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Full Bernanke Testimony

Tyler Durden's picture


Some observations on the Stigmata of being associated with the Federal Reserve:

Many banks, however, were evidently concerned that if they borrowed from the discount window, and that fact somehow became known to market participants, they would be perceived as weak and, consequently, might come under further pressure from creditors. To address this so-called stigma problem, the Federal Reserve created a new discount window program, the Term Auction Facility (TAF). Under the TAF, the Federal Reserve has regularly auctioned large blocks of credit to depository institutions. For various reasons, including the competitive format of the auctions, the TAF has not suffered the stigma of conventional discount window lending and has proved effective for injecting liquidity into the financial system (Another possible reason that the TAF has not suffered from stigma is that auctions are not settled for several days, which signals to the market that auction participants do not face an immediate shortage of funds.)

On foreign FX swap arrangements:

Liquidity pressures in financial markets were not limited to the United States, and intense strains in the global dollar funding markets began to spill over to U.S. markets. In response, the Federal Reserve entered into temporary currency swap agreements with major foreign central banks. Under these agreements, the Federal Reserve provided dollars to foreign central banks in exchange for an equally valued quantity of foreign currency; the foreign central banks, in turn, lent the dollars to banks in their own jurisdictions. The swaps helped reduce stresses in global dollar funding markets, which in turn helped to stabilize U.S. markets. Importantly, the swaps were structured so that the Federal Reserve bore no foreign exchange risk or credit risk (In particular, foreign central banks, not the Federal Reserve, bore the credit risk associated with the foreign central banks’ dollar-denominated loans to financial institutions.)

On the upcoming increase in the spread between the Discount rate and Fed Fund rate:

Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve’s lending facilities, in light of the improving conditions in financial markets; they are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about as it was at the time of the January meeting of the FOMC.

On temporary liquidity measures declining. Alas, nowhere Bernanke does not mention that holdings of MBS and USTs have more than made up for this presumed improvement.

In summary, to help stabilize financial markets and to mitigate the effects of the crisis on the economy, the Federal Reserve established a number of temporary lending programs. Under nearly all of the programs, only short-term credit, with maturities of 90 days or less, was extended, and under all of the programs credit was overcollateralized or otherwise secured as required by law. The Federal Reserve believes that these programs were effective in supporting the functioning of financial markets and in helping to promote a resumption of economic  growth. The Federal Reserve has borne no loss on these operations thus far and anticipates no loss in the future. The exit from these programs is substantially complete: Total credit outstanding under all programs, including the regular discount window, has fallen sharply from a peak of $1-1/2 trillion around year-end 2008 to about $110 billion last week.

Uh, $110 billion? Weren't the temporary liquidity programs supposed to expire on February 1?

On Quantitative Easing:

In addition to supporting the functioning of financial markets, the Federal Reserve also applied an extraordinary degree of monetary policy stimulus to help counter the adverse effects of the financial crisis on the economy. In September 2007, the Federal Reserve began reducing its target for the federal funds rate from an initial level of 5-1/4 percent. By late 2008, this target reached a range of 0 to 1/4 percent, essentially the lowest feasible level. With its conventional policy arsenal exhausted and the economy remaining under severe stress, the Federal Reserve decided to provide additional stimulus through large-scale purchases of federal agency debt and mortgage-backed securities (MBS) that are fully guaranteed by federal agencies. In March 2009, the Federal Reserve expanded its purchases of agency securities and began to purchase longerterm Treasury securities as well. All told, the Federal Reserve purchased $300 billion of Treasury securities and currently anticipates concluding purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March. The Federal Reserve’s purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks. A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in private credit markets and put downward pressure on longer-term private borrowing rates and spreads.

Uh, a range of evidence also suggests that when the Fed pulls out in March the housing market will crash (more) as the Fed monopolizing the MBS bid effectively destroyed the private component to MBS purchasing. Good luck there Ben.

On increasing the interest on reserve balances, and giving banks yet more free money on the $1.2 trillion in excess reserves:

Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on banks’ holdings of reserve balances. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

On withdrawing liquidity:

One such tool is reverse repurchase agreements (reverse repos), a method that the Federal Reserve has used historically as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. The counterparty’s payment to the Federal Reserve has the effect of draining an equal quantity of reserves from the banking system. Recently, by developing the capacity to conduct such transactions in the triparty repo market, the Federal Reserve has enhanced its ability to use reverse repos to absorb very large quantities of reserves. The capability to carry out these transactions with primary dealers, using our holdings of Treasury and agency debt securities, has already been tested and is currently available. To further increase its capacity to drain reserves through reverse repos, the Federal Reserve is also in the process of expanding the set of counterparties with which it can transact and developing the infrastructure necessary to use its MBS holdings as collateral in these transactions.

As a second means of draining reserves, the Federal Reserve is also developing plans to offer to depository institutions term deposits, which are roughly analogous to certificates of deposit that the institutions offer to their customers. The Federal Reserve would likely auction large blocks of such deposits, thus converting a portion of depository institutions’ reserve balances into deposits that could not be used to meet their very short-term liquidity needs and could not be counted as reserves. A proposal describing a term deposit facility was recently published in the Federal Register, and we are currently analyzing the public comments that have been received. After a revised proposal is reviewed by the Board, we expect to be able to conduct test transactions this spring and to have the facility available if necessary shortly thereafter. Reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so.

The Federal Reserve also has the option of redeeming or selling securities as a means of applying monetary restraint. A reduction in securities holdings would have the effect of further reducing the quantity of reserves in the banking system as well as reducing the overall size of the Federal Reserve’s balance sheet.

Yet a glimpse of reality through the psychosis emerges:

I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid. The Federal Reserve is currently rolling over all maturing Treasury securities, but in the future it may choose not to do so in all cases. In the long run, the Federal Reserve anticipates that its balance sheet will shrink toward more historically normal levels and that most or all of its security holdings will be Treasury securities. Although passively redeeming agency debt and MBS as they mature or are prepaid will move us in that direction, the Federal Reserve may also choose to sell securities in the future when the economic recovery is sufficiently advanced and the FOMC has determined that the associated financial tightening is warranted. Any such sales would be at a gradual pace, would be clearly communicated to market participants, and would entail appropriate consideration of economic conditions.


As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets. Accordingly, the Federal Reserve is considering the utility, during the transition to a more normal policy configuration, of communicating the stance of policy in terms of another operating target, such as an alternative short-term interest rate. In particular, it is possible that the Federal Reserve could for a time use the interest rate paid on reserves, in combination with targets for reserve quantities, as a guide to its policy stance, while simultaneously monitoring a range of market rates. No decision has been made on this issue; we will be guided in part by the evolution of the federal funds market as policy accommodation is withdrawn. The Federal Reserve anticipates that it will eventually return to an operating framework with much lower reserve balances than at present and with the federal funds rate as the operating target for policy.

Full Bernanke testimony even as Ben Shalom is snowed in with his favorite printing press.



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Wed, 02/10/2010 - 11:47 | Link to Comment MarketTruth
MarketTruth's picture

i read the prepared statement from the USA's Federal Reserve Chairman Ben Shalom Bernanke and this plan is not a plan more than a way to funnel even more money to banksters for free in hopes they can re-inflate their balance sheets to balance out the massive JUNK paper the banksters they hold.

Basically, as banks keep money at the Fed, the Fed will pay banksters MORE money in interest on said funds to keep them OUT of the system (thus avoiding hyperinflation). The problem is that it will not FORCE banks charge more interest to consumers more than probably keeping the fund safe and sound at the Fed for the free money and free interest on said money to inflate their balance sheets (velocity of $ zero). If the Fed was truly serious, it would charge BANKS more money to borrow funds, READ: raise interest rates.

The problem with raising interest rates is that banksters can no longer get 0% money from the Federal Reserve, and thus buy USA debt (bonds, etc) that earn 3%+, thus giving banksters 3%+ of free money risk free. It also keeps the USA's interest on debt lower, though of course am sure some secret additoonal QUESEing will happen... off the Fed's balance sheets that no one sees.

Another problem, if the banksterrs actually do release their funds to the public, hyperinflation could easily take hold due to the MASSIVE funds the Federal Reserve has pumped into the system. At this point in time, with China now officially liquidating massive dollars in investment as announced earlier today, the USD is not looking good at all and neither in the market. That, combined with what the Federal Reserve is proposing will probably lead to much future pain within the USA due to this massive financial nightmare that the country refuses to face directly.

Pretend and extend is the name of the game... while getting free $$$ from the Federal Reserve on the backs of USA taxpayers. So who is really paying for this mess, the USA taxpayers of course.

Furthermore, while Americans who make the error of keeping money at their bank, they will get virtually NO INTEREST due to the official Fed lending rate being effectively 0%. Meanwhile if you can get a loan from banksters, they will now charge more for that to their customers. As such, USA taxpayers who want loans will be paying a far higher % spread (penalty per se).

Again, USA taxpayers and those who choose to keep money within a bank will be crushed at a higher spread rate. So again who is really paying for this mess you ask? The USA taxpayers of course.

Wed, 02/10/2010 - 12:13 | Link to Comment infotechsailor
infotechsailor's picture

Oh Will you Pull the Trigger Already, Mr. B.S. Bernanke?

I'm looking forward to loaning money to my neighbors.

Wed, 02/10/2010 - 11:57 | Link to Comment SDRII
SDRII's picture

Do they have any idea how such a move would be reflected in the term structure? Not a lawyer and not that it matters but on its face seems unconstitutional via discrimination?


Wed, 02/10/2010 - 12:01 | Link to Comment lsbumblebee
lsbumblebee's picture

Here we go again with Ben and his "exit strategy" bullshit, nicely timed to explain the gold cartel's handiwork this morning. As if they care how obvious they are anymore.


Wed, 02/10/2010 - 12:02 | Link to Comment DaveyJones
DaveyJones's picture

(1) orchestrate (or allow) an emergency (2) pass new emergency measures that (a) suspend the normal rules (b) reward powerfull players and (c) gradually destroy individual rights and property, and then (3) most important, pass never ending extensions. Is it just me or am I starting to see a pattern..... 

Wed, 02/10/2010 - 12:16 | Link to Comment MarketTruth
MarketTruth's picture

(c) gradually destroy individual rights and property.

Remember: One of the last acts of a rogue government is to rob the people of their money/possessions.

Wed, 02/10/2010 - 16:12 | Link to Comment DaveyJones
DaveyJones's picture

love the avatar

Wed, 02/10/2010 - 12:03 | Link to Comment mberry8870
mberry8870's picture

"all of the programs credit was overcollateralized or otherwise secured as required by law."


Collateralized by nothing but crap.


Works for me. Please proceed.

Wed, 02/10/2010 - 12:08 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

What's that they say?

Oh yeah, the devil's in the details.

Wed, 02/10/2010 - 12:37 | Link to Comment DaveyJones
DaveyJones's picture

I think Bernanke's favorite devil quote is that one from Flip Wilson

Wed, 02/10/2010 - 12:20 | Link to Comment Traianus Augustus
Traianus Augustus's picture

The insanity continues as Ben has the full confidence of all who matter.  This is an appropriate strategy for a man who never met a bailout he didn't like.  The US constitution hasn't mattered so far.  Why should it matter now?  Besides the people who believe in that kind of stuff are now mocked as simpletons by the banker/ruling elite.

Wed, 02/10/2010 - 12:26 | Link to Comment H.W. Plainview
H.W. Plainview's picture

Why isn't anybody talking about the following?

1)  The Fed is mandated to refund its "profits" to the treasury at the end of every year.

2)  If the Fed is going to be paying "interest on reserves" then they will be using monies that should have in prior years been refunded to the Treasure (the taxpayers).

3)  This is blantantly stealing taxpayer money and handing it to banks.

Where's the fking outrage??


"I am an oil man"



Wed, 02/10/2010 - 13:09 | Link to Comment Hephasteus
Hephasteus's picture

Lost in an abyss of rediculousness. Which will soon be drank as a potion of ridicule. Till every drop is gone.

Wed, 02/10/2010 - 13:14 | Link to Comment Jean Valjean
Jean Valjean's picture

Naked is the new black.

Wed, 02/10/2010 - 13:41 | Link to Comment Anonymous
Wed, 02/10/2010 - 15:04 | Link to Comment BlackBeard
BlackBeard's picture

Annnnnnd Big Ben can go fuck himself.

Wed, 02/10/2010 - 17:33 | Link to Comment carbonmutant
carbonmutant's picture

"As a result of the very large volume of reserves in the banking system, the level of activity and liquidity in the federal funds market has declined considerably, raising the possibility that the federal funds rate could for a time become a less reliable indicator than usual of conditions in short-term money markets."

Mon, 04/19/2010 - 10:34 | Link to Comment Tom123456
Tom123456's picture

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