circulate through the Fed. My guess, this won't go anywhere, although we will see. Bernanke should be fired.

justin said...

Where's Arlen been for everything else concerning their crooked deeds? I wouldn't bet on him showing up for this matter. Just my opinion though. As always no disrespect met towards anyone else. Especially you Jerry. Hell, your part of my cyber family lol.