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Nassim Taleb: "The Fed's Business Is Price Instability"
As we try to figure out how it is possible that the market can still be trading down on a massive POMO day, here are some thoughts from Nassim "Fat Tails" Taleb, who has obviously ignored the surgeon general's warning not to discuss the Fed. A visibly agitated Taleb, who may or may not have overindulged in the coffee IV drip earlier, was in full form on Bloomberg TV with Erik Schatzker lamenting that the Fed is not a publicly traded entity with options so that one can buy some seriously out of the money puts on Brian Sack. No choice words were spared, or Black Swans strangled, during the filming of this clip.
Taleb's thoughts on Bernanke and the Fed:
"It seems to me, from what I see, that these people [Bernanke] do not understand risk.”“Did [Bernanke] see the crisis? Did he see the accumulation of hidden risk in the system? No. He was flying the plane and he crashed the plane…"
"[Bernanke] underestimated risk. He is sort of risk-blind from his analysis of the situation before the crisis when he deemed it was the right moderation."
"[Bernanke] reminds me of LTCM people. They had brilliant people with great academic records and they blew up the fund and almost blew up Wall Street….So here we have a symptom that you notice in economic academia of the use of the wrong tools that underestimate risk. I don’t mind someone saying this is a policy, these are the risks, these are the returns, let’s see how it works. Bernanke does not seem to be taking that approach. He is someone who talks about returns without talking about risk. It’s identical to a pilot who is talking about speed -- not talking about safety. The measures he is using, this quantitative easing, may work but should it fail the risks are humongous.”
Taleb commenting on former Fed governor Randall Kroszner's statements that QE2 makes sense:
"This guy [Randall Kroszner] was governing the Fed? It's good that he moved to the University of Chicago. He reminds me of those people that sell out of the money options and claim that it's safe. This guy is not only claiming that its safe but that it’s the thing to do…He should definitely stay at the University of Chicago and not get involved in economic life."
Taleb on the risks of the central bank's quantitative easing:
"Talk to a German, particularly someone who has studied Weimar Republic and you’ll understand what the risks are."
"You short an out of money option on hyperinflation…The point is that you may print, print, print or do these devious methods to hide that you’re printing, but it won’t have any effect. Just like a ketchup bottle that you pour and nothing comes out. And then you make a statement like Bernanke saying you have evidence that this is working, that there is no risks, and then suddenly, just like an out of money option, the whole ketchup coats your French fries, everything, the whole table, your face, everything.”
“Let’s go back to the basics. [Bernanke] did not see the risks in the system before. Why are you listening to him when he talking about what to do? Why would are you listening to him?”
“Assuming there is a very small risk, who is bearing that small risk? Retirees. The debasement of the currency is something that would be borne by those who were the victims will not be the ones who benefited from the crisis. The thing is that you’re trying to print money to bail out those who have made mistakes by taking a mortgage that they shouldn't have taken…and by bankers. Who is paying the price? Retirees. And you’re debasing the currency and people who hold your currency. It’s an insult to those who have bought dollars in the past."
Taleb on what he believes the Fed should be doing instead:
"It’s not a Fed problem, it’s a deficit problem."
"People want a free lunch. It reminds me of people who lose money in the market and when I was an option trader, people would call me up and ask for a magic way to make their money back. That’s what the Obama team is doing. Instead of accepting that we have a risk problem, we have lost money, and you don’t double up with future generation’s money either by increasing deficits and or debasing the currency. You have to face the saying that there is no free lunch."
“The main problem was risk in the system. You cannot solve a risk problem by risky methods. You have to accept…We’re forcing the Greeks to reduce; ok you spent money you didn’t have; now you’re going to cut down. We're going to have to face the same thing. And you’re going to take pain, it’s painful, but that's life."
"The Fed's business should be price stability; unfortunately their business seems to be price instability."
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What will you have wished you had done before you die?
If we are talking women? I guess I would have to say 'filled more input gaps'
Economy? Bought more gold at $325.00
CKF
Behead a central banker with an axe.
+1
you may get your chance shortly...
Off with their heads! They're not using them, anyway.
+1
Aren't you supposed to use a leaded shaft or wooden stake to the heart?
Jessica Alba for sure
Best answer by far.
I would like to see a 10% flash crash without recovery in the face of Benron Bermonkey and the F'n POMO coattail pseudo bulls. Wishful thinking, I know.
sorry to take the first spot for someting unrelated but does anyone have any answer to why Mish's Blog site is removed?
Fuck Mish, next.
ok, quick sideline to Mish...
Investor for 17 years, runs his on fund for 12 years, blogs for 3 years, disappears without warning... my suspicion... HACKED
All your bloggers are belong to us, make your time...
CKF
That seems to be the most likely explanation! Amazing!
But do you think they hacked him, then deleted his blog? Is that what you think is likely to have occurred? If so, then he will probably be back within a few days?
He must be pissed as hell!
...or is all this even more sinister? I don't know!
Hackers would have had to hack Google itself. Good luck with that theory. His site is back up in any event.
He had some harsh words for Google and their double dutch irish tax evasion sandwiches. Not a good idea when you are using the Google Blogger platform for your blog.
I was thinking the same things when I saw his site down.
my guess is he's a bit busy and forgotten to pay for something:-)
his blog just came back online about 5 minutes ago
I'm sure that if his site comes back up Mish will find a way to blame it on the public unions.
Max Keiser
http://www.youtube.com/watch?v=33KF3d4JEDs
Posted on Max's site... take JPM down... buy silver!
http://www.youtube.com/watch?v=0bJK9K05Hgo&feature=player_embedded
AAPL flash crash
did you get some at 212
Was there really an AAPL flash crash?? I just brought up the tick chart and don't see it.
Bought all I could at 215. Am now retiring to Tahiti. lol
stockcharts show it. My broker showed it to $212.52. But in thlae st 5 minutes, it looks like it was edited and the quote no longer shows it. COVER UP!!!
Goog Finance is showing 212 in the range. Heh. Someone's got some 'splain'n to do.
At times like this I like to post a link to my "flash crash" story. It's fictional but I want you to think about Fortran (the one with boobs) swinging the market 20% on either side of the average to make a buck, nuking the HFT algos, branching and then setting fire to the GS co-lo, and the Exchange keeping the whole thing under their hat. No flash crash here folks. Oh hum just another day.
Fun times. Fun times.
http://madscienceunlimited.com/fiction/theexchange.html
Fortran is quite the babe, even with the blue skin.
paging Mr. Sack
Harry whats up with SSO ?
I'm long at 43.62. It'll be fine. If not, I'll take a my loss. I trade with very tight stops on these leveraged ETFs. Should turn this afternoon.
Just bust'n, thanks for heads up though a good etf for pomo days ....
Obviously brilliant but needs a speech coach!
I am thrilled you changed your avatar.
The one with Bawney Fwank weirds me out. Sharp fellow, that poster, but his/her avatar is creepy....
Would you mind if I "borrowed" your old avatar for a bit?
Tell your tits to stop staring at me.
Just like a ketchup bottle that you pour and nothing comes out. And then you make a statement like Bernanke saying you have evidence that this is working, that there is no risks, and then suddenly, just like an out of money option, the whole ketchup coats your French fries, everything, the whole table, your face, everything.”
I like this guy! Way to go, fat tails!
Please some flair nature boy.........Wooooooooooooooooooooooooo
William-
Please provide advance notice of such graphic posts, I just lost my lunch.
Cod piece. Clearly.
s i m p l y gross, william
get that ape a wax job.
Banzai,
Just a thought. Is Taleb by any chance Bernanke's Evil twin brother, parted at birth. I mean, the resemblance is striking.
LMAO
I noticed that as well ;-)
There must be a story here!
Jewish mother - Arab father kinda Nemesis for life.
Look at their background, it's uncanny
The suspense is a killer, the plot ultimately leading to the conflict of all conflicts.
LMAO
Source please?
Doesn't sound too jewish or arab to me ... more like pure Lebanese Christian.
Vaguely right, but I'm sure Taleb would prefer "phoenician". His roots and understanding of the culture go back to the misty dawn of civilization.
I always thought that about Krugman and BB..
Nah, he has way too much hair, on top of his head that is.
LMAO
Taleb is one of the coolest, most arrogant SOB's on the planet. Oh, and did I mention, insanely smart? He disappeared a few months back after telling everyone at a conference to take all their money and short the S&P and treasuries. If you followed that at the time, you lost a lot of money. But he's brilliant anyway.
Same thing with this moron. He post on ZH look out for his trash/snake oil ... .... Just like Grand Super Bad.
http://www.youtube.com/watch?v=5Jw_Sq-0aHk&feature=related
Yea Ive seen that clowns videos on Youtube before, bunch of other hucksters over there as well endlessly pumping PM's as the be all end all salvation. I tell them GOLD and SILVER trade on MARKETS, all markets are manipulated so therefore its all garbage.
Who is that dude? Man, about a minute into his "passionate" plea I really thou......zzzzzzzzzzzzzzzzzz....oh, I'm sorry. What was he saying??
Notice the date ? Mid sep. before the bull ruuuuuuuunnnn ..... Very bad cash call.
First thing I looked at was the date. Wonder what he's saying now after missing that run??
Same thing ...
Suckers. he may as well have said "new lamps for old".
Arrest Bernanke, replace with Taleb.
Why are treasuries collapsing today? Is this the selling before a treasury auction at 1 pm? This seems to be significant!
the front run trade is too crowded. yesterday's action all but guaranteed a sell off in the bonds after the fact.
i feel like i'm back in lebanon (nassim taleb on qe2)
i have a feeling that's not a compliment.
He wasn't talkin' the Beirut of 1960 and that's fo sho
+1
Haunting statement if I ever heard one.
Will the sheeple of this country be able to see that we are in fact Greece? Can their be a political fiscal response that approaches sanity? I think not. Ron Paul has it right, 10% reduction in govt and it should be immediate. Instead, we will get the dollar halved in value, all but forcing our creditors to institute trade protections. then it plays out ZH style.
Have you ever had an argument with someone who is so egotistical that they will never admit they are wrong even when indisputable evidence is shoved in their face? That's central banking in a nutshell. Central banking is the very definition of unbridled arrogance.
Yea like my whole family, like trying to get a cat to look at itself in a mirror. Never happen.
+1000
Yes, I have an ex wife who should have been a central banker. I look forward to massive inflation wiping out the value of my payments to that b!+@#. Inflation increases are capped at 2.5% every 2 years! Thank god she is so dumb.
HA! Mine wanted the shit ticket holders so badly she gave up pensions & trusts. Ya, I know this says more about our stupidity in taste than anything else .... Still ya gotta laugh
I remind myself daily that I have to laugh it off. otherwise, I would be in a padded cell, playing Kuponk! with my 6 year old during visitation hours at the funny farm.
what I have yet to work out is what to do when the shit hits the fan and I need to get out of NYC...how do I take my son with me without including the dumb one? Maybe invite her up to the country place for a hunting accident?
Paging Dick Chaney, please go to the nearest duck blind. Paging Dick Chaney.
Do a Mitt Romney and strap her ass down on the roof .. Just make sure you provide goggles so OSHA doesn't cite you .. and leave the shotgun in the trunk since it isn't water foul season just yet. :) Besides, I bet she could get more truckers to honk if she worked it right than your lilun ever could. Hell, the insta androids would be all over youtube ever before you made it to Danbury, and well, hell, she would have some digits for dates even. Caring about safety, keeping family ties intact, being considerate enough to hook her up with some dates + free advertising opportunities .. real NYC classy hehe
Cheers
He who has the most missles does the central banking and you don't get to argue with him
Yes. That would be my boyfriend.
No SheepDog-One, I haven't kicked him to the curb yet. I've thought about it though, and decided he might come in handy later. He can fix damn near anything. He's a good little sheeple and an even better engineer. LOL
:o)
No, not Greece. You are Rome.
Ron Paul is not trustworthy. And what you need is a 90% reduction in govt.
Man I hope Bernanke and Sack and all the rest are going thru boxes of Depends undergarments today.
Look at these damn bonds! Has China made moves dumping them today? Looks to me like its at least a strong possibility. Im sure Tyler will let us know of any news on that front.
Got to love the ketchup analogy.
Very apropos too, blood, Gore and all!
So, is Taleb an insider or an outlier?
ORI
http://aadivaahan.wordpress.com
Something is REALLY fishy today. This whole thing stinks to high heaven. Both bonds and stocks are selling off -- but bonds particularly -- in the face of heave monetization and asset pumping by the Fed? Something stinks!
Something stinks alright. Benny prints up 7.2 large and the DXY is at the days highs. WTF over.
China dumping bonds? Sure as hell looks like a perfect fit. Lots of very strange things going on, 'airplane contrails' the least of it.
China does not appreciate this instabirity!
No they certainly do not like these 3 Stooges FED antics 1 bit!
China's been doing the swaps through the BOJ for a while now. Old news. The big news is that it looks like the fed, through this same conduit, used the 500bn US swap line to quash commodities overnight (a nice parting gift for the G20 crowd). THAT's the news. The move in the 10yr is to collapse the spreads on the 10/30 and make some folks (PD's) some easy end of week coin and catch the pomo pumpers flat footed. Worked like a champ too. Blue label time in the Hampton's as the shorts get just enough juice to get squeezed next week.
WGAS?
Who gives a shit?
Haha, I actually took Randy Kroszner's class at UC 2 summers ago. Only way I got an A was to repeat the garbage he mentioned in class on the exam even though I did not believe it. Had I written what I really thought (Austrian school stuff) I probably would have gotten the lowest grade. I suppose Randy is trying to get back to the Fed or Wall St. so he's cheerleading for his next role once he leaves the school (again). Nice guy overall though.
Anil Kashyap and Raghuram Rajan are the best Banking professors at the school.
Mr. Taleb, as you will undoubetly be one of the first to arrive at the new FEMA camp for "Subversives who undermined national security vis a vis financial terrorism" please set up a welcoming committee for ZH members and please ask for marital quarters so that I might be so lucky as to see my wife again. Also, please save me a top bunk. I expect a full day's extra bonus ration upon arrival, as I will have had a rough journey. Thanks!
Hey, I think I seen that trutv has Jesse Ventura @ 10 tonight and is visiting the fema camps. I too would like to preview my future quarters, so i"m going to dvr it.
Excellent and thank you for the heads up! I will tune in to watch. May I please ask you to re-post this on Monday so that others may look it up? Thanks again and have a great weekend!
PS - lessons from the holocaust indicate you should be in the habit of wearing good workboots, clean underwear, and warm clothes (like a heavy overcoat)...it seems they don't give you the chance to change your clothes before you start your new, educational journey.....
Of course the lesson of the GULAG was that if you dress too well the "socially useful" theives will take your good coat and boots and you'll end up with the same bedbug infested rags as the rest of the "politicals".
that 'missle' in SoCal was really a black swan.
Check out this airliner's contrail
http://upload.wikimedia.org/wikipedia/commons/thumb/6/60/Minuteman3launc...
Whoa! Nice MD-80 passenger jet takeoff there again!
Lol'
And one more really creepy/cool pic
http://upload.wikimedia.org/wikipedia/commons/5/5f/Peacekeeper-missile-testing.jpg
Mirv-a-lous! Simply mirv-a-lous!
Nice. I think Ryan Air is buying a 'fleet' of those 'impeller drive aircraft' for its new lower cost fares.
Ryan Air = TPG
I think he's just fully aware, based on his personal experience, exactly what all of this entails.
I was thinking as I was watching him he looks not agitated by a coffe IV but a guy with personal safety concerns on his mind.
Hot tubs. Small air craft. Buses.
Lot's to worry about.
He's probably fine as long as he stays on live TV. Off-camera though, watch out.
Quantas A380s even
Word
My assumption is that he is passionate on his views of loss mitigation when it comes to lives.
Yes, let me please take this opportunity to once again say that Taleb is the fucking man.
And although he isn't the most telegenic person in the world. Everything he has written is worth reading. The end-notes (and unpublished end-notes) alone to The Black Swan are a feast of knowledge and wisdom.
There is no free lunch.
Please make a note of it.
+10
In b-school finance they tried to tell us that "diversification is the only free lunch" due to non-correlation and concomitant sigma reduction. We all saw what happens when all risk assets get thrown out together.
diversification = more chance for failure.
Besides, accurate application of real-life correlation is as realistic as Frodo. Anyone who is smart enough to think otherwise is actually that much more retarded.
Wrong again. There is a free lunch. It's called compounding interest. on one side, you get a free lunch. on the other side, you give someone a free lunch. it almost looks like there's two free lunches.
You won't live long enough to get rich compounding interest at these rates. Free peanuts maybe.
Besides, depending on the circumstances there are still things like inflation and default risk to sour your sandwich.
I don't want a free lunch....I want a naked lunch.
oh yeah....what's in YOUR Sack?
The unfettered ability to see what is on the end of the fork.
Bravo! I have no comeback for that!!!! Thanks!
NASSIM TALEB is super cool & I adore him, just like I adore HUGH HENDRY........they are truth-talkers & refreshing. ........ I like him so much that I bought his book, BLACK SWAN, & I haven't bought a book for 10 years !! ..... go NASSIM go !! TRASH THAT S.O.B. BERNANKE........ TRASH THE SHIT OUT HIM FOR ME, TOO.
Ditto.
I read "The Great Inflation" written in 1975 about Weimar. The utter evilness of printing money.
The filth that endorses the policy is utter scum. Moraless scum.
Yeah, but did ya read it?
This Arab guy Nassim is full of hot air. He says to many things and nothing at the end
watch this with Hugh Hendry from Eclectica, he is so confused, talking nonsense!
http://www.youtube.com/watch?v=YQ2otZqmNKE
Troll, Nassim is not an Arab.
Depends on how you define your terms. There certainly have been Christian Arabs longer than there have been Muslim Arabs and he's a reasonably devout Orthodox Christian.
From his home page:
I am a native French speaking Ελληνοσ?ρος (Syrian-Lebanese blood, Arabic tongue, Greek heart ) son of Jesuit educated French citizens to confuse matters (though I am not myself a French citizen). http://www.fooledbyrandomness.com/
Nouriel Roubini on CNBC Europe this week.... Hes trashing everyone.
watched it. cause i learned about him right here right now on ZH high def entertainment. cept my bedroom TeeVee doesn't show the picture only sound.
I feel for the guy... hemroids are a bitch!
Not with a bang but a wimper...
If only Nassim spoke as well as he writes.
Sometimes POLESS is POMO
Don't let them tell you you are powerless:
http://alethonews.wordpress.com/2010/11/09/german-people-in-unprecedented-rebellion-against-government/
That's righteous
Reading the comments there gave me chills. There really are quite a number of us out there--not just those of us hooked into the financial world, but many who are watching, paying attention and preparing.
Yup. That is the behavior of people when they have given up. They've given up, they are not going to try and save it, it's not worth saving, let it burn. They become very quiet, but are working toward something else.
Toward the next thing whatever they decide that needs to be.
The current system need not even burn, actually. It could be left to its own to rust in place, like a forgotten pyramid to some antique god of a lost religion. Combustion of another kind, but combustion all the same.
I appreciate his reference to Lebanon. We in the US most often make reference to Germany's hyper-inflation. There have been many other hyper-inflationary episodes in recent history. Brazil is another.
the whole ketchup coats your French fries, everything, the whole table, your face, everything.
It won't be ketchup all over Ben Bukkake's face when this is over.
Taleb is a guy that needs to be consulted when the sit down happens.
Too bad he didn't go into the merging of insurance co's and banks which led to severe risk and credit ramping. As well too bad he didn't go into lack of oversight as the shell game of MBS's and Liar Loans was building. Those are far more fundamental issues, and although he mentions debt and the hand off to future generations, the big question is why the Fed missed the boat when chief underwriters at citi were sending emails up the food chain saying 60% (2006) and 80% (2007) of all new mortgage loans were not meeting specific documentation requirements? Is this blow up intentional? Is this whole thing more like looking at Russian Dolls with one agenda inside the next inside the next... 2012 Presidential ticket: Ron Paul 4 Pres, Bill Black 4 VP
It's pretty simple to understand if you just look at a few statistics that seem to always be swept under the rug. In Dec of 2007 when the recession began the dow was at 14235. There were only a handful of people in foreclosure and the notice of defaults were just starting to pile up. Homes at this time had 35%+++ more value then today and Americans had 11.5 TRILLION more wealth then they have today. The federal deficit was knocking on the 10 Trillion dollar door and the amount of currency in the system was 980 billion. Now thankfully the recession has ended back in May 2009 because we now have the Dow at an artificial 11200. There was a record number of foreclosures in September, the deficit is now knocking on the 14 Trillion dollar door, and the notice of defaults have hit record highs if you include all the people engaged in some sort of HAMP scheme to prolong the agony. There is now 2 TRILLION dollars in the system, soon to be more and if you add in the loss of American wealth+ bailouts, tarp,hamp,pomo,qe1,qe lite,que2, stimulus, and the FED's balance sheet including an estimated 3 TRILLION in off sheet debt we our 23.5 TRILLION DOLLARS deeper in the hole then we were when the recession began. 47 States are in financial distress and record numbers of Americans are on government assistance in one way or another. So honestly what do they think another 600 billion dollar hail mary is going to do other then allow the banks to manipulate the stock market and get one last hand in the empty cookie jar. At this point it is simply pure desperation and givin the place we are in, it will only bring us to the 25 TRILLION dollar black hole when the whole thing comes crashing down. Nassim is spot on when he said that Bernanke didn't even recognize the crisis as it was unfolding so why would anybody even listen to a word he has to say now? He has spackled and painted the hole for almost 3 years and look at where it has gotton us. The only people that have benefited are the CRONIES that caused the crisis. I'm sure that was the plan, they were always intended to get all this money out of American taxpayers. The largest heist in American history and now a so called recovery? How can anybody buy any of this when we are 25 TRILLION DOLLARS deeper in the hole then we were in Dec 07?
Excellent comments, and yes, Taleb was a trader, but he's still brilliant and spot on, and over the past three years I've yet to hear a former Fed governor who sounded like he was capable of finding his own vagina!
Blah blah we're dead blah trillions blah de blah debt.
So. What's your beef?
j/k. That was brilliant. $25T. Sounds about right. With numbers like that you realize it's time to just sit back and watch this fooker leave the rails. Train wrecks I have known ...
he is supremely unimpressive... and btw he was a rubbish options trader in his day. Absolutely rubbish.
Perhaps you're right, but I do appreciate his general rule of thumb: If you didn't see the crash approaching in 2003-2007 then your opinion is worthless today.
Many of today's leaders and pundits fail this laugh test. What do they call it in the banking world? Ah yes, "pay-for-performance". What a concept!
Absolute garbage. It's not a Fed problem or a deficit problem, it's de-industrialization.
Without industry, finance is bullshit.
From first principles, this is quite correct. We nuked ourselves via off-shoring and out-sourcing.
Financial fraud was then the only game in town. Everyone played it because they had to. To not play was to go on welfare. Now the Ponzi is rotting, the smart playerz are bailing (and being bailed out) and the middle-class is evaporating. Game over.
Will we re-industrialize? You betcha. Either that or die. We'll also bring back gardens and hand carpentry and having a dozen chickens in the back yard. Just like it was supposed to be, before we forgot that we were humans and not machines.
With all due respest, cougar, (I normally like your posts, I think), that is a tired and inaccurate refrain!
Germany and Hong Kong do off-shoring and outsourcing and they're doing [relatively] fine. Those are not the fundamental problems.
The fundamental problem was NOT REPLACING the outsourced low-skill jobs with higher value-added onshore jobs. Everyone demands the right to a college degree, so what use would it have been to retain shirt-stitching, pcb-assembling and car-welding jobs in America?
The socialist central planners should have been thinking smarter, just like entrepreneurs would have if they had not been legislated and taxed out of existence over the last 30 years in America.
Free market capitalism would never have allowed this current situation to arise!!
Although Ben is not stupid (remeber, he is a sophisticated academician), he is utterly clueless. What he doesn't realize, among other things, is that, if you compare the current bizzaroo to porn, he is in getting ready to kneel for the 'money shot'. That is, once the WallSt Studs are done fucking the economy six ways from sunday, they will deliver right on Ben's face. And Tim's too.
Ergo Ben is totally gay!
You guys complaining about Dumb ex Wives, well your kids intelligence is primarily determined by their mother's. You are just making up the genetic numbers. morons. And it sounds like a few of you did not inherit the genes for empathy, guilt and conscience, nor love,(evolution kept it to provide for family survival) so likely your kids will be stupid courtesy their mum's, and narcissists like their dads, and wont give a toss about you.
Ben’s purpose behind QE2 is to save the banking industry from collapsing from de-levering. If the asset value of mortgages held by banks is compelled to be marked-to-market and the housing market continues to devalue, the banks are belly-up. If the banks go bust, Congress will be forced by riots to analyze the operation of the Fed.
The Fed receives phenomenal gain from T-securities.
Let us review how the Fed and Congress create fiat money. Congress grants a T-security to the Fed (asset) and the Fed credits the Treasury’s account (Federal Reserve Notes) as a liability. The checks written by the Treasury on that credit will then be honored by the check clearing procedure of the Fed.
[Granted, this is a vast simplification of the process. The basic accounting by the Fed can be reviewed at 2009 Annual Report to Congress by the Board of Governors from page 448 ,
http://www.federalreserve.gov/boarddocs/rptcongress/annual09/pdf/ar09.pdf and Treasury accounting breakdown is accessible at http://www.fms.treas.gov/mts/mts0610.pdf
.]
Congress gets to spend the fiat money so created and the Fed holds the security and receives interest. When the security matures, the Treasury must redeem the security. The value of fiat money initially created must then be paid to the Fed and becomes gain.
The Fed has an accelerating option--it can sell the security. Arrangements are made whereby the Treasury acts as auctioneer and Primary Dealers are required to submit bids. Bids may be submitted to the New York Fed or to the Treasury. Upon maturity of the security, the Treasury redeems the security from the holder. The Fed receives the (bid) value of the security upon the sale.
By either of the two methods, the Fed has received the value of the security. The total value of all issued T-securities becomes a gain for the Fed.
The method used by Congress to redeem the security, and the interest incurred, is beyond the scope of this writing. THINK---more T-securities.
?
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