Kocherlakota Suggests It May Be Time For Fed To Consider "Bailing Out", Or At Least LBOing, America

Tyler Durden's picture

We can only assume this is some evil April Fool's joke: in a speech, titled appropriately: "Central Bank Independence and Sovereign Default" given at Wharton, Minneapolis Fed's Kocherlakota who now it can be put to rest was well aware of what today's NFP number will be, says the following: " I’ve argued that even if the fiscal authority borrows
exclusively in its country’s own currency, the central bank can have a
large amount of control over the price level. But the central bank can
only achieve that control if it is willing to commit to letting the
fiscal authority default. Such a commitment may expose the country to
risks of short-term and medium-term output losses. How this trade-off
should best be resolved awaits future research. But I suspect that it
may be optimal for central banks to guarantee fiscal authority debts in
some situations
." In other words, if this is really a prevailing mode of thought within the Fed, very soon we may witness the first ever Leveraged Buyout by a central bank of a sovereign, leading to advent of the concept known as the Full Faith and Credit Of The Chairsatan. It will also certainly cement the perception of the Fed as an "independent" organization. And one wonders why gold is well on its way to recouping today's losses.

From: Central Bank Independence and Sovereign Default

Narayana Kocherlakota - President
Federal Reserve Bank of Minneapolis

Wharton Conference
Philadelphia, Pennsylvania

Sargent and Wallace published their classic “Some Unpleasant Monetarist Arithmetic” in the Minneapolis Fed’s Quarterly Review
in 1981. Since that date, there has been a growing appreciation of the
role of fiscal policy in the determination of the price level. The idea
is a simple one. Consider a government that borrows only using
non-indexed debt denominated in its own currency. There is an
intertemporal government budget constraint that implies that the current
real value of government liabilities — including the monetary base —
must equal the present value of future real surpluses. Because the
liabilities are nominal and non-indexed, the government budget
constraint provides a linkage between the public’s assessment of future
real tax collections and government spending and the current price

I like John Cochrane’s analogy here.2
He thinks of money and government bonds as being like stock in a
company. Just like a firm’s stock, money and bonds implicitly represent
claims to the ownership of the government’s stream of surpluses. And
just like with financial assets, the variations in their prices are
fundamentally linked to variations in the present discounted value of
government profits — that is, surpluses.3

This simple insight has rather profound consequences for how we think
about inflation. Inflation is no longer “always and everywhere a
monetary phenomenon”. Instead, even apparently independent central banks
may not have control of the price level. Thus, if the public begins to
think that the fiscal authority is behaving irresponsibly, that belief
will push upward on the price level.

However, in the existing literature, the analysis of fiscal effects
on the price level is typically based on the presumption that a fiscal
authority will never default on liabilities denominated in its own
currency. In my remarks today, I will relax this assumption. Once I do
so, it will become clear that a sufficiently tough central bank does
have the ability to control the price level, regardless of the behavior
of the fiscal authority. 4
I will argue that its ability to do so hinges on the nature of its
response to the possibility of default on the part of the fiscal
authority. I will talk about some of the short-run versus long-run
tensions involved in that response. Throughout, I will refer to the
central bank as CB and the fiscal authority as FA. I will refer to the
currency as being dollars, but that should not be viewed as suggesting
that I am talking about the United States — or Australia.

Let me start by describing a simple CB policy: a commodity price peg.
Suppose the central bank holds X ounces of gold. It commits to being
willing to buy and sell p dollars for each ounce of gold, and has a monetary base of $pX. This policy successfully ties the price level to variations in the price of gold, regardless of the behavior of the FA.

What impact does this policy have on the FA? Now, when the FA borrows
in dollars, it is essentially borrowing in a real commodity: gold. All
of the FA’s debt is essentially indexed to the price of gold, and it is
certainly conceivable that various shocks could lead the FA to default
on those obligations.5

Of course, as I have argued elsewhere, this simple policy is generally viewed as suboptimal by macroeconomists. 6 In contrast, suppose that the CB follows an aggressive Taylor rule when determining the path of the short-term interest rate. 7 That policy pins down an inflation path in the usual way, regardless of the FA’s fiscal plans.8
However, given that inflation path, the FA’s nominal debt is now
actually real. This means that if the FA is faced with an unexpected
decline in its current and expected future real surpluses, it will be
forced to default.9

Thus, once we allow for the possibility of default by the FA, a
sufficiently tough CB can have considerable control over the price
level. Of course, I’ve been arguing through examples. It would be more
interesting to deliver a fuller characterization of the term
“sufficiently tough” — but I’m not going to attempt to do so. Instead,
in what follows, I’ll discuss some aspects of the CB’s response to a
particularly critical situation.

Suppose the FA owes $10 billion on a given Friday. It plans to repay
that loan by auctioning new debt on the preceding Monday. However, when
it auctions off the new debt, it finds that it can only raise $5
billion. The FA is now in danger of defaulting on its Friday obligation
of $10 billion.

It is at this stage that the level of commitment of the CB to its
chosen inflation path will be severely tested. The FA will ask the CB to
take some action that will allow the FA to raise an additional $5
billion on Wednesday. There are many possible actions. The FA might ask
the CB to intervene by setting a floor on the price of debt in the
Wednesday auction. But there are less overt approaches. For example, the
CB can commit to a price peg for the FA’s debt in the secondary market
for that debt.

In any event, if the CB does intervene in some way to ensure the FA’s
solvency, the CB no longer can be said to have independent control over
the price level. If the CB’s intervention was largely unanticipated by
markets, expected inflation will rise after the CB’s intervention. Then,
incipient fiscal insolvency has triggered inflationary pressures. Of
course, markets may well have already assigned a positive probability to
the possibility that the CB might intervene in this kind of scenario.
If so, then past inflation was already influenced by the markets’
expectations of this fiscal policy scenario.

Should the CB be required to never intervene in this sort of
insolvency scenario? I’ve argued that a ban on these interventions will
give the CB more independence in its control over the price level. For
those who think of CB independence as being the foundational element of
macroeconomic policy, that pretty much settles the question.

But I see a couple of reasons for caution here. It is certainly
conceivable that FA insolvency can be triggered by shocks that are well
outside of the control of the FA itself. And, empirically, FA insolvency
is associated with large short-term and even medium-term declines in
output. Should the CB be prepared to drive the FA into insolvency given
the possible adverse economic impact on the country?

More subtly, regardless of the FA’s solvency, sovereign debt issues
can fail simply through a co-ordination failure among investors. If I,
as an investor, don’t anticipate that others will buy into the debt
issue, I won’t either. In this sense, sovereign debt issues may be
susceptible to suboptimal “runs”. The CB can eliminate this possibility
by ensuring the nominal promises of the FA whenever the FA is threatened
with default.

Thus, I see trade-offs. On the one hand, the CB is known to be
willing to intervene to keep the FA solvent, then inflation is
necessarily shaped by fiscal considerations and by the short-run
incentives of elected officials. We know from many years of theoretical
and empirical research that this effect is not a desirable one. On the
other hand, if the CB is fully committed to allow the FA to default if
necessary, then even optimal debt management by the FA may end up
exposing the country to troubling risks.

Let me wrap up. I’ve argued that even if the fiscal authority borrows
exclusively in its country’s own currency, the central bank can have a
large amount of control over the price level. But the central bank can
only achieve that control if it is willing to commit to letting the
fiscal authority default. Such a commitment may expose the country to
risks of short-term and medium-term output losses. How this trade-off
should best be resolved awaits future research. But I suspect that it
may be optimal for central banks to guarantee fiscal authority debts in
some situations. If so, we again have to think of price level
determination as something that is done jointly by the fiscal authority
and the central bank — just as Sargent and Wallace taught us 30 years

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Racer's picture

They want real dictatorship and not just behind the scenes

AssFire's picture

Maybe a scapegoat every 4 to 8 years depending which political party "deserves" it. But no, the wizard wants to always stay behind the curtain.

In Fed We Trust's picture

No Aprils's fool joke to be found here mate.

Humor is the best way to warm the public the the future agenda/current agenda of the globalists.

Did you see John Stewart's "Freedom Packages" skit this week?

In Fed We Trust's picture

I have already stated that the Fed already owns a big chunk or the resdential market by holding the bag of toxic MBS.

That trend will only continue. So now the FEd will be shopping for cities they want to buy/bailout.  I dont think Detroit on the list.

Who knows, maybe Paulson has already sold poritions of the US to China,

Or maybe they have been scheming with the Chinese to "nationalize our banks and theirs at the same time" and squeeze out some new turd/currency for the new world to base itself on.

George Soros still trying to fit himself into the equation at the last minute.


MarketTruth's picture

I Pledge Allegiance to the Federal Reserve
Of the United States of America
And to the bankers for which it stands,
One currency under God,
Indivisible, with liberty and justice for none.

willien1derland's picture

Wow! Stopped me cold in my tracks - with the exception of my stomach as that has not stopped turning - MT that was Brilliant - ++good

Bicycle Repairman's picture

"One currency under Mammon"

Fixed it for you.

alien-IQ's picture

I agree. I think what they have done here is test the waters to see how Americans respond to such a proposal. Needless to say that unless this is mentioned in a halftime report of the NBA Finals or during one of the segments of dancing with the stars...this will go largely unnoticed by the majority of Americans. This is rather frightening, to say the least.

Harlequin001's picture

Are you guys serious.

This is a bankruptcy. You either bail it out or your government goes bust.

Do you seriously think Congress is wringing its collective hands saying 'Er I dunno, maybe we shouldn't take this money?

or perhaps you think these politicians have plans to make themselves totally unpopular and cut $100 billion from the budget.


including making every lame excuse for doing it.

Conspiracy? you must be joking. The alternative is failure, and it doesn't matter if the end result is failure tomorrow, they don't look that far ahead...

But conspiracy, no way...

NidStyles's picture

You honestly think that no one there saw this coming? You really believe that this was just how the cookies fell into place, and that the language and the action's of the key player's had nothing to do with it? You think that the people in charge up there were simply watching American Idol while they were supposed to be on the floor's of the Congress, in the Whitehouse, or at the Federal Reserve board meeting's?


Wake up dude, these people are not like you or me. They are motivated, and have an agenda. How else, or why else would they be in the position's they are in?


Seriously, you gotta quit being so simplistic, and thinking that everyone is the same. We aren't, because some of us have more motivation, and different goal's than everyone else.


You could look at it this way. Your postition is life is where it is by your choices. You may have never been motivated to be in the Army as Infantryman, or decided to try out for SFAS, or make it through Ranger School and Airborne unscathed. That's the path I took, can you say the same? I never learned about how most of this stuff work's outside of Austrian Economics while I was in. I read a lot of Ron Paul's stuff, and listened to him for 12 years. Did you make those choices? Did you have the same exact choices that eventually brought you here? See what I mean? These people are all motivated to get where they are at, and now that they are there, they have other motivations that are to progress their position even further, at least they think so.

Harlequin001's picture

You honestly think that no one there saw this coming? You really believe that this was just how the cookies fell into place, and that the language and the action's of the key player's had nothing to do with it? You think that the people in charge up there were simply watching American Idol while they were supposed to be on the floor's of the Congress, in the Whitehouse, or at the Federal Reserve board meeting's? I don't think anyone is that stupid, are they?

'You honestly think that no one there saw this coming?'

This is a logical conclusion to a given set of circumstances. Fact is I saw it coming a long time ago without being party to any conspiracy and you don't need the brains of a rocket scientist to work out that inflation comes next, straight after default. Still haven't seen anything that would convince me of any grand conspiracy, not in any of these posts and not in yours either.

Fact is bankruptcy awaits for certain,and the banks just like the politicians will take the easy short term route in trying to fix it. It's not over yet.

Not for a minute do I not think that son of Obama does not know son of Bush, who does not know son of Clinton or whatever. Fact is that that is the circle in which they move. Should son of Bush choose to run for president I feel sure that others in that circle will support and help if possible because that is where their contacts lie. That is not a conspiracy either.

But I don't doubt that we will see daughter of Clinton in politics in future not because of any conspiracy or grand plan or because she has anything particularly good to offer, but because she has connections that can get her there where you and I might not.

We have a bunch of idiots in charge who got there because they promised you welfare they couldn't pay for and no one looked past that at the last election. They work together to fudge through a guaranteed collapse whilst a bunch of other sharks wait to make money where they can. We have just witnessed the greatest grand fraud in the history of mankind and no one is prosecuted because the government condoned it. It condoned it so it could fund its deficits because to not do is to default and to give up its armed forces and influence. It really is that simple. but that is not in itself a grand plan, and no where in any of this do I see an ultimate goal that results in the subjugation of the entire human race by a bunch of devious bankers..

'You really believe that this was just how the cookies fell into place' it is the logical consequence of a debt based economy, no different to any individual spending on a credit card.

Like you say, it's just the way it is.


alien-IQ's picture

Failure is not an option...it is a certainty.

In Fed We Trust's picture

If this guy wants to "cement the idea that the Fed is Independent"


TheFool's picture

I want to agree with you Racer, but I also believe AssFire makes a good point. On the other hand, isn't a fundamental change required within the FED in (New World) Order for the new global currency to be brought in to the fold? In other words, destruction of the old world order to bring in the new, therefore a transition must occur over a period of time while a superficial explanation of what's going on will be provided in order to keep the details secret behind the curtain. I'm just glad we have some folks poking their head underneath the curtain to snatch a glimpse of these events. Thanks to Tyler and folks here at Zero Hedge.

slaughterer's picture

Faux hawk becomes mega infini dove.  This guy is schizo...

Bay of Pigs's picture

Before yesterday, I'd never heard of this guy. Where did he come from?

Turd nails it.


Thomas's picture

I read it differently. I hear a guy saying that they have to let sovereign default get back into the calculus of the debt buyers and that CBs can't keep buying up all the debt.

tcrown's picture

I will personally finance this bailout of the fed.  Consider this payment to be made in an FX swap with China, given my ghost ownership of silver held by JP, which was loaned back to me, paying margins on my silver they don't have, of which JP leveraged against CDO's, yielding me in excess of 14 Billion in today's current price of silver.

alien-IQ's picture

Did he just suggest that the Federal Reserve take over America ? Can we now OFFICIALLY charge them with treason and attempted overthrow of the government? Or would that be redundant?

lynnybee's picture

count me out of this shit .    final straw .    this country used to be for the AMERICAN CITIZENS.     evidently, I've been in la-la land my whole life.     (p.s. thank god for my ZEROHEDGE education, or I'd still be living in la-la land with a big smack upside the head coming to me ! )  .......... WHERE'S THE REVOLUTION, PEOPLE !

AssFire's picture

Idiots were bred well in advance to be happy with "getting theirs". No outrage until a tax revolt- that is the only thing that will stop feeding these skums.

eddiebe's picture

The skums don't need taxes anymore, just inflation.

slaughterer's picture

It IS April Fool's day!   What an insane stream of foolishness for one day... from our Satanic Majesty's "CB" of Hell.

Rainman's picture

Here is voodoo keynesianism at its very finest....complete with valuation pegs and sovereign insolvency scheming. God help us.

Josh Randall's picture

I wish the headline read: "Kocherlakota Suggests It May Be Time For Fed to get run over by a formerly dumb downed military and populace"

Sudden Debt's picture

I don't know...

That the FED prints Trillion for the banksters so they can keep their increasing bonusses... oké, I understand that!

But that the FED should print for the common people?



Cleanclog's picture

What about when the Central Bank is China's and it has a say on our prices?  Oh yeah, that already happened.  Still think QE3 is Fed buying and supporting sov. risk of other countries and USA counties and cities.

honestann's picture

End the fed.

Demolish every fed building.

Hang everyone who ever worked at the fed for treason.

Impeach every politician who ever voted to empower the fed.

Hansel's picture

How can they LBO America?  They don't have anything of value to trade.  Or is that the point... they just want to steal everybody's shit.

alien-IQ's picture

when you can create "money" out of thin air...nothing is out of your price range. theoretically...they could buy the Sun.

Homey Da Clown's picture

If your blood was not boiling already,  do not read the following:


U.S. Federal Reserve Chairman Ben S. Bernanke’s two-year fight to shield crisis-squeezed banks from the stigma of revealing their public loans protected a lender to local governments in Belgium, a Japanese fishing-cooperative financier and a company part-owned by the Central Bank of Libya.

Dexia SA (DEXB), based in Brussels and Paris, borrowed as much as $33.5 billion through its New York branch from the Fed’s “discount window” lending program, according to Fed documents released yesterday in response to a Freedom of Information Act request. Dublin-based Depfa Bank Plc, taken over in 2007 by a German real-estate lender later seized by the German government, drew $24.5 billion.

The biggest borrowers from the 97-year-old discount window as the program reached its crisis-era peak were foreign banks, accounting for at least 70 percent of the $110.7 billion borrowed during the week in October 2008 when use of the program surged to a record. The disclosures may stoke a reexamination of the risks posed to U.S. taxpayers by the central bank’s role in global financial markets.


Separate data disclosed in December on temporary emergency- lending programs set up by the Fed also showed big foreign banks as borrowers. Six European banks were among the top 11 companies that sold the most debt overall -- a combined $274.1 billion -- to the Commercial Paper Funding Facility.


Why is BB not brought up on charges? It is far past the time to dismantle the Fed.


Rainman's picture

These CB lending schemes with foreign banks are fire and kindling for sovereign debt repudiation and an ugly consequence called World War III. It's not just a taxpayer issue. 

eddiebe's picture

The vast majority of Americans  don't understand anything like this, or they are too busy working, or watching TV or doing whatever.

 The ones that do understand dont give a shit as long as they can garner a few crumbs from trickle down.

The ones that do understand and care, are powerless to do anything about it.


Cdad's picture

"Computer...analyze Thomas Lee's [of JPM] commentary on the BlowHorn [CNBC].  Does he really believe the S&P will go up until it hits the QE2 cliff...and then descend?  Report.  

Extrapolate...if yes, then why wouldn't the JP Morgue simply take the S&P to 1370 right now? Report.

Are the answers to both the first and the second questions simply that Ben Bernanke now owns the United States?  Report.  Extrapolate...will Ben Bernanke announce this conclusion on Monday?  Report."


"Computer...apply the word "Bitchez" to the fact that the market has zero credibility and get me Duncan Niederauer on subspace immediately. "

Cdad's picture

"Computer...did Steve Grasso on the floor of the holoexhange just recommend starting a position in Netflix?  Is Steve Grasso currently wearing a hockey helmet donated in December by Cdad Industries or is Steve Grasso actually part of an organized crime ring and he is currently carrying a gun under his jacket?

Computer...did the intellectual giant P. Najarian [while constantly saying "we look at da...we talk about..."] just suggest that $Vix has now priced in the flock of Black Swans?  Repeat, did the former special teams player just suggest that VIX says "All Clear?"  Re-fucking-port?

Computer...end program.  COMPUTER......!"


dogismyth's picture

If you want to win big with these motherfuckers, then invest every dime you have on the primary dealers.  YES...I did say that even though I want to vomit from thinking about it.

Its all paper trading and accounting tricks with the power to print money ad nauseum in virtually every country in the world.  Yes they will attempt to buy the world along using the primary dealers as their proxy.  Its no different than the Cap and Trade ponzi scheme whereupon profits are made from virtually zero productivity and hype.

Face it....the PTB (the banks, BIS, IMF) already own the mega-corporation, most of the land (through title or control of the title), food resources, the military industrial complex, the news media, energy and soon...water resources (which come with the land rights).

It is world domination and this phucktard Kocherlakota is just another slimy cheerleader implementing his marching orders.  Trust none of them even when they speak something you feel is right.  Trust none of the politicians.  And trust none of the corporate leaders. 

Of course these central banks will buy up debt.  Why not?  What are they really buying?  They are buying hard assets (e.g., countries, infrastructure, companies and humans).  And through their ponzi scheme, they are getting the assets for virtually nothing thanks to their earlier ponzi schemes that have literally tightened the noose around everyones neck.

Now you know your who your enemy is! Its not Al-Ciada, not Libya, not Iraq....its the motherfucking central banks and those behind the veil.  They all must go....one way or another.  Or we could just talk about it for a few years....and see what happens.  Just like we have done for decades, and look at where that got us.

dalkrin's picture

I'd rather invest what I've scraped together in this life in silver and guns.  The primary dealers are already bloated and engorged enough by their snouts in the trough of the national wealth.  No, we won't starve the beast by bowing out of the game, but we can situate ourselves to be independent and self-confident.  ZeroHedge is proof that not all media is subject to the whims of the vampire squid overlords.  Continue to educate yourself and remain aloof from the fluff trotted out on the snooze networks.

virgilcaine's picture

Firing up the presses for the Muni rout?  doubtful Bankers aren't at risk.  More like Munis will fail and we won't do a thing to stop it but actually encourage and caused it.

Sweet Chicken's picture

Everyone keeps suggesting to end the Fed, why bother!? I say why doesn't someone just start shooting these fuckers?!


assembler's picture

Another hydra head would just replace any that was removed. The beast needs to be killed legally, once and for all. But that won't happen until... Best advice: Put your treasure in heaven where thieves cannot steal it! Bank on Yeshua.

chindit13's picture

I suspect Tyler et al are saving the Fed PDF vomit for weekend analysis, but there are some interesting revelations in the data.  Denninger has an article in which he quotes the charter and what types of collateral the Fed is legally allowed to accept in return for saving, er, funding.

With that in mind, I find in one document the breakdown of collateral posted by Goldman Sachs at a time when it was into the PDCF for $6 billion, none of which seems to fall within the parameters of the Fed charter.  Total collateral posted gave them theoretical fat of 7.9% (no notation of value relative to then current market price).  While some of the collateral was AAA rated, the following was also included:

Agencies (FNM, FRE):  $535.6 million

BBB $257.2 million

BB $296.2 million

B $527 million

CCC-C $926.2 million

D $234.3 million

Equity $2213.2 million

Totals of Agency, <=BBB, & Equity:  $4.989 billion

% of these in relation to total borrowings:  83%

"We hold these truths to be self-evident; that all men are created equal"


Caviar Emptor's picture

Guys! Guys! What he forgot to say was that The Fed has just completed it's prototype of a solar-powered perpetual printing machine! Rid yourselves of all anxiety!

99er's picture


Perhaps Ben and the Boyz will stop messing around.


jmac2013's picture

Why stop with America?  Why not print enough funny money to buy out every asset in the entire world?  Economist Michael Hudson has been asking this very question for some time.  What is preventing them from doing this?

dogismyth's picture

NOTHING!!  Not you nor I, not no one! Ruff!

They know we only bleat like good sheep.  They can handle a little bleating.  And they know that's all we will do.


Or in the virtual surreal world of the internet....


In Fed We Trust's picture

Who else did you think was going to strp up and loan the money to rebuild the cities of the people we freed?

Only the Fed is that, generous and kind, to step up to the plate, when everyone else is afraid during war times.

And a peace loving President, also helps to see that these cities get rebuilt for the newly freed people to go home to.

Oh regional Indian's picture

better watch for those over-smart indians all you merican folks.

We are not the top arguers int he world for nothing. Narayana sounds way too clever. Like a fox.

And you are in the henhouse.