This page has been archived and commenting is disabled.

The Fed is So Predictable

Submitted by Chris Celi on 11/30/2011 18:15 -0400

Funny thing is, they aren't supposed to be. Opaqueness is part of what makes a central bank effective. And of course, we didn't actually predict this move by the Fed, but in my blog post on Monday I made made this assertion:

With banks in the EU in dire need of recapitalization, at some point eurobonds and euros will not suffice to prevent them from collapse. Banks and central banks all over the world already rely heavily upon the worlds reserve-currency (the dollar) to act as a capital cushion. When times are tough, we can observe excessive lending activity on behalf of the Federal Reserve, whereby they lend substantial amounts of dollars to banks in need of capital.

Two-days later, dollar swap rates are cut, whereby the Fed becomes the world's lender of last resort. I remember something like this happening in... 2008? Yes, yes that was it. Fed to the rescue, toxic assets withdrawn from the system and are plopped right onto the balance sheet of the Fed, where they still reside. I'm not sure what the Fed is holding as collateral as they "swap" for the dollars, but if it starts with E and ends with O, I have a feeling that the 27 Eurozone nations are making out like bandits from this transaction. When their currency is worthless by December 10th they are going to be quite happy they unloaded those liabilities for the Fed to sit on while they deflate.

I worry a lot about the state of the assets the Fed has on its balance sheet, and how long they can continue to sit on them. Recall that a lot of these assets are MBS's acquired at the peak of the crisis. In case you haven't been following, and if this move by the Fed hasn't indicated it clearly enough, things haven't gotten any better.