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

Tyler Durden's picture

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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.

VegasBD's picture

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

JACOB5CD's picture


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.

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.

Crime of the Century's picture

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

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.

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!

gookempucky's picture

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

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.

Anonymous's picture

now that's funny!

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!

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.

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.

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?

carbonmutant's picture

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

Treasuries are getting pretty common...

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.

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.

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.


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.

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.

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.



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.

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

Anonymous's picture

The Fed doesn't own AIG - Treasury does.

deadhead's picture


And, the Fed owns the US Treasury. 


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!


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

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. )

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.

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...

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?

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...

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?

seventree's picture

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


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.

Anonymous's picture

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

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.

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.

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.

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...

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.


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?

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.

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).

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.

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.