Foreign Central Banks

Interest rates have to soar to unimaginable levels to attract recalcitrant investors, or the plunge in spending sends us into a postponed Great Depression II.
There will be no Prince Charming riding in on a white horse this time. Back out the Fed as the buyer of last resort, and where are we? The $3.8 trillion budget Obama budget isn’t encouraging me to back off from this ledge. Be a peach and bring me some MRE’s, a five gallon bottle of water, and a case of 9 mm ammo, will you?

It appears that the debate over the reappointment of Bernanke will likely come down to an impending U.S. Senate Cloture vote, barring a further uptick in political pressure on President Obama, who increduously seems to have missed the message of the vast majority of Americans who are opposed to Bernanke's renomination. I'm no Senate parliamentarian but it is important for us to understand some of the subtleties of this matter, some of which I'm sure I haven't thought about but am confident that the ensuing comments from Zero Hedge readers will fill in the blanks and lay out other options.

Greg Mankiw provides a useful primer on runaway inflation done right... and done Ben. Yet his warnings that inflation may be stealthily approaching, sure to risk the ire of deflationists everywhere, may be very much irrelevant: the Fed, which is entering the bottom ninth on the great failed Keynesian experiment realizes it is running out of cards. The one thing that is certain, is that no matter what the true final outcome, the Federal Reserve will certainly miss the Goldilocks landing strip by a mile. And the political and economic ramifications of the Fed's outright failure will be tremendous.

"When investors are forced to sell even their less-speculative positions to make good on their loans, markets spiral lower and create a severe demand for cash. At that point, the Minsky moment has arrived." The Minsky moment is, once again, knocking on the door.

Due to popular demand, and in response to the earlier post by David Rosenberg, we present the Top Ten Surprises for 2010 as laid out by Blackstone Vice Chairman Byron Wien. No commentary necessary.

For some reason Zero Hedge is prone to take a great deal of heat (both directly radiated and reflected) whenever we opine on the (rather obvious to us) prospect that interest rates might actually (quelle surprise) rise in this environment.  Today, rather than engage in "we told you so" gloating, or endure the repetitive pleadings of commentators that this or that Treasury auction was really a success if you just look a little deeper at the figures, we'll just quote Bloomberg quoting other fixed income observers on today's auction of two years, in an article "ambiguously" titled "U.S. 2-Year Yields Highest Since October After $44 Billion Sale."

A big picture perspective of why the American public, and the world, should be very concerned about the fate of the U.S. dollar courtesy of one grotesquely irresponsible act by the Federal Reserve after another.

One month ago, Zero Hedge did an exhaustive examination into the topic of over half a trillion of foreign FX liquidity swaps to central banks issued by the Fed, and how by administering this unprecedented incursion into international monetary policy, Ben Bernanke became the lender of last resort not only to US institutions on the brink, but to all those foreign central banks, and thousands of foreign financial institutions, who were massively short the dollar the last time the bubble popped (ring a bell?). Since we have ended up in the same boat promptly once again, and since the ponzi scheme can only continue so long before all those short the dollar scramble to cover shorts at some point in the future, as Roubini has predicted, it is merely a matter of time before the Fed will need to disburse another trillion or so of FX swaps to bail out all those who are shorting the US middle class into oblivion. We ignore the ethics of bailing out those who have done nothing but piggyback on the dollar carry trade, and in doing so, have decimated the purchasing power of America's working class, which is precisely what Ben Bernanke did. Buying stocks may be patriotic but bailing out those who want your dollar to purchase less tomorrow than it can today, sure does not pass the sniff test (Bernanke, of course, being at the top of that particular food chain).

As the time to make or break the Fiat Money Overlords (no, not Chrysler), aka the Successor to the Second Bank of The United States which President Andrew Jackson managed to disassemble in 1832, yet which came back with a vengeance in 1913 under the guise of the Federal Reserve, approaches, two independent amendments emerged today: one drafted by Fed transparency proponents Ron Paul and Alan Grayson (found here) and one by Bank of America and Citigroup's favorite Congressman, North Carolina democrat Mel Watt (found here). As a reminder, here is a list of the Congressman's top contributors and sources of money in 2007-2008, which may explain some of his motivations: #1 Bank of America;#2 Wachovia Corp;#3 American Express;#4 American Bankers Assn.

As we pointed out recently, excess reserves at banking institutions have hit yet another all time record over $1 trillion, courtesy not just of the Fed's burgeoning reliquification efforts via direct asset purchases, but also due to its strategy to wind down the SFP program, and keep the Federal debt level under the legal cap, thereby providing even more liquidity to banks, to the tune of$185 billion. Yet if you thought that this inability to pass liquidity over into the broader currency pool was something to be concerned about (you know, that whole lending to consumers thing), you were wrong. Or so claims Goldman Sachs in this extended expose on why central planning is in fact good for Communist America. Also, for anyone who still doesn't understand how modern Fed-subsidized cash hoarding works, this primer should explain it all.

The Empire strikes back...

Recently we presented our extended thoughts on how it was that the Fed first encouraged massive dollar-denominated, underfunding global positions, and subsequently, when funding became scarce, provided unprecedented capital bailouts to foreign Central Banks. The clip below takes the key theme we introduced and presents some of the political and social implications of this new and accepted doctrine of not just domestic, but global moral hazard, shepherded by the Federal Reserve.

If after reading the two previous posts on the Federal Reserve as saviour of the western world and the Federal Reserve as responsible Central Bank willing to accept bankrupt equities as collateral in its discount window, left your with any unanswered questions, fear not for there is light at the end of the tunnel, and it is called Kay Hagan, Democratic Senator from North Carolina. Senator Hagan believes S 604/HR 1207 is unnecessary: you see the "immediate and broad disclosure that S. 604/HR 1207 would require, could disrupt the financial markets, and jeopardize our country's international finance relationships." Which presumably means that Senator Hagan grasps, comprehends and can explain in simple English such things as $600 billion worth of liquidity swap lines to foreign Central Banks, and the need for those. Additionally, she is aware that the Fed's discount window on occasion holds stocks of bankrupt companies as collateral. Not only that, but it is likely the case that professing a deep understanding of the functions of the Federal Reserve, Senator Hagan is willing to stake her political career and the well-being of her children in guaranteeing that the kind of systematic interference that the Fed has perpetrated via a $6.5 trillion dollar funding gap at foreign CBs is not only tolerable, but in fact beneficial for the US economy, and that a result of the dollar printer's constant and aggressive intervention in global and domestic monetary policy, the likelihood of major risk flaring episodes occurring in the future is zero.

Courtesy of the Fed's own disastrous policy of flooding the market with trillions of cheap credit over the past several decades, the resulting massive one-sided trade of buying dollar denominated securities, funded with inappropriately duration matched products, ended up in $6.5 trillion of Fed-funded global Moral Hazard exposure. When the wheels came off the financial system last fall, the Fed had to step in and bail out all foreign Central Banks. From the BIS: "In providing US dollars on a global scale, the Federal Reserve effectively engaged in international lending of last resort...What pushed the system to the brink was not cross-currency funding per se, but rather too many large banks employing funding strategies in the same direction, the funding equivalent of a crowded trade." The imminent question - How long until the next iteration of the Fiat banking system's most crowded trade (long US-denominated securities, courtesy of a cheap carry trade somewhere in the world) pulls the system back to the brink again?