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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
level.

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
ago.

 

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Fri, 04/01/2011 - 12:18 | 1125379 Racer
Racer's picture

They want real dictatorship and not just behind the scenes

Fri, 04/01/2011 - 12:24 | 1125392 AssFire
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.

Fri, 04/01/2011 - 13:00 | 1125511 In Fed We Trust
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?

Fri, 04/01/2011 - 13:05 | 1125529 In Fed We Trust
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.

 

Fri, 04/01/2011 - 13:30 | 1125629 MarketTruth
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.

Fri, 04/01/2011 - 13:42 | 1125685 willien1derland
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

Fri, 04/01/2011 - 16:11 | 1126381 Bicycle Repairman
Bicycle Repairman's picture

"One currency under Mammon"

Fixed it for you.

Fri, 04/01/2011 - 12:30 | 1125424 alien-IQ
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.

Fri, 04/01/2011 - 12:50 | 1125480 Harlequin001
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.

or do you think they've given INSTRUCTIONS TO BERNANKE TO DO WHATEVER IT TAKES...

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...

Fri, 04/01/2011 - 13:17 | 1125563 NidStyles
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.

Fri, 04/01/2011 - 14:05 | 1125797 Harlequin001
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.

 

Fri, 04/01/2011 - 14:43 | 1125967 ThreeTrees
ThreeTrees's picture

Excellent reply.

Fri, 04/01/2011 - 13:18 | 1125569 alien-IQ
alien-IQ's picture

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

Fri, 04/01/2011 - 13:09 | 1125537 In Fed We Trust
In Fed We Trust's picture

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

then CHANGE THE FUCKING NAME ALREADY!" bitch

Fri, 04/01/2011 - 13:42 | 1125696 TheFool
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.

Fri, 04/01/2011 - 12:21 | 1125384 slaughterer
slaughterer's picture

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

Fri, 04/01/2011 - 12:51 | 1125488 Bay of Pigs
Bay of Pigs's picture

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

Turd nails it.

http://tfmetalsreport.blogspot.com/2011/04/big-picture-whats-really-going-on.html

Fri, 04/01/2011 - 13:02 | 1125522 Thomas
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.

Fri, 04/01/2011 - 12:22 | 1125385 tcrown
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.

Fri, 04/01/2011 - 12:23 | 1125388 alien-IQ
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?

Fri, 04/01/2011 - 12:22 | 1125394 lynnybee
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 !

Fri, 04/01/2011 - 12:26 | 1125402 AssFire
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.

Fri, 04/01/2011 - 13:12 | 1125554 eddiebe
eddiebe's picture

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

Fri, 04/01/2011 - 12:24 | 1125395 slaughterer
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.

Fri, 04/01/2011 - 12:26 | 1125403 Rainman
Rainman's picture

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

Fri, 04/01/2011 - 12:26 | 1125405 Josh Randall
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"

Fri, 04/01/2011 - 12:27 | 1125406 Sudden Debt
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?

THEY ARE NOT BILLIONAIRES! THEY DON'T ALL HAVE PHD'S!! WHY SHOULD THEY GET IT?!!

 

Fri, 04/01/2011 - 12:29 | 1125413 Cleanclog
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.

Fri, 04/01/2011 - 12:29 | 1125414 honestann
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.

Fri, 04/01/2011 - 12:40 | 1125458 redpill
redpill's picture

Stop, you're making me horny.

Fri, 04/01/2011 - 13:09 | 1125541 In Fed We Trust
In Fed We Trust's picture

Denver. Check

Fri, 04/01/2011 - 12:30 | 1125418 Hansel
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.

Fri, 04/01/2011 - 12:36 | 1125438 alien-IQ
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.

Fri, 04/01/2011 - 12:30 | 1125429 Homey Da Clown
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.

 

Fri, 04/01/2011 - 12:45 | 1125469 Rainman
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. 

Fri, 04/01/2011 - 13:25 | 1125609 eddiebe
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.

 

Fri, 04/01/2011 - 12:32 | 1125435 Cdad
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."

Curious.

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

Fri, 04/01/2011 - 12:39 | 1125455 Cdad
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......!"

 

Fri, 04/01/2011 - 12:39 | 1125447 dogismyth
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.

Fri, 04/01/2011 - 13:11 | 1125542 dalkrin
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.

Fri, 04/01/2011 - 12:40 | 1125449 virgilcaine
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.

Fri, 04/01/2011 - 12:39 | 1125453 Sweet Chicken
Sweet Chicken's picture

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

 

Fri, 04/01/2011 - 18:50 | 1126873 assembler
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.

Fri, 04/01/2011 - 12:47 | 1125457 chindit13
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"

Bullshit.

Fri, 04/01/2011 - 12:46 | 1125473 Caviar Emptor
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!

Fri, 04/01/2011 - 12:48 | 1125477 99er
99er's picture

/DX

Perhaps Ben and the Boyz will stop messing around.

http://www.zerohedge.com/forum/99er-charts-0

Fri, 04/01/2011 - 12:51 | 1125486 jmac2013
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?

Fri, 04/01/2011 - 12:56 | 1125502 dogismyth
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.

BLEAT BLEAT!!

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

I-BLEAT

Fri, 04/01/2011 - 13:15 | 1125558 In Fed We Trust
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.

Fri, 04/01/2011 - 12:53 | 1125494 Oh regional Indian
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.

ORI

http://aadivaahan.wordpress.com

Fri, 04/01/2011 - 13:12 | 1125547 truont
truont's picture

Kocherlakota:  "All your Fruited Plains are belong to us."

Fri, 04/01/2011 - 13:20 | 1125589 tahoebumsmith
tahoebumsmith's picture

Like we have suggested before in the past, the big reset button is going to be pushed. Narayana was obviously chosen by the NWO to plant the seed. The global cartel is preparing to introduce a new global currency, this is why deficits never mattered. You wonder why the big 5 crony banks had to stock up on capital and take over 55% of the financial industry? You wonder why 3 new Chase Banks have been built in my town in the past 6 months? You wonder why housing needed a government back stop? You wonder why the FED has been channeling money out to the ECB and other crony owned corporations? They have done so to fatten those who will benefit and survive this transition meanwhile leaving the rest in the dirt. This has been the plan from the start, making sure the top 5 % control everything and force everybody else to be their serfs. Alot of what's going on in the Middle East right now is happening because of this move. Without participation from Russia, China, Venezuela and Iran the world oil picture makes this more challanging for the elite. You wonder why Obama was over sucking up in Brazil last month? You wonder why were still in Iraq and Afghanistan? You wonder why all of a sudden the EU Council and the UN are teaming up  to have a target practice on Libya? The board game is going to change and the players are going to switch sides. When this happens there is going to be a a serious war between those who want to play by the new rules and those that don't. How does it feel to be a pawn in some CRONIES master game? And how will it feel when you're eliminated from their game because you are more of a burden then your worth? And you still wonder why they have been building so many underground bunkers and cities over the past decade?

Fri, 04/01/2011 - 13:31 | 1125639 hambone
hambone's picture

Tahoe,

is that a buy or sell?  I'm confused and would help if you'd end w/ a BTFD or like...

Fri, 04/01/2011 - 13:45 | 1125704 tahoebumsmith
tahoebumsmith's picture

BTFB...buy the fucking bunker

Fri, 04/01/2011 - 23:35 | 1127326 Oh regional Indian
Oh regional Indian's picture

Very very well said all around Tahoe.

The wake up can be self-driven or will be harshly inflicted. No doubt.

ORI

Fri, 04/01/2011 - 13:28 | 1125614 whstlblwr
whstlblwr's picture

You know who gets it. Alec Baldwin. He'd be good president. He's critical of Obama, and mad at nuclear bullshit

If we want to create change, we can start it. Or we have discussion on who we choose for president. Then we get them on ballot. I nominate Baldwin. If agree with me, everyone try to contact Baldwin, let's get his name on the ballot.

Fri, 04/01/2011 - 13:30 | 1125624 simon says
simon says's picture

This is some serious over-inflated ego of the Fed guy.  If the Fed does not toe the line and buy the Govt debt, its a simple Congressional vote to make the Fed an agent of the Govt and fuck their independence.  That doesn't mean the bankstas won't get pissed off and dollar won't devalue substantially in the transition ... but the citizens (through the Govt) have the right to choose how to get out of this mess - not the Fed.

Fri, 04/01/2011 - 13:30 | 1125625 Catullus
Catullus's picture

I think he's also saying that the fed can manage the inflation expectation by suggesting that government can default and that it would be "questionable" if the fed would allow that to happen. It's really to suggest the tight rope act of outright hyperinflation and hyperdefaltion. A lot of the ZH crowd plays this debate up as being some sort xx-flationista. This is of course impossible when everyone moves to one side of the boat at the same time.

I think a legit question in this line of thinking is to ask "why hasn't the fed bailed out states and munis yet?" and the answer is they need to have the risk of default to suppress the inflationist rush. They're playing chicken with people right now, but you have to know that they will bail out government if it ever hit the fan. They really don't have an option.

In the meantime, remove yourself from the flation debate. You're just going to be proven wrong either way. Because as you engage in the debate, you actually assist the fed in managing expectations

Fri, 04/01/2011 - 13:35 | 1125656 tamboo
Fri, 04/01/2011 - 13:39 | 1125683 newworldorder
newworldorder's picture

RE: Kocherlakota comments and the release of FED banking data;

The FED with Congressional mandate - or not - has become the Lender of Last Resort for the world's financial system. Operationally, they do not have anyone in a daily supervisory capacity providing oversight on their decisions or actions. Benny and the Jets are therefore free to conduct their private banking business as they see fit. The US Executive and Congressional authorities have given them this power "carte Blanche."

No FED decision at the time it is made, is subject to prior approval by anyone outside of the FOMC. It may be coordinated with Treasury, but oftentimes this is merely a formality.

The majority of US citizens are not remotely aware that this is going on and frankly are too busy in their daily lives to notice.

The worlds other Central Bankers also want this safety net. Outside of an all controlling "one world government" this is the best arrangement possible. It the FED did not exist during the last 30 years, it would have had to be invented. Although many of us do not agree with the power that has been given to the FED, the reality is that it has become the de facto world financial authority.

Short of world financial system implosition or major change in US voter financial education, there will be no change. The can will be kicked down the road for as long as possible.

 

Fri, 04/01/2011 - 13:40 | 1125684 Quinvarius
Quinvarius's picture

The Fed is under the mistaken impression that releasing press notes every day is a good idea.  I assure them, every word they utter turns into poison in their mouths.  People who live in bubbles should at least understand they are in a bubble and are not able to understand what their actions might do.  In that way they can know to do and say less.

Fri, 04/01/2011 - 13:49 | 1125717 cabernet
cabernet's picture

How do you LBO what's already been LBOed?

www.TheAngryGrapes.Com 

Fri, 04/01/2011 - 13:59 | 1125772 linrom
linrom's picture

Wow!! For one he is setting up FA(US government) to take the blame for inflation. He is also suggesting that US should default on its future obligations: Social Security and its related social safety programs.

Like PIMCO's Gross he is also using the concept of net present value of future liabilities, but at least, he puts it somewhat in perspective in relation to future income of FA, unlike Gross who(like many others) invent the concept of unfounded liabilities in order to terrorize the public and justify cuts in insurance payouts form Social Security.

What Kocherlakota is saying is to end quantitative easing and let the US government default. This way it will allow the FED to control inflation when CB is back on gold standard(as if FA can't ever devalue currency in relation to gold.) In fact. gold standard makes currency devaluation simpler than under current system of floating exchange rate circle jerk and its attendant price rise of gold.

What a crock pot!

What needs to be done foremost is to increase FA income by a going back to taxation in force before Ronald Reagan where deficits did matter and we did not allow rich elities to merely collect interest instead of paying taxes.

Fri, 04/01/2011 - 14:14 | 1125835 tony bonn
tony bonn's picture

if these comments don't confirm to the fucktard that the goal of the plutocrats and banksters is total sovereignty over this nation, then such individuals are indeed fucktards.....

Fri, 04/01/2011 - 14:29 | 1125903 Quinvarius
Quinvarius's picture

After reading this, I realize this man is an idiot who has probably read only one article on finance this year.  This is his grade school report on it.  I like his blowing off of the gold standard because he heard it was suboptimal.  Because money retaining value is somehow suboptimal.

Fri, 04/01/2011 - 14:38 | 1125945 willien1derland
willien1derland's picture

Too true Q - money having value places a constraint & for imbeciles like Kochlakota that is too confining for their egos to accept & would LIMIT their 'power' - it is absolutely incomprehensible to me that this YoYo is still employed - but then again Fred Mishkin 'retire' - Too frustrated for words - great post

Fri, 04/01/2011 - 14:30 | 1125911 earnulf
earnulf's picture

When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation.

(fill in the appropriate justifications)

Fri, 04/01/2011 - 14:33 | 1125918 willien1derland
willien1derland's picture

I propose an amendment to the currently negotiated U.S. Budget - The Federal Reserve Termination Act of 2011 - with immediate effect - Bernacke & all the rest of the so called 12 Federal Reserve Chiefs should be charged with TREASON

Fri, 04/01/2011 - 15:33 | 1126221 gwar5
gwar5's picture

Stiff the Fed and let the Fed default and take their well deserved lumps. We have no sovereign duty to save the Fed. They've been humping our apple cart for 100 years.

As I recall, FRN stands for "Federal Reserve Notes." We can just give them worthless sovereign notes and then see how they like them apples.

That's not default according to the Fed's well established rules of engagment. Until it is usurped by the UN and IMF, we still have the biggest military. I don't cry over criminal banksters who don't cry over me.

Fri, 04/01/2011 - 16:39 | 1126521 SilverFiend
SilverFiend's picture

Me thinks we're screwed!

Sat, 04/02/2011 - 01:23 | 1127469 Yen Cross
Yen Cross's picture

Leveraged Buy outs? OK!

Sat, 04/02/2011 - 01:24 | 1127471 Yen Cross
Yen Cross's picture

Just take the Crown Jewels and stick them where the sun doesn't shine.

Sat, 04/02/2011 - 14:42 | 1128197 JeffB
JeffB's picture

"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."

I think the main problem that should be addressed here, or really should have been addressed long before this point in time, is why the FA is so far in debt that it cannot repay its legitimate debts.

But I also have to question an important premise here, namely "it can only raise $5 billion". Surely he must mean they can't raise it at an interest rate they find palatable. If it's truly an auction and they don't set limits on what can be bid, someone would loan them the money, but they would just have to let the market find the necessary interest rate to clear the decks.

"Should the CB be required to never intervene in this sort of insolvency scenario?"

I say YES. It would force the FA to live within its means and ideally to save up for a rainy day, rather than spend as much as it can until the bond vigilantes finally put them out of their misery.

Other than being attacked by another country or some similar catastrophe that could not be planned for, it is their own fault if they are "susceptible to suboptimal “runs”." At least that is the case with respect to the developed world, and probably the developing world as well.

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