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Guest Post: The Federal Reserve Still Doesn't Know How To Get Rid Of Excess Liquidity

Tyler Durden's picture


Submitted by James Bianco of Bianco Research

•    The Wall Street Journal - Fed Proposes Tool to Drain Extra Cash
The Federal Reserve on Monday proposed selling interest-bearing term deposits to banks, a move the U.S. central bank would make when it decides to drain some of the liquidity it pumped into the economy during the financial crisis. The new facility is intended to help ensure that the Fed can implement an exit strategy before a banking system awash with Fed money triggers inflation. Fed Chairman Ben Bernanke has described term deposits as “roughly analogous to the certificates of deposit that banks offer to their customers.” Under the plan, the Fed would issue the term deposits to banks, potentially at several maturities up to one year. That would encourage banks to park reserves at the Fed rather than lending them out, taking money out of the lending stream.The central bank said the proposal “has no implications for monetary policy decisions in the near term.” “The Federal Reserve has addressed the financial market turmoil of the past two years in part by greatly expanding its balance sheet and by supplying an unprecedented volume of reserves to the banking system,” it said. “Term deposits could be part of the Federal Reserve’s tool kit to drain reserves, if necessary, and thus support the implementation of monetary policy.” Michael Feroli, an economist at J.P. Morgan Chase, said “it’s another step forward in the exit-strategy infrastructure, but it’s been well flagged in advance, so it’s not a surprise.” When Fed officials decide to tighten credit, they would likely use the term-deposits program ahead of — or in conjunction with — adjusting their traditional policy lever, the target for the federal funds interest rate at which banks lend to each other overnight. The Fed also said Monday that its balance sheet rose slightly to $2.2 trillion in the week ending Dec. 23. The Fed’s total portfolio of loans and securities has more than doubled since the beginning of the financial crisis. As part of its efforts to fight the downturn, the central bank is buying $1.25 trillion in mortgage-backed securities, a program it says will end in March. The Fed now holds $910.43 billion in mortgage-backed securities, it said Monday.

• - Fed Proposes Term-Deposit Program to Drain Reserves
The Federal Reserve today proposed a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system.  The plan, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Fed Chairman Ben S. Bernanke is preparing tools and strategies to shrink or neutralize the inflationary impact from the biggest monetary expansion in U.S. history. Central bankers are also conducting tests of reverse repurchase agreements and discussing the possibility of asset sales. Term deposits may help the central bank “assert operational control over the federal funds rate” once officials decide to lift the overnight bank lending rate from the current range of zero to 0.25 percent, said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. Excess cash “would be locked up” rather than put downward pressure on the federal funds rate, he said.The Fed won’t begin raising interest rates until the third quarter of 2010, according to the median estimate of 62 economists surveyed by Bloomberg News in the first week of December.

•    The Financial Times - Fed to offer term deposits to banks
The US Federal Reserve plans to offer term deposits to banks as part of its “exit strategy” from the exceptionally loose monetary policy used to fight the recession. In a consultation paper released on Monday the Fed said it planned to change its rules so that it could pay interest on money locked up at the central bank for a defined period. The Fed added that the well-flagged rule change - designed to allow it more influence over the $1,100bn in excess reserves held by banks - was part of “prudent planning. . . and has no implications for monetary policy decisions in the near term”. It is one of a number of measures that has been outlined over the past few months by Ben Bernanke, chairman of the Fed, as an option to drain liquidity from the financial system in a manner that protects the economic recovery while heading off the threat of inflation.

•    The Federal Reserve - Notice of proposed rulemaking; request for public comment.
The Board is requesting public comment on proposed amendments to Regulation D, Reserve Requirements of Depository Institutions, to authorize the establishment of term deposits. Term deposits are intended to facilitate the conduct of monetary policy by providing a tool for managing the aggregate quantity of reserve balances. Institutions eligible to receive earnings on their balances in accounts at Federal Reserve Banks (”eligible institutions”) could hold term deposits and receive earnings at a rate that would not exceed the general level of short-term interest rates. Term deposits would be separate and distinct from those maintained in an institution’s master account at a Reserve Bank (”master account”) as well as from those maintained in an excess balance account. Term deposits would not satisfy required reserve balances or contractual clearing balances and would not be available to clear payments or to cover daylight or overnight overdrafts. The proposal also would make minor amendments to the posting rules for intraday debits and credits to master accounts as set forth in the Board’s Policy on Payment System Risk to address transactions associated with term deposits.


We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.  The fact is they have no plan and are still throwing everything on the wall to see what sticks. From the November 4 FOMC minutes:

Participants expressed a range of views about how the Committee might use its various tools in combination to foster most effectively its dual objectives of maximum employment and price stability. As part of the Committee’s strategy for eventual exit from the period of extraordinary policy accommodation, several participants thought that asset sales could be a useful tool to reduce the size of the Federal Reserve’s balance sheet and lower the level of reserve balances, either prior to or concurrently with increasing the policy rate. In their view, such sales would help reinforce the effectiveness of paying interest on excess reserves as an instrument for firming policy at the appropriate time and would help quicken the restoration of a balance sheet composition in which Treasury securities were the predominant asset. Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals. Furthermore, they believed that other reserve management tools such as reverse RPs and term deposits would likely be sufficient to implement an appropriate exit strategy and that assets could be allowed to run off over time, reflecting prepayments and the maturation of issues. Participants agreed to continue to evaluate various potential policy-implementation tools and the possible combinations and sequences in which they might be used. They also agreed that it would be important to develop communication approaches for clearly explaining to the public the use of these tools and the Committee’s exit strategy more broadly.

The Federal Reserve first hinted at term deposits almost two months ago, although exactly what they were talking about was left vague until now.

Remember that the Federal Reserve has to withdraw over a trillion dollars of excess liquidity.  The easiest way to do this is to sell hundreds of billions of MBS, Treasuries and agencies.   As the bold highlighted passage above implies, they are scared to death of doing this, so they propose complicated schemes to withdraw liquidity like reverse repos and now term deposits.

We have argued that these schemes will not work.  They cannot be done in the sizes necessary or enough to even matter.  The Federal Reserve could possibly drain tens of billions of dollars via these schemes, but collectively that will amount to a rounding error when the goal is to withdraw over a trillion in excess reserves.

The Federal Reserve does not want to admit defeat, so they continue pursuing these strategies that will not make a difference.  We believe they also do it to “look busy” as they are taking measurements and notes as to how to withdraw all the liquidity they have pumped in.  They think this will give the market comfort that someone is on the case and that inflation expectations will not get out of control.  The market is not buying this.  Inflation expectations, s measured by TIPS inflation breakeven rates, are going vertical.

Reinvestment Risk

As to term deposits, the Federal Reserve is proposing an illiquid short term instrument for banks to invest in.  Banks would buy these instruments and “lock up” the excess reserves they now have.  This would have the same effect as draining excess reverses.  The maturities of these instruments would be as long as one year.

It is unclear if there will be a secondary market for these instruments, and if so, how liquid it will be.
Without a secondary market, buyers of these instruments face huge reinvestment risk.  The future course of short term interest rates is arguably to the most uncertain it has been in decades.  Will the Federal Reserve stay near zero until 2012 or will they be forced to raise rates in the first half of 2010?  Given all this uncertainty, who wants to lock up money in something that cannot be sold before maturity?  This is especially true given the Federal Reserve’s statement that the “maximum-allowable rate for each auction of term deposits would be no higher than the general level of short- term interest rates.”

The general level of short-term interest rates is set on known instruments that have generations of history and active secondary markets.  If the Federal Reserve wants to introduce a new, and wholly unknown instrument with an uncertain secondary market and offer no interest rate premium, then we cannot see how this will work beyond a token amount after some arm twisting to get them sold.  The Federal Reserve will have to offer a premium for uncertainty and illiquidy to make this fly in any major way, something they said they will not do.

Complicated Is Simple

The Federal Reserve owns 80% of AIG.  With each passing day it looks like the Federal Reserve is adopting AIG Financial Product’s business practices.  That is, when faced with a financial problem, they create complicated tools (like CDS).  When critics says these new products will not work, tell them they do not know what they are talking about and create even more complicated tools to dazzle everyone.  Once the tools are so complicated that no one understands them, you will be hailed as an expert with no peer.  You might even be named TIME’s Person of the Year.


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Tue, 12/29/2009 - 14:10 | 176879 Stevm30
Stevm30's picture

UMMM - it's called a TREASURY BILL Bernanke you dumbass!  You want to go head to head with Timmay G. and the US Government?... LOL! That's a fight I'd like to see.

Tue, 12/29/2009 - 14:14 | 176885 VegasBD
VegasBD's picture

Yes. Please. So we can end this third central bank already.

Tue, 12/29/2009 - 14:13 | 176883 JACOB5CD
JACOB5CD's picture


Tue, 12/29/2009 - 14:20 | 176884 Cursive
Cursive's picture

Enough with all this talk of "tools" that the FBR uses.  The toilet is still backed up and shit is raining from the 13th floor.  Many thanks to Jim Bianco for this excellent analysis.  At the end of the day, the Wizard is just a little man hiding behind a curtain.

Tue, 12/29/2009 - 14:54 | 176937 Segestan
Segestan's picture

That is really a naive view. The little man behind the curtain is a global network. A network that has human science down to an art. Good luck with that Yellow brick road idea.

Tue, 12/29/2009 - 15:29 | 176983 Crime of the Century
Crime of the Century's picture

Interesting - so the blanched faces in Sep '08 were just an act?

Tue, 12/29/2009 - 15:55 | 177017 Cursive
Cursive's picture


My sentiments are the same as that posted by "Crime of the Century".  I love your mangled metaphors.  "Human science"?  Is English your second language?  I don't doubt that there are powerful and dark forces at work here, but I doubt their eventual success.  Goebbels knew a lot about using human behavior to consolidate power.  How'd that work out for him?  Listen, it is a more naive view to deny the existence of gravity or to think that a man or a group of men can prevent the inevitable.  The central banks of the world cannot keep the lid on this pressure cooker.  God help us all.

Wed, 12/30/2009 - 04:58 | 177550 Rusty_Shackleford
Rusty_Shackleford's picture

Agreed.  There is no one smart enough or with a big enough network to make a system of non-redeemable paper-ticket currency sustainable.  Whether you look at it from the standpoint of Triffen's Dilemma, or just plain common sense, it just can't work.  It will destroy itself.



As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

Tue, 12/29/2009 - 14:18 | 176890 gookempucky
gookempucky's picture

Knew I should not have sent him that package of BEDAZZLER's for Xmas

Tue, 12/29/2009 - 14:24 | 176897 Brett in Manhattan
Brett in Manhattan's picture

Why doesn't the Fed just sell all the MBSs they bought? That should drain a few hundred bucks out of the system.

Tue, 12/29/2009 - 15:18 | 176968 Anonymous
Anonymous's picture

now that's funny!

Tue, 12/29/2009 - 16:17 | 177054 Cognitive Dissonance
Cognitive Dissonance's picture

"That should drain a few hundred bucks out of the system."

That had me laughing. But I've read other comments from people trying to apply common sense to the situation by offering reasonable ideas for draining liquidity from the system and then lamenting on when the Fed doesn't do it. There is a simple reason why it's not done.

Because the Fed doesn't wish to drain liquidity from the market. Period!

Tue, 12/29/2009 - 16:38 | 177092 Brett in Manhattan
Brett in Manhattan's picture

Exactly, the Fed could hold a Dutch Auction and sell the trillion plus MBSs on their books, but, that would expose those assets for what they're really worth.

Tue, 12/29/2009 - 19:35 | 177270 B9K9
B9K9's picture

The Fed is trying to keep everyone honest with these periodic feints regarding 'draining liquidity'. I mean, talk about false flag operations; the Fed talks up one strategy while covertly pursuing exactly the opposite through one of its many proxies. Monkey see, monkey do - they learned well from their squidly masters.

At the risk of losing $trillions in housing values, there is no way either the Fed, Treasury or FanMac can allow interest rates to climb even a fraction from where they are right now. It turns out that the math is actually quite simple; dollars must be printed in such vast quantities that new keyboards will probably have to be ordered. Of course, with the dollar driven to new lows, it's only a matter of time before a formal devaluation (effective default) is announced

Ultimately, all these fun & games don't do anything other than allow us to continue "eating our see corn". (See: FanMac obviates all loss limits in preparation for principal reductions.) What we really need is some type of productivity break-through in order to be able to pyramid a new layer of debt. That's why I expect to see some type of Nuremberg rally where the PTB will get everyone worked up over the next big gov't sponsored initiative. (An expanded ME war just doesn't do it for me - we'd need to draft around 10-15m guys and place them over there as occupational forces to get even small ROI.) So it might be something like the moon shot of the 60s - cold fusion? (Cap 'n trade only works as a wealth siphon.)

It doesn't matter what it is as long as people believe there is an opportunity, and are willing to spend/invest capital they don't have, but will borrow/lend, in order to get in on the "ground floor". This is neo-Keynesian 'functional finance' to a T.

The big winners are of course banks, and surprisingly, investors, if any of the concepts actually take hold. Of course, nationalized cum directed economies rarely ever achieve those types of gains, so the big play might be gold if all we end up doing is pissing away a few $trillion more before we default.

It's a tough game knowing the possible outcomes; it sure looks like disaster, but you never know if something won't come up. It's probably preferable to be a clueless ignoramus who either scores big if things turn out OK, or becomes canon fodder if the SHTF. In either case, you have no idea what just happened.

Tue, 12/29/2009 - 17:03 | 177130 ahab
ahab's picture

that's funny (-:

Tue, 12/29/2009 - 17:21 | 177149 Anonymous
Anonymous's picture

Because the Fed lives in fantasyland where somehow Timmy's half-witted ideas to bailout the housing market indefinitely will make them worth something one day.

If you bought garbage assets for more than they are worth would *you* sell?

Tue, 12/29/2009 - 18:40 | 177231 Guy Fawkes
Guy Fawkes's picture


Tue, 12/29/2009 - 19:03 | 177248 carbonmutant
carbonmutant's picture

If diamonds were as common as sand, that's what they'd be worth.

Treasuries are getting pretty common...

Tue, 12/29/2009 - 14:32 | 176907 merehuman
merehuman's picture

So the fed holds all the paper on properties, doesnt that make them the largest land holder in the country? Doesnt that mean they own us? And in return we are given green papers.  Is this the gist of it? If so we are the dumbest natives ever conquered.   Where are my beads?

submitted by the man on the street.

Tue, 12/29/2009 - 18:27 | 177219 Anonymous
Anonymous's picture

No, that's the funny part. The fed owns the paperwork that says they own the rights to the future stream of income on those mortgages that people will surely keep paying on. I hear the Indians actually still own the land. Or the Queen. At any rate it might as well be you as them. Possession and all. Pshaw the Fed doesn't own the land. Heck that's why the banks offloaded the paper onto the Fed in the first place. If the paper represented a claim on real estate well then that would really BE something. If you don't understand this, you must be a regular person.

Tue, 12/29/2009 - 14:35 | 176912 waterdog
waterdog's picture

This CD thing is just smoke. The boys know that saying anything, regardless of how stupid, will distract our minds from the real problems.

How does the CRE problem fit in here? Did it solve itself and go away? Last I read, that is a 700 billion dollar bank problem waiting on Bernanke bucks.


Tue, 12/29/2009 - 16:10 | 177037 deadhead
deadhead's picture

the Fed has answered that one.

the Fed has indicated to banks that they can roll over CRE loans irrespective of collateral values.  nice way to utilize FDIC insured funds.

Tue, 12/29/2009 - 16:23 | 177067 Cognitive Dissonance
Cognitive Dissonance's picture


Sadly it's as simple as that. What bad loans? I (the Fed) don't see any bad loans. And you banks don't see any bad loans either. Those old "bad" (not bad, just misunderstood) CRE loans can be easily rolled over to remove the non-performing label. And we (the Fed) and other regulatory agencies will look the other way.

Hell, even an old fart like myself can get laid if every woman I meet has no standards what-so-ever. Of course, that would mean I've died and gone to hell.

Tue, 12/29/2009 - 18:46 | 177233 deadhead
deadhead's picture

yep, it is that simple, which is the amazing thing.

along with the pronouncement the Fed did comment some mumbo jumbo that related to underwriting standards, but it was so vague you could drive a truck through it.

it's part of the "all in" bet as they are hoping those malls go to 100% occupancy, rents increase, and debt service becomes a piece of cake.  same with office bldgs, i.e. unemployment goes to 5%, new companies are just clamoring for A space, etc.  the interesting part will be if and when debt service becomes a problem.  i simply don't believe CRE (and the banks, regionals in particular) can pull it off, with some exceptions, naturally.

talk about an abuse of FDIC insured funds.  I still remember the days underwriting loans (for a large regional, one of the sacred 19) and even though the mantra was one of pushing very hard to make loans, it was still a conservative business and there were lots of declines.  my how it has changed.  one of the things I do agree with buffett about is the importance of "old fashioned" underwriting standards: skin in the game by the borrower, reasonable LTV values, reasonable D/I levels, and on commercial non real estate deals, a solid b'ness plan and loan officers that know the customer(s), the market, the product/service, etc.



Tue, 12/29/2009 - 14:39 | 176917 trav777
trav777's picture

why in the hell would they WANT to drain the liquidity?

Do they honestly have advisors so full of shit that they believe that lending is actually reviving?

The interbank market is still dead, the Fed IS the credit market and the USG IS the borrower of last, first, and only resort!

They have no choice but to ADMIT to permanent liquidity, aka printing.  Unless they want that deflation thing to come back which will destroy the USG's sheet so quickly that the Fed's lifespan as an "independent" organization will be measured in NY seconds.

Lending WILL NOT REVIVE into a contractionary future!  There is no growth to pay the coupon!  The only inflationary tool they have is devaluation.

There is no demand for credit and nobody willing to supply because there are simply so few economically viable activities out there in this astoundingly overcapacitied world.

Tue, 12/29/2009 - 16:16 | 177048 Anonymous
Anonymous's picture

Lending WILL NOT REVIVE into a contractionary future! There is no growth to pay the coupon! The only inflationary tool they have is devaluation.

There is no demand for credit and nobody willing to supply because there are simply so few economically viable activities out there in this astoundingly overcapacitied world.

This is the best statement I've read and i agree wholeheartedly. The economy has been overbuilt and therefore, there is not enough growth potential to provide a way out of this. The only way out is devaluation in my opinion and this is why I own gold. This is what I refer to a great deal over at

Tue, 12/29/2009 - 14:45 | 176925 Anonymous
Anonymous's picture

The Fed doesn't own AIG - Treasury does.

Tue, 12/29/2009 - 18:47 | 177237 deadhead
deadhead's picture


And, the Fed owns the US Treasury. 


Tue, 12/29/2009 - 14:46 | 176926 Anonymous
Anonymous's picture

Are Banks Scamming Fannie?

You remember the announcement that Fannie and Freddie would have an "unlimited" credit line from Treasury to cover shortfalls and buy-outs of defaulted loans from MBS, right?

Well then, read this from the forum:

After the Fannie news came out this weekend, a friend called me and his brother works for Chase Mortgage. He told me that Chase is redoing stated income loans and instead of actually appraising the home, they are going back 3 years on the homes valuation in order to get the loan processed. Then they are selling these mortgages to Fannie Mae.

Yes, that's an anecdotal claim, but if true can someone explain to me how this isn't out-and-out fraud?

Is Fannie requiring the actual appraisal with the loan package information they buy, or is the entire "verification" nothing more or less than a checkbox that says "yes, we have an appraisal"?

Toxic waste dumping ground? Maybe.

But one thing is certain - I've not heard of Fannie and Freddie forcing putbacks of loans they purchased from various brokers and originators where there was fraud in the original loan.

Why not?

Why should Fannie and Freddie eat this if in fact the banks breached their reps and warranties in the original tender of the paper?

And since it appears that banks have been tremendously successful in shoveling off garbage paper to Freddie and Fannie while not being held to account for their activity, one has to wonder if this anecdotal report is accurate!


Tue, 12/29/2009 - 16:32 | 177082 trav777
trav777's picture

KD ought to know by now that Fraudie and Phony's mandate is to reinflate the housing market and get loans happening by any means necessary.

Scamming?  LOL...only like you would "rape" a prostitute you already paid for

Tue, 12/29/2009 - 23:00 | 177417 dnarby
dnarby's picture

I have wondered if FanFreddie were going to become the defacto "bad bank" for that possible solution (but by buying the assets at inflated prices, e.g. )

Tue, 12/29/2009 - 15:07 | 176957 mtguy
mtguy's picture

Even if there was a demand for credit, why would the banks take the risk? I mean it sounds as if a bank could take some of their reserves and by one of Benny's CD's and earn a spread that way -no risk, no fuss. In fact, once purchased, the banks can plead their case for not lending as they can't lend out the money they put into Benny's CD's. How convenient.

Tue, 12/29/2009 - 15:17 | 176965 Anonymous
Anonymous's picture

Dont you worry. Ben willfigure it out. After all he went to amerikas bestest schoolin' at ol' harvard collegium of stupidity. Keyenes, keynes marx, and more keynes...

Tue, 12/29/2009 - 15:17 | 176967 Handle with care
Handle with care's picture

Am I misunderstanding something?  Because it seems to me that the Fed allows banks to borrow at around zero percent and now they want to allow the banks to deposit this money at the Fed for a higher interest rate.


Is that really what's happening?

Tue, 12/29/2009 - 15:38 | 176999 Crime of the Century
Crime of the Century's picture

They are already doing that. The deposits are liquid however, and so have inflationary potential. What the Fed seeks to do is lock it up. Which goes against the complaints that the banks are already locking it up (having seen their own balance sheets). Doublethink - it's what's for dinner...

Wed, 12/30/2009 - 05:07 | 177553 Rusty_Shackleford
Rusty_Shackleford's picture

Yeah.  I get a kick out of that too. 


We're going to "drain" liquidity by paying interest on the bank's money

So,......OK, it's 6 months for now and the $1.2 Trillion the Fed is "holding" for the banks is now $1.3 Trillion.  Now what?  Are they going to keep paying interest until the principal is infinity?

Tue, 12/29/2009 - 15:53 | 177015 seventree
seventree's picture

Wow that's scary. Good thing the economy is going to start recovering next week. I heard that on TV.


Tue, 12/29/2009 - 16:07 | 177033 Ripped Chunk
Ripped Chunk's picture

Momentum building. 2010 looks like shit.

Meanwhile the media folks slapping each other on the back and celebrating "mission accomplished" as their relentless PR blast apparently lifted holiday sales to "better than last year" levels.  Or not.

Wed, 12/30/2009 - 09:35 | 177629 Anonymous
Anonymous's picture

We shit the bed but the media is telling us that it's just a chocolate on the pillow.

Tue, 12/29/2009 - 15:20 | 176971 Anonymous
Anonymous's picture

From the November 4 FOMC passage above ....

Other participants had reservations about asset sales–especially in advance of a decision to raise policy interest rates–and noted that such sales might elicit sharp increases in longer-term interest rates that could undermine attainment of the Committee’s goals.

Translation - If the Fed sells MBS, they would drive rates higher and Bernanke would need to be placed in a witness protection program. So this is not going to happen.

Tue, 12/29/2009 - 15:21 | 176972 dead hobo
dead hobo's picture

Every dollar of drained liquidity is a dollar that can't be used to feed the beast when it needs to sell new debt. If they drain, rates rise and the economy folds. I'm still betting they figure out some new way to scare the markets without folding credit too much. The alternative is a textbook economy, with high rates and the corresponding downturn that accompanies high rates.

This is a hell of a puzzlement. Agreed it's probably a smokescreen.

Tue, 12/29/2009 - 15:40 | 177004 trav777
trav777's picture

A rise in rates would precipitate a full-on monetary collapse, as in severe deflation.

The reason EM rates are higher is because they can be...activity there is more profitable than in more mature economies.

There is not enough to do here with rates high; things just aren't that profitable anymore.  All the good oil wells have been drilled and drained, the land cultivated...they suburbanized everything.

Profit margins in mature economies decline over time, which is why the capitalist system moves on to unexploited pastures.

If rates rise sharply, that will revert shit quickly back to feudal rent-seeking behavior.  If economic activity is less profitable than the prevailing coupon, the activity won't happen via lending.  Without lending, we don't have money.  Put simply, a rise in rates leads back to rentierdom and a gold standard.

Tue, 12/29/2009 - 15:44 | 177007 Crime of the Century
Crime of the Century's picture

The market will be punk'd in '10 (Round 2), in order to finance some debt. The Gov 401(k) ("Thrift Savings Plan") will be moved into bonds. Private pension plans should be beyond wary at that point...

Tue, 12/29/2009 - 16:11 | 177039 seventree
seventree's picture

Hey it worked in Argentina. By which I mean, their government was able to sieze private savings, replacing them with default-prone bonds, and keep the official machinery going a little while longer.

I would be most concerned about cash IRA's. The IRS can change tax liability rules on these at any time, including a penalty (or mandatory distribution) for account holders that don't elect to move into bonds. Some kind of national emergency would divert public attention.


Tue, 12/29/2009 - 18:48 | 177238 Guy Fawkes
Guy Fawkes's picture

or sold as a way to "protect" everyones retirement 401K accounts. Afterall if it hasn't been taxed yet ... who's money is it really?

Tue, 12/29/2009 - 15:24 | 176977 Anonymous
Anonymous's picture

Every Ivy League MBA I talk says the same thing: "We didnt go to Harvard,etc to learn anything about business (!!!!!), we went to Harvard,etc to make contacts and networking." This is de facto evidence of the inanity in Amerikan B schoolin' education. It is prima facie evidence of racketeering and consipracy to defraud. RICO anyone? Close down the schools.

Tue, 12/29/2009 - 17:08 | 177138 SteveNYC
SteveNYC's picture

You are right, I've heard the same thing. Having worked in finance for some time, in America and abroad, I can honestly say that a B-school education in the USA is a complete and utter waste of money unless you come out with "the contacts".

The typical MBA from a US college could be completed by a person with severe mental retardation (no offense).

Tue, 12/29/2009 - 18:21 | 177214 Rainman
Rainman's picture

Skull and Bones, baby.

Even a dumbshit like W got to be Prez with the proper creds of connection, silence and conspiracy.

No free thinkers or moralists allowed.

Wed, 12/30/2009 - 09:30 | 177620 phaesed
phaesed's picture

Actually Fisher was a skull and bone


Even more interesting is that he was a moralist until he lost his money in the market, funny how a rich man will do anything to get his money back if he never had to live in it's absence and how a poor man turned rich will just go back to work.

Tue, 12/29/2009 - 15:28 | 176981 Anonymous
Anonymous's picture

I am suspicious of all the banks. I truly believe they have nowhere near the amount of deposits stated on their books. I have received now some 10 letters from forensic accountants requesting me to verify my deposits in retail banks. I suspect that the cash money has been already removed from these banks. This would be very frightening. It would suggest the newtworth of the US is far less than reported and further compromises the debt outstanding.

Tue, 12/29/2009 - 15:34 | 176992 Anonymous
Anonymous's picture

What excess liquidity?

Tue, 12/29/2009 - 17:06 | 177134 smalltownlawyer
smalltownlawyer's picture


In banking, excess reserves are bank reserves in excess of the reserve requirement set by a central bank—the Federal Reserve System. They are reserves of cash more than the required amounts. Holding excess reserves is generally considered costly and uneconomical as no interest is earned on the excess amount. Therefore, many banks minimize their excess reserve amounts by putting them to more productive use. For banks in the U.S. Federal Reserve System, this is accomplished by making short-term (usually overnight) loans on the federal funds market to banks that may be short of their reserve requirements.

Tue, 12/29/2009 - 15:40 | 177003 Cognitive Dissonance
Cognitive Dissonance's picture

"We believe the proposal of this new tool signals the Federal Reserve is still flailing around trying to look busy so everyone is assured they have a plan.  The fact is they have no plan and are still throwing everything on the wall to see what sticks."

Bingo. Once someone explains to me how the US Government plans on paying the interest on all the public debt that's outstanding (new and old) I will believe the Fed is interested to removing the "excess liquidity" before it ignites another bout of inflation. Of course, NO ONE is talking about actually paying back the debt without rolling it over.

Until then, I will continue to believe that inflation , under control (sic) and spread out over the next 10-15 years, is precisely what they want and exactly what they're working towards. Let's get real people and stop listening to (and by extension, believing) the Fed confidence game their running in full public view and with the tacit and implicit support of Congress, both political parties and the American people.

Tue, 12/29/2009 - 15:45 | 177008 Crime of the Century
Crime of the Century's picture

Animal Spirits is all they have left...

Tue, 12/29/2009 - 15:58 | 177023 Anonymous
Anonymous's picture

They may want inflation and they are certainly doing everything they can to get it, but under control? Farewell and adiou to you fair Spanish ladies ...

Tue, 12/29/2009 - 15:58 | 177024 mule65
mule65's picture

Isn't printing money the Fed's only option?  Gold up.  Equities up.  Real Estate up. Dollar down.

Tue, 12/29/2009 - 16:05 | 177029 jedwards
jedwards's picture

Gold is only up if interest rates stay low.  In a "good" scenario where the economy recovers and the Fed increases interest rates, gold will plunge.  Gold seems to only be good in a doomsday scenario where the economy is in the shitter and interest rates stay low, and the dollar takes a pounding because of loss of confidence.

If they start jacking up interest rates, it means the party is over, and gold will plummet.

That being said, I still have my GLD position, but I've sold some and am starting to move it into TBT.  I no longer believe in the doomsday scenario, although I do believe that the Fed will lose control of the dollar and interest rates will go up.

Tue, 12/29/2009 - 16:17 | 177052 trav777
trav777's picture

I cannot agree with this.

Rates should increase only if economicalness of activity increases.  Remember, money only exists in the form of a loan, which then requires you go do something, i.e., grow in order to pay it back plus interest.

I do not see anything on the horizon here that will materially increase aggregate economicalness thus demand for money should remain low.  An interest rate regime CANNOT survive if the fundamental rate attempts to be above the ROI profitability of the interest rate zone.

Simply put, you cannot lend at 6% if the activity lent against produces a 5% profit margin.  That loan is a prefab'd default.

An increase in rates as a prophylactic or preemptive move by the Fed, or else as a result of bond market spook will cause a deflationary crush and ultimate loss of faith in paper.  We see high interest rates ONLY on companies nearing default or those who are expected BKs.  I used to laugh on Yahoo at people crowing over their 12% WM divvy.

If rates blow high, that would be a sign of impending US default.

Tue, 12/29/2009 - 16:33 | 177079 Sancho Ponzi
Sancho Ponzi's picture

I remember back when Japan began to decline, and some talking head economist spewed on about how lowering interest rates to zero would make anything profitable including reclaiming the seas off Japan's coast via landfill. What a bunch of BS.

Even if I can borrow money for nothing, why the hell would I lend to a business which is obviously unprofitable? China's artificially low currency is wiping out manufacturing in the developed countries by making those businesses unprofitable, and zero interest does nothing to address that particular problem, and neither does liquidity.

Tue, 12/29/2009 - 16:48 | 177106 trav777
trav777's picture

Yes, yes...and what are Japan's rates 20 years later?


This kinda proves my point...Japan became uneconomical when they hit the growth wall.  And their rates haven't crept up nor can they. 

But all the cheap credit in the world cannot make REAL activity become profitable when it inherently isn't.

Rates cannot rise into a climate of uneconomicalness of activity.

Tue, 12/29/2009 - 18:54 | 177244 Guy Fawkes
Guy Fawkes's picture

+1 for use of uneconomicalness

Tue, 12/29/2009 - 22:27 | 177385 Sancho Ponzi
Sancho Ponzi's picture

Japan continues to fund its uneconomicalness by borrowing from its own citizens at artificially low interest rates, whereas the American consumer has neither the means nor the desire to continue subsidizing its lack of profitability. One dies a slow death while the other likely goes down in flames.

Tue, 12/29/2009 - 16:39 | 177095 Oso
Oso's picture

Exactly.  One way or another, rates will not move up until risk-buyers have been exhausted out of risk, or QE 2.0 is launched and the currency crisis is immeidately upon us (ie, the Fed wont budge until it sees the white's of the currency crisis' eyes).


I bought a bunch more TLT today, 89.28.  lets see how it goes.  could be a losing trade into the new year, but wont be for long.

Tue, 12/29/2009 - 16:52 | 177110 trav777
trav777's picture

people don't understand what Volcker did and why and even how it worked.

Inflation rates were high because of the collapse of Bretton Woods; there was a real loss of confidence in the dollar and a TON of uneconomical BS being done.

Volcker's rate regime crushed that unprofitable activity and purged it.  In the process a lot of people got wiped out, but this is the nature of things.  After that, economicalness returned to the US, built on supply-side debt, and rates have steadily declined since as economicalness has decreased in a global phenomenon.

Again, once the whole world is paved over, paving companies go from HUGELY in demand to worthless.

Tue, 12/29/2009 - 19:28 | 177263 phaesed
phaesed's picture

No worries Oso, I loaded up on calls today as well, with my ass protected with a single put, lol.

Tue, 12/29/2009 - 16:39 | 177089 Blindweb
Blindweb's picture

Please see 1977-1980, the test run.  There's no way out this time.  Well except maybe the way we got out of the great depression, but with severely diminished returns.

Wed, 12/30/2009 - 05:01 | 177551 bokapita
bokapita's picture

"Gold seems to only be good in a doomsday scenario where the economy is in the shitter and interest rates stay low, and the dollar takes a pounding because of loss of confidence"

So no worries about going all out into gold then!

Wed, 12/30/2009 - 05:13 | 177555 Rusty_Shackleford
Rusty_Shackleford's picture

I was thinking the same thing.

Tue, 12/29/2009 - 16:11 | 177038 Cognitive Dissonance
Cognitive Dissonance's picture

"Isn't printing money the Fed's only option?"

I understand you're asking a rhetorical question. I find it so sad that the answer is "YES" and that it's not in the best interest of you and I for the Fed to continue to print money. Or is it? It is definitely in the best interest of the status quo and the powers-that-be for the Fed to continue and so that's the way it will remain until it collapses.

I don't see the Fed closing down voluntarily, I don't see Congress exercising it's power and closing down the Fed, I don't see the shadow government loosing interest in manipulating the various puppet strings currently under their control and I most certainly don't see "we the people" taking back our sovereignty and power from those we willingly cede it to in the first place.


Tue, 12/29/2009 - 21:04 | 177327 msjimmied
msjimmied's picture

Maybe "we the people" are beginning to wake up...headline article on Huffpo.



Tue, 12/29/2009 - 16:19 | 177060 Sancho Ponzi
Sancho Ponzi's picture

It is, but that's only part of the equation. Even if the Fed succeeds in its attempt to inflate asset valuations, who will have the cash to purchase houses and cars? Real wages haven't increased in a decade, and consumers are still tapped out.

Tue, 12/29/2009 - 16:26 | 177073 mule65
mule65's picture

Non-American consumers, I guess.

Tue, 12/29/2009 - 16:10 | 177036 trav777
trav777's picture

Let's review GD1...

Interest rate regimes proved utterly ineffectual at reviving demand, as did demand-side keynesian stimulus projects.  None of them worked at all, the depression persisted.

At the end of that, they went with brute force devaluation - that is where we are headed and there is no two ways about that.

Every country in the world is embarked on massive debt-fueled stimulus, including the vaunted China.  Their growth rate has for years, far prior to the crisis, been built on GDP driving more GDP in a ponzi-style effort.  Everyone is battling the tendency of the creditmoney system to deflate in response to crumbling real yields and contractionary realworld forces.

I mean, China is a good case study - what are the yields from the most recent construction projects?  They are freaking negative.  This is money that would not have been borrowed nor lent but/for a mandate from the government.  And the activity shows up in their GDP figures, as does the borrowing and spending the USG has done on its metrics.

But, this cannot obviate the real, fundamental problem...there is precious little to invest in at this point that can repay a loan at interest.  Real yields have gone to shit.  We *should* expect leverage ratios to go apeshit as a result and this is precisely what has occurrred.  In response to infinitesimal profitabilities, we see astronomical leverages being employed to try to "volume" a return out of it.

At the end, the only way to satisfy the math is to wipe out the debts.  But a de jure default is verboten, so we will see devaluation.  Once the whole world is paved over, do you lend more to a paving company?

Tue, 12/29/2009 - 16:14 | 177047 Cognitive Dissonance
Cognitive Dissonance's picture

While reading your comment, an old joke flashed in my mind.

"Sure I loose money on every widget I sell. But I'll make it all back plus more on the huge volume."

Tue, 12/29/2009 - 16:20 | 177062 trav777
trav777's picture

dude, you're too intelligent to misspell "lose" like that.

But the point is still taken...modify the joke to make the widget of tiny profitability.  That is why leverage ratios and even synthetic economics are the rage now.

The only way to get a "decent" return is to lever to the moon.  The underlying activities are now of increasingly scant profitability.

As an aside, I see no discussion of this in mainstream economics, of declining "economicalness" of activity through the business cycle.  We are clearly facing that. 

Tue, 12/29/2009 - 16:44 | 177102 Oso
Oso's picture

your misspelling of "lose" immediately makes me question everything you have ever said in the past and in the future.


just one small action causes a loooosssss of trust



Tue, 12/29/2009 - 16:55 | 177116 trav777
trav777's picture

i think u replied to the wrong poster lol


Wed, 12/30/2009 - 14:41 | 177944 Ripped Chunk
Ripped Chunk's picture

Uh huh, thats why Bernanke is re-appointed

Tue, 12/29/2009 - 16:56 | 177120 Cognitive Dissonance
Cognitive Dissonance's picture


Dude, you ever hear of a typo? Why would you even point it out when it was so obvious? Are you so intelligent that you must point out that I'm too intelligent to make a stupid mistake? Yet I made one? Your arrogance is breathtaking. Get over yourself.

Tue, 12/29/2009 - 17:05 | 177132 Oso
Oso's picture

CD, chillers buddy boy, i dont think he was being serious ;)

Tue, 12/29/2009 - 17:07 | 177135 Blindweb
Blindweb's picture

Caused by the limits of the primary, planetary earth life sustaining, economy having been reached?  In the land of permanent industrial contraction and negative returns, 0% will be king?

Wed, 12/30/2009 - 14:41 | 177946 Ripped Chunk
Ripped Chunk's picture

Trav, how many of you are there?

Tue, 12/29/2009 - 15:50 | 177013 Anonymous
Anonymous's picture

What liquidity? Going hand in hand with the FED's treasury and MBS purchases (inflating the asset side of the FED's balance sheet) was a dramatic rise in banks' parking 'excess' reserves at the FED (inflating the liability side of the FED's balance sheet). This was not an accident. Bernanke advocated paying interest on on reserve deposits as a way to 'infinitely' expand the FED's balance sheet.

So the argument that the FED is pondering setting up time reserve deposits (via cert of deposit mechanism) smacks of a smokescreen.

I wonder if the true goal is to protect the FED by reducing the ability of banks to withdraw the reserves on deposit. Like a regular bank cd, the investor can't get out early or can do so only by paying a penalty.

Otherwise, the FED has borrowed short (immediately withdrawable reserve deposits) and invested long (the MBS purchases).

What would happen to the FED's balance sheet (and solvency) if the reserves were withdrawn, while the FED still owned the possibly toxic MBS?

The recent decision to expand guarantees to the GSE's may be a complementary 'protect the FED' program to the extent it allows the GSE's to repurchase the MBS' on the FED's balance sheet.

Is the FED now strictly in self preservation mode, advocating programs that would let it unload the toxic MBS's on the asset side of the balance sheet, while protecting the liability side by restricting the ability of banks to redeem the reserves deposited at the FED?

Wed, 12/30/2009 - 11:43 | 177386 TimmyM
TimmyM's picture

This is the most interesting thing I have read all day.

But let us also look at the nature of excess reserves. They are not just extra money in the banking "system"-they are the extra money in banks that are always net sellers of overnight money. Large fast growing risk taking banks are always net borrowers of overnight funds. Many of these banks are TBTF and are not afraid of liquidity problems. They have ready access to wholesale funding both private and public programs. But the cautious, conservative perennial net sellers do not trust selling unsecured overnight funds to just any old highest bidder anymore.

So the Fed has expanded their balance sheet with liabilities that to some extent were credit frozen, flight to quality money that fled the Fed funds market. Money that fled to repos and collateralized deposits and T-bills and discos was more convenient to keep at the Fed and earn interest. While theoretically excess reserves are viewed as tender for the next fire of credit expansion, to the extent the fears of the perennial net sellers has changed permanently-it might on balance become credit easing to have these tied up as term deposits. At least then the Fed has control of their ability to fund extraordinarily large discount window drawdowns or even QE2.

Now it looks like the House "Financial Reform" bill says the Fed may need $4 trillion.

Tue, 12/29/2009 - 16:03 | 177028 Anonymous
Anonymous's picture

Will these term deposits carry a premium interest rate vs. treasury bills of similar maturity???

Tue, 12/29/2009 - 16:06 | 177030 chet
chet's picture

Once the Fed "locks up" some liquid moolah, (i.e. by selling a CD), does it then destroy some of this cash?

I can see how locking up liquidity can keep it from sloshing in the real economy temporarily. But if the liquidity is just sitting on the Fed's books, it will come back out eventually right, with interest?  (i.e. when the CD matures?)

My confusion is this:  will the ever-growing amount of money currently in the system (at the Fed and outside it) ever actually get reduced?  Or is all this newly printed money permenantly in existence, and "draining liquidity" is simply about making this money illiquid, but not actually reducing it?

Tue, 12/29/2009 - 17:44 | 177176 Jean Valjean
Jean Valjean's picture

This is the key question and I believe the answer is NO. If you had something of value, would you just hand it over to someone to vaporize it? No, you probably wouldn't. If banks buy CD's from the fed, the CD will still be an asset on their books that will back their reserves, just like excess cash would only now it's earning interest. All the better to pay big bonuses with... another step down the path to Us vs. Them.

Tue, 12/29/2009 - 16:07 | 177032 Ben Graham Redux
Ben Graham Redux's picture

I have a different interpretation of this announcement - I think the Fed is running out of money and can't impact the long end of the curve without either playing a spread trade or QE2.  Keep in mind that the Fed is a bank.  To pay interest on idle money is suicide for a bank.  Instead, I firmly believe that the Fed is introducing this under the guise that they're draining liquidity and will instead buy long dated paper to keep long rates from skyrocketing.

Why do I believe the Fed is running out of money?  Because they are paying 25 bps on the excess reserves, and seemingly, buying MBS paper with the proceeds.  My guess is that the MBS paper is returning far less cash flow than the prices paid would indicate.  This leaves the Fed needing to either find another source of liquidity or start printing through Quantitative Easing.  If they go back to QE2, the dollar gets destroyed.  In essence, the Fed is boxed into a corner.

Tue, 12/29/2009 - 16:19 | 177059 Shameful
Shameful's picture

Uh, how can you run out of money when you have the printing press?  They are only a bank in the fact that they lend out money, they are equal parts bank and counterfeiter.  You never see a counterfeiter worried about not having freshly printed bills, they are more concerned with jail time.  After all did the Central Bank of Zimbabwe have a problem with comming up with cash?

Tue, 12/29/2009 - 16:29 | 177076 Ben Graham Redux
Ben Graham Redux's picture

Shameful, the Fed is a bank.  Other than a small amount ($300 billion), the Fed has not been running a printing press.  Instead, they are trying to earn a spread on their money like all other banks.  When you realize that all money in the US is backed by debt, then you begin to understand what the Fed can and cannot do.  This is an action designed to keep them from having to print money which would destroy the dollar.  You forget that the Fed is effectively the central bank for the world which means they can't behave like the idiots in Zimbabwe without destroying the world economy.  While I ultimately expect them to go that route, it appears that it's their final solution, not what they want to do today.

Tue, 12/29/2009 - 17:37 | 177168 Shameful
Shameful's picture

Yes I'm aware that the money is backed by debt but I will argue that the debt is nearly infinite, or near enough.  After all look at the Fed sucking down MBS by the billions, and we know they are in the Treasury market as well.  God only knows what deals they have to buy foreign assets and securities.

The fact that we have a market so large that it's difficult for the human mind to get around, to me says that their ability to expand their balance sheet is nearly infinite or at least enough to destabilize the dollar and the world.  What would stop them from buying all the bad house loans in Spain for example?  Hell with no audit they could even keep it off the books.

The fact is we don't know what the Fed is doing, I merely state that running out of money is not a concern for them.  Are they insolvent, sure without the printing press and the ability to add digits to a computer account.  Uncle Ben has even stated that he has a technology called a printing press and has often advocated creating money, and I believe he can and will do so.  However Uncle Ben will see the dollar burn in the fires of Hades before he admits he or Greenspan was wrong so we agree that is the endgame for them in all this.

Tue, 12/29/2009 - 19:22 | 177258 Brett in Manhattan
Brett in Manhattan's picture

Agree with everything until the last sentence. The Fed will do whatever it takes to NOT crash the dollar, as it would be the equivalent of setting fire to their own house.

And let's not forget, guys like Bernanke and Greenspan, are academics who are good at talking the talk, but they're just frontmen, and not the ones making the BUSINESS decisions. That's done by bankers in New York.

Wed, 12/30/2009 - 14:18 | 177916 trav777
trav777's picture

The Fed may.

But deflation threatens the Federal Sovereign.  FDR's devaluation was not above preserving the value of the Fed's dollar claims or the claims of any creditor.  It was about saving the USG's neck from insolvency.  Certainly, the banks holding paper claims against anyone were supposedly "unhappy," though I maintain that inflation helps them more than deflation.  The only people who like deflation are little people holding cash.

Nixon's actions were as well intended to stave off insolvency.

As soon as material deflation threatens the sovereign, the Fed's independence will vanish.  Force majeure has the word "force" in it and the .gov does know about force.

Tue, 12/29/2009 - 20:43 | 177311 Ben Graham Redux
Ben Graham Redux's picture

There are limits to how large the Fed can expand its balance sheet and those limits are based on their ability to service their debt.  Ultimately, I expect the Fed to simply print base money, but until that time, they're limited by debt service.

As I said before, the Fed is a bank and subject to cash flow constraints.  My best guess is that they "print" money when they run out of cash flow.  If you think of it as a bank, and if you've ever analyzed a bank balance sheet you understand the limitations that they face.  But again, when they can no longer meet cash flow obligations, that's when I expect them to print, or expand the monetary base by multiples of its present number.  When that  happens, it  will be base money, not new debt.

Tue, 12/29/2009 - 17:52 | 177184 Jean Valjean
Jean Valjean's picture

Why do you pretend the Fed is a normal bank.  What other bank would have willingly brought all that garbage onto their balance sheet over the last two years?  The fed is an "insurer of the status quo" for it's members.  Whatever it needs to do, even in desperation, it will do to save the system that allows it's members to multiply money and spend it first.

Tue, 12/29/2009 - 20:35 | 177303 Ben Graham Redux
Ben Graham Redux's picture

Jean, this is the first time the Fed has ever purchased junk in it's almost 100 years of operation.  It's also the first time they've ever paid interest on reserves.  Historically, they had practically zero cost of capital, now they pay interest - they're forced to act more like a hedge fund with a low cost of capital than a traditional central bank.

Tue, 12/29/2009 - 16:52 | 177112 Anonymous
Anonymous's picture

Ben Graham

Bernanke's advocacy of paying interest on reserves would support your notion. By increasing reserves on deposit, the FED has money (how the heck ever one defines that these days) to purchase whatever they want on their balance sheet. Thus, Bernanke's argument that paying interest would allow the FED to 'infinitely' expand its balance sheeet (meaning the asset side of same).

Perhaps the cert deposit proposal is a device to increase the amount of interest being paid, thus supporting your idea that they need more reserves to do more purchasing. Of course, they could simply increase the amount being paid now (from 25 bps) and accomplish the same effect.

Thus, the additional notion that the depositing banks won't be allowed to have early withdrawals from the cds suggest the FED is desirous of 'trapping' reserves on deposit.

My suspicion/fear is that we're slipping deeper into a survival of the fittest mode and the FED is responding by going into self preservation mode, let the economy be damned if necessary.

Tue, 12/29/2009 - 20:38 | 177308 Ben Graham Redux
Ben Graham Redux's picture

Anon,  If I'm right, the $1.25 trillion is simply an accounting entry of toxic bonds from th banks that hold them to the central bank, with the credit to the banks being  kept in reserves to fund the purchase.

This next step, if I'm right, is a change in strategy that allows the Fed to use short term funds to bring down the long end of the curve.  It's different money as it's not excess reserves, it's excess cash looking for a home or a higher rate of interest.

Wed, 12/30/2009 - 05:16 | 177557 bokapita
bokapita's picture

"My suspicion/fear is that we're slipping deeper into a survival of the fittest mode and the FED is responding by going into self preservation mode, let the economy be damned if necessary."

This is the point. This discussion is exactly the type of discussion that the central banks and governments want people to have. The reality is that the real producing economy cannot support the populace in the style to which they have become accustomed. If that is not addressed (and there are no signs it will be) all this paper talk is so much hot air - because implosion/adjustment will occur. I mean, chairs on the Titanic.

Tue, 12/29/2009 - 16:14 | 177045 Shameful
Shameful's picture

Wow so selling their own will they be buying their own bonds like the US Treasuries in an epic circle jerk?

I understand them saying this, hell they may even want to do it.  After all if they sell the toxic sludge they have taken on their books then we are all screwed.  Once the world realizes that the Fed can't reign in liquidity there will be even more confidence lost int he US dollar (should no better not to by trash at par). 

The problem the Fed faces if they leave the liquidity or pump more eventually those banks will fractional reserve it out massively shooting up the money supply.  If they pull the liquidity back the banks fold and we we get deflation.  Looks like one hell of a tightrope to walk between hyperinflation and deflation.  We know Bernake doesn't have the skill to navigate this dangerous path so we are forced to wonder which direction will this all come crashing down on.  I think they will err on the side of inflation because Central Bankers seem to fear deflation like a vampire fears sunlight.

Tue, 12/29/2009 - 16:27 | 177074 trav777
trav777's picture

the tightrope is an illusion...on both sides lurk destruction of the paper which represents promises levied on a future that will not come.

If you own a share in a playoff pool and your team gets mathematically eliminated, or you own a trifecta containing a horse that died half-track, this is a case where the outcome hasn't yet occurred, but is determined nonetheless.

And at this point paper claims against impossible outcomes become of zero-worth.  Call it the Point of Recognition.  When the horse breaks his leg, you would sell that ticket for whatever you could get for it, but you only can until the guy next to you looks at the track.

Tue, 12/29/2009 - 16:29 | 177075 phaesed
phaesed's picture

Uhhhh, like I've been saying for several months.... the Fed purchased all those short term bills to SELL THEM.


*sigh* Yeah, I'm the fucking idiot, that's why bond yields are mysteriously falling today eh?


Tue, 12/29/2009 - 16:32 | 177083 phaesed
phaesed's picture

Well, sell the ones that were recently issued... it was also to hide the sopping up of the high coupon bonds.

Tue, 12/29/2009 - 17:43 | 177175 Shameful
Shameful's picture

Okay maybe I'm not understanding.  So the Fed bought the short term paper to sell it, why?  I cannot see a profit motive otherwise why would they load to the gills with MBS?

I'm here seeking enlightenment.  So tell me what the Fed will do, since knowing that is the surest way to make money.  Is this part of a game to keep rates down on treasuries, what is the motive and goal of the Fed?  I agree that equities will come down, but is the Fed going to deliberately crash the market to drive down yields?  I could see that but won't that cause a lot of political pressure since the idea of the recession ending in the MSM has been based on the stock market's upward trajectory?

Tue, 12/29/2009 - 19:30 | 177266 Brett in Manhattan
Brett in Manhattan's picture

The real money is made in the markets. When the Fed starts to raise rates, the market will tank and the public will seek refuge in banks, leaving the stocks for insiders to buy on the cheap. When this cycle is complete. The Fed will once again lower rates, encouraging the public to jump back in the market, right when insiders are ready to distribute and retail what they bought at wholesale.

Tue, 12/29/2009 - 19:30 | 177267 phaesed
phaesed's picture

Well duhhhhh, the truth is the Fed only controls peoples opinion of rates, not the rates themselves when it comes to Treasury paper.

Wed, 12/30/2009 - 09:26 | 177618 phaesed
phaesed's picture

hey sorry on the duhhh, that wasn't nice... just kinda tired of the same argument being applied regardless of context.


And btw all you Treasury Bears.... even Marc Faber just spent a few moments talking about how Treasuries are oversold

Tue, 12/29/2009 - 16:18 | 177057 Anonymous
Anonymous's picture

I can't believe that you guys think BBB doesn't know what he is doing. That's blasfemie. Shame on you, you little people!

Tue, 12/29/2009 - 19:31 | 177268 phaesed
phaesed's picture


And that's a dictionary. Learn how to use it.

Wed, 12/30/2009 - 01:46 | 177499 RockyRacoon
RockyRacoon's picture

A simple spell-check would have corralled that varmint.  Funny how little is it used.

Wed, 12/30/2009 - 09:27 | 177619 phaesed
phaesed's picture

That's one of my favourite Beatles tunes, lol

Tue, 12/29/2009 - 16:24 | 177068 Anonymous
Anonymous's picture

The Fed prints money when they want. They hide the facts. They bought MBS and instead of taking a loss, now they want their money back from the banks. So Fed wants money back and keep the MBS so they will own America. They print DEBT and want it back with interest. The interest is FREE for the Fed and they print money and just sent money to banks with a computer. So Wilson was wrong and the Fed needs to be out of business. Hiding facts and getting free money is fraud. Some Fed managers need to go to prison; as do some employees in DC...Dodd and Frank for starters.

Tue, 12/29/2009 - 16:46 | 177104 seventree
seventree's picture

This site is really bumming me out. I need an MSM good news fix.

Here we are: Business Week says "Confidence Rises As Consumers See Brighter Future."

I feel so much better now ... ZH was just a bad dream ... keep the prozac coming ...


Tue, 12/29/2009 - 17:27 | 177159 bugs_
bugs_'s picture

"...develop communication approaches..."

Post on ZeroHedge before your audit.


Tue, 12/29/2009 - 17:30 | 177162 Anonymous
Anonymous's picture

The only way to get rid of BennyBux is to burn them. Unfortunately, that's still illegal. But you can ask at stores when you are paying for your purchases, "Excuse me, do you still take BennyBux? You know, Federal Reserve Notes?" If enough people begin to say this, congress will eventually have to pass a law allowing people to burn their BennyBux; it's only a matter of time.

Tue, 12/29/2009 - 18:25 | 177217 Anonymous
Anonymous's picture

The only "printing" currently being performed, I don't believe is OVERT printing. They are taking trash MBS on their balance sheet from the banks marked at 100% to prop them up.

I believe that the new liquidity being introduced into the system is just the difference from what the MBS would be worth marked at 100%, versus what it is really worth on the open market. IMHO.

I think that is why Bernanke could tell Congress in the past that he was not monetizing the debt. (He can claim he is not doing it and "get away with it", only because nobody can say for sure and prove what the MBS are really worth).

Tue, 12/29/2009 - 18:40 | 177230 buzzsaw99
buzzsaw99's picture

Drain what? They shoved a trillion into the banks who bought stocks and commodities. That money is gone. There's nothing left to drain. The banks don't have any money. They want to give the bank maggots a trillion dollars then drain from somewhere else? Good luck with that one! bwa bwa bwahahahahaha!!

Tue, 12/29/2009 - 19:35 | 177269 Anonymous
Anonymous's picture

I sent this in a s a public comment just now:

Federal Reserve,

As it is apparent from the announcement that a significant amount of time went into this latest
excess liquidity removal technique, I felt a comment was in order.

Federal Reserve comments frequently appraise the citizenry that our economy is healthy and well
on the mend. This being the case, I don’t see why the Federal Reserve does not just sell the Mortgage
Backed Securities that it has amassed during the recent crises. This action would be an excellent method
to withdraw excess liquidity from the markets while also showing the world that the Federal Reserve
has complete faith in it's comments about the health of our economy. I am quite sure that the Federal Reserve would recoup it's initial investment on these securities because they were purchased prudently, knowing
that future losses could be passed on to the taxpayer.

In closing, the FED could prove that this was all a simple "mis-valueing" of these securities and
close the book on this financial crisis once and for all by simply selling all of it's MBS holdings at "the market rate"
I hope you shut these damn bears up once and for all.

P.S. I will gladly purchase a portion of the MBS you hold. I offer $100.00 CASH for every $500,000,000.00
face value MBS. (I may require a loss sharing agreement with Sheila Bair of the FDIC)

Tue, 12/29/2009 - 22:12 | 177369 gookempucky
gookempucky's picture

Be careful what you ask for-you might end up with this offer of debt


Tue, 12/29/2009 - 21:58 | 177356 Anonymous
Anonymous's picture

Interesting, and (mostly) very intelligent discussion.

Please note that the $trillion that's sitting in excess reserves was not there before the Fed created it by pushing a button on a computer, which credited the banks' accounts at...the Fed. The Fed didn't "borrow" it from the banks, who didn't have it to lend. It was not put there for "liquidity", but to pro forma balance the bank's books to prevent a total banking collapse. The function of .25% interest payments on the reserves was to insure there would be no fractional lending (not that there was any danger, put the Fed was in a panic). So, yes, the Fed "printed" that money, and yes, it would be inflationary if it ever hit the street, but it won't and the current "cd" announcement was for the psychopolitical reassurance of the inflation freaks - and there are many of those.

We've now gone full circle from pompous declarations that risk was underpriced and assets overpriced because of a "global liquidity glut" (that the Fed declared itself helpless to control) to pompous declarations that there's "just the right amount of liquidity" (completely under the Fed's control) so not to worry.

The Fed is a dangerous, opaque body of fools. They don't determine the course of the economy (though Milton and the True Believers will deny that), they react to it. If you want to base your investments on projections about the future, stop micro-obsessing on the Fed and watch the private markets' tolerance for underpriced risk - that's what has driven everything since the mid-90's.

Tue, 12/29/2009 - 22:00 | 177357 Anonymous
Anonymous's picture

The fed is buying MBS with no concern about possible default. They print the money which means that if mortgages default then they just take ownership of the property and it costs them nothing. If mortgages don't default then they earn interest. It almost seems like they benefit more from default so they gain possession of another part of America at essentially zero cost.

Wed, 12/30/2009 - 00:51 | 177479 virgilcaine
virgilcaine's picture

With Zero % rates and a Dollar worth 78 cents there is little incentive to do anything!

Your going to Sell what to whom and what for?  Its over.


Maybe at 10% TSY I'll get up and do something not til then..

Obama makes me laugh he wants Banks To Lend but since they Saved EVERY

Bad Loan made by Banks their is no Idea to KNOW WHAT ANYTHING is WORTH. How do you lend when you  can't price anything for what its worth?

















Wed, 12/30/2009 - 01:22 | 177490 blackebitda
blackebitda's picture

yeah they should have never tried to inflate in the first place. y'all want the answer, to getting rid of the liquidity problem. CLOSE DOWN THE FED. problem found is a problem solved. 

here goto min 37:00 and find out how the revolutionary war really started. the bank of england would not accept colonial scripts. fiat money the US made that was not underwritten by debt with no interest to pay would no longer be accepted by England to pay taxes. view on...





Wed, 12/30/2009 - 02:09 | 177504 Mark Beck
Mark Beck's picture

Is it just me, or does the FED act stupid. I mean really, its getting out of hand. 

Case in point; the FOMC gathers around and proposes to flood liquidity from several avenues; low rates, buying Treasuries, buying MBS, and buying Agency paper. Also, there are numerous other programs where the FED is acting in concert with Treasury and FDIC. TARP etc. etc. 

So they have these big plans, Okay lets ask the obvious questions, how do you tighten on all of this easing?

Maybe they should have thought about how to ease, before committing Trillions of dollars? This is the Central Bank of the United States, with the ability to ease in one year, more than the total tax receipts of the nation.

You would think they would have a plan in place before embarking on these massive programs.


The MBS story is interesting, the articles estimate is $910B. They want to tighten on an asset sale where the asset in some cases is worth pennies on the dollar depending on the tranche. So you want to remove liquidity using a worthless debt instrument. How exactly can you control liquidity with something that is ill-liquid? That is, not able to attract buyers (currency). Well you can't.

Giving away the worthless asset does not drain liquidity in the amounts needed, and no thanks for a rev repo on something that is not worth holding. Unless real estate prices increase substantially, the FED will be holding their MBS for a long time. 

The question is; how can the FED achieve their mandated objectives when they embark on monetary policy which hinges on asset class market price to tighten? OOPS.

Mark Beck

Sun, 01/03/2010 - 12:36 | 181146 Anonymous
Anonymous's picture

A few days late for a reply but i think you've already answered your own question. To quote,

" do you tighten on all of this easing?"
" can the FED achieve their mandated objectives..."

Just a quip, don't bet on it!

Wed, 12/30/2009 - 03:51 | 177538 mrmortgage
mrmortgage's picture


Good evening. Wow, on the front top of the page of the has a radical honest proposal to pull all $ out of the 'too big to fail' banks that are screwing us and not lending.

This is catching fire rapidly among the readership. Which is the #1 read newsite now. Aside from google news and yahoo news of course.



Wed, 12/30/2009 - 06:40 | 177563 agrotera
agrotera's picture

Yep, the fed just wants to look busy and part of their busy work is to cook up more complicated explanations about how they will "mop"up liquidity when there never was any "excess" liquidity--just money pumped into defunk cartel members--and instead oflawyers and CPA's getting together to insist that our legislators are captured and that accounting fraud is the new standard for our government officiated financial crime syndicate, all we have is more of the same, day after day...

Wed, 12/30/2009 - 07:08 | 177569 theprofromdover
theprofromdover's picture

"never underestimate the stupidity of your enemy"

(dumb-asses are dangerous)

Nobody outside of Benny's Bubble has any doubt that the decade of kamikaze borrowing was anything but normal, natural or sensible. Because the bottom line price is so high, most of us really don't want to go back to those days -but Benny's boys do. They look back and see happy days for the chosen few. They want the new-normal back again as soon as possible, and even worse, think they can actually get there without any pain to themselves ..........

That is why all the crap is going to be bought up on our behalf, 'cos he really thinks one day soon it will be worth 100 cents on the dollar (nay, even more).

Just as you feared -as the true bank of last resort- the Great American Public have to take on the debt, all of the commercial and residential, all of the insurance, all of the fees and charges, they are going to belong to us. Problem is, we know the time for dizzying asset inflation has gone, and was never meant to be for our benefit. We get stuck with the sewage.


Wed, 12/30/2009 - 08:30 | 177590 Anonymous
Anonymous's picture seems obvious to me. Benny ain't gonna
drain and the banksters ain't gonna loan because
there's no demand for loans except from those unqualified
to pay them back. So what are we left with?
The back end of the yield curve for a couple of years....
while the front end does a tiny bump up in yield on the return to "normalcy".. a 2% GDP economy) Very Japanese.

Wed, 12/30/2009 - 13:04 | 177821 Anonymous
Anonymous's picture

Now that Treasury has nationalized home ownership, it opens the way for an easy solution to the housing crisis - make principal payments on mortgages a dollar-for-dollar tax credit. What the Treasury loses in tax revenue is made up by the repayment of the mortgage loan principal owned, in large part, by the GSE's.

True, this would have the adverse effect of possibly helping the average homeowner - but nothing is perfect.

Wed, 12/30/2009 - 13:25 | 177838 Leo Kolivakis
Leo Kolivakis's picture

Jim Bianco, you were always one of my favorite independent analysts. I wish you a very Happy New Year and thanks for posting your thoughts on ZH!



Wed, 12/30/2009 - 14:57 | 177970 trav777
trav777's picture

Watch the Fed resort to securitization where the taxpayer/them bears the loss for any impairments to the sub-senior tranches.

Basically, transforming crap MBS paper, which itself may be equity tranche garbage, into FF&C with a Treasury cashflow.

The paper the Fed bought was not mortgages...there are no mortgages anymore.  They bought CDOs comprising various tranches of mortgage pools.

sub-senior CDO tranches were BUILT to go to freaking zero quickly in the case of any material impairments.  If the Fed only bought the senior paper, then there is no problem except that all the mezzanine and equity slices are still sitting on banks' L3s and in SIVs and other off-sheet vehicles.

Some of this garbage was either synthetics or else CDO squareds, where a supersenior tranche off of a CDO built out of EQUITY tranches could somehow get a AAA rating.

There is no way to know what the Fed has and what's out there without accounting which nobody will do and nobody will force.  The reality is that given the decline in home prices, equity and mezz tranches are wiped out - Markit ABX indices tell us this.  But, none of the banks will divulge how much of what they own and neither will the Fed.  The entire Fed balance sheet is freaking L3.

Thu, 12/31/2009 - 07:18 | 178671 Rick64
Rick64's picture

Taxpayer: Hey tim can you explain this MBS & CDS crap to me in layman terms?

Geitner: Ya ok peon, I mean taxpayer. We took the anus swaps from the banks and loaded them on the taxpayers. Then created some penile swaps, a little deal we made with the FED because we're going to hand them back and forth so the FED gets some action too.  When that becomes too painful we're going to create some KY swaps then inject some liquidity.

Taxpayer: Oh my God I think I finally see the whole picture.

Geitner: Dammit I dropped my pen can you pick it up.

Taxpayer: Sure, but why are your pants unzipped?



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