This page has been archived and commenting is disabled.
Fed Eats Treasury
Historically the US Treasury Department has been
responsible for the Dollar policy and liability management (debt
issuance). Both of those responsibilities have been co-opted by Ben
Bernanke. That Treasury has let this happen speaks volumes
for the lack of leadership. In my opinion Treasury is allowing the Fed
to run wild while the systemic risks are rising.
responsible for the Dollar policy and liability management (debt
issuance). Both of those responsibilities have been co-opted by Ben
Bernanke. That Treasury has let this happen speaks volumes
for the lack of leadership. In my opinion Treasury is allowing the Fed
to run wild while the systemic risks are rising.
The issue of exchange rate policy is, I
think, clear-cut. There is a direct correlation between QE and dollar
weakness. A weak dollar is a primary goal of QE. A cheap dollar policy
will bring us the inflation that Bernanke keeps telling us we need. It will also make us a pariah. This comment from the German Finance Minister at the Korean G 20 says it all.
think, clear-cut. There is a direct correlation between QE and dollar
weakness. A weak dollar is a primary goal of QE. A cheap dollar policy
will bring us the inflation that Bernanke keeps telling us we need. It will also make us a pariah. This comment from the German Finance Minister at the Korean G 20 says it all.
“I
tried to make clear that I regard that (QE-2) as the wrong way to go.
An excessive, permanent increase in money is, in my view, an indirect manipulation of the exchange rate.”
The issue of liability management is not as clear
as is the case for FX policy. Let me try. Consider this chart of
existing treasury debt outstanding.
as is the case for FX policy. Let me try. Consider this chart of
existing treasury debt outstanding.
As Zero Hedge has been pointing out for weeks, there simply is not enough long-term bonds outstanding for the Fed to purchase.
QE-Lite commits the Fed to buy
Treasuries in an amount equal to the roll off of the MBS book from
QE-1. Between the low rate/refi’s, repurchases of mortgages in default
(20+%) and the normal turnover in homes a substantial portion of the
Fed’s MBS book will run out over the next 24 months. We could push $1
trillion just from that. Then there is good old QE-2 that is staring us
in the face. That number starts with $500b and goes easily to a
Trillion. A reasonable estimate for the amount of total Fed POMO buys
between now and 12/31/11 is $1.5 Trillion.
Treasuries in an amount equal to the roll off of the MBS book from
QE-1. Between the low rate/refi’s, repurchases of mortgages in default
(20+%) and the normal turnover in homes a substantial portion of the
Fed’s MBS book will run out over the next 24 months. We could push $1
trillion just from that. Then there is good old QE-2 that is staring us
in the face. That number starts with $500b and goes easily to a
Trillion. A reasonable estimate for the amount of total Fed POMO buys
between now and 12/31/11 is $1.5 Trillion.
With that estimate go back to the graph and tell me what are they going to buy? There are few choices:
(A) The Fed could buy 100% of all existing
issues from 2018 on. They could also buy up all of the scheduled new
issues for the next 14 months with a maturity greater than eight years.
That would come to the $1.5 trillion. This approach would be insane.
issues from 2018 on. They could also buy up all of the scheduled new
issues for the next 14 months with a maturity greater than eight years.
That would come to the $1.5 trillion. This approach would be insane.
The existence of a viable and liquid
long-term bond market is a cornerstone of America’s capital market.
Eliminating a substantial portion of the float for maturities ten years
and longer would have negative implications for liquidity for all
long-term debt issued globally. The US Treasury market has always been a
benchmark from which thousands of other credit instruments are spread
priced. Liquidity in Treasury issues is an essential ingredient for swap
and hedging pricing. A busted Treasury market is like putting sand in
all of the capital markets. Things will grind down. Liquidity will be
impacted.
long-term bond market is a cornerstone of America’s capital market.
Eliminating a substantial portion of the float for maturities ten years
and longer would have negative implications for liquidity for all
long-term debt issued globally. The US Treasury market has always been a
benchmark from which thousands of other credit instruments are spread
priced. Liquidity in Treasury issues is an essential ingredient for swap
and hedging pricing. A busted Treasury market is like putting sand in
all of the capital markets. Things will grind down. Liquidity will be
impacted.
(B) The Fed could buy all maturities such that their purchases approximated the average life of existing US debt. This would be supremely insane.
The problem is that the average maturity is just a bit over four years. Looking
again at the chart you will see that in order to achieve a balanced
purchase program the Fed would have to acquire hundreds of billions of
2, 3 and 4-year paper. Two problems:
again at the chart you will see that in order to achieve a balanced
purchase program the Fed would have to acquire hundreds of billions of
2, 3 and 4-year paper. Two problems:
(I) Interest
rates for these short maturities are already at historical low levels.
Further reductions would starve more savers and fatten bank income
statements. But they would do nothing for the housing market and the
unemployment rate.
rates for these short maturities are already at historical low levels.
Further reductions would starve more savers and fatten bank income
statements. But they would do nothing for the housing market and the
unemployment rate.
(II) What
happens in two years when $300b of bonds owned by the Fed come due? Is
Treasury forced to issue more debt to the public to pay off the Fed?
That would be an opportunity for the bond market to rape the taxpayers.
They would have the Fed and Treasury in their crosshairs. Keep in mind
that this conflict is not some time far off into the future. On the day
that QE-2 is completed it will be less than twelve months
more until the first maturities hit. What will inevitably happen is that
Bernanke will rush to the rescue and announce that he is rolling over
his holdings and will do what he has done with QE Lite. He will have
permanently expanded the Feds balance sheet. He will have no other
option but to do so. IMHO there is no greater systemic risk that the
nation faces. We will have been forced into a policy of perpetual QE. PRECISELY WHAT BERNANKE HAS PROMISED AGAIN AND AGAIN THAT HE WOULD NOT ALLOW.
happens in two years when $300b of bonds owned by the Fed come due? Is
Treasury forced to issue more debt to the public to pay off the Fed?
That would be an opportunity for the bond market to rape the taxpayers.
They would have the Fed and Treasury in their crosshairs. Keep in mind
that this conflict is not some time far off into the future. On the day
that QE-2 is completed it will be less than twelve months
more until the first maturities hit. What will inevitably happen is that
Bernanke will rush to the rescue and announce that he is rolling over
his holdings and will do what he has done with QE Lite. He will have
permanently expanded the Feds balance sheet. He will have no other
option but to do so. IMHO there is no greater systemic risk that the
nation faces. We will have been forced into a policy of perpetual QE. PRECISELY WHAT BERNANKE HAS PROMISED AGAIN AND AGAIN THAT HE WOULD NOT ALLOW.
We are getting dangerously close to a trade
war with our closest allies. The US weak dollar policy engineered by
Bernanke has global considerations beyond short-term economics. This is a
matter for the Executive Branch of government. Elected officials are
responsible for this critical policy matter. So far they have just looked the other way.
war with our closest allies. The US weak dollar policy engineered by
Bernanke has global considerations beyond short-term economics. This is a
matter for the Executive Branch of government. Elected officials are
responsible for this critical policy matter. So far they have just looked the other way.
Treasury is responsible to the people for maintaining viable capital markets. They
are mandated to minimize the risks associated with bunching of
maturities. Yet the Fed’s QE will clearly undermine their efforts. And
they have been silent these past few months. If they were looking out
for the best interest of all Americans they would have been yelling and
screaming that the long-term strategic interests of the US are not aligned with a short-term bet by the Fed.
are mandated to minimize the risks associated with bunching of
maturities. Yet the Fed’s QE will clearly undermine their efforts. And
they have been silent these past few months. If they were looking out
for the best interest of all Americans they would have been yelling and
screaming that the long-term strategic interests of the US are not aligned with a short-term bet by the Fed.
Bernanke has his foot so deep in his mouth
with QE that he can’t back off and he can’t win. If he comes with some
minimalist approach it will accomplish nothing, except disappointing all
those who think they own a free put. He could go the other way and give
us shock and awe. Thirty-six months later America will fall into a hole
that will take a very long time to dig out of. Either way, QE and the
Bernanke Fed will go down in history as one of the worst mistakes the
country has ever made. History will not be so kind to Geithner either.
As Treasury Secretary he ignored two critical obligations of his office.
We will all pay a big price.
with QE that he can’t back off and he can’t win. If he comes with some
minimalist approach it will accomplish nothing, except disappointing all
those who think they own a free put. He could go the other way and give
us shock and awe. Thirty-six months later America will fall into a hole
that will take a very long time to dig out of. Either way, QE and the
Bernanke Fed will go down in history as one of the worst mistakes the
country has ever made. History will not be so kind to Geithner either.
As Treasury Secretary he ignored two critical obligations of his office.
We will all pay a big price.
»
- advertisements -
so who the hell wants to "trade" bonds, when the only solution is to orphan them all?
Bruce, you sound like you actually expected more from Turbo Tim. He just couldn't figure out that tax software and you thought he could handle this? I mean really.
Great post Bruce. The current policy is full of contradictions, and the clock is running on these idiots.
How is this a problem? The Fed will just find other assets to buy (equities).
Ask Shirakawa.
Try HELOCS from banks (using your money/assets).
Obama and Geithner are on board so we can increase exports - they're fine with screwing the dollar, although they must pretend to care about it.
Exports of what?
These are historic times indeed!
+1, GREAT article, Bruce.
I didn't previously think about it in these terms: I knew the Fed co-opted the Treasury (Executive Branch), but didn't think about it in terms of Executive Branch paralysis through lack of leadership. IMHO, after thinking about it in the way you discuss, that is *EXACTLY* what's going on. The lights are on, but nobody is home in that branch.
You are correct, history will NOT be kind to Bernanke. I fear it won't be kind to the rest of us either.
The German Finance Minister:
I agree with the assertion, but what the $*#&! is this "in my view" crap? Must everyone weasel-word what is so obvious a conclusion?
Another conclusion is that the Fed is simply doing
Treasury's bidding. As for where the Fed will find the T-bonds to buy, why the Treasury will just issue more debt! Thereby mortgaging the hard work of future generations (via taxation) and diluting the wealth of all Americans. Fits in well with the fiscal policy paralysis of successive administrations.
sorry but you don't understand, the Treasury co-opted the Fed, under Bush. History will anoint Bernanke, for what he has done for mortgage holders, continue to lower their existing credit card rates, and secondly to inevitably force down consumer interest rates, by extending the power of the government to borrow money at low interest rates, to every average American. While CC companies like VISA continue to report record earnings, Bernanke will see they get their (usurious) comeuppance, in exchange for GSE status for VISA and MC (what the hell good did that do Fannie and Freddie?) The Fed in turn has taken on their toxic debt, Bush/Obama, and for that they may be destroyed, but to destroy the Fed is to destroy the UST, right? So that ain't going to happen, is it? (I like to think it would, but in a jaded moment I must admit)
and so I say 2012 Bernanke/ Obama
True that the $700B-$800B started under Bush. That was a hand-off problem (Bush passed to whomever was going to be elected). True also that Bush never addressed the MBS crap (both parties to blame, but Fannie&Freddie are mostly democrat institutions). However, Bush ran the executive branch. Today, nobody does (in terms of the Treasury keeping the Fed in line).
This is not true. Consumers are defaulting and deleveraging. Interest rates are irrelevant, except to steal from Granny and her CDs. Bernanke will do nothing to stop the tide in the MBS market. Consumers will not benefit in any way from the low rates. In order to do so, they would have to be willing to *increase* leverage, and they won't do that. Consumers can't even pay their debts at 0% rates, so the future is merely default (rates are irrelevant).
That's true now, but it was not true three years ago.
Yes, it is.
We won't make it that far.
I'm not sure I understand all your assertions. In short, Bernanke solved nothing, re-structured nothing, and actually merely "levered up" on the back of the US taxpayer. The US taxpayer had *none* of the liabilities for Fannie&Freddie, AIG, GM, all the Maiden Lane crap, etc., until Bernanke went insane. Read that again: The US Taxpayer had NO LEGAL LIABILITIES WHATSOEVER for ANY of those entities. None of them were backed by the taxpayer, and technically, most of them would be highly illegal for them to be backed by the taxpayer.
As a result of Fed insanity, there is now no possible option except for US sovereign default and worldwide reboot.
It's a math thing. The international banking system will still default (nothing was solved). Now, we're merely going to take out the US taxpayer at the same time.
No, this would not have been the only option had Bernanke not gone insane.
Oh, so wrong. Bush MORE than helped the MBS crap along by mandating federal agencies to grow the number of homeowners through support of Carter's Community Reinvestment Act. While CRA didn't in itself mandate high risk loans, whaddya gonna get when you require investment in the ghetto?
You are correct -- Bush *did* actively make executive decisions to increase MBS leverage, and Bush also halted FBI prosecutions into the MBS fraud. I won't defend him for his role.
However, while we agree both parties are to blame, I still assert that Fannie & Freddie are mainly Democrat playgrounds (look at their donor list and who they've placed to run those organizations for seven- and eight-figure salaries).
F&F and government policy have hurt home owners to unbelievable levels. Home owners and all taxpayers would have been better in every way if F&F never existed.
Mikla I agree, this is a good insightful contribution by Bruce. I'm always on the look-out for your posts because I always learn something or at least become aware of something new. If I may ask, what are you meaning by "We won't make that far".
The debt unwind is happening now, and it cannot be halted. The very big dominoes are wobbling -- and they will fall (soon). It's currently unclear if all the dominoes fall at once, or if there are time gaps from one falling to the next falling (it all depends on counter-party trust, as every sovereign is merely cooking its books, and there will be a time not-long-from-now when no institution will trade their "real" thing for the worthless currency that denominates the transaction).
Britain is toast, the EU will die, Japan is on life support, and QE2 will be followed by QE3 and then QE4 ... etc. Bruce's whole assertion is that QE2 could bring about "the end". If it doesn't, I assert QE3/QE4 will do that. Every QE play is merely a "double-or-nothing" -- they solve absolutely nothing, and actually make the problem bigger/worse. This won't hold together until 2013.
Big topic. Historically, discussion of "timing" is (mostly) stupid -- nobody knows when. Sovereigns are good at hiding accounting fraud. However, our current problems (worldwide) are fundamentally ones of cash-flow, so that forces a somewhat bounded time-of-reckoning (sovereign cash-flow problems cannot be hidden). I'm 80% confident the US blows before 2013 (by 2012), and give it a 60/40 that the EU blows before the US. Japan is a spoiler.
First rule of banking: if a debt can't be repaid, it won't be repaid.
The US is insolvent:
http://www.financialsensearchive.com/fsu/editorials/martenson/2006/1217....
The US Taxpayer had NO LEGAL LIABILITIES WHATSOEVER for ANY of those entities.
There is no US taxpayer, Americans receive two dollars in services for every dollar they contribute. These things are paid for with monetary largesse, engineering by Bernanke and company. The man is holding the whole frigging country together, Obama couldn't eat an ice cream cone on Coney Island without the man's permission.
You are saying the US taxpayer receives more than it pays. We agree. This is done through fraud (e.g., issuing debt without the intention of repaying).
However, the US taxpayer exists. When it is deemed dead, the nation defaults.
For example, the Greece taxpayer is dead.
If by "largesse" you mean "fraud", we agree.
In every sense, we are merely "kiting bad checks". Nothing is "paid for".
No. The ponzi is ending whether Bernanke thrashes wildly or not.
All Bernanke is doing is "upping the ante" through "double-or-nothing" increased leverage to bring more people into the void.
That void now includes the US taxpayer, past the point of no return.
Bummer.
More to the point, the taxpayer had no "say" (no representation) in this process. Throughout history, this has lead the violent overthrow of the unjust government. That is why I assert history will not be kind to Bernanke. Even if he did it "for the children", he acted beyond his authority, caused grievous harm, and failed to deliver the "good" he promised. (Mathematically, what he promises is impossible, since it is a mere ponzi.)
collapse or be saved by ???
Can anyone point out where the US Treasury explicitly guarantees the Fed's balance sheet?
I thought that the Fed was a private corporation, owned by the member banks of the regional Fed branches. Let those equity holders "eat cake".
The US Treasury makes no explicit nor implicit guarantee of the balance sheet of the Federal Reserve System. However, historically the asset side of the Fed's balance sheet has been composed overwhelmingly of direct obligations (full faith and credit) of the United States, commonly referred to as "treasuries" or "treasury obligations".
Thus, prior to recent years activities, the balance sheet was "effectively" guaranteed simply by virtue of its composition being limited almost exclusively to treasuries.
However, with events of recent years, the direct balance sheet's inclusions of non-government guaranteed obligations, many of which are of debateable quality, as well as off balance sheet risks (Maiden Lane, expanded offshore swaps with other banking entities, etc.) the credit quality has deteriorated in comparison and without the explicit or implicit guarantee, is simply not as safe as it used to be. Indeed, many have referred to the newer composition in contrast to the more traditional, as the Zimbabweisation of the Central Bank.
Further, it is the asset side of the balance sheet which supports the liability side, composed almost exclusively of currency in the form of non-interest bearing perpetual (no maturity) IOU's known as Federal Reserve Notes.
Thus, the joint concerns of some is not only of the expansion (in size, magnitude) of the balance sheet, but of it's deteriorating quality standards in comparative terms.
No, it is not guaranteed by the US Government, but is only reflective of the quality of the investment portfolio, the asset side of the ledger.
Thanks for that, Knukles.
Seems to me, since rule of law has been long been abrogated by the PTB, I say fuck the treasuries, fuck all bond holders, fuck China, and the rest of 'em.
I hereby call for a revo'fucken'lution!!!!
not if the tea party / populist revolt says no
The regional banks are "owned" by the banks in that region. The board of governors of the federal reserve system is a federal entity.
The Fed is a "private bank" and the ONLY federal about it is the name.
Treasury will be left to decide hence the American taxpayer or it's share owners...ooops...I mean creditors.
As the saying goes...the Fed is no more Federal than Federal Express. It is also an absolutely privately controlled entity
The only govt appointee to the Federal reserve is Bernake. The rest are all voted on by the 12 member banks which ultimately are controlled and owned (through layers of holding companies) by most of the world's elite families ( Rothschilds, Morgans, Rockefellers, Snyders, Barclay's, Moses, etc)
The rest of the members of the board of governors are also apointed by the government.
The government even has some control over some board members of the regional Feds.
It is safe to say that the Federal Reserve System is a mixed government-private monster. In reality, the Fed is a cartel of private banks granted and regulated by the government.
The old money banks (the world's elite families) are acquiring the future debt obligations of the US taxpayer at an astounding rate. The chart above appears to indicate they (and the other few debt-holders who haven't yet sold to them) own everything after 2020. Further QE drops that date of reckoning closer with every auction.
And if there's any remaining question as to who's in charge, the Fed meeting is one day post-election. They get the last word, not us.
Yep, your post and your name say it all!
This ends when we remove the Fed and restore America's manufacturing base, not sooner and not later. It will probably mean saying good bye to the current incarnation of organized crime-controlled currency, the US dollar.
http://psychonews.site90.net
Stunning.