Discount Window Borrowings Plunge To Just $11 Million, Lowest Since 2007; And Other Observations On The Future Of Fed Liabilities

Tyler Durden's picture

In all the recent hoopla over Excess Reserves and spurious rumors over whether or not they should generate any form of interest (readers will recall a key catalyst for a surge in the market two weeks ago was the expectedly false rumor that Bernanke would announce the elimination of any IOR (Interest Paid On Reserves) rather than keeping the even current minimal 0.25% rate), everyone seems to have forgotten that old staple: the Discount Window. And probably logically so: while the Excess Reserve issue is one that deals with excess liquidity in the banking system (by definition: otherwise it would be lent out to consumers), Discount Window-related concerns deal with the opposite, or a liquidity deficiency. Logically, the two are mutually exclusive: near record excess reserves held with Federal Reserve Banks simply means that banks are not in any want for money (of any term, but most specifically ultra-short term).Looking at the Fed's H.4.1 statement confirms that for the week ended July 29, the Fed's Primary Credit facility (aka the current version of the Discount Window, together with the Secondary Credit and the Seasonal Credit Facility) usage has plummeted to just $11 million: a negligible number for a "rescue facility" that at the peak of the crisis saw more than $100 billion in overnight borrowings. The finding is not surprising, when considering that the rate on the Primary Credit Facility is 0.75%. As this is higher than the rate on the 2 Year Treasury, there is very little banks can do in reinvesting capital that is more expensive than even long-term funding sources. In other words, with well over a trillion in Excess Reserves, banks are becoming increasingly self-funding, at least in the medium term, and seek to disintermediate themselves from the Fed. In looking at the same problem, but from the perspective of the IOR, the Atlanta Fed concludes: "One broad justification for an IOR policy is precisely
that it induces banks to hold quantities of excess reserves that are
large enough to mitigate the need for central banks to extend the
credit necessary to keep the payments system running efficiently. And,
of course, mitigating those needs also means mitigating the attendant
." An environment in which banks are increasingly leery of relying on the Fed for funding, irrespective of whether IOR at 0.00% or 0.25%, is not one in which consumer should expect to see any incremental lending any time soon.

The chart below shows discount window borrowings since 2007, combing the Primary and Seconady Credit facilities.

A glance at the other side, or the Fed's "excess liquidity" liabilities, reveals that while Excess Reserves have declined by almost $200 billion since their peak of $1.227 trillion on February 24, to the current $1.045 trillion, the balance has been more than made up by the Deposits with FR Banks other than Reserves, which during the same period has more than offset the Excess Reserve decline, climbing from $45 billion to $250 billion. Indeed, as the chart below demonstrates, banks continue basking in the glow of the Fed liquidity excess, whether they collect 0.25% on this capital or not. While the $205 billion increase in the latter category deserves an analysis of its own, we will put that off to a future date.

Combining the two charts yields the following observation: there are three distinct regimes visible: the first one pre Bear Stearns, was one in which the ratio of Primary Credit Borrowings to Excess Reserves was negligible. Then, at the collapse of Bear (blue shaded area), the ratio of Discount Window Borrowing to Excess Reserves surged to over 100%, at its peak hitting 250%: this was Regime 2. However, Regime 2 promptly ended when Lehman also failed, pushing the ratio back to historical levels, as Excess Reserves took off to offset for the massive surge in Fed "assets" as part of QE 1.0. With the most recent reading, the ratio of the two is back to 0.0%.

So what happens next?

If, as Bullard expects, QE 2 is imminent, then the assets imminently purchased by the Fed will result in yet another massive offset of Excess Reserves: in other words, should QE 2.0 prove to be about $2-3 trillion, all of a sudden banks will find themselves depositing instead of $1 trillion in cash with the Fed, anywhere between $3 and $4 trillion. When one considers the FRNs in circulation are less than $1 trillion (as the other main Fed liability), and this relationships starts to get problematic. If the Fed has difficulty explaining why banks are unwilling to lend to consumers when there is over $1 trillion in cash sitting and collecting dust, or 0.25% as it is technically known, the problem gets even thornier when Bernanke (and Jamie Dimon) have to defend 4 times this number. Surely, the US consumer will demand that banks open up the spigot and provide cash to everyone no matter what their creditworthiness, simply as a result of all the excess money floating around. Will lowering the IOR to 0% at that point help? Not at all due to massive problems such a move would create in the shadow banking system. Very much contrary to expectations of lowering the IOR to 0%, Bernanke in fact provided reasons for why such a move would make no sense:

"… Lowering the interest rate it pays on excess reserve—now at 0.25%—could create trouble in money markets, he said.

" 'The rationale for not going all the way to zero has been that we want the short-term money markets, like the federal funds market, to continue to function in a reasonable way,' he said.

" 'Because if rates go to zero, there will be no incentive for buying and selling federal funds—overnight money in the banking system—and if that market shuts down … it'll be more difficult to manage short-term interest rates when the Federal Reserve begins to tighten policy at some point in the future.' "

In other words, all those who say QE2.0 will do nothing to stimulate the economy are correct, as all such a greenlighted action would encourage is the warehousing of yet more cash by banks. And since banks have no incremental incentives to lend it out, it doesn't matter if the Fed's liabilities are $2.5 trillion or $2.5 quadrillion. Instead of stimulating inflation, which is the end goal, all such an action would do is to create further doubts about the stability of the dollar, which in turn, as Ambrose Evans-Pritchard discussed, is a sure way to go to hyperinflation without first passing either Go, or inflation. Hyperinflation: not in the sense of a pull-driven rise in prices from cheap consumer credit, but a complete collapse of faith in the monetary unit of exchange, likely predicated by a rush to physical commodities and a collapse in the paper system supporting the forced shorting of commodities such as gold. And with Treasuries yielding next to zero courtesy of the expectation of the Fed becoming the end buyer for all paper, and stocks surging to infinity, on the assumption that the Fed will not allow the failure of any risk assets, the end result will be the most divergent market in history, in which both inflation and deflation are priced at the very margins with no gray area inbetween (a theme we have been observing increasingly more often on the pages of Zero Hedge). While that may be good in the short-term for long-only holders of any asset classes, in the medium run (not to mention long), it means the end of the financial system, as the Fed will be caught in a Catch 22 whereby it needs to sustain the perception that it will print into infinity to maintain the divergence, or else the convergence will be one of catastrophic proportions. Of course, even the continued decoupling between inflation and deflation will ultimately eat away at the core of the monetary system, resulting in the complete destruction of the dollar. And with both inflation and deflation priced in at the extreme margin, the only sure alternative will be non-paper based forms of exchange. And unless someone can come up with a substitute to the 2,000 year old legacy cash alternative of gold, it is obvious what real asset class will benefit at the end, as society once again reverts from a monetary system to something far simpler, and far less encumbered by the scourge of any society that are Central Banks.

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ExistentialSkeptic's picture

the 2,000 year old legacy

6,000-year-old at least, but who's counting.

Rogerwilco's picture

Not to nit pick, but I wish I had a "trilling" in excess reserves.

breezer1's picture

knew it all the time. we are screwed.

Spitzer's picture

Zero demand for worthless money, sounds inflationary to me.


jdrose1985's picture

Zero demand for worthless money, sounds inflationary to me.

please send any worthless money you have my way, there certainly seems to be a shortage of it, even in this inflationary environment you've identified. TIA

Spitzer's picture

Zimbabwe dollars, in the mail.

jdrose1985's picture

Zimbabwe dollars, in the mail.

Ah, nice cop-out. I think your original post was in the context of Fed credit, not Zimbabwe. 

Any spare, worthless FRN's you have, shoot em my way. I have plenty of ways to put them to good use.

Spitzer's picture

Fed credit.....Ben, is that you ?

But seriously, what I meant was that the US dollar has no intrinsic value, in digital form, it doesn't even have the value of the paper that it is not written on.

Sam Clemens's picture

I'll be glad to give you all the FRN's you want.  Just send me silver rounds in exchange.  Today's spot price would be fine.  TIA


I actually saw some worthless money - in Europe in 1992. I entered an abandoned house in Yugoslavia that had been looted of everything of value. There was paper Yugoslav currency scattered all over the floor, some in denominations as high as 10,000 whatever. I showed some to the locals and they burst out laughing.

When the Yugoslav establishment (read rich Serbs) no longer had the military assets to chain the slaves of their multi ethnic wonderland together the whole scam imploded.

Here in our Glorious Empire the establishment still has the military assets to extort oil from foreigners. The Imperial PTB (read Bilderbergers etc.) get the boob tube Amero patriot peasants to go along with this mass murder and looting by blowing up our own buildings and blaming it on that B-movie villain, Osama bin Subcontractor of the London-created Moslem Brotherhood.

If we lose the oil wars (very possible) or if the boob tube patriot peasants wise up (unlikely) then the scam will implode here as well and people will actually be willing to send you all the then worthless FRNs you want.

We’re nothing but the Capone extortion mob with aircraft carriers and a Central Bank to deceive the bean counters and handle the book keeping.

All this talk at ZH about inflation, deflation, bonds, stocks etc. is damn interesting but is only meaningful as long as our imperial butcher and loot machine is winning. May the Cyclops eat you next to last.

Young's picture

Funny, I got one of those bills as a kid aswell...

knukles's picture

Why go to the discount window?  The system's awash in excess, net free reserves.  No need to! 

Mark Beck's picture

Its obvious, the FED is pro member banks not pro economy or employment or USD.


What form will QE2 take? Good question.

Exactly what would the justification be to buy another trillion or so in assets? The answer would be to bail out big banks once more, but this would only go to offset bad debt, MBS buy part 2. No real infusion of investment into the economy. It is like trying to finance growth by borrowing from future revenue to pay for legacy bad debt rather than removal of the debt through default. Madness.

The FED motivation, a threat to big bank solvency.

Mark Beck

Spitzer's picture

The fed is pro academia, nothing else.


The real economy will continue to crash until it cannot support the tax payments that pay the debt. At that point it will not matter if the Fed prints nothing, the dollar will be sold off and inflation will ensue.

Just like when the PIGGS could not support the debt of the Euro, the Euro sold off and inflation insued. The Euro did not rise (deflation)

Jeffersonian's picture

I understand the dangers of a paper money system if not managed with extreme prudence, but going back to gold does not seem like a realistic alternative. The growth of the economy would be tied directly to the amount of gold in circulation. How can that possibly work when the supply is so low? Seems to me if we went to gold currency today we would immediately crash the economy to a level which reflects the amount of gold in circulation, i.e. essentially zero. What am I missing? Using gold and silver as a partial backing to the dollar may be workable, but that is about as far I'd go with that.

Incidentally do you guys have any recommendations of online gold dealers with reasonable premiums? If one were to look locally, who would I contact? A jeweler?

SDRII's picture

What price of gold are you assuming?

FOFOA blog

RockyRacoon's picture

Not again....   "There isn't enough gold to back the currency."

As you say SDRII, if it's priced right there is more than enough.

defender's picture

The growth of the economy would be tied directly to the amount of gold in circulation.

In many ways this would be a good thing.  Our current system looks at the numbers of dollars that have changed hands in a year, and if that number went up, then we are happy (GDP).  The reality is that this has very little to do with the economy, and everything to do with the total number of dollars in circulation.  If we have more dollars circulating, then we have a higher GDP.  The fact that about 10% of the previously working population has been unemployed for the last year, and we still get a positive GDP, shows the true amount of inflation that has entered the system. 

Seems to me if we went to gold currency today we would immediately crash the economy to a level which reflects the amount of gold in circulation

This is true, but the amount of goods that the gold would purchase would be the same as the amount that dollars are purchasing now.  Rings and necklaces and bracelets and all kinds of bling would be melted down for their value, and life would go on, the only difference is that instead of a dollar menu at McDonalds, there would be a silver gram menu for your perusal.  That washing machine that you just bought would have been paid for in a single 10th oz gold coin.

In the end, I am undecided if this is inherently better than our current system.  Right now the keepers of the money supply (Fed) have a vested interest in the country improving, or they loose wealth.  With gold, anyone that has a hoard will be a king, and all the kings will be fighting over the scraps that are left over.  But at least you will be free of obligations that are inherent in a paper money system.  I am not sure which would cause the least amount of pain and suffering for us, the proletariat.

wintermute's picture

You don't need gold to back the dollar or currency of any other country. You just need it for international trade to have a stable world economic system.

Even then the gold is only needed to settle the difference between net imports/exports.

Consider country A sells software to country B which sells pork bellies to country A. The value difference between the two amounts can be settled via gold at a central repository. This is how it used to work before World War I wrecked the system. Repositories such as the Bank of England hold gold on account of different parties. One stack belongs to country A and another belongs to country B. At the end of each day the net difference of international trade means some gold bars are moved from one pile to another.

This system would prevent the vast global trade imbalances such as that between China and Western countries. China would only be able to export more than it imports by the amount of gold which western countries would stomach accruing in the Chinese gold pile.

Nationally each country has to take responsibility for their own currency issuance. But because it is not valid for international trade - then the printing to destruction by one country does not have systemic risk. This is why Zimbabwe could destroy its currency without contagion to its neighbours and trading partners. Because they only accepted hard-currency from Zim or tangible food/minerals exports from Zim for the imports it received.

There is more than enough gold to settle the balance of debts between countries for international trade and a stable global system.

SDRII's picture

The problem with creeping deflation is NIM compression on the asset side more than offseting the inelasticity of the liability funding side now at zero. Such a scenario would find the banks seeing further and further pressure on the top line, especially the regionals in their AFS/HTM portfolios. Perhaps that is an incentive to raise the IOR as the embedded losses fester

Instant Karma's picture

Hey Tyler! How much money would be pumped into the economy if interest rates were a more typical 5% instead of 0.25%?

Isn't the Fed holding back the economy by keeping rates at zero, depriving those with cash or cash equivalents interest income?

The only point of 0% rates seems to be to keep the Treasury from defaulting on 14 Trillion in debt.

Hedge Jobs's picture

its the other way around IK but your point "Isn't the Fed holding back the economy by keeping rates at zero' is correct.

interest rates are set by central banks by either incresing or decreasing the amount of money in the system. Think of the IR as the price of money and the price being affected by the usual forces of supply and demand . If they want to lower the target rate they increase the supply of money in the system and hence the price of money (the IR) falls. This is what we have at the moment and why there is all this "excess liquidity" which is artificially propping up asset prices everywhere. So far this has prevented another great depression but has just created an economy on life support. Like a critically injured car crash victim being kept articially alive only to die once the life support gets turned of. Thats the US economy at the moment.

What you suggest by increasing rates to say 5% would have the efect of turning that life support off. By increasing rates to 5% the FED would have to drain (not pump in) trillions of $ from the system reducing the supply and therefore increasing the cost of money. Many parts of the economy are now solely dependant on this cheap money and would fail. This would send the US economy into another depression which is why it hasnt been done. Remeber that the mindset of the physcopathic fed is to cut rates everytime growth stalls. But once you cut to 0 its game over or you change the rules of the game which is what they are trying to do. the FEd doesnt understand that the rules over the game cannot be changed, only manipulated for a period of time.

Increasing rates to more normal levels would hurt alot in the short term but is the right thing to do for US citizenry. It would restore value to money, encourage people to save and invest in productive capacity, discourage people from taking on excessive destructive debt and wipe out the useles unproductive speculators that now rule the economy. It would allow the economy to reset itself, although at a much lower base, and start to grow again based on sound fundamentals.

raising rates is the best of a bad bunch of options for the US and deserves more attention as a solution than it is getting. Make no mistake about it, it would be a very tough couple of years for everyone but there would be genuine light at the end of the tunnel unlike what we are currently looking at. If the FED thinks they can QE their way out of this we are for a lot longer than a tough couple of years, try a tough decade.

But the FED isnt there to look after its citizenry its there to look after itself and its international banking cartel so they will never raise rates as it would lead to a default on the sovereign debt. Personally i say fuck the foreign bond holders, fuck the fed, fuck ZIRP 4 ever. Its time to take back control of the US finacial system form its foreign owners and to start looking after the people it is meant to serve.


FranSix's picture

If you would care to recall, we started in year 2000 with rates @ ~6%.

The Fed sets interest rates according to the discount rate.  The discount rate is set by the market.  You will see that the Fed acted accordingly by following the discount rate.  The Fed is NOT holding back the economy by lowering rates accordingly, they have no choice but to follow the discount rate down, because if they don't then lending gets crushed.  Eventually, this goes into a liquidity trap where we are now, where any amount of money-printing does not result in growth.

Low short term rates are a legacy of the discount rate at one time being higher than long bond rates, incentivizing borrowing short and lending long.  This is what characterizes the bubble.  Short rates higher than long rates.  The inevitable consequence is that demand for short term money skyrockets as rates go down. And this is where all of the activity is biased, overwhelmingly in short term money.

The problem is that financial institutions, which are exposed mostly to interest rate obligations,  go bankrupt when short term rates approach zero, because their net earnings fall very far behind inflation and can no longer meet with their obligations. The general consensus that banks are profiting with low interest rates because of cheap money are a misnomer.  Inflation adjusted earnings have collapsed.

Hence the bailout with the onset of financial crises.

NoVolumeMeltup's picture

Denninger to write about this piece in 3..2..1..

Oh wait, no he won't.

MarketTruth's picture

Dennin...who? Oh, you mean the guy who whines all the time, like his recent cry about cookies and tracking while his own site uses cookies and tracking LOL!!!

Remember: He does not believe in physical  gold yet loves if you join his discussion board as a gold member. Apparently he believes in the fake 'value' of paper and Internet browser cookie gold to line his pockets?

Lux Fiat's picture

I can understand the spike in the IOR in the fall of 2008 as banks were scared of the counterparty/credit risk of all but the US gov't or Fed.  However, if things have improved significantly in terms of credit quality and risk from those dark days (as measured by yields on junk bonds, Libor (ok, maybe it's not such a great proxy), and the decline in the use of the discount winow), then one would expect an increase in sound lending opportunities, and from there, one would expect the total amounts in the IOR to drop appreciably. 

To a non-Wall Streeter such as myself, the continued level of IOR seems to indicate that banks do not see lending opportunties that they view as more lucrative than a .25% return.  Or do the banks not set the level of funds to be maintained in the IOR?  The latter possibility is particularly unsettling.  Would love to have anyone with some real insight into this debunk.  Interesting that the amounts in the IOR that are reserve deposits are somewhat close to, but above the $700b TARP program, as mentioned in the article.

Why unsettling?  ZH has alluded in some articles that the gov't or Fed may be working with (ordering?) banks to buy gov't securities.  There's a lovely section from Paul Blustein's book on Argentina's 2001-2002 default that puts more light on the topic. 

"But as foreigners' willingness to invest in Argentine bonds diminished, the cash-starved government would surely use its power over the banks to pressure them into buying more and more of those bonds.  Calomiris feared; that pattern had materialized in other developing countries.  So that when default finally came, the banks would be laden with assets that were plunging in value, creating the conditions for runs by depositors and a complete financial breakdown."


Being in a country that has

 - a high federal gov't debt level (and some states with massive unfunded liabilities at varying levels of gov't),

 - a high current account deficit (at a time when foreigners are removing funds from the US (TIC data)),

 - a significant trade deficit, and

 - the potential for "exploding debt dynamics" (read interest rates on debt higher than real economy GDP growth rate)

...does not give me the warm economic fuzzies.

nmewn's picture

"ZH has alluded in some articles that the gov't or Fed may be working with (ordering?) banks to buy gov't securities."

In reality this government only needs the Fed for this, just for the ledger entry. They don't even need bond dealers or private banks. And the money issued is not backed by anything, that is, no collateral.

It would be like you and I knowingly writing a check with nothing in the account in order to "pay" for the government bond issued by the Treasury.

It's a crime when any other private corporation or you or I do it. It is not when that private corporation does. One of life's little conundrums...LOL.

New_Meat's picture

you did say private, right?

nmewn's picture


It's privately owned. It is not a branch of government.

To be a member of the Federal Reserve System you are required to buy non-transferrable stock in a regional branch (an affiliate) of the corporation, the Federal Reserve. The buying of stock makes one an equity holder in the enterprise and is one definition of privately owned. They make 6% after matter what. Pretty good gig if you can get it these days.

Lux Fiat's picture

Learned a little about the private nature and membership requirements of the Fed back in 2008.  Kind of gives a whole new meaning to conflict of interest and having the fox guarding the henhouse. 

Between the Fed's inherent tendency to view financial crises through it's memberships' lense (it would be surprising if it didn't given how it is composed) and the existing level of political and regulatory corruption, we got TARP et al instead of something akin to the Swedes' approach to an insolvent banking system.  I don't think that the Fed is intentionally trying to destroy the system/country (I know others disagree), but their take on good intentions isn't going to get us where we need to go, and likely has damaged our chances of getting out of the woods.

On the other hand, if the US gov't had made a whole bunch of foreign bondholders take haircuts on FRE, FNM, etc., wonder if some unhappy foreign gov't holders would have gotten angry enough to spite their face (and ours) by boycotting a few treasury auctions in protest.  Instead, it would seem we have largely made them whole.  Doing the right thing in the fiscal and monetary policy arena can be a bitch when you've (politicians, regulators, voters, etc.) let your country's unsustainable promises, spending and reliance on foreign capital get to the point where it impacts national security. 

From my perspective, the worst offshoot of Greenspan's low interest rate policies is that it didn't provide any market interest rate discipline to the Congress and voters.  After several decades of voices saying the debt sky was falling, having ultra-low interest rates was taken by many as an "all clear" signal.  The debt stampede started in earnest, when slowing down as the cliff edge neared was in order.

nmewn's picture

It was around that same time for me as well (around 07-08) that I started poking around and I also don't believe it's creation was with bad intentions. 

Their mission is liquidity, not solvency, two very different things.

"Doing the right thing in the fiscal and monetary policy arena can be a bitch when you've (politicians, regulators, voters, etc.) let your country's unsustainable promises, spending and reliance on foreign capital get to the point where it impacts national security."

Well put. Congress is supposed to look after the solvency issue.

Unfortunately they have developed the bad habit of overdrawing their account requiring the Fed to manufacture money, based on debt, to put into it.

It's a negative number to begin with. I have often suspected Tyler of using this concept of negative numbers in some of the log in's as dark humor ;-)

Still researching that side topic...LOL.



New_Meat's picture

OT, but applies to us all:

It's a negative number to begin with. I have often suspected Tyler of using this concept of negative numbers in some of the log in's as dark humor ;-)

Especially when the capcha yells at me that the answer can only be 2 characters long, and it is, except for that pesky minus sign.

Then it lets me pass.

- Ned



nmewn's picture

"Then it lets me pass."

It was in the healthcare one thousand nine hundred sixty often overlooked provision ;-)

Lux Fiat's picture

"Unfortunately they have developed the bad habit of overdrawing their account requiring the Fed to manufacture money [emphasis added], based on debt, to put into it."

Perhaps this is a reflection of my ignorance, but this is where I have a major problem with the Fed actions of the last couple of decades.  If the Fed had not "manufactured" money, interests rates probably would have risen to a higher than economically comfortable level, providing a much needed negative feedback loop to our prolifigate Congress and electorate.

I realize that Congress can exert some pressure due to the Senate confirmation process required for the Boad of Governors, but once confirmed, they should be relatively free "do the right thing" as they only get one 14 year term.  Of course, when you represent member banks that take a hit in profitability during a resulting slowdown or recession, I guess it's easier to say than do. 

However, it does seem that over the last 20 years or more, the Fed has been complicit in dismantling many of the early warning tripwires/self-correcting feedback loops found in a healthy and stable economic system.

nmewn's picture

"but this is where I have a major problem with the Fed actions of the last couple of decades."

By law they are private. By operation they are government. They are a Government Sponsered Enterprise just like FNM/FRE. And we all know how that turned out.

In my view, outside of the influences of JP and the rest at it's creation, there was no nefarious intent when it was formed. This is not to say it's not a stupid idea, just an ends to a means they were trying to address. It was formed basically to prevent bank's from running out of cash during a panic. It has morphed into a Congressional cash cow where the representatives will not put their butt on the line and CUT spending.

Spending what you don't have begets debt. The problem is spending. Congress (the House) starts the spending process. The Fed doesn't spend a dime. Neither does the President, he can either veto spending bills or sign them.

So the Fed dutifully lowers interest rates to keep the party going and the tax revenue flowing against a tide of ever growing deficit spending leading to more debt issuance, which is a Congressional problem. Not a Fed problem, if the Congress taxed & spent wisely there wouldn't be a problem. At least regarding debt issuance and it's financing.

Do I agree we should have a private Fed issuing the nations currency? No. Do I think they have been put in an untenable situation? Yes. Should any currency issued be backed by a tangible asset(s)? Yes.

What assets? Gold/silver/oil/government owned land etc. That would make our representatives responsible for their spending & debt issuance.

Can you imagine Sen.Goldfarb going home and explaining he voted to issue a mortgage on a National Park so a bridge to nowhere could be built? Think about it. Let's turn it around on their ass.

But we still have to repudiate the debt. Some or all. There is no other way out and I can assure you at least 3/4 of American citizens are not about to roll over and die because of a paper obligation made by complete incompetent's put to them or foreign government.



Lux Fiat's picture

Is the Fed required by law to issue currency to cover deficits?  Guess I could go do more reading and look into the laws that govern it etc., but I don't know the answer.  If not, then they have tacitly been party to what I agree is, at its heart, a horrendous Congressional/voter/citizen lapse of responsibility.  I also have had a beef with Congress and complicit voters for many, many years of deficit spending, but I might as well have been spitting into gale force winds.

I've heard that the Fed has twin mandates to maintain price stability and low unemployment.  I don't know to what extent these are "hardcoded" by law.  I've heard both Greenspan and Bernanke say on numerous occassions while testifying before Congress that deficit spending would be harmful to the country over time.  I certainly understand that Congress has handed them a mess.  But by trying to address the short-term symptions (which may be what they are legally required to do - don't know enough to say), they unwittingly, or otherwise, participated in creating an environment where the deficit problem could grow and fester without any of the normal ill effects occurring that might have encouraged folks to reconsider the path they were on.  Now instead of sitting on a firecracker, we are sitting on sticks of dynamite - or worse.

Sorry if I gave the impression that I viewed the entire mess as all of the Fed's fault.  I don't, and there are many more factors that played a part, some of which I probably am clueless about.  Perhaps I am mistaken, but it did seem that my prior response re the Fed did elicit a bit of a defensive reaction. 

Lux Fiat's picture

A question.  If the Fed had no choice but to do what it did because of the laws it is bound to follow (I don't know if that is the case or not), what changes could be made to rectify the situation?  Perhaps their primary mission should be to conduct monetary policy in such a way as to encourage long-term solvency on the part of the fed gov't, and on the part of the financial system?  Would be curious as to whether you had any thoughts on the what might prevent a repeat of the last 20+ years (40+ in some folks' books) - aside from a more aware, concerned and voting citizenry.  I like to grouse like most folks, but after a reasonable/cathartic period of grousing, I like to think about what might make things better.

Lux Fiat's picture

But we still have to repudiate the debt. Some or all.

Agree, barring some miraculous game changer.  Referring back to my trusty copy of Paul Blustein's book on the Argentinian debt crisis, which is, sadly, reading more and more like a roadmap for America.  The book explains a viewpoint held and communicated by economist Charles Calomiris on the Argentine's situation in Oct. 2000:

"At some point, the Argentine government would be unable to sevice the debt it had incurred because of the viciousness of the cycle the country was falling into, and delyaig the recognition of that reality would only lead to catastrophe.  The most sensible approach was thus for the government to administer a haircut to its creditors [we missed one such opportunity in the fall of 2008] - that is, force them to accept a reduction in the amounts they were legally owed." 

Also, from Blustein's book, an observation made by IMF members during debates on a loan package for Argentina:

"The problem historically has not been that countries have been too eager to renege on their financial obligations, but often too reluctant."

nmewn's picture

As Pogo said so long ago "We have met the enemy and he is us."

If candidates of higher ethical and moral fiber will not run. If voters of higher ethical and moral fiber will not look within themselves for the good of the country as a whole the experiment of self rule & individual liberty will be over for a short time.

Fiat collapse is not unique. It is always a product of spending what it not there to spend.

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world's greatest civilizations has been 200 years."

This is why we were given a republic. It has been changed over time into a democracy.

"The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money." Alexis de Tocqueville

We are here.




Lux Fiat's picture

I've long thought that older we get, the more cognizant of the flaws in the world we become.  As a history major undergrad, I am aware that some level of corruption in gov't has always been present.  But it seems to me that like many other things, it moves in cycles.  The excesses of the Gilded Age seem to be upon us.  But this to shall pass.  But I'm not sure if the edifice will be able to ride out this storm this time.  I hope so.

There are always a small pocket of people who will do the right thing, damn the consequences, the age, the fashions, etc..  There are periods when the sticks and carrots in use reward/encourage good behaviour from those less endowed with moral fiber.  However, the past 20 years have been marked by quite the opposite.  Which means that we are probably close to the point when the pendulum will start to swing the other way.

nmewn's picture

I went on their website. It was "enhanced" for my viewing pleasure sometime in 2007 looks like so I couldn't find what I was looking for...and I detest Wiki-Everything as a source.

But this aligns with my position from somewhere other than Wiki or the Fed;

Don't believe everything you read until you verify it for yourself...including me. It's always better that way. Maybe I'm overlooking something but I don't think so.


Miles Kendig's picture

Ok then ..  PANCAKE BITCHES !!  Covered with Pepsi & Mentos.

Lux Fiat's picture

Let's hope QE2, if it does materialize, doesn't serve up "pancakes" ala Grecque with lots of "loss of confidence" syrup on top. 

And no, I was not the "junker'.

ZeroPower's picture

Discount window borrowings plunging ever since the crazy 08/09 levels is a good thing - banks don't need any short term cash to survive as they have enough earning the spread on giving people mortages and LOCs

bankonzhongguo's picture

After you have all the fake "money" you need, bordom just drives to Power.  Parsing the FinReg catastrophe its clear that there is a cold war for the regional/community banks, with the big six sitting patiently to be handed the keys to consolidate the commerical banking industry - not that the American economy is worth investing in.  Locking in all those pension funds to be legislated counter-parties for the next bubble collapse will suck last of the baby boomer capital to Dubai and beyond.  Systemic Risk banks just get another layer of protection at the expense of all others. "FIOA?  We don't need any stinking FOIA.  I don't have to show any stinking FOIA!'   Just as all those bailed-out clever derivatives decouple from nominal or classic investments, the new "Paper Chase" of QE2 will simply put more presure on local economies independance, which are deflating.  Just as Israel claims it bought-out all those Arabs in the West Bank, so too will Exxon, GS, Chevron and Citi just write a check FOR Maryland and Manhatten Island. 

Welcome to Planet Starbucks.

zhandax's picture

complete collapse of faith in the monetary unit of exchange

In this environment who would be willing to buy US dollar bonds at near zero percent?  We all know the effect of rising rates on a multi-trillion debt financed with more borrowing.  This will be the gasoline dumped on the fire which will cause the whole system to collapse, probably within 6-9 months.

MachoMan's picture

In the flight to quality, everyone...  1% looks great compared to .5%...  remember in 08 when bond purchasers had to pay the government for the pleasure with a negative yield?  Guess what?  Time for round 2.  The preservation of wealth is more important than yield...  decreasing less than another asset class is the best alternative...

we are incredibly exposed to any rise in rates...  won't happen...  printing isn't an option...  the only thing left is austerity...  QE 2.0 will be a whisper compared to 1... 

Gordon Freeman's picture

The long bond is going to 3%.  Could make your year, depending on how you set it up...

zhandax's picture

The flights to quality we have seen in the last two years were based on the assumption that the reserve currency was the safest place to hold funds.  The premise outlined above is a flight to quality to get out of anything related to the dollar (as in no one on the planet wanting to hold dollars).  In that scenario, the long bond could easily be at 8% by Christmas.