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The Fed's $27 Billion (And Counting) Call Provision
Much has been written about the Fed's Permanent Open Market Operations, or the technical name for Quantitative Easing's Bond Repurchase, aka Monetization, program. What has been largely left out is the true cost in the form of a call premium that the Fed has paid out due to what amounts to an early redemption of $300 billion in par securities. From a basic bond standpoint, the Fed's buybacks of Treasuries at market prices simply represent premium redemptions as a substantial amount of the bonds bought back had been issued (at par) when interest rates were materially higher. Therefore the differential from par to market has to be considered when evaluating the actual cost to US taxpayers, and by implication, early paydown benefit to bondholders. The surprising result: after $300 billion in par repurchases (or $295 billion ex-TIPS to be precise), a whopping $27 billion has been paid by the Fed over par to account for declining interest rates over the past three decades. As the actual price paid by the Fed is known only to the Fed itself, despite claims to transparency and openness, this is at best an exercise in extended bond math. Only when the Fed is truly audited will we get a full glimpse into just how much the Treasury portion of QE has truly cost US taxpayers in order to provide a quick and lucrative "out" to all those bondholders, especially the ones who purchased bonds at lofty interest levels (and thus very discounted prices) in the early to mid 80's. In sum, even though the Fed has purchased a nominal $300 billion in assorted government securities, its actual cash outlay has likely been in the $325 billion+ ballpark. Keep in mind this analysis excludes the roughly $1.4 trillion in MBS and Agencies that Bernanke is still actively gobbling up to prevent the housing market from collapsing. A comparable exercise performed in that part of the POMO market would likely yield even more distributing results.
On March 18th of 2009, the FOMC released a statement outlining
the purchase of $300 Billion in U.S. Treasury securities. However, all
reporting on these purchases were released in Par terminology, with no
detail given regarding the market price of these securities. This
brings up the question, what was the actual price paid for these
securities? It would most certainly not be at par, so one must
automatically assume that it was the market price. Unfortunately,
without accurate reporting due to the Fed's unwillingness to disclose any actually relevant cashflows to the broader public, the exact amount spent on this program must
be estimated. This further complicates the matter since the value
depends on the rate of interest used for each security and few of these
securities mature at the discrete intervals used in the construction of
the yield curve.
First, let’s take a look at the facts:
Treasuries purchased:
Individual Securities: 143
Number of Transactions: 553
Total Par: $295,448,000,000
Weighted Average Coupon: 3.7213
Weighted Average Maturity (From 11/30/09): 6.02 years
Tips
are irrelevant to this study, but the total par of 13 TIP Securities
purchased is $4,552,000,000 or 1.52% of the total Par Purchase amount (combined, one gets the $300 billion par total for the Treasury portion of QE).
The important item to note here is that after a large period of
inflation, a small number of TIP securities were purchased at deflated
prices.
Now for the Treasury Bonds/Notes, there are
multiple methods to estimate the approximate rate of interest used, but
for the sake of not overestimating the impact, the information being
reported uses the higher of the two rates surrounding the actual
maturity. For example, if a note matured 4 years, it is then bounded by
3 and 5 year rates for that particular day and thus the 5 year rate was
utilized to estimate a purchase price. It must be noted then that the
estimate being reported MUST be less than the actual price paid, by how
much can not by determined unless the Federal Reserve decides to
publish the actual values. To compensate for irregularities on the
curve, valuations were then calculated using continuous formulas to
provide for the most accurate values.
Upon completion of this study, multiple important questions
became readily apparent. These will be outlined at the end. First, let
us look at a security which was issued in 2009 that was subsequently
purchased by the New York Fed.
912828KN9 – 5 year note, 1.875 Coupon
Issue date: April 30th, 2009
Maturity Date: April 30th, 2014
Average Price paid at Auction: 99.6917
Total Issuance: $35,000,000,000
Average Sale Price: 99.167
Amount Repurchased by POMO at PAR: $5,961,000,000
% of Total Issuance: 17.03%
Approx Sale Price: $5,942,621,462
Number of POMO transactions: 6
Approximate Market Price Paid (total): $5,791,441,102
Approximated Gain: $169,558,897.75
Approx % Gain from Sale: 2.31%
Approx % Gain from Par: 2.84%
Issue Notification: http://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20090428_2.pdf
Well, that appears to have gone well. But unfortunately out of
the 143 individual securities purchased a gain was registered (from
Par) for 15 of these securities or a mere 10% of the total. The total gain
from Par pricing would be $533 million or so. But that’s not what
should concern you. What should concern you is the larger number of
securities where we paid $28 billion in excess of par. Let’s take a
look at the security which would have the largest gain over par, which
was issued on August 15th, 1989.
912810ED6 – 20 year bond,
Coupon: 8.12
Issue date: August 15th, 1989
Maturity Date: August 15th, 2019
Total Issuance Size: 20,214,000,000
Amount Repurchased by POMO at PAR: $3,788,000,000
Percent of original issuance: 18.74%
Number of POMO transactions: 5
Approximate Market Price Paid (total): $5,356,587,487
Approximated Gain: $1,568,587,486
Approx % Gain from Par: 41.41%
In
fact, when you look at the distribution of these securities, the
largest gains over par ALL come from bonds issued from the late 1970’s
to the early 1990’s, when they were issued with larger coupons. The
plot gets thicker however when you do a Google search for each of these
securities. When you research 912810ED6 you find out that in fact THIS
SECURITY WAS ALSO PURCHASED IN 2001 DURING THE EARLY DAYS OF THE
MELTDOWN. http://www.treasuryhunt.gov/instit/annceresult/press/preanre/2001/ofbbr41901p2.pdf
This
brings up a larger issue…. Are Market Crashes the result of liquidity
problems or are market crashes ENGINEERED to help solve liquidity
problems? In effect, is the debt cycle the ultimate cycle? This simple exercise demonstrates that the total cost of the $295.5 billion in Treasury Purchases (not
including TIPS) hypothetically would have cost the American taxpayer
$322.8 billion, or rather $27.4 billion in excess of stated. This amount to roughly $100 per US citizen. How many hungry, homeless people would that feed?
And just what is the comparable "call" premium that the government has paid the likes of PIMCO and China in purchasing their MBS and Agency securities at prices exponentially over fair value? That is another exercise that we are currently conducting, but we can tell you now, dear taxpayers, your tax dollars were put to good use to pad the pockets of Mr. Gross, and all those others (all of them) who were selling MBS at market prices directly to the Fed over the past year. And with Wellington and BlackRock being completely phased out as agents in the MBS POMO program, very soon there will be absolutely no information leakage as to just how far the Fed has perverted the true state of the mortgage backed market. Which in these days of rampant and wholly accepted and endorsed bubble recreation, is a "very good thing." As Dan Aykroyd pointed out so many years ago in Spies Like Us, "Chem men'she znaesh', tem luchshe." The Chairman wholeheartedly agrees.
Summary of QE Treasury purchases at market.
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Great post TD, thank you!
QE, buying MBS, zero-overnight rates have one purpose only which is to support banks and their proxies at the cost of tax-payers.
Given these extreme actions we must be soon facing an abyss.
Great post TD, thank you!
QE, buying MBS, zero-overnight rates have one purpose only which is to support banks and their proxies at the cost of tax-payers.
Given these extreme actions we must be soon facing an abyss.
As provided by CNBS, 2009 - One Strange Year.
http://www.fundmymutualfund.com/2009/12/2009-one-very-strange-year.html
Yet somehow the market can go up? who is buying?
Yet somehow the market can go up? who is buying?
The authoritative Financial Times quoted a Fed official, who declined to be identified, but acknowledged that policy-makers had considered “buying U.S. equities” — not just futures. The Fed, said the official, could “theoretically buy anything to pump money into the system,” including “state and local debt, real estate and gold mines, any asset.” That sounds much like the same broad conception of empowerment Greenspan had injudiciously taken note of in 1997.
Thanks for the post TraderMark.
It is a parallel universe that couldn't exist but appears to hold for now.
Let's see what Santa will bring us today and tomorrow:-)
I'm a little confused by your conclusions. Basic bond math explains the large premium, assuming I understand your point clearly.
Using round numbers, assume an original coupon rate of 8%, exactly 10 years remaining to maturity, and an existing rate of 3.75% for newly issued 10 year instruments.
The future value of 20 payments of $40 for $1000 is $1191. Adding the FV of the principal payment plus annuity, and discounting the amount at 1.75%, or 3.5% annualized, the price is roughly $1548, representing over a 50% gain.
The above illustration uses numbers close enough for horseshoes in this case. What am I missing in your stated problem?
Or, to twist the perspective a bit, the Fed used electron money to reduce the cost of UST debt service by monetizing the most expensive debt available to buy. The holders made a large gain on sale and the Fed, essentially, paid nothing.
I just felt my brain grow.
Thank you for a peek behind the curtain ZH.
Sorry if this is a stupid question
Who owns the mortgage backed securities the Fed has purchased ? (I am assuming the taxpayer) If and when the economy stabilizes will these be sold to pay down the debt ?
Not a stupid question. The MBS is owned by the world of investors, so everyone is participating in this generous buy-back.
However, if and when we ever do get an honest review of the Fed's activity we will find that the biggest seller of Agency MBS was, of course, the Chinese.
They had us over a barrel. So we bought in our bad bonds from them.
bk
Bruce thanks for taking the time to reply.
I am assuming the FED will try holding the securities untill the economy, housing market re-inflates enough to allow for their sale. I would hope that they would not be sold in some manner that does not have the tax payers best interest at heart ie: to line the pockets of insiders.
Yet due to many of the actions and lack there-of, I am skeptical.
Now I am a bit conflicted as I am enthused that the economy is not buying the BS green shoots and may coerce the punishment and corrective actions needed upon the fraudulent activity and corrupt insitutions inbeded into the system. Yet on the other hand if our economy is gutted for decades and the dollar destroyed we lose.
So I do not know if my purpose-full non-participation in the economy and my encouraging others to non participate and to strike will serve the best interests of our nation.
Feels like a Mexican Stand off.
If I am getting something wrong please chime in.
That's how they want you to feel. Have the courage to say, "go ahead, make my day." Call their bluff. No one has the balls.
I am a bit more suspicious.... Probably a company that is politically connected to the leadership at the FED.
Audit the FED NOW!
I have always assumed the QE tactics in buying the GSEs were (a) to support a residential real estate market that would otherwise be in 100% FAIL mode, and (b) to buy back GSEs held by foreign holders in exchange for their purchases of Treasuries , i.e., over time convert non-government guaranteed debt into US government guaranteed debt. Who can say no? It's really an exchange of lower tier "barely secured" debt for a highest tier asset, U.S. Treasuries. Or call it CASH for CLUNKERS (i.e., Cash for Your Radioactive GSE debt). Muscial chairs and don't be holding those GSEs when the music stops in March.
How can GSEs continue to sell their debt if the Fed does not buy it?
The Federal Reserve is the biggest criminal organization in the world. It is Satanic and exists for only one reason- To continuously shovel money into the vaults of the banks and at the same time, line their pockets.
The $300b of Treasury paper resulted in an average premium of 6%?? so that is $18b.
The 1.4T of Agency MBS is all "callable paper" so these do not trade at big premiums, My guess is an average of 2%. So that is another $28b.
Add this up and you get around $50b of premium paid. I think I am going to vomit....
Bruce,
First, please turn your head while vomiting. I'm wearing my nice shoes.
Second, you don't think we're actually going to return to sanity and pay these bills, do you?
LOL...
On top of all the REAL money being transferred to the Banks (and China), imagine the great benefit of Mark-to-Market on the holdings throughout 2009 due to that. Given that Treas. paper is a huge holding of the above, the accounting trick would be helpful indeed.
All data seems to suggest that abolition of the FED is the rational decision, but we will need a much bigger blow-up before that happens.
Can we acomplish the abolition of the FED without (them) intentionally destroying the dollar as the World currency ?
Yes.
Ah, who cares. It's all good. Happy days are here again. After all, the Commerce Department (and they would never lie, right?) just announced that, well, I'll just let the AP tell it...
WASHINGTON (AP) -- Personal incomes rose in November at the fastest pace in six months while spending posted a second straight increase, raising hopes that that the recovery from the nation's deep recession might be gaining momentum.
The Commerce Department said Wednesday that personal incomes were up 0.4 percent in November, helped by a $16.1 billion increase in wages and salaries, reflecting the drop in unemployment that occurred last month.
Gotta pass me some o-dat hopium (http://finance.yahoo.com/news/Incomes-and-spending-post-apf-55706162.htm...), son.
I've been saying this for a while... (it's good to have someone support my suppositions with numbers). The Fed/Treasury is doing everything in its power to beef up the banks balance sheets for the coming losses:
1) QE, ie buying all the crap from the banks at unknown (most likely > market) prices
2) Steepest yield curve ever
3) Suspension/Changing of mark-to-market, uptick rule
4) TARP/TALF/alphabet soup of loan guarantee programs
These guys aren't dumb. They know the losses that are coming. The question is whether it will work? And if it works, will (hyper)inflation be an unintended side effect?
FIFY
The biggest theft in history has yet to come.
In due time, it will be accomplished by a big fat thumb on the delete button at the FED.
This is so glaringly obvious even for non-u.s citizens like me, and I think this has been the exit strategy from the beginning when Greenspan became chairman.
The ultimate exploitation of fiat.
Genius or Frankenstein?
M. Copenhagen
Yes that is one of my concerns as well.
Rob Carbono
Im enlightened, and rather amused by many of these responses.
I have one simple point to make:
IF...IF all the securities, Bonds, MBS that the Fed is purchasing, is WORTH holding to maturity (basically holding it means a profit)...then WHY THE HELL didnt Holding until Maturity work for Fannie and Freddie?
C'Mon people....If Fannie and Freddie imploded in the first YEAR of this crisis, what in Gods world makes us think that the Fed will come out smelling like roses by holding the same !@$# securities until maturity...the same securities that KILLED Fannie and Freddie and now the FHA.
Naivity in all its glory.
Sorry.
Son of Tarp (II) intact for 3rd up wave... the slush fund that keeps on giving
The Fed is a Fascist CartelNelson Hultberg
No one in the freedom movement today disputes that the Federal Reserve is the source of many of our economic woes. Where disagreement arises is in defining the precise nature of the Fed and the source of its capacity to create the harm it does. Many who support gold money and free enterprise claim that the Federal Reserve is a "private corporation" run by capitalist mega-financiers. This I believe to be mistaken.
The Federal Reserve, in my opinion, should not be classified as a private corporation. It should be termed a government-run fascist cartel. There are several important reasons for this. For example, all nationally chartered banks in the Federal Reserve system are forced by the government to join the cartel. Bernanke and his board of governors are appointed by the President and approved by the Senate. The Federal Reserve came into being because of an act of Congress, and it can be altered or legislated out of being at anytime by Congress. These factors are not how private corporations are created or operated. The Fed entails government involvement in a massive way. Without the special monopoly privileges legislated
by Congress that sustain the Fed, it disappears.
Moreover, the great bulk of the profits of the Reserve Banks are turned over to the federal treasury. As John McCormack explains in a Liberty magazine article: "[H]olding shares in the Fed is not a very profitable activity. Dividends to member shareholders are limited to 6% of nominal capital (hardly a great rate of return) and all Fed revenues above this amount (invariably vastly greater sums) are returned to the U.S. Treasury. In 1994, for example, total dividends to member banks amounted to $212 million while the Treasury received $20.5 billion, 97 times as much." [Liberty, March 1996.]
Government is thus a full partner in the Federal Reserve System. And a business entity with the government as a full partner is not a private corporation.
Courts Create a Fallacy
Much of the reasoning behind the mistaken notion that the Federal Reserve is a private corporation lies in court cases such as LEWIS vs. United States on June 24, 1982. In that case, the 9th Circuit Court ruled: "We conclude that the [Federal] Reserve Banks are not federal...but are independent, privately owned...corporations...without day to day direction from the federal government."
There are numerous cases like this where the courts have ruled that the Reserve Banks of the System are privately owned and controlled corporations. The mistake made here by those who support the notion of a "private Fed" is that because the courts declare something to be so, it somehow makes it so. This, of course, is a fallacy. Judges only interpret the law; they do not make the truth. Truth is something we discover through identification of the facts of reality and coherence with the laws of logic. Men find the truth through a process of synthesizing reason, experience and intuition.
What then are the facts of reality and the laws of logic in this case? They are as follows: A private entity in the marketplace is the opposite of a public entity. It is a free entity without monetary support and monopolistic legislation to protect it from government bureaucracy. It is an entity that is operating in a laissez-faire environment. To the extent that government intervenes into and controls, regulates, manipulates, or monopolizes an entity's market policies, then that entity is no longer private or free. It becomes statist / collectivist (i.e., socialist / fascist) to some degree or another. How much government involvement there is will determine how collectivist the entity becomes.
For example, Exxon Corporation is considered a private corporation. So let's compare it to the so called "private" Federal Reserve corporation. Does Exxon have its CEO and board of directors appointed and confirmed by the government? No, but the Fed does. Are 97% of Exxon's profits turned over to the federal Treasury? No, but the Fed's profits are. Can Exxon be voted out of existence tomorrow by Congress? No, but the Fed can. Therefore despite what our courts maintain, the Fed is not a private corporation; it is a government run cartel.
The fact that the courts define the Fed as "private" is the way that tyrannical ideologues pull the wool over the people's eyes. This is done to make the people think we are still a free, "private" enterprise country. This is how they smuggle us into corporate statism, i.e., economic fascism -- by getting the intelligentsia of the country to buy into their redefinition of words. The courts are run by statist judges, and the schools are run by statist professors -- all pretending that we are still a "free" enterprise system. In fact, many of them actually believe their own warped logic. It's the way they were taught, and they lack the intellectual rigor to investigate the fallacies of their assumptions. They ritualistically use the term "private" because it conveys the image of "free." But private in this instance is in name only. If a private entity does not have control over its operations, its profits, and its policies, then it is no longer private; it is public, and socialist or fascist to some degree or another.
Who Controls Who?
So do the bankers control the government, or does the Federal Government control the bankers? One way to answer this question is to ask who can abolish who? Can the Federal Government abolish the Fed? Certainly. Anytime it wants to, Congress could eliminate the Fed by a majority vote of its members. But can the mega-bankers, with all their power to influence politicians, abolish the Federal Government? Hardly. In this respect of creation and abolition, the Federal Government is the power behind the evil of our Federal Reserve system. But in actual practice, I think it is more accurate to say that the evil comes from the combine of the two forces. Separately, neither the mega-bankers, nor the Federal Government would be able to wield the dangerous control over our lives that they gain in concert. It is only when they join forces to become "partners" that they gain the power to do the evil they do.
When the mega-banks of America were still largely free-market institutions operating under the gold standard during the 19th century, their capacity for dangerous power over our economy and individual lives was limited. Likewise with the Federal Government; when it was still a defined Constitutional body without the ability to print paper money, its capacity for dangerous power over our economy and individual lives was limited. But in 1913, these limitations were destroyed because the mega-banks and the Federal Government went into partnership. They formed the massive cartel of the Federal Reserve System. And in doing so, the Federal Government granted monopolistic powers to the mega-banks, which gave them the ability to egregiously expand the money supply via credit creation. After elimination of the dollar's gold convertibility in 1933 and 1971, this became the power to create money indiscriminately.
What needs to be understood, however, is that the mega-banks could never have achieved such a dangerous power grab without the complicity of the Federal Government. Once again, it was the Federal Reserve Act of 1913 that brought the Creature into being. It was Congress that voted to grant monopoly status to the mega-bankers, which gave them their dangerous credit creation power. Without their monopoly backed by the force of government legal tender laws, the mega-bankers do not have the capacity to expand the money supply inordinately and rob us of our wealth. Thus for all their reputed control over world events, the mega-bankers do not become dangerous until they join forces with the government, which gives them the dangerous powers they now wield.
Reinforcing the Collectivist Mantra
It is important to clarify this misconception of a "private Fed" because the Fed is an evil institution. When we mistakenly define it as a private corporation, we then reinforce the collectivist mantra about free enterprise being evil. If the Fed is both a private corporation and evil, then the collectivist claim that private corporations need to be pervasively controlled by centralized government gains merit in the people's eyes.
If, however, we portray the Fed as it actually is (a government run cartel) then the solution to its evil becomes clear -- end its protective connection to the government, which would eliminate its monopoly status and its power to dangerously expand the money supply. Simply abolish the Reserve Banks and make the member banks independent institutions again. They would then have to live with the rules that the market would demand. And the market would demand open disclosure of the extent of their fractional reserve loans. Most important of all, the market would demand redemption of all bank issued paper notes with gold coins or bullion upon customer request. Both of these market demands would temper excess paper issuance on the part of banks and keep them responsible.
In other words, repeal the government's legal tender laws, establish a free-market for banking, and let the marketplace decide what should be used for money. The banks would then have to offer quality gold money that the people desired, rather than corruptible paper money that a government cartel mandates. This would decentralize the financial power of our economy out among the thousands of individual banks throughout the country and strip the Federal Government of its dangerous control over our wealth and productivity.
Statists and world government advocates on the left do not want a free banking system for obvious reasons. It would shrink their power and wealth greatly, and short-circuit their dreams for more and more centralized government. But populist conservatives on the right don't want a free banking system either; they want Congress to run banking instead of the Fed. The reason why populist conservatives in America want Congress to run the banking system of America is because they fear a private, free-market banking system. They fear it because they believe 19th century banking was a free-market mess of wildcat corruption, exploitation, and fraud.
But the mess and corruption of 19th century banking was not caused by any connection to laissez-faire capitalism. It was caused by incessant government intervention into the market to convey privileges to the banks and also heap mandates upon them that brought about financial distortions, fraud, and ill-collateralized institutions.
For example, government was famous for intervening to allow the more unscrupulous banks to suspend their contractual obligation of gold redemption to their depositors whenever such banks had expanded credit too excessively. This consequently allowed many banks to repeatedly issue excessive paper notes at larger and larger levels, which created bevies of insolvent institutions throughout the country. Government interventions also relaxed accounting standards for banks, allowed them to overstate their assets and understate their liabilities with impunity. Also government interventions often mandated that banks back shabby state bond issues, which brought many of them to financial ruin. But if the market had been left free, such practices and mandates would never have arisen, and the great majority of insolvent banks would never have come about. The mess and corruption of 19th century banking can be laid at government's interventionist door.
[On this issue of why free-market banking is not dangerous and is vitally necessary to maintain freedom in general, see the following: Ron Paul and Lewis Lehrman, The Case for Gold, (Washington, DC: Cato Institute, 1982), pp. 17-118. Antal E. Fekete, "Money and Credit," http://professorfekete.com/math.asp. George A. Selgin, The Theory of Free Banking: Money Supply under Competitive Note Issue (Totoway, NJ: Roman & Littlefield, 1988), pp. 5-15. Kurt Schuler, "The World History of Free Banking," Chapter 2, in Kevin Dowd (ed.) The Experience of Free Banking, (London: Routledge, 1992), pp 7-47.]
Separate the State and the Banks
The proper approach to this problem is first to portray the Fed in its true light, as a "fascist cartel" rather than as a "private corporation." If we do this, we can then arrive at the right solution to the financial corruption taking place in our society. That solution is to separate the state power from the financial power of society.
Separate the state and the banks just as we long ago separated the state and the churches. Independently, these three institutions will function properly; but let the coercive power of the state fuse with either the moral power of religion or the financial power of banking -- and you are begging for a dictatorship.
If the reader will stop and think about why it was so necessary for men to separate the moral power of the church from the state centuries ago, then he will understand also why it is so vital to separate the financial power of banking from the state today.
When the church and the state formed alliances during the Middle Ages, the clergy gained the power to impose their dictates upon the populace by the physical force of the law. With separation of the state and the church, however, it then became necessary for the clergy to win their converts over voluntarily. If a church member didn't like a certain policy of his religion, he was free to walk away without any fear of reprisals from the coercive machinery of the clergy-state combine.
This same principle applies to the banking world. When banks form alliances with the government, they then become capable of imposing their will (or paper money) upon the populace by the physical force of the law. With the separation of the state and the banks in a laissez-faire economy, however, all bankers must then win their customers over voluntarily with quality money and service, just as the clergy have had to win their converts over voluntarily with better ideas and service. Thus, it is not mega-banks that are dangerous and evil. It is mega-banks forming alliances with the state that is dangerous and evil.
Those on the political right, who preach that the Fed is a private corporation, play directly into the hands of those who hate capitalism and freedom. What else can one conclude about capitalism if the evil of the Fed is due to the fact that it is a "private corporation," and therefore needs to be "taken over by Congress?" If capitalism has created such an evil power, then we need (as the collectivists are always eager to tell us) more government power in Washington to counteract it. We need more centralization, more regulation, more bureaucracy, more taxes. This is the tyrannical con that collectivist intellectuals have been utilizing for decades. Demand more power for the central government to counteract evils that the power of the central government has brought into being in the first place. The Fed is a perfect example of this. We don't need a government solution to this problem; we need a government withdrawal from causing it.
Populist Reform of the System
There are several banking reform measures being proposed by populist conservatives today that fall victim to this idea that government is the solution to the evils of our Federal Reserve System. One such example is the National Economic Stabilization and Recovery Act (NESARA) -- a radical overhaul of America's monetary system. Because the NESARA people mistakenly conceive of the Fed as being private, they assume that the answer to its abuse of money is to give the money creation power to Congress. But this is jumping from the frying pan into the fire. Does anyone really believe that Congress will responsibly use such a power? They will do the same thing that the Fed has done for 90 years -- corrupt the currency in order to create the illusion of prosperity, so as to get congressionally elected and bureaucratically appointed to office again and again.
NESARA's reform plan actually states that by giving Congress the power to create money, "the people" will be able to "create as much or as little currency as they need." You can bet grandma's farm that once Congress has the power to create money, the people and their representatives will definitely "create as much as they need" all right. And since humans have a tendency toward endless need of money, they will ultimately succumb to the same pitfalls as our present Federal Reserve.
Thus many well-meaning advocates of freedom and Constitutional government on the political right are adding fuel to the statist / collectivist propaganda machine controlling our media and schools with their mistaken characterizations of the Federal Reserve as an evil, private corporation.
The mega-banks that make up the Federal Reserve System are dangerously evil, there is no doubt about that. But their evil does not spring from their "privateness," nor from their "corporateness." Their evil springs from the mixture of their corporate goals with government coercion, from the fact that they are in bed with the biggest evil of all -- the federal Leviathan in Washington, which grants them protection from market demand. Kick them out of that bed into the free-market, deny them any and all legislated privileges, and we solve the problem of mega-bank exploitation.
The collectivist one-worlders are hard at work today muddying up the ideological waters by smearing the system of capitalism. We do not need to give them added ammunition, which is what we do when we claim that the Federal Reserve is a private corporation. We reinforce the Marxist smear that private free enterprise is a system of favoritism for business class interests, that it is exploitation of the people by private financiers. Class interest favoritism and exploitation are certainly rife throughout our system. But such corruptions are not the result of private corporations and capitalism; they are the result of government cartels and fascism.
No private bank in a truly free-market would possess the power that the government's present mega-bank cartel (the Fed) possesses. The Fed only has it's power because government, having taken over much of the market today, has given the Fed a monopoly. Remove government monopoly privileges (i.e., legal tender laws), and the Fed's power evanesces.
Immense confusion reigns throughout our nation today as to what free enterprise is, what legitimate government entails, how monopolies form, what our rights are, etc. This confusion has been brought about primarily because of grievous political, philosophical and economic fallacies taught in the universities, which has given us legions of Orwellians who twist and corrupt the meaning of words to make them mean what they want them to mean. This process allows them to manipulate the masses into voting America into servitude. Such semantic manipulation is quite apparent in today's analysis of the Federal Reserve System. Our authorities in the courts and in the schools pretend that the Federal Reserve is a private corporation operating in a capitalist free-market independent of government, and most of our punditry buy into it. This enables the authoritarians to bamboozle the people into thinking we still have a free capitalist system, when in actuality we have an ever-increasing fascist economic system.
If we are to succeed in checking this dictatorial aggrandizement that is insidiously moving us toward a One World Government, then we must quit lending credence to collectivist pretenses. We must quit portraying monetary dangers to our freedom as coming from a "private" Federal Reserve. The despotism growing amidst us stems from the mega-banks and our government combining into a grotesque mutation that is neither private nor free. To win the battle against this despotism, we have to portray its reality properly to the people.
http://www.thedailybell.com/681/Nelson-Hultberg-The-Fed-is-a-Fascist-Car...
Great post Tyler thanks...
Spring 2010 will be an interesting time...
1. The banks, large pension funds, and financial institutions will be floating on a cloud of cash, financed by the central bank.
2. The average person will be reviewing their budget for new ways to cut their expenses.
3. The bailout of treasuries and mortgage backed securities will be wrapping up.
4. Congressmen and Senators will begin to think about the fall elections.
5. Ben Bernanke will be happily ensconced in a new 4 year term.
6. Large, increasing federal deficit spending will need financing.
7. The powers that be will not hesitate one second to spend more on a "stimulus" or strong arm the Federal Reserve to print more. (through threat of an audit) Justification for this flawed policy will be to "create jobs" or follow "Keynsian economics" (a contradiction in terms)
8. Chinese citizens will begin to wonder at the potential collapse of the fruit of their labor (stored in dollar denominated debt)
9. Smart fixed-income debt holders will start to question whether their investments can survive either double digit inflation or market rates of double digit interest. (either one destructive to their portfolio
10. The Obama administration will continue to hold up any sign that things are improving to continue more of their disasterous policies.
The Fed is "strong armed" to print by the threat of an audit? I thought the audit was important to figure out how much they were printing when we weren't looking. I think you've got that backwards: printing preceded and generated the need for an audit, not the other way around.
Also, Chinese citizens don't wonder anything, and to the extent they engage in wondering, it doesn't matter. As here, their government is controlled and operated by elites, not the citizens.
A few observations;
Okay, so the FED paid a premium for Treasuries. What about transaction fees paid to the primary dealers? What is your estimate on these costs?
Also, I do not work for the FED, but my guess is that $300B T buy program, plus whatever premium and end costs, requires no more effort in their allocation, than the ability of the FED to maintain these entries on their books. If you try and talk in terms of this created money representing real labor or real worth, you will become severely depressed.
Because, this is not how our central bank works or has ever worked. It is clear that without this T buy program the FED could not assure the administration that the Treasury would have some latitude in meeting budget obligations for 2009. The FED is key in funding government. Without the FED there is no cushion for the administration. This is why I do not necessarily separate the FED from the rest of our government in perpetuating debt.
The actions of the administration require a central bank to inflate the currency in order to fund expenditures. The relationship is not adversarial it is symbiotic.
Mark Beck
Ummmm......
"this is not how our central bank works or has ever worked."
Seriously? Do some more homework man, this is EXACTLY how our Fed works. They did they same thing in 1929 & 1973.
The Fed is not key in funding our government, the Fed funds the banks, the Treasury funds the Fed, our taxes fund the Treasury.
You're moving backwards.
Can I get a dumbed down version of this post somewhere? Like,
"Quantitative Easing For Dummies", or something?
The Fed says 300 Billion, but then accounts for that money using face value. Unfortunately bonds do not trade at face value, they trade at "valuation", valuation depends on the rate of interest, the lower the rate of interest, the higher the valuation.
They count on you not understanding the difference and that's how they steal without people ever knowing.