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How The Federal Reserve Bailed Out The World

Tyler Durden's picture


When the financial system almost imploded in the fall of 2008, one of the primary responses by the Federal Reserve was the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The number went from practically zero to a peak of $582 billion on December 10, 2008. The number of swaps outstanding was almost directly correlated with the value of the dollar (much more on that shortly). A graphic representation of this can be seen below:

The topic of skyrocketing liquidity swaps was in fact the headline feature of one of the numerous grillings of the Chairman by the inimitable Alan Grayson as can be seen in the following video:

And while Bernanke was not very interested in getting caught up in providing actual explanations, the Bank of International Settlements just released a major paper titled "The US dollar shortage in global banking and the international policy response" which goes on to demonstrate just how it happened that Fed chief Ben Bernanke in essence bailed out the entire developed world, which was facing an unprecedented dollar shortage crisis due to the sudden implosion of FX swap lines and other mechanisms which until that point were critical in maintaining the dollar funding shortfall for virtually every foreign Central Bank.

The BIS provides the following big picture perspective:

The funding difficulties which arose during the crisis are directly linked to the remarkable expansion in banks’ global balance sheets over the past decade. Reflecting in part the rapid pace of financial innovation, banks’ (particularly European banks’) foreign positions have surged since 2000, even when scaled by measures of underlying economic activity. As banks’ balance sheets grew, so did their appetite for foreign currency assets, notably US dollar-denominated claims on non-bank entities. These assets include retail and corporate lending, loans to hedge funds, and holdings of structured finance products based on US mortgages and other underlying assets. During the build-up, the low perceived risk (high ratings) of these instruments appeared to offer attractive return opportunities; during the crisis they became the main source of mark to market losses.

How exactly did this improper perception of funding risk manifest itself?

The accumulation of US dollar assets saddled banks with significant funding requirements, which they scrambled to meet during the crisis, particularly in the weeks following the Lehman bankruptcy. To better understand these financing needs, we break down banks’ assets and liabilities by currency to examine cross-currency funding, or the extent to which banks fund in one currency and invest in another. We find that, since 2000, the Japanese and the major European banking systems took on increasingly large net (assets minus liabilities) on-balance sheet positions in foreign currencies, particularly in US dollars. While the associated currency exposures were presumably hedged off-balance sheet, the build-up of net foreign currency positions exposed these banks to foreign currency funding risk, or the risk that their funding positions (FX swaps) could not be rolled over.

Once again, the specter of everyone (and in this case it really means everyone) doing the same trade: sound familiar? This is eerily similar to what happened to basis traders in late 2008 (nothing pretty) when the balance of the trade was so skewed to one side, that there was nobody willing or able to take the opposing side, leading to massive wipe outs for everyone who participated. It is also comparable to the situation prevalent in equity markets currently.

What is now unquestionable, and what will be made clear shortly, is that the dollar trade is precisely what the basis trade, or any other trade, would have ended up being for any and every Central Bank that had a funding mismatch in dollars after the Lehman bankruptcy (all of them), had the Federal Reserve not stepped in and become the lender of last resort to the entire world.

The Prehistory

How did it happen than in 8 short years virtually every bank would become reliant on the Fed's wanton printing of dollars for their very survival?

The origins of the US dollar shortage during the crisis are linked to the expansion since 2000 in banks’ international balance sheets. The outstanding stock of banks’ foreign claims grew from $10 trillion at the beginning of 2000 to $34 trillion by end-2007, a significant expansion even when scaled by global economic activity (Figure 1, left panel). The year-on-year growth in foreign claims approached 30% by mid-2007, up from around 10% in 2001. This acceleration took place during a period of financial innovation, which included the emergence of structured finance, the spread of “universal banking”, which combines commercial and investment banking and proprietary trading activities, and significant growth in the hedge fund industry to which banks offer prime brokerage and other services.

At the level of individual banking systems, the growth in European banks’ global positions is most noteworthy (Figure 1, centre panel). For example, Swiss banks’ foreign claims jumped from roughly five times Swiss nominal GDP in 2000 to more than seven times in mid-2007 (Table 1). Dutch, French, German and UK banks’ foreign claims expanded considerably as well. In contrast, Canadian, Japanese and US banks’ foreign claims grew in absolute terms over the same period, but did not significantly outpace the growth in domestic or world GDP (Figure 1, right panel). While much of the increase for some European banking systems reflected their greater intra-euro area lending following the introduction of the single currency in 1999, their estimated US dollar- (and other non-euro-) denominated positions accounted for more than half of the overall increase in their foreign assets between end-2000 and mid-2007.

Taking a step back: how do countries traditionally express long positions in dollars, and how does it happen that what by definition should be a hedge trade, could get so out of hand.

We first introduce concepts related to an internationally active bank’s investment and funding choices. Consider a bank that seeks to diversify internationally, or expand its presence in a specific market abroad. This bank will have to finance a particular portfolio of loans and securities, some of which are denominated in foreign currencies (eg a German bank’s investment in US dollar-denominated structured finance products). The bank can finance these foreign currency positions in several ways:

  1. The bank can borrow domestic currency, and convert it in a straight FX spot transaction to purchase the foreign asset in that currency.
  2. It can also use FX swaps to convert its domestic currency liabilities into foreign currency and purchase the foreign assets.4
  3. Alternatively, the bank can borrow foreign currency, either from the interbank market, from non-bank market participants or from central banks.

The first option produces no subsequent foreign currency needs, but exposes the bank to currency risk, as the on-balance sheet mismatch between foreign currency assets and domestic currency liabilities remains unhedged. Our working assumption is that banks employ FX swaps and forwards to hedge any on-balance sheet currency mismatch. That is, a bank funding in domestic currency (option 1 or 2) is likely to do so as described in option 2. Importantly, the second leg of the swap in option 2 is not that different from funding a position through foreign currency borrowing in the first place (option 3): in both cases, the bank needs to “deliver” foreign currency when the contractual liability comes due.

There is much more to this congruity, however for those seeking the full story we refer them to the actual paper. The key issue is that over the years, banks managed to accumulate a substantial amount of funding risk as a result of positions set to take advantage of the Fed's dollar destructive generosity:

Funding risk is inherently tied to stresses across the global balance sheet: mismatches between the maturity, currency and counterparty of assets and liabilities. Quantifying this risk requires measurement of banking activity on a consolidated basis, preferably at the level of the decision-making economic unit (ie individual banks). Data designed to identify vulnerabilities in banks’ funding patterns would ideally include, for both assets and liabilities, a complete breakdown of positions by currency, maturity and counterparty type, along with the relevant risk characteristics and off-balance sheet positions.

For a much more detailed analysis of dollar funding applicability we again refer readers to the original source, however in essence what the BIS did was to analyze the variance between domestic and foreign offices/balance sheets vis-a-vis domestic operations of various banks, and how dollar funding via FX swaps or otherwise was hedged on bank balance sheets, as well as funding maturity mismatch for dollar assets.

We use this dataset to investigate how banks fund their foreign currency investments, and to derive their funding requirements across currencies and counterparties. While not at the individual bank level, the advantages of these data are that they provide (i) the consolidated foreign assets and liabilities for each banking system, (ii) estimates of the gross and net positions by currency, and (iii) information on the sources of financing (ie interbank market, central banks and non-bank counterparties).

One of the key findings of the BIS paper is that the host countries of foreign banks have massive international operations, which traditionally are funded in the reserve currency - the dollar:

Looking at these data from the perspective of host countries shows just how large banks’ international operations really are. Table 2, where the column headings now indicate host countries, shows the gross and net international asset position of each country, and compares these to banks’ cross-border claims (here, including banks’ cross-border interoffice positions as well). The table distinguishes between positions booked by offices of “domestic” and “foreign” banks in each host country. In five countries (BE, CH, DE, JP and UK), banks’ cross-border positions accounted for almost half of that country’s external assets at end-2007, and as much as a quarter in five other countries (CA, ES, FR, IT and NL). The offices of foreign banks alone accounted for nearly 40% of the United Kingdom’s external assets. In contrast, positions booked by the home offices of domestic banks were much larger in the case of Belgium, Germany, Japan and Switzerland.

What is notable from the above table is just how massive foreign banks' USD-funded positions are, especially when viewed from the perspective of various GDP numbers. The 6 countries that make up the core of the Eurozone all have foreign dollar denominated claims which are well over 100% of their respective GDPs! These countries took on an amount of Dollar exposure that would take on a country's entire GDP to fund and then some. And the fact that they have done so with the complicity of the Federal Reserve is staggering and a clarion call for a global risk regulator which is distinctly separate from the US Fed, which prompted this intractable risk taking in the first place.

As for how this funding mismatch manifests itself in practice, the BIS had this insight:

Foreign currency assets often exceed the extent of funding in the same currency. This is shown in Figure 3, where, in each panel, the lines indicate the overall net position (foreign assets minus liabilities) in each of the major currencies. If we assume that banks’ on-balance sheet open currency positions are small, these cross-currency net positions are a measure of banks’ reliance on FX swaps. Many banking systems maintain long positions in foreign currencies, where “long” (“short”) denotes a positive (negative) net position. These long foreign currency positions are mirrored in net borrowing in domestic currency from home country residents (recall equation (1)). UK banks, for example, borrowed (net) in sterling (some $550 billion in mid-2007, both cross-border and from UK residents) in order to finance their corresponding long positions in US dollars, euros and other foreign currencies. By mid-2007, their long US dollar positions stood at $200 billion, on an estimated $2 trillion in gross US dollar claims. Similarly, German and Swiss banks’ net US dollar books approached $300 billion by mid-2007, while that of Dutch banks surpassed $150 billion. In comparison, Belgian and French banks maintained a relatively neutral overall US dollar position prior to the crisis, while Spanish banks had borrowed US dollars to finance euro lending at home, at least until mid-2006.

Taken together, Figures 2 and 3 thus show that several European banking systems expanded their long US dollar positions significantly since 2000, and funded them primarily by borrowing in their domestic currency from home country residents. This is consistent with European universal banks using their retail banking arms to fund the expansion of investment banking activities, which have a large dollar component and are concentrated in major financial centres. In aggregate, European banks’ combined long US dollar positions grew to roughly $700 billion by mid-2007 (Figure 5, top left panel), funded by short positions in sterling, euros and Swiss francs.15 As banks’ cross-currency funding grew, so did their hedging requirements and FX swap transactions, which are subject to funding risk when these contracts have to be rolled over.

And here comes the first estimate ever attempted at quantifying the Fed sponsored "Dollar Destructive" moral hazard: the upper bound of the total loss in the case of a major liquidity event occurring with the Fed's complicit bailout on the table would amount to a staggering $6.5 trillion from a dollar duration funding mismatch alone! This is an astounding, unfathomable and untenable number. Yet it is likely the same now as it was at the onset of the Lehman crisis.

Taken together, these estimates suggest that European banks’ US dollar investments in nonbanks were subject to considerable funding risk at the onset of the crisis. The net US dollar book, aggregated across the major European banking systems, is portrayed in Figure 5 (bottom left panel), with the non-bank component tracked by the green line. By this measure, the major European banks’ US dollar funding gap had reached $1.0–1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion), and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars. If we assume that these banks’ liabilities to money market funds (roughly $1 trillion, Baba et al (2009)) are also short-term liabilities, then the estimate of their US dollar funding gap in mid-2007 would be $2.0–2.2 trillion. Were all liabilities to non-banks treated as short-term funding, the upper-bound estimate would be $6.5 trillion (Figure 5, bottom right panel).

The Crisis

So what exactly was the chain of events that ended up with the Fed having to singlehandedly bailout the rest of the world?

The implied maturity transformation in Figure 5 became unsustainable as banks’ major sources of short-term funding turned out to be less stable than expected. Beginning in August 2007, heightened counterparty risk and liquidity concerns compromised short-term interbank funding (Taylor and Williams (2009)), visible in the rise of the blue line in the lower left panel. The related dislocations in FX swap markets made it even more expensive to obtain US dollars via currency swaps (Baba and Packer (2009a)), as European banks’ US dollar funding requirements exceeded other entities’ funding needs in other currencies.

European banks’ funding difficulties were compounded by instability in the non-bank sources of funds as well. Money market funds, facing large redemptions following the failure of Lehman Brothers, withdrew from bank-issued paper, threatening a wholesale run on banks (Baba et al (2009)). Less abruptly, a portion of the US dollar foreign exchange reserves that central banks had placed with commercial banks was withdrawn during the course of the crisis. In particular, some monetary authorities in emerging markets reportedly withdrew placements in support of their own banking systems in need of US dollars.

Market conditions during the crisis have made it difficult for banks to respond to these funding pressures by reducing their US dollar assets. While European banks held a sizeable share of their net US dollar investments as (liquid) US government securities (Figure 5, bottom right panel), other claims on non-bank entities – such as structured finance products – have been harder to sell into illiquid markets without realising large losses. Other factors also hampered deleveraging of US dollar assets: banks brought off-balance sheet vehicles back onto their balance sheets and prearranged credit commitments were drawn. Indeed, as shown in Figure 5 (top right panel), the estimated outstanding stock of European banks’ US dollar claims actually rose slightly (by $248 billion or 3%) between Q2 2007 and Q3 2008. It was not until the fourth quarter of 2008 that signs of deleveraging emerged.

Banks reacted to the dollar shortage in various ways, supported by actions taken by central banks to alleviate the funding pressures. Prior to the collapse of Lehman Brothers (up to end-Q2 2008), European banks tapped funds in the United States; their local US dollar liabilities booked by their US offices, which included their borrowing from Federal Reserve facilities, grew by $329 billion (13%) between Q2 2007 and Q3 2008, while their local assets remained largely unchanged (Figure 6, left panel). This allowed European banks to channel funds out of the United States via inter-office transfers (right panel), presumably to help their head offices replace US dollar funding previously obtained from the market.

In a nutshell what happened is that short-term sources to sustain the massive dollar funding mismatch disappeared virtually overnight, and CBs were suddenly facing a toxic spiral of selling increasingly more worthless assets merely to satisfy currency funding needs in an environment where all of a sudden nobody was willing to provide FX swap lines. So what happens next...

The Fed Bails Out The World

No, that is not an overstatement: had the Fed not stepped in, the rest of the world (which optimistic pundits tend to forget exists in their bubble view of the US market as the one and only) would have simply collapsed as the $6.5 trillion dollar funding gap closed in on itself, causing a indiscriminate selling off of all dollar denominated assets. The implosion of the basis trade would have seemed like a picnic compared to what was about to ensue had the Fed not stepped in to perpetuate the Fiat banking way of life.

The severity of the US dollar shortage among banks outside the United States called for an international policy response. While European central banks adopted measures to alleviate banks’ funding pressures in their domestic currencies, they could not provide sufficient US dollar liquidity. Thus they entered into temporary reciprocal currency arrangements (swap lines) with the Federal Reserve in order to channel US dollars to banks in their respective jurisdictions (Figure 7). Swap lines with the ECB and the Swiss National Bank were announced as early as December 2007. Following the failure of Lehman Brothers in September 2008, however, the existing swap lines were doubled in size, and new lines were arranged with the Bank of Canada, the Bank of England and the Bank of Japan, bringing the swap lines total to $247 billion. As the funding disruptions spread to banks around the world, swap arrangements were extended across continents to central banks in Australia and New Zealand, Scandinavia, and several countries in Asia and Latin America, forming a global network (Figure 7). Various central banks also entered regional swap arrangements to distribute their respective currencies across borders.

And here is the chart that started off this article in more regional detail:

And it gets worse: the Fed's printing press single handedly guaranteed the way of life for the UK, the Eurozone and Switzerland with unlimited funding! Whether the Fed was within its rights to bet the American way of life in order to mitigate the stupidity of Europe is a question best left to politicians. And politicians take note: the Fed's actions were to the benefit of "banks around the world including those that have no US subsidiaries or insufficient eligible collateral to borrow directly from the Federal Reserve System."

On 13 October 2008, the swap lines between the Federal Reserve and the Bank of England, the ECB and the Swiss National Bank became unlimited to accommodate any quantity of US dollar funding demanded. The swap lines provided these central banks with ammunition beyond their existing foreign exchange reserves (Obstfeld et al (2009)), which in mid-2007 amounted to [TD: a meager and very much underfunded] $294 billion for the euro area, Switzerland and the United Kingdom combined, an order of magnitude smaller than our lower-bound estimate of the US dollar funding gap.

In providing US dollars on a global scale, the Federal Reserve effectively engaged in international lending of last resort. The swap network can be understood as a mechanism by which the Federal Reserve extends loans, collateralised by foreign currencies, to other central banks, which in turn make these funds available through US dollar auctions in their respective jurisdictions. This made US dollar liquidity accessible to commercial banks around the world, including those that have no US subsidiaries or insufficient eligible collateral to borrow directly from the Federal Reserve System.

The quantities of US dollars actually allotted through US dollar auctions in Europe provide an indication of European banks’ US dollar funding shortfall at any point in time (Figure 8). Most of the Federal Reserve’s international provision of US dollars was indeed channelled through central banks in Europe, consistent with the finding that the funding pressures were particularly acute among European banks. Once the swap lines became unlimited, the share provided through the Eurosystem, the Bank of England and the Swiss National Bank combined was 81% (15 October 2008), and it has remained in the range of 50–60% since December 2008.

Concluding observations

One angle of preliminary concluding remarks is provided by the cautiously worded prose of the BIS:

The recent financial crisis has highlighted just how little is known about the structure of banks’ international balance sheets and their interconnectedness. The globalisation of banking over the past decade and the increasing complexity of banks’ international positions have made it harder to construct measures of funding vulnerabilities that take into account currency and maturity mismatches... The analysis shows that between 2000 and mid-2007, the major European banking systems built up long US dollar positions vis-à-vis non-banks and funded them by interbank borrowing, borrowing from central banks and FX swaps. We argue that this greater transformation across counterparties in fact reflected greater maturity transformation across these banks’ balance sheets, exposing them to considerable funding risk. When heightened credit risk compromised sources of short-term funding during the crisis, the chronic US dollar funding needs became acute, particularly in the wake of the Lehman Brothers bankruptcy.

In contrast to many previous international financial crises, it was banks’ international exposures to other industrialised countries that deteriorated, and the global interbank and FX swap funding structure which seized up. The build-up of such stresses at the global level can only be identified by tracking the extent of cross-currency funding, and by implication, banks’ reliance on short-term interbank and FX swap positions. What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a “crowded trade”. Only when examined at the aggregate level can such vulnerabilities be identified. By quantifying the US dollar overhang on non-US banks’ global balance sheets, this paper contributes to a better understanding of why the extraordinary international policy response was necessary, and why it took the form of a global network of central bank swap lines.

Why is this critical? We are now back at a time when the only gains in the stock market are at the expense of dollar destruction, with a concomittant funding for dollar denominated assets. In one short year since the collapse of Lehman we have gone back to the same dollar funding risk exposure as was on the books in these days before Dick Fuld's empire unravelled. While whether or not the Federal Reserve stepped beyond its bounds in practically bailing out not just Goldman Sachs, but as this paper has proven, virtually the entire world, is not up to us to decide. However, a critical topic is: have we learned anything from the implications of an unprecedented dollar funding gap, which is likely back to record levels once again? What is obvious is that the Fed's current policy of a weak dollar, contrary to its repeated lies otherwise, is simply enhancing the dollar funding moral hazard: and the breaking point will come sooner or later with disastrous consequences.

As the H.4.1 discloses weekly, the Fed's liquidity swaps are now back to almost zero. This means that foreign Central Banks believe they have the FX swap and dollar maturity situation under control. They thought the same before Lehman blew up. And they were wrong. As the DXY continues tumbling ever lower to fresh 2009 lows, the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive and historic short squeeze. If and when an exogenous event occurs, not even $6.5 trillion in Fed swap lines will be sufficient to bail out the world economy. It is time someone in Congress asks the Chairman all the pertinent questions that evolve from this analysis and how he is prepared to handle its next, much more vicious, and likely terminal, iteration.

Full BIS paper.


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Mon, 10/19/2009 - 14:54 | 103609 Cheeky Bastard
Cheeky Bastard's picture

Looking at the future, i kind of wish they didnt

And now, i will read the article.

Tue, 10/20/2009 - 16:13 | 104802 Anonymous
Anonymous's picture

The next round of the banking credit inplosion,
the overcommitted Fed may not be able to step in,
perhaps the reason for gold's runup.

Now fiduciaries realize they cannot stuff
what's left of $60 T global economy into gold,
so Big4 Asset Allocation sees a rush to dollars,
notes and oil...

Mon, 05/10/2010 - 23:15 | 342720 JW n FL
JW n FL's picture

Here in America, total debt compared to GDP now stands at around 280% to 300%. (By definition, these numbers are estimates, since it's impossible to arrive at a precise figure, but the latter is not needed in order to get the gist of what's going on.)

This is the highest debt-to-GDP ratio that the country has ever seen. By my calculations, as we exited 1929, debt-to-GDP was about 200%, though it did rise pretty dramatically while we were in the Depression, to about 300%. But by 1950 or so, the debt-to-GDP ratio came in at about 150%. It rose to some 220% in 1990. So obviously, our current ratio of total debt outstanding to GDP is the highest it's ever been (the Depression excepted).


Is it a hell of a LOT!!!! more due to offbook, offshore lending / swaps???? what is debt to GDP, today? 1,000% or more?

Fri, 05/27/2011 - 14:30 | 1317679 JW n FL
JW n FL's picture  Treasury Direct $14 Trillion Debt   $15 Trillion in Loans   ='s $29T


Looks like I as Not so far off in my 1,000% range! unfortunately for ALL Americans!

Mon, 10/19/2009 - 14:59 | 103612 Slewburger
Slewburger's picture


Digitizing $ for Foreign liquidity = Disturbing.

On a side note.... Tyler do you ever stop?

Are those 10 hour breaks between posts for work... or sleep?

Mon, 10/19/2009 - 15:50 | 103665 Anonymous
Anonymous's picture

there's more than one

Mon, 10/19/2009 - 16:46 | 103743 Anonymous
Anonymous's picture

Aren't there 40 or something close to that number?

Mon, 10/19/2009 - 20:30 | 103939 Anonymous
Anonymous's picture

This is zen thing. The number is between zero and infinite.

Mon, 10/19/2009 - 17:09 | 103772 Slewburger
Slewburger's picture


Mon, 10/19/2009 - 15:09 | 103620 Prophet of Wise
Prophet of Wise's picture

911 Operator: 911, What is the nature of your emergency?

Caller: Yes, I'd like to report a rape-in-progress.

911 Operator: In mean its happening right now?

Caller: Yes, operator...its happening right now! I am being sodomized right now.

911 Operator: Where is your attacker?

Caller: All around me from all sides.

911 Operator: Can you identify them?

Caller: No operator, they have been very very clever at concealing their identity.

911 Operator: Where are you?

Caller: I don't know anymore. I don't recognize this place.

911 Operator: Well we can't send help if you don't know where you are?

Caller: It wouldn't make much difference now. You wouldn't be able to restore my innocence and what's been done is done.

Mon, 10/19/2009 - 15:16 | 103626 E pluribus unum
E pluribus unum's picture

Does this mean that the banks really were insolvent (and still are) last year?


OMG - I am sooooooo shocked

Mon, 10/19/2009 - 15:24 | 103634 Don Smith
Don Smith's picture

Serious question - does anyone know how to find someone to lend 1- 2- year US treasuries if I wanted to short them and buy, say, Australian govies?

Mon, 10/19/2009 - 15:27 | 103641 Marla Singer
Marla Singer's picture

There's 2 year treasury note futures and their options...?

Mon, 10/19/2009 - 15:45 | 103659 Don Smith
Don Smith's picture

Thanks, good point.  I am looking at a Joe-Sixpack carry trade.  A leveraged play against the dollar.  I'm a small fry, and am looking at ways that a small investor can set up a levered position in currencies to ride this dollar wave down to its nadir, wherever that may finally be.

So, if I've got, say, $10,000 to throw at this, and wanted to short the dollar and use the proceeds to buy AUD or equivalent debt instruments (bonds, or even CDs) with max leverage, how does an ordinary guy do this?

Certainly, one route would be to buy $10K of 6-month calls on TBT, for example.  But theta can be a bitch, and the market can stay irrational ... yadda yadda. 

Or, I could convert to AUD and buy $10K in Australian Dollar denominated debt, which yields something more than the 1% I can get in a 2-yr treasury.  But that's a pretty lame trade, since there's no leverage, and I lose so much in transactional costs.

So, anyone have a play here?  (again, Marla, thanks for the futures idea, that was perfect for my detail-less post).

Mon, 10/19/2009 - 19:05 | 103863 Joe Sixpack
Joe Sixpack's picture

"I am looking at a Joe-Sixpack carry trade."


Everything is a carry trade now. Euro, dollar, silver,... and now, Me! Is that good or bad for me?

Tue, 10/20/2009 - 10:58 | 104332 Joe Sichs Pach
Joe Sichs Pach's picture

I would say neutral my friend.  Definitely neutral...

Wed, 10/21/2009 - 10:23 | 105484 NumisEX
NumisEX's picture

Whoh, bizzaro world. A half a case of Joe

Mon, 10/19/2009 - 15:25 | 103639 faustian bargain
faustian bargain's picture

It's gonna take me a while to read this epic post.

Mon, 10/19/2009 - 17:59 | 103810 Brian Griffin
Brian Griffin's picture

An extra adderall is in store for this old dog. 

Mon, 10/19/2009 - 15:30 | 103644 waterdog
waterdog's picture

One mystery down, one more to go. I was right about Limey's central bank. Anyone heard from him lately?

Mon, 10/19/2009 - 15:31 | 103645 Ruth
Ruth's picture

More PROOF THE FED NEEDS AUDITED and probably DISMANTLED IN TIME.  Do I trust politician to be responsible with that task, since they cannot keep their noses clean themselves?  We must count on the few who have balls enough to take on the task....we better start realizing which battles are worth it.   FED AUDIT, FIN INDUSTRY REGULATION, JOB CREATION, HEALTHCARE AND PROBABLY IN THAT ORDER.

Why should be bail out the universe?  GS and their baby squids should be our first domestic (financial) terrorists to be looked at, FED and their cohorts would be our first international terrorists.

Oh, AND now that we know more and it's just as expected....WHEN ARE WE CLAWING THE MONEY BACK?  WE NEED NEW RULES FOR NEW INFORMATION! 

Mon, 10/19/2009 - 15:36 | 103646 Yossarian
Yossarian's picture

the trade de jour is once again the dollar funding one, although unlike before when the Yen was the carry currency of choice, this time it is the dollar itself, positioning banks for the double whammy of not just a dollar funding shock, but one coupled with a potential massive and historic short squeeze. 


Can you please explain that- how is it different to the Yen carry trade other than being on a much larger scale?  It seems that the best hope to get out of this would be to pray that the reflation works and the cash flows from the $assets will allow foreign banks to pay back their central banks who can then close their swaps with the US Fed.  This might mean years of deleveraging...unless rates rise to levels sufficient to attract Asian exporting nations to mitigate this deleveraging by providing short-term funding.  Perhaps they will switch out of T-Bills...

Mon, 10/19/2009 - 16:08 | 103694 jm
jm's picture


As a carry trade, the world not only benefits by dollar decline, it actively seeks to drive it down.  As a reserve currency, the dollar is a de-risking asset, a flight to safety so to speak.

When whoever needs dollars because they are squeezed meet those rushing for dollars to derisk, the effect will not be swish, as they say.

Mon, 10/19/2009 - 15:34 | 103649 digalert
digalert's picture

Why didn't Grayson just say to Bubble Ben that we sold happy boxes of shit abroad, in effect screwing them. When the whole scam was exposed, uncle Ben chose to pay them to cover their losses, thereby screwing the US taxpayers. Is that not in fact what happened?

Mon, 10/19/2009 - 17:41 | 103790 Rollerball
Rollerball's picture

That's how I see it.  Taxpayers get "punked" (by) back stopping private-to-public debt swaps as a hedge against:  a) WWIII; b) sovereign default of the global "carry" trade; c.) both a) and b)?  Grayson, like Ron Paul, knows how far they can go before ending up like JFK.  Hooray, the Fed audit is unnecessary now, thanks to the new transparency of it's owner(s) at the BIS! Thanks BB for saving Zion's moneychangers.  You're my hero Nero, I mean Neo!  

Mark 11:15–19

Matthew 21:12–1

Luke 19:45–48

John 2:12–25


Mon, 10/19/2009 - 18:41 | 103850 rr_
rr_'s picture

BIS owners own the FED or FED owners own BIS now?    The crisis was coincident with a BIS mandate for reserve asset quality.

Mon, 10/19/2009 - 20:13 | 103922 Gilgamesh
Gilgamesh's picture

The same owners for both the Fed and the BIS.  This rabbit hole is deep and shallow at the same time.

Mon, 10/19/2009 - 22:08 | 104032 Rusty Shorts
Rusty Shorts's picture

Proverbs 9:11-13


In those days Alan Grayson arose, and ye he spake, he sayeth, where is our goddamned money, so sayeth the Alan Grayson.

Tue, 10/20/2009 - 10:12 | 104303 Anonymous
Anonymous's picture


Mon, 10/19/2009 - 15:38 | 103650 starfish
starfish's picture

Support HR1207: Audit the FED.

Mon, 10/19/2009 - 15:41 | 103654 TraderMark
TraderMark's picture

Good post, love the supporting details.

p.s. if anyone wants to chime in on why their neighbors, work associates, friends or whomever are completely apathetic to our generational theft please contribute a comment.

I spend weekends banging my head against the wall trying to figure it out and still fail.  Maybe I am just living in the Matrix.

Mon, 10/19/2009 - 16:26 | 103719 Anonymous
Anonymous's picture

TM, I share your frustrations. I attended a dinner last night for a group to chat with two candidates for the local school board (top rated public school in our state.) Neither of them could even begin to explain fractional reserve banking. Before the night was over both began to grasp the need to include such instruction in our public schools.

One brick at a time.

Mon, 10/19/2009 - 20:08 | 103919 Howard_Beale
Howard_Beale's picture

Good for you...keep it up.

Mon, 10/19/2009 - 21:29 | 104002 Miles Kendig
Miles Kendig's picture

Excellent.  Every journey is a series of individual discreet steps.  Thank you for this one.

Fri, 10/30/2009 - 15:57 | 115489 Anonymous
Anonymous's picture

In the 1770s in the thirteen colonies the second most popular category of books (after religious material), was Law!

The ordinary literate citizen was primarily concerned with questions of faith, morality and law!

That's what it takes to make a real revolution.

Mon, 10/19/2009 - 16:38 | 103735 Boop
Boop's picture

Because they don't know it's going on? 

Mon, 10/19/2009 - 16:50 | 103752 MinnesotaNice
MinnesotaNice's picture

Yes... this content came from a paper issued by the BIS... however don't lose sight of the fact that Bernanke sits on the Board of the BIS... and the Board guides policy and what is disseminated by the BIS...

Mon, 10/19/2009 - 19:57 | 103848 Miles Kendig
Miles Kendig's picture

Which makes this particular paper, who released it, the material discussed with it, and the matter of its discussion all brilliant tells. I doubt rather seriously the BIS would have done so without significant reason MnNice.

Inquiring minds would love to know what prompted the BIS to such action.

Mon, 10/19/2009 - 20:42 | 103952 Anonymous
Anonymous's picture

Because Bernanke wants Noble.

Captcha Q: -26 times 29 equals ?
Please add calculator app. to the website.

Mon, 10/19/2009 - 15:42 | 103658 Cognitive Dissonance
Cognitive Dissonance's picture

Simply the newest version of a very old trick. Run the damn system to the breaking point and then create a panic to cause people to react in a way you expect them to.

Make sure you have your buddies and cohorts positioned to take advantage of this massive shift and then sit back and watch the fun.

Wash, rinse and repeat as often as the fools will let you.

Mon, 10/19/2009 - 16:06 | 103691 Anonymous
Anonymous's picture

We are all just 'marks' in an advanced game theory. Probable reactions have already been calculated and accepted based on risks i.e. collateral damage. Create circumstances... execute... prevent sensible conclusions. Welcome to the new reality.

Mon, 10/19/2009 - 19:58 | 103867 Miles Kendig
Miles Kendig's picture

Same as the old reality.  Game theory however advanced only goes so far.  Usually not very far hence the need of those whose models are predicated upon it find their position requires frequent episodes of wash, rinse & repeat cycles.

Thanks for the rating.

Mon, 10/19/2009 - 19:26 | 103876 Cheeky Bastard
Cheeky Bastard's picture

game theory is the biggest voodoo shit of modern day economics that it is simply unbelievable that people actually use it, or even pay attention to it. you may ask why. it is simple; the MAIN axiom ( well more of a BS speculation, or a contingent or false premise ) of game theory is that all the participants are rational. FAIL.

Mon, 10/19/2009 - 21:50 | 104018 Benthamite
Benthamite's picture


"It has been said that man is a rational animal.  All my life I have been searching for evidence which could support this."

-B. Russell


Tue, 10/20/2009 - 03:31 | 104174 JacksWastedLife
JacksWastedLife's picture

What's wrong with the Nash Equilibrium and related ideas?

Tue, 10/20/2009 - 03:37 | 104176 Cheeky Bastard
Cheeky Bastard's picture

the MAIN axiom ( well more of a BS speculation, or a contingent or false premise ) of game theory is that all the participants are rational. FAIL.


here you go, i bolded it for you.

Tue, 10/20/2009 - 08:57 | 104234 Cognitive Dissonance
Cognitive Dissonance's picture

"the MAIN axiom ( well more of a BS speculation, or a contingent or false premise ) of game theory is that all the participants are rational. FAIL."

When you look at game theory or efficient markets theory they all rely on a "rational" player or investor or whatever.

It does stroke our ego's nicely (mental masturbation at its finest) to think we irrational animals are really very rational in all our affairs, doesn't it?

Tue, 10/20/2009 - 09:01 | 104240 Cheeky Bastard
Cheeky Bastard's picture

i have always been more proud of my irrational side and my animal heritage, then my human side. yes it is awesome to know how to solve differential equations, but that capability ain't worth shit when it comes to survival. we are just animals, with a concept of god, and hence, we think were are not animals. yes it is that simple.

Tue, 10/20/2009 - 15:03 | 104648 Miles Kendig
Miles Kendig's picture

Yaskov:  The human species has lived on this world for some millions of years.  For all but a small fraction of that time we have lived as hunters.  Hunting.  It was your way of life until you walked away from it.  I am offering to return it to you.

Kendig thinking:  Who says I walked away from all of it Yaskov?  Indeed, it is time to write about my last 20 years in the ghetto.  Thanks for the idea old associate.

I must admit that there is a difference between the south of the US and the south of France..

Cheers CB

Tue, 10/20/2009 - 09:02 | 104241 JacksWastedLife
JacksWastedLife's picture

Define rational?

Tue, 10/20/2009 - 09:04 | 104243 Cheeky Bastard
Cheeky Bastard's picture

exactly !

Tue, 10/20/2009 - 10:37 | 104320 Miles Kendig
Miles Kendig's picture

Cheeky - Catch me yesterday during the pish?

Tue, 10/20/2009 - 10:42 | 104324 Cheeky Bastard
Cheeky Bastard's picture

during the what 

mang, im extra stupid today, i have no idea what pish is

Tue, 10/20/2009 - 14:16 | 104435 Miles Kendig
Miles Kendig's picture

Pishing threat thread..

Sat, 04/16/2011 - 23:20 | 1177179 Bazooka
Bazooka's picture

You SOB, you stole my avatar!

Tue, 10/20/2009 - 10:19 | 104312 maff
maff's picture

Well, Goldman Sachs seem to be behaving pretty rationally...

Mon, 05/10/2010 - 23:20 | 342730 JW n FL
JW n FL's picture

I will buy that for a dollar... and you got junked for this statement? I wonder what they would think if I said it my way to stir the pot... "Rot Roh Reorge

Mon, 10/19/2009 - 15:45 | 103661 Yossarian
Yossarian's picture[1][id]=CNCF&s[1][transformation]=log  

What do we make of this?  Seems cash flows haven't been bad...if we believe these numbers 

Mon, 10/19/2009 - 16:01 | 103677 jm
jm's picture

Numbers spot on... the scale is whack.  Look to the left.



Mon, 10/19/2009 - 16:06 | 103689 Anonymous
Anonymous's picture

That is absolutely awful. Is that logarithmic scale that the FED is using?

The person who created that chart should be fired. Immediately.

Mon, 10/19/2009 - 17:13 | 103775 Cognitive Dissonance
Cognitive Dissonance's picture

Graph manipulation is part of your standard MBA training. Don't want parabolic curves upsetting the natives. Slow and easy on those charts until everyone who isn't anyone is fleeced.

Mon, 10/19/2009 - 17:45 | 103796 Anonymous
Anonymous's picture

There's nothing wrong with the scale. It's a log scale. That is appropriate so that a doubling or an order of magnitude change anywhere along the graph gives the same visual impact.

Mon, 10/19/2009 - 21:40 | 104011 jm
jm's picture

Sorry I said "whack".  I meant "wank".

Go ahead and junk me for visual impact.

Mon, 10/19/2009 - 20:00 | 103913 Anonymous
Anonymous's picture[1][id]=CNCF&s[1][transformation]=pch

this graph from the same site shows the YoY cash flow change.

Mon, 10/19/2009 - 15:51 | 103668 George the baby...
George the baby crusher's picture

Ben and Paul looked into the abyss and it scared the living shit out of them.  Understandable after reading this absolutely brilliant papper by BIS.

Mon, 10/19/2009 - 17:32 | 103781 Cognitive Dissonance
Cognitive Dissonance's picture

Ben and Paul looked into the abyss and it scared the living shit out of them.

I tend to agree simply because Ben and Paulson/Geithner are stooges and not the ultimate decision makers. Granted they're extremely intelligent well compensated much higher level stooges. But stooges none the less.

Look at history. Plenty of fools and not-so-fools in high places who history reveals much much later were puppets. Do you really think things are any different today? The modern J P Morgans are not public figures these days.

I would bet my bunched panties that they're simply taking their marching orders from higher authorities. Just like Presidents, agency heads, Congress persons and Fortune 500 CEOs are run into and out of the game as needed, so is the head of the Fed and Treasury.

They might even think they are making most of the decisions but the strategic ones are made for them. Every time I look under a rock, I see old money calling the tune.

Think of it as a multi level marketing organization (Amway for example) with dozens of levels. No, this isn't wild eyed conspiracy theory. Everywhere I look, the public figures are puppets. I want to know who's pulling the strings.

Mon, 10/19/2009 - 22:48 | 104072 Gordon_Gekko
Gordon_Gekko's picture

I tend to concur. When different and totally unrelated individuals reach similar conclusions after independently studying the situation and circumstances at hand, and via their own separate paths, I think there is definitely something to it. The puppet masters have chosen to remain hidden and with good reason. When the SHTF, it is the stooges that will get sacrificed, not them. They will keep their money and their power and just select new servants. In fact, I won't be surprised if they are playing both sides of the fence even right now - whoever fails will be sacrificed.

Tue, 10/20/2009 - 09:06 | 104244 Cognitive Dissonance
Cognitive Dissonance's picture


I so love it when some academic or political stooge declares that people seek hidden players and so called "conspiracy theories" to help their little minds deal with life's little surprises.

Anytime I hear that I start looking under rocks for the cockroaches.

What people fail (or refuse) to recognize is the inherent bias in the highly educated ladder climbing career oriented individual working in group think sectors to come to conclusions that not only don't make waves but reinforce their own standing and the standing of their industry.

We hear what we want to hear and reject contrary information. The tendency is even greater when we are paid (with either money or public recognition etc) to do so.

Tue, 10/20/2009 - 19:25 | 105097 Gordon_Gekko
Gordon_Gekko's picture

"...the highly educated ladder climbing career oriented individual working in group think sectors..."

I used to be one of those - not anymore!

Mon, 10/19/2009 - 15:58 | 103674 Argos
Argos's picture

How about this as a form of protest?  Get out of the market, sell all stocks and bonds, pay the penalty and tax, cash in your retirement account, buy physical gold and silver.  Get rid of your credit cards and join a small decent local bank.  Easier than marching, and you're hitting them in the wallet, the only place they can feel pain.

Mon, 10/19/2009 - 16:16 | 103704 Anonymous
Anonymous's picture

I already did that. Except I didn't have much so I spent it on dental work, lasik surgery, toilet paper, guns, ammunition and the like. No need to reinvest. I ran up my credit cards and filed BK. Suck it bitches.

Add one more thing. Stop shopping at Walmart you INGO-SHEEPLE REALITY TV WATCHING FUCKTARDS! (Of course they're not reading this....oh well)

Thu, 10/22/2009 - 07:15 | 106640 Anonymous
Anonymous's picture

Holy cow. I literally did something similar in late 2006 and early 2007 with orthodontia (as per your "dental work") and LASIK as well, though I threw in some laser hair removal and electrolysis to boot. I didn't have enough left over for a tummy tuck so I spent the rest on clothes, jewelry, shoes, and other trinkets until my savings got to $0. Guns are mostly useless anyway so I didn't bother with that part.

I didn't count on losing my job so fast, so I'm going down hard from preexisting conditions sooner rather than whenever it would've happened anyway. It had been taking me down even with health insurance, and none of this is worth living through anyway, so I'm ready to go anyway.

Mon, 10/19/2009 - 17:51 | 103802 Anonymous
Anonymous's picture

YES! This is what must be done en masse! IF our elected leaders are so bought and paid for that they feel they are only answering to their bankster masters, then the time is nearing for the people to act collectively in ways which will put these criminal bastards out of business.

The old fashioned way!

Mon, 10/19/2009 - 16:08 | 103692 SDRII
SDRII's picture

Doesn't this just say that the US/global IBs pumped out so much toxic USD junk that at some point the question is not funding but repudiation ( a la China and their derivatives jingle mail). Makes sense the Fed had to fund it for this very reason. The fed should be less worried about fx swaps than potentially trying to aggressivily mamage a debt jubilee (h/t Keen) - which is a more destructive mirror image of the printing anwser. The problem for the Fed is that they have to fund it or they find themselves in the same position as their co conspiritors with regard to resi and commerical non recourse lending. The threat of the corss borders simply walking away from their $ liabilities is the threat that shakes the very foundations of the likes of Kohn and is co inflationistas. The Fed loses every way - bail and destroy the dollar to fund garbage assets or don't print and watch the US banks get evicerated. In every case the LT demand / ocnfidence in dollar is destroyed. 

Mon, 10/19/2009 - 16:55 | 103758 deadhead
deadhead's picture

wow, i'm not sure that i've ever seen Mish that enraged....

i think we have passed the twilight zone and we are now living in insanity at this point...

Mon, 10/19/2009 - 18:55 | 103858 I am a Man I am...
I am a Man I am Forty's picture

It's difficult for smart, honest people to watch this take place.

Mon, 05/10/2010 - 22:39 | 342686 Johnny Dangereaux
Johnny Dangereaux's picture

When you get confused, listen to the music way or or lead?

Mon, 10/19/2009 - 17:15 | 103779 faustian bargain
faustian bargain's picture

i'm spreading that one around...nice.

Mon, 10/19/2009 - 17:38 | 103786 Cognitive Dissonance
Cognitive Dissonance's picture

Unfortunately, Joe Six-Pack was captured many hundreds of moons ago. His/her defined benefit pension, federal/state/local government pension, 401(k), 403(b) etc, individual IRA and cash investments and especially the home are all dependent on the fraud continuing in order for his/her assets to be pumped back up. Or at least that's what he/she thinks.

As long as his/her interests are seemingly aligned with the criminals, there will be no revolution. Joe Six-Pack is on a very short leash.

Mon, 05/10/2010 - 23:25 | 342740 JW n FL
JW n FL's picture

The absolute funds where crushed!!! the idiot lucky sperm club members where in fact taxed beyond taxed this last go round... the Black Swan, Goosed the 6% crowd worse than any other segment, save the whole World of course... 

Mon, 10/19/2009 - 20:59 | 103977 Gilgamesh
Gilgamesh's picture

I heard this twice today during 30 mins of FM radio listening:

I had not heard it ever before, except for one time - here:

I do not chalk it up to coincidence (probably due more to fading nightlife!).

Mon, 05/10/2010 - 23:31 | 342744 JW n FL
JW n FL's picture

Great post, Thanks!

Edward Bernays
1891 - March 9, 1995

The Father of Spin: Edward L. Bernays and The Birth of Public Relations
by Larry Tye
Henry Holt & Company


PR! A Social History of Spin
By Stuart Ewen
Basic Books

Visiting Edward Bernays
A Chapter From PR! A Social History of Spin
"To put it simply, Edward Bernays' career -- more than that of any other individual -- roughed out what have become the strategies and practices of public relations in the United States."



The Museum of Public Relations
The Museum of Public Relations was established in 1997 and "is the place to go to learn about how ideas are developed for industry, education, and government, and how they have been applied to successful public relations programs since the PR industry was born."

Niccolo Machiavelli:
Statesman & Political Philosopher
No enterprise is more likely to succeed than one concealed from the enemy until it is ripe for execution.


Sun Tzu On The Art of War
"The oldest military treatise in the world"
Translated from the Chinese By Lionel Giles, M.A. (1910)


Extraordinary Popular Delusions and the Madness of Crowds
by Charles MacKay Review
Why do otherwise intelligent individuals form seething masses of idiocy when they engage in collective action? Why do financially sensible people jump lemming-like into hare-brained speculative frenzies--only to jump broker-like out of windows when their fantasies dissolve? We may think that the Great Crash of 1929, junk bonds of the '80s, and over-valued high-tech stocks of the '90s are peculiarly 20th century aberrations, but Mackay's classic--first published in 1841--shows that the madness and confusion of crowds knows no limits, and has no temporal bounds. These are extraordinarily illuminating,and, unfortunately, entertaining tales of chicanery, greed and naivete. Essential reading for any student of human nature or the transmission of ideas.


The Crowd: A Study of the Popular Mind
Courtesy of the Electronic Text Center, University of Virginia Library
"THE following work is devoted to an account of the characteristics of crowds. The whole of the common characteristics with which heredity endows the individuals of a race constitute the genius of the race. When, however, a certain number of these individuals are gathered together in a crowd for purposes of action, observation proves that, from the mere fact of their being assembled, there result certain new psychological characteristics, which are added to the racial characteristics and differ from them at times to a very considerable degree. Organised crowds have always played an important part in the life of peoples, but this part has never been of such moment as at present. The substitution of the unconscious action of crowds for the conscious activity of individuals is one of the principal characteristics of the present age."

Gustave Le Bon

Mon, 10/19/2009 - 16:13 | 103700 Anonymous
Anonymous's picture

Is the Fed going to make a profit on this trade? If we swapped US dollars for foreign currency a year ago, can we swap it back now? The dollar has dropped in value against the Euro over the last year.

Mon, 10/19/2009 - 19:55 | 103906 Fritz
Fritz's picture

The Fed?


Best laugh I had all day. Only the squid is allowed to profit.

Mon, 10/19/2009 - 16:23 | 103714 Anonymous
Anonymous's picture

You have problems? Reknown NFL quarterback Bernie Kosar declares bankruptcy today per bloomberg. Guess an MBA from Miami and an NFL pedigree only go so far. The rich have really been annihilated. Cubs declare bankruptcy and now this. And virtually every team receives a welfare check for their taxpayor stadia.

Mon, 10/19/2009 - 18:20 | 103832 rr_
rr_'s picture

Sept 2008 was declaration of war between the billionaires and the millionaires.

Tue, 10/20/2009 - 10:46 | 104326 John Self
John Self's picture

Something like 70% of retired NFL players end up in bankruptcy.  It's mind-boggling.

As for the Cubs, I always assumed it was just a clever way to shed the Milton Bradley contract.

Tue, 10/20/2009 - 19:48 | 105111 Unscarred
Unscarred's picture


Have you ever heard Bernie Kosar talk?  I'm a Cleveland guy, and let me tell you, he goes on sports talk shows and does pre-season games with a microphone in one hand and a martini in the other.  This past summer, the Miami Herald did an article that discussed his bankruptcy and fallen empire, including his alcohol and drug abuse.

"He just learned the other day, after much trying and failing, how to make his own coffee. This is a man who owned his own jet and helped found companies, plural. But when his new girlfriend came over recently and found him trying to cook with his daughters, she couldn't believe what was on the kitchen island to cut the French bread. A saw."

How fucked up in the head do you have to be to cut bread with a fucking saw?!  Like they say, "only in Cleveland..."

Mon, 10/19/2009 - 16:35 | 103731 drbill
drbill's picture

Big surprise... The Fed answers to no one. Even if they had to answer to someone (CONgress), there are no real penalties for their actions. (As Denninger said, there is no "or else" in the Federal Reserve Act) So, the Fed does whatever it wants whenever it wants to do it.

Even if there was an "or else", does anyone really think that the government would do anything about it? My only comfort is that the central bankers of the world seem to have actually believed that their paper had some value. How ironic!

Mon, 10/19/2009 - 16:41 | 103738 dark pools of soros
dark pools of soros's picture

so with the western world flush with monopoly money to the powers that be; assets are at once both rising from currency devaluation and worthless from lack of demand from the larger market/economy tailspin are we heading to a divided by 0 valuation here? where avg joes can't buy anything but a few wall street suits can buy everything?

Mon, 10/19/2009 - 17:03 | 103765 Anonymous
Anonymous's picture

When will we STOP THE PRETENDING????

Mon, 10/19/2009 - 22:07 | 103792 Miles Kendig
Miles Kendig's picture

The nature of the exponential growth curve applied to the formation, accumulation & servicing of debt requires an ever increased stream of hard assets with generally accepted value curves that exceed the curve of debt and future income streams that can be carried forward to operate.  The processes discussed in this article addresses some of the inherent attributes of this system.  The fact that the feds swap actions did nothing to resolve this structure and were simply designed to bridge the gap, coupled with the primary thrust of the feds past and subsequent actions in concert with the other primary international players signal the strong desire to perpetuate and expand wherever possible this process rather than address the shortcomings of the underlying structure.  An analysis of that structure calls into question its validity, stability, sustainability and sanity.

Thanks for putting this up TD.

Mon, 10/19/2009 - 17:42 | 103793 elignorant
elignorant's picture

"Is unnatural selection!!!,  I want the truth!"

Mon, 10/19/2009 - 18:12 | 103822 rr_
rr_'s picture

This is epic.

Mon, 10/19/2009 - 18:12 | 103823 Slewburger
Slewburger's picture

Can anybody tell me what the feedback mechanism for the excess liquidity in the foreign markets?

Or is it just held?


Mon, 10/19/2009 - 18:23 | 103833 rr_
rr_'s picture

Was the buying of dollar assets by the foreign banks in lieu of direct assessments by the US government for the cost of the Afghanistan and Iraq wars?  Japan and Germany were assessed, and paid up, for a share of Gulf War 1.

Mon, 10/19/2009 - 18:28 | 103839 Anonymous
Anonymous's picture

I have to read this 2 or 3 more times.

Bottom we still have the probelm, and if so, to what degree?

Mon, 10/19/2009 - 19:08 | 103864 Joe Sixpack
Joe Sixpack's picture
Proclamation on the Federal Reserve System of the United States of America

March 2008

WHEREAS, Article I, Section 8 of the Constitution of the United States of America authorizes Congress "To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures";

WHEREAS, on December 23rd, 1913 the US Congress enacted the Federal Reserve System;

WHEREAS, the Federal Reserve System is considered an independent agency within the federal government, with oversight of Congress and containing appointed public officials on its board of directors;

WHEREAS, the Federal Reserve System Controls the Federal Reserve Note, the official currency of the great nation of the United States of America;

WHEREAS, there may be controversies regarding the legality and constitutionality of the Federal Reserve System, it is recognized that the said system has operated continuously as the central banking system of the United States since the inception of the Federal Reserve Act of 1913;

WHEREAS, the Constitution of the United States of America granted Congress the authority to create the current Federal Reserve System, it also does grant Congress the authority to modify or revoke the Federal Reserve System;

WHEREAS, the actions of the Fedreral Reserve System represent the credit and currency of the United Stated of America to the citizens of this great nation and to the world;

WHEREAS, the Federal Reserve System, acting independently within the federal government allowed, supported, and even promoted parasitical and non-productive uses of the money and credit of the United States of America;

WHEREAS, the United States and likely the entire world's financial system is undergoing massive de-leveraging of the said parasitical and non-productive uses of the credit and money of the United States of America (as well as other nations' currencies);

WHEREAS, the US dollar, the "Federal Reserve Note" is declining in value due to these parasitical activites, as well as potentially other causes;

WHEREAS, it is recognized that the citizens of the United States and other nations did willingly participate at some level in the creation and propogation of said parasitical activities;

WHEREAS, it is also recognized that the United States of America, a sovereign nation, has the legal, moral, and God given authority to take actions to benefit its citizens and to protect its good name, credit and money in times of difficulty;

WHEREAS, it is recognized that the current time is such a time of great difficulty;

WHEREAS, it is recognized the parasitical financial institutions and their activities are at odds with citizens of the United States of America and the good credit and money thereof;

WHEREAS, the current indications are that the Federal Reserve System is acting to preserve the financial system currently flooded with the parasitical activities;

WHEREAS, the current indications are that the neither the Federal Reserve System, nor the Congress of the United States, nor the people of the United States have access to the books of the institutions being preserved by the Federal Reserve, and therefor the degree of inter-connectivity and risk associated with the institutions and other entities cannot be determined;

WHEREAS, the Federal Reserve System is accepting non-performing assets as collateral for credit with ultimate taxpayer responibility to entities not under its legislative mandate;

IT MUST BE CONCLUDED, that the Federal Reserve System is not acting to the benefit of the people of the United States of America, its credit, money, and good name;

WHEREAS, it is recognized that the political will and capability of the government of the United States of America may not be up to the task of prosecuting this proclamation ; It is also recognized that this may be the only hope for the continued survival of the United States of America as the great nation as it has historically existed.

NOW THEREFORE, it is PROCLAIMED by those supporting this Proclamation that the Congress of the United States of America FULLY NATIONALIZE the Federal Reserve System, and take full control of the credit and money of our great nation; The Congress must take whatever action necessary to seperate out, sequester, disown, or otherwise neutralize the effect of the parasitical financial activities which led to the current crisis; The Congress of the United States of America must reorganize, replace, or terminate the Federal Reserve System as appropriate; or otherwise devise a system for creation of the national currency.

IT IS FURTHER PROCLAIMED, that the Congress of the United States of America in cooperation with the Executive of the United States of America contact allied nations and any other nation willing to participate in the overhaul of the failing and parastical financial sytem currently in operation and create new treaties and alliances as necessary to create a sane and productive system of finance with the express goal of supporting a productive national, and by extension and through voluntary cooperation, world economy;

FURTHERMORE, it is PROCLAIMED that it should be the goal of such an international effort to maintain fair international trading practices allowing for protection in national interest of labor, resources, and productive capabilities;

WHEREAS, it is recognized that such a move on the part of the United States of America may result in the necessity of an isolationist policy IF the other developed nations do not follow our lead; If such occurs, so be it.


Mon, 10/19/2009 - 19:11 | 103866 George Washington
George Washington's picture

Tyler, great job on explaining a crucially important story.

Given these facts, would it be fair to say that David Bloom is wrong when he says that the dollar won't rally at the next stock market crash?




Mon, 10/19/2009 - 19:17 | 103870 Tyler Durden
Tyler Durden's picture

Depends where in the circular argument you catch the dollar. I think the take home message from the above article is actually simple: if the global CB system nearly collapsed due to dollar funding concerns when the dollar was not the carry currency, imagine what will happen when you have a dual quest for funding: 1) from structural asset/currency mismatch and the FX swap's propensity to evaporate when most needed; and 2) from the need to cover the shorts that themselves are allowing the funding of US denominated assets (it takes a while to filter through). What has happened is that we are doubly on the hook now to the Fed to provide perpetual dollar funding to anyone who needs it.

As to a direct answer, I think the next market crash will be critical whether it is a liquidity, counterparty or simply driven by momentum with everyone unwinding at the same time (Oct 19, 1987). If it is a combination of all three, the Fed will be unable to restore the system, absent it printing several dozens of trillions of dollars overnight which would devalue the entire dollar denominated asset base (which accounts for roughly 400% of Europe's GDP).

Mon, 10/19/2009 - 19:49 | 103875 George Washington
George Washington's picture

Well put.  Thanks.

Mon, 10/19/2009 - 19:38 | 103888 Marvin the Mind...
Marvin the Mindreader's picture

So after the Fed fails to restore the system, what happens?

Mon, 10/19/2009 - 20:00 | 103912 Fritz
Fritz's picture

So, if I understand it correctly, we have successfully exported moral hazard?



Mon, 10/19/2009 - 20:20 | 103929 Johnny G.
Johnny G.'s picture

Is there anyone who regularly reads this site that believes the Fed wouldn't print 20 - 50 trillion to retain control?  There's too much to lose for those that reside in the Ivory Tower and 200 West.

Mon, 10/19/2009 - 20:37 | 103945 Miles Kendig
Miles Kendig's picture

The issue is what kind of world would that be and would the fed still be in charge of it were it to follow that path?  If maintaining rough equivalence in this environment is challenging what would the process look like under those conditions?

Mon, 10/19/2009 - 20:53 | 103968 Johnny G.
Johnny G.'s picture

The kind of world it would be would mirror France.  Half the people would work for the government. A third wouldn't work at all; and a coffee would cost you $20 - $25.  A vodka in a hotel, $75.  The sun would still rise in the East, and we'd still use Google to search for crap on the internet.


Besides, I don't think it's that challenging to maintain "rough equivalence" anymore.  Just buy $700BB notional of "way out of the money" S&P futures and watch the quants hedge delta.  The market goes up, everyone feels better.  And if $700BB doesn't work, then make it $2Trillion.  My opinion - the people on the very, very top are willing to do anything to stay there.

Mon, 10/19/2009 - 21:11 | 103986 Miles Kendig
Miles Kendig's picture


Mon, 10/19/2009 - 20:46 | 103960 Cognitive Dissonance
Cognitive Dissonance's picture

Desperate men do desperate things. Whatever it takes has been, and will be again, the rallying cry during this wash/rinse cycle.

It would be madness on our part to expect anything less than all out Fed madness the next time. The thinking is always, they would rather have half of something than all of nothing.

So they will destroy the currency in an effort to save it. People seem to forget this policy worked wonders in Vietnam, Iraq and all those little wars along the way.

We must stop applying logic and rational thinking when we think about what the Fed can and will do. Name me one person who hasn't been surprised by all the different programs the Fed has come up with to extend the Ponzi.

Never ever think these people are anything less than brillant. 

Mon, 10/19/2009 - 20:54 | 103970 Johnny G.
Johnny G.'s picture


Mon, 10/19/2009 - 21:13 | 103991 Miles Kendig
Miles Kendig's picture

CD - You are on a roll here with brilliance does not equal logic when survival is concerned.

Tue, 10/20/2009 - 09:19 | 104252 Cognitive Dissonance
Cognitive Dissonance's picture


This is like the 10th time you have condensed my 6 paragraphs into one brillant sentence.

How about I just quote you condensing me from now on? :>)

BTW I have heard you mention living in pain a few times. I don't know what's going on in your life but I have some kind of understanding.

Chronic pain, of which I suffer as well, is debilitating both physically and mentally. If you are seeking relief with medication, the roller coaster of the meds and of going into and out of the pain can drive the most stable person mad.

My condolences to you.

Tue, 10/20/2009 - 14:21 | 104602 Miles Kendig
Miles Kendig's picture

If you wish to quote me this is a public space.  I have to question your choice of choosing my words among so many quality thinkers here.  After all, my primary purpose here is exercise....

Tue, 10/20/2009 - 09:33 | 104270 Cognitive Dissonance
Cognitive Dissonance's picture

At the risk of sounding totally self centered, I have found that IF one can survive the metal and emotional trials of chronic pain and push past the "why me" and "this isn't fair" circular trap that leads straight into madness, people in chronic pain have great incentive to explore the world (as well as self) in ways that most people would never dream of doing.

It sounds like you are doing so based upon your insightful comments.

My experience with other chronic pain sufferers who have pushed past this boundary is that they become willing to overcome the painful "cognitive dissonances" guarding so many myths and lies and begin to see the world and self as it truly is.

It seems that if the pain of life (in whatever form) doesn't kill you (or more accurately you don't kill yourself) you gain courage and perspective that enables great leaps of understanding and awareness. It seems the pain is the motivator. We begin asking way, as in why me. If we survive, we go so much beyond why.


Tue, 10/20/2009 - 15:11 | 104597 Miles Kendig
Miles Kendig's picture

Acceptance is a beautiful space.  Too many years jumping out of aircraft and sleeping on the ground carrying my home on my back.  Then coming home to stuff like this..  The song remains the same, generation after generation... Advance to 8:10 for the classic anger at the world space.

Only to discover that I have a "special gift" discovered via a courtesy look from an old family friend on top of the other associated chronic conditions that the VA adds up to more than 170%...  This is what led me here.  I was advised to develop new areas of study and work new neuro pathways of thinking to stimulate my brain and attempt to slow the process.

Subitly disappears over time..Cheers


Tue, 10/20/2009 - 13:10 | 104493 dark pools of soros
dark pools of soros's picture

right - but if Ron Paul were to become the next Andrew Jackson, would the country have the stomach for it?  Would he be able to fight off the murder attempts? Wouldn't some usually stable but now desperate country panic and start more wars? 


If all the countries that are being bribed by the FED all cook their books and never ask for the numbers to add up, can't we all just live in fantasy until when?  what event can really tip this facade over?



Tue, 10/20/2009 - 00:58 | 104147 Anonymous
Anonymous's picture

If I understand your answer " it is a combination of all three, the Fed will be unable to restore the system, absent it printing several dozens of trillions of dollars overnight which would devalue the entire dollar denominated asset base"

The we would see a rush into the dollar a collapse of the equity and energy markets, then when the realization takes hold the dollar would collapse again and commodities would rocket.

As a oil trader on wall street for 25 years ( hunkered down in north county San Diego now) we are seeing an energy market levitated higher on just the force of money as demand continues to languish. Watch the contango spread this winter to see if oil truly has a fundamental bid to it.

Thanks for your insights. Circular argument is right, my sense is stay in the aussie and canadian bonds and wait for the circle to be complete.

Mon, 10/19/2009 - 19:38 | 103889 Bear
Bear's picture

The Spin Doctors are writing another chapter in the 'New Normal' America

Note further job losses are now 'expected' ... just like their Wall Street friends: Lower the expectation so low that everyone beats expectation. I think will continue seeing this trend everywhere ... Wall Street, MSNBC, White House




Mon, 10/19/2009 - 20:12 | 103921 What_Me_Worry
What_Me_Worry's picture

CNBC/Bloomberg/Fox Business and the dozens of other financial news sources should be absolutely embarrassed that they haven't ever reported on something to even a small degree of the importance of this article.


Of course, we all know they could care less.  They know their audiences would have been guaranteed to be lost by the end of the first paragraph of this article.


And FWIW, thank you.  I have been trying to wrap my head around what could finally cause the short squeeze in the USD and possibly let common sense return to the marketplace.  Granted, it could be a hard lesson.  Albeit, one that eventually is going to be learned.

Mon, 10/19/2009 - 20:42 | 103953 Gilgamesh
Gilgamesh's picture

Nah, they are too busy reporting REAL news - like this:

CNBC, Reuters fall for climate hoax

Mon, 10/19/2009 - 20:16 | 103923 Anonymous
Anonymous's picture

will be my epitaph
as I crawl this cracked and broken path
if we make it
we can all sit back and laugh

-Epitaph, King Crimson

Mon, 10/19/2009 - 20:21 | 103930 Anonymous
Anonymous's picture

As I noted this morning on,
Banks Doubled Down: Super Long Assets /Short USD
Simplified, the current worldwide trade du jour is short the USD, long assets: real estate, paper, commodities , and equities . That includes the Fed and other central banks obviously. To call this a crowded trade is a colossal understatement. Not even sure if "bubble" does it justice. A systemic roll of the dice. The odds of an orderly exit are laughable.
Twenty Years Ago Today the '87 crash had a 2 month lead time from the mid August high. This market is not going to offer that luxury. Try 2 days.

Mon, 10/19/2009 - 21:06 | 103982 buzzsaw99
buzzsaw99's picture

Central bankers owe allegiance only to one another, patriotism is irrellevant. That the fed would buy back all that crap paper from abroad at face value was the only move in this whole mess I didn't anticipate. The screw job has been on the american people all along when I once thought they would screw the people abroad as well. A minor misjudgment on my part.

Mon, 10/19/2009 - 22:12 | 104041 Johnny G.
Johnny G.'s picture

So true!  The CB's are totally allegiant to each other (CFR & Kensian group think).  You know things are f'd up when the Swiss are willing to sell-out the only franchise that's kept them afloat for the past 600 years.  They've completely castrated their citizens.  How long before they submit and join the EU?

Mon, 10/19/2009 - 21:50 | 104017 Anonymous
Anonymous's picture

Best article I have read yet on the crisis. Those who want to understand, and think the crisis was about stocks should read it.

Mon, 10/19/2009 - 22:05 | 104030 Crab Cake
Crab Cake's picture

I say this with all seriousness, can someone, anyone, offer a defensible arguement on behalf of the Fed?

They bought time?  To make it worse?

What if the rest of the world we bailed out would be happy to accept our lift up, and then dump us to the sharks?  Amero, part of the plan?  Who am I kidding.  If we had to bailout everyone, then they are all toast when the building dam bursts too; which is why the are scrambling around to no avail.  Ring around the rosie, pocketful of posie, ashes to ashes, we all fall down.

I'm really starting to feel like taking my tinfoil hat off and throwing it at someone.  What idiots.  How can rich powerful people be this stupid?

Mon, 10/19/2009 - 22:11 | 104036 Gilgamesh
Gilgamesh's picture

What idiots.  How can rich powerful people be this stupid?

More and more people are starting to understand that they are not stupid.  These people answer to the real rich, powerful people.  And those people have zero loyalty to any sovereign nation, let alone the United States.

Mon, 10/19/2009 - 22:24 | 104050 Crab Cake
Crab Cake's picture

No, I was speaking of a paler shade of stupid.  They're all going to end up dead, and most likely most of us with them.  That's my wager, historically speaking. 

Mon, 10/19/2009 - 22:34 | 104063 Johnny G.
Johnny G.'s picture

In the long run, sir, we are all dead.


viva Zero Hedge!

Tue, 10/20/2009 - 00:39 | 104139 Gordon_Gekko
Gordon_Gekko's picture

"And those people have zero loyalty to any sovereign nation, let alone the United States."

Exactly. Thank you.

Tue, 10/20/2009 - 13:17 | 104509 dark pools of soros
dark pools of soros's picture

perhaps they do - but on another planet that they will inform us about once we are all rounded up, dizzy from chasing our worthless currency to the ground..

Mon, 10/19/2009 - 22:27 | 104053 ghostfaceinvestah
ghostfaceinvestah's picture

Another great article from Doug Noland (you have to scroll down to the end to read his commentary).

"The inflationists are keen to argue that, with “inflation” remaining so low, policymakers enjoy unusual latitude to stimulate.  By this point, haven’t we learned that rising CPI is not a primary contemporary risk associated with ultra-loose monetary policy?  The mispricing of risk, unchecked speculation, asset-Bubbles, financial fragility, and economic maladjustment have already proven themselves as deleterious effects of loose money.  I group these types of responses to unstable finance (“money and Credit”) as “Monetary Disorder.”  Anyone watching global markets these days must recognize that Monetary Disorder remains powerfully entrenched."


Mon, 10/19/2009 - 23:54 | 104107 glenlloyd
glenlloyd's picture

Love Noland's articles, read them every Friday. Always skip to his personal commentary at the bottom notch IMO.

Mon, 10/19/2009 - 22:43 | 104065 Anonymous
Anonymous's picture


Mon, 10/19/2009 - 22:45 | 104067 Anonymous
Anonymous's picture


just wanted to do the math problem
double negatives and all

thoughtful post

Mon, 10/19/2009 - 22:47 | 104069 Charley
Charley's picture

Moral of the story: We can pretty much write off the idea of a dollar collapse, and a new reserve currency.

Mon, 10/19/2009 - 22:55 | 104076 ghostfaceinvestah
ghostfaceinvestah's picture

This is interesting.

“The chairman of the Federal Reserve indicated it would be structured in a manner such that BAC stock should go up when announced,” Chief Financial Officer Joe Price said in a Dec. 29 e-mail to top executives of the Charlotte, North Carolina-based bank, including Chief Executive Officer Kenneth D. Lewis


Mon, 10/19/2009 - 23:41 | 104103 SDRII
SDRII's picture

take on bis? appears fed had to bail more as a reinbursment for the sh%t packaged and sold by the US banks. Complaining about bailing out the Euro banks entirely misses the point. These banks bought toxic assets - high prob of fraud involved - from the US financial complex. The Feds had to know this was occuring as monkeys outside the financial complex knew it was a bubble - except greenspan and Kohn (how is this guys till employed). The housing bubble was sustained by the GSE - which clearly knew what was transpiring. See Katherine Fitts comments re the GSEs and the recent Treasurer/finance guy suicide not to mention the parade of profile persons that transited through the GSE management and boards. Basically all this article says is that the US pumped out so many dollar denominated "assets" that there is a funding shortage. If the Fed hadn't done anything what would the recourse have been to Fed banks/IBs/GSEs etc?

Mon, 10/19/2009 - 23:55 | 104109 glenlloyd
glenlloyd's picture

And, didn't the Fed have to guarantee all that GSE junk China had purchased?

Mon, 10/19/2009 - 23:12 | 104083 Anonymous
Anonymous's picture

In 2013 it will be exactly 100 years since 1913.

Tue, 10/20/2009 - 00:00 | 104110 Anonymous
Anonymous's picture

(1) Open flagrant monetization
(2) State unemployment benefits run out approx. year end
(3) FDIC broke, limping along hoping to beg bandages from lepers
(4) Boomer generation about to cannibalize what's left of SS, Medicaid, Medicare
(5) 23 million accessing food stamps, welfare state is waxing
(6) Official denial of scope of financial damage and continuing insolvencies; real coverup of imminent danger
(7) Instead of reforming laws, reining in large speculative banking firms, and prosecuting the fraud and larceny, USA power structure has backstopped and bailed out the evildoers. The speculative frenzy has moved to hypermode.
(8) Market fixing and manipulation is open secret on all public bourses.
(9) Fed Reserve has abandoned all mandate i.e. no price stability, skyhigh unemployment--debauching of currency; sedulous theft of dollar denominated wealth worldwide
(10) Conspiracy to corrupt official statistics; encouragement of fraudulent accounting for bank marks, public company reportings, etc. Mark-to-myth

Just a few of the signs and portents that this government has no wish, nor ability to reform.

They are either inept, fully compromised by an intriguing shadow gov't, or condensing all this malevolence into such a concentrate of social stress that the explosion will necessitate adoption of a veiled agenda. New currency, new trade system, scalable war?

Only the initiates and acolytes of the gentlemen's club of Khans know this.

Tue, 10/20/2009 - 00:24 | 104123 Gordon_Gekko
Gordon_Gekko's picture
"and a clarion call for a global risk regulator which is distinctly separate from the US Fed"
We already have one and it's called Gold - it's just that it's been exiled for a long time now, and when it comes back it will do so with a vengeance. Seriously guys, do you really think another government regulator/regulation will fix this mess?
"The number of swaps outstanding was almost directly inversely correlated with the value of the dollar"
From the graph you posted the opposite seems to be the case, i.e., number of swaps is almost directly positively correlated with the value of the dollar. I think I have good reason to believe why that might have been the case.
Tue, 10/20/2009 - 08:06 | 104210 Charley
Charley's picture

"Seriously guys, do you really think another government regulator/regulation will fix this mess?"

Exactly. This is not about the failure of the Fed, but the anachronism of national currencies.

But, to this must be added an additional imperative: (1)there is no constituency for gold as world reserve currency. Each nation wants to maintain its control over its national economic policy - which implies gold cannot be a substitute for fiat. Gold threatens not just the power of Washington, but every nation state. (2)the US does not want to lose its exorbitant privilege in this arrangement.

Try as they might like, there is no alternative to the dollar, and no nation or group of nations will be able to bring one into existence.

Tue, 10/20/2009 - 13:26 | 104518 dark pools of soros
dark pools of soros's picture

please pick up a history book..  not even one that is dusty to disprove what you are saying

Tue, 10/20/2009 - 01:04 | 104145 agrotera
agrotera's picture

The monopoly that is the privately held federal reserve includes the babies that run their machine, and that would be the bailed out banks--anyone who has heard William K. Black speak recognizes that the fraud committed by the providers of junk loans, and the rating and packaging and selling of crap AAA loans to people, institutions and countries are guilty of fraud--

i say, OK, let the world be bailedout, but the owners of the crime syndicate monopoly that is the fed, have to pay for this fraud by giving up their ownership of half of the DOW which they acquired by buying legislators to pass laws to legalize their criminality...and they are also committing front running and insider trading since the circle of the plung protection team has no monitoring and it is quite obvious that the massive gains recently by the banks are partially because they are using free money, but also most assuredly because they run the playbook which is all market action...



Tue, 10/20/2009 - 02:17 | 104165 Anonymous
Anonymous's picture

The Fed is getting paid for this though. Am I missing something?

Fed agrees to lend foreign central bank some number, call it $100B, from the Fed. The Fed swaps that $100B in exchange for the same market value of the foreign central bank's currency and enters an agreement to buy it back at the same market level in the future.

Foreign central bank then goes and lends that $100B to banks and passes the interest back to the Fed. When markets return to normal (whatever that is), foreign central bank unwinds the dollar borrow and gives the Fed back its USD.

Not arguing there isn't a systematic problem, but the Fed is getting paid for selling when no one else can/will. That being said, it risks longer-term inflation if the trade was not un-wound.

Tue, 10/20/2009 - 13:32 | 104523 dark pools of soros
dark pools of soros's picture

but why would they care?  print print print..  so it devalues their buddies fortune but they will always have many times the purchasing power than the serfs. That ratio is all they care about - not how many zero's the price of anything is


the game doesnt have to end.  What happens is that you get more and more hopelessness at the bottom and that is part their playbook anyway.


job well done from their view

Tue, 10/20/2009 - 03:13 | 104171 Anonymous
Anonymous's picture

I would take this whole thing with a grain of salt. I don't believe banks are honest so why should I believe in their "after the fact" explanations?

Now for the ones that believe in this BS ...... let me rape your wife and later I will write a nice explanation that will make you nunderstand why It "happened".

Tue, 10/20/2009 - 03:47 | 104177 BorisTheBlade
BorisTheBlade's picture

That explains a lot, thanks Tyler, that's one of the most interesting pieces I've read recently on ZH or elsewhere. From that you can pretty much see the character of the next criris as the moral hazard and imbalances are still there.

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