Revisiting The "Nuclear Option": Will The Fed Buy European Bonds?

Tyler Durden's picture

Nearly two years ago, we first breached the topic of the Fed's nuclear option: the possibility (or is that likelihood) of the Fed stepping out of the continental US and proceeding to monetize European bonds. Back then we noted: "One thing learned over the past year is that everything is a distraction for something else, and that something else, quite usually without failure, ends up being the Marriner Eccles building on Constitution Avenue in D.C. What we refer to is disclosure from a paper written by none other than the Maestro Jr, in 2004, titled "Conducting Monetary Policy at Very Low Short-Term Interest Rates" (oddly appropriate). In this paper, Bernanke discusses not only the possibility of purchasing corporate assets (bonds and stocks), but emphasizes that one other security class which the Fed may be inclined to acquire under conditions such as those today, and has an explicit authority to do so, are foreign government bonds." The specific text referenced was the following: "In simple terms, if the liquidity or risk characteristics of securities differ, so that investors do not treat all securities as perfect substitutes, then changes in relative demands by a large purchaser have the potential to alter relative security prices. The same logic might lead the central bank to consider purchasing assets other than government securities, such as corporate bonds or stocks or foreign government bonds. (The Federal Reserve is currently authorized to purchase some foreign government bonds...)" So the question then becomes: with the ECB stubbornly refusing (for now) to proceed with outright monetization, and with its balance sheet already surpassing all time records as noted earlier (see below), coupled with tomorrow's LTRO which as discussed over the weekend will be a "Risk On" attempted failure, even if providing a brief relief rally in the interim, not to mention the complete lack of any long-term viability plan out of the Eurozone (EFSF failure due to lack of demand; IMF bailout plan failure due to the UK's veto and the circular joint and several funding by Italy and Spain of an Italian and Spanish bailout), will it be, once again, the Fed which at the end of the day will have to, by covert pathways or otherwise, be forced to step in and monetize European bonds: the so called Nuclear Option? Providing the latest thoughts on the topic is SocGen's Aneta Markowska...

Nuclear options - Can the Fed buy European bonds? This was a question that came up in Friday’s testimony by NY Fed’s Dudley to a congressional panel. Dudley confirmed that the Fed has the legal authority to buy foreign sovereign debt if the collateral is considered good and with appropriate haircuts. Though he wouldn’t rule anything out, Dudley noted that this has never been done and the bar is extraordinarily high. Theoretically speaking, this could actually be seen as a good option that solves a number of economic challenges: the US would see a weaker dollar, helping to rebalance its economy, while Europe would see its funding costs go down. Yet, we believe that the Fed would be facing tremendous political resistance in the US to such a decision. To date, the Fed’s crisis fighting operations have not led to any losses; buying foreign assets would expose US taxpayers not just to credit risk but also to currency risk. The Fed would probably think long and hard before taking such a step, particularly during a politically charged election year.

Yes, the Fed will think long and hard, but since as Kyle Bass observed, an ECB response would likely come only after a Eurozone default, and thus would be too late, an outcome which Draghi has telegraphed well in advance, we doubt that political considerations will hold the Fed back from doing whatever it needs to rescue the banking system, which currently has as its focal point day to day developments in Europe. It is also our contention that preserving the "Fiat way of life" is a sufficiently high bar for Mr Dudley. And yes, it is logical why such a move by the Fed is precisely what the Fed would desire, as it would lead to the same collapse in the USD that resulted back on March 18, 2009 when the Fed announced the expanded QE1. Finally, the primary reason why the ECB will likely not get involved is that its balance sheet is already at burgeoning records, and is well bigger than that of the Fed, making the final decision all too easy.

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MsCreant's picture

"Revisiting The "Nuclear Option": Will The Fed Buy European Bonds?"

Yes. Neeext!

redpill's picture

* but we won't find out about it until 2015 under a FOIA request

Divided States of America's picture

I think Occupy will go nuclear if that way we bailing those lazy ass Europeans, not over my dead body.

MsCreant's picture

We, they, funny. We are all Ponzi scammers now, baby. It is all in the land of the absurd. Everyone is broke. They are printing and looking for a fiction that everyone will believe and let things go on as they have. 

redpill's picture

OT: Hitler was just informed about Ron Paul's latest polling results in Iowa:

That clip never gets old!

Banksters's picture

Now that was HILARIOUS!

trav7777's picture

with the ECB's balance sheet at 2.5T, how can we say they HAVEN'T been printing???

There just THAT MUCH debt out there needing rolled.  Doubling is like that.

75% of world debt is dollars, so it's up to the Fed to take care of that base.

clones2's picture

They've got balls of steel if they openly purchase Euro Bonds..

But I'm sure they have a "plan" :-) haha.

DonnieD's picture

The Fed's balance sheet expanded by a few hundred billion today. They had to make a statement when BAC closed sub $5.

CClarity's picture

Need to make Cindy Lou Hoo down in Whoville happy with a Santie Claus rally.  Print, need, print, need until more people "get it".

Mr Lennon Hendrix's picture

The ECB's book is bigger than the Fed's....

I wonder if Ben has book envy

AldousHuxley's picture

Fed needs to short Euro banks, let them fail and profit for US.

Then also short US banks and let them fail along with Buffett's insider trader on BAC to profit for US and let bankster execs join th unemployment line.

Then short Chinese housing and let them fail along with communist party.


Relay the proceeds to US Treasury to pay off debt.


Any remaining profits are used to fund Ron Paul's presidential campaign.




MsCreant's picture

If we put you in as the head of the Fed, would you do all this and then shut the fucker down?

Potemkin Village Idiot's picture

Huxley/Paul 2012

Casue then when Huxley passes too close to the book depository, we end up with Ron Paul as POTUS...

AldousHuxley's picture

if I shut it down, then all elites would have to do is to kill me and resurrect the Fed...for the 4th time in US.


I would introduce legal competitions to the Fed with multiple national currencies. I mean their power really comes from monopoly of monetary policy giving you no choice but to accept their failures and corruption.


Also divide up central federal power systems and divde them into smaller portions such as at the state and county level  so that government maintains representation ratio to the people. This is to prevent consolidation of power into fewer and fewer hands as populations grow. All this consolidation only benefit those at the very top as you can see from mergers and acquisitions as the top elites just grow the pyramid beneath them.


It is time to decentralize United STATES of America. We still don't have a good grasp of central governance. Time to go back to letting states develop their own ways and see what works. All we know is New York City banksters cannot be trusted.






zhandax's picture

All we know is New York City banksters cannot be trusted.

All we know is New York City banksters and all lawyers cannot be trusted.  There, fixed it for ya.

Stoploss's picture

Were the last ponzi house left on the block. All the neighbors are falling apart fast. Now asia is going into a banking crisis. Perfect timing.

zhandax's picture

Sounds familiar; you own a house in California?

GeneMarchbanks's picture

Oh yes you are. Occupy can go nuke-ular, the Teabaggers can go apeshit, it matters not.

BTW, should this occur I'd like to say to my American friends, Thank you and you will not regret this decision that the banking cabal made for you. Now back to democracy...

WhiteNight123129's picture

I think Germany would laugh its ass off so much, they would have a Schnapps party at the Bundestag and the Buba if that happens.


MsCreant's picture

**and they already started doing it in 2008.

Mr Lennon Hendrix's picture

You talkin' 'bout Benny and Barney?  Or Benny and Barkey?  Or Barney and Barkey?  Or Bushy and Barkey?  Or Bubba and Barkey and Bushy?

MsCreant's picture

"Blarney" needs to be on your list somewhere. I'm talking about Blarney, the Ben-o-cide, tho.

MillionDollarBonus_'s picture

I have been suggesting this for many months now. I truly believe that this is the ONLY viable policy in the long term. Many US financial institutions have large exposures to European sovereign debt, and a default could seriously harm their balance sheets. The financial sector is a large part of our economy here in the US, so it is in our national interest that our Federal Reserve does everything possible to stabilize Europe. And if that means full-scale debt monetization, then so be it.

mayhem_korner's picture

And if that means full-scale debt monetization, then so be it.


ROFL - the truth is so funny!  I'm picturing Ben, goggles and kneepads on, hovering two stories over a 10-foot diameter PRINT button with a big Keynesian grin on his face.  BANZAI!!!

Potemkin Village Idiot's picture

Yeah... speaking of BANZAI... I'm waiting for WB7 to come out with the foto of Bernanke, while saying he wouldn't monetize the US debt, with a thought bubble above his head thinking... "Ha!ha! I haven't said anything about Eurozone debt"...

zhandax's picture

Hey MDB, what do you think would happen if 'Many US financial institutions' were forced to follow centuries old practice in finance and their balance sheets collapsed and they were forced to file bankruptcy due to stupid risks taken on the supposition that the fed would bail them out?   I gotta hear your 'end of the world' scenario.....  Call an early morning committee meting; the ESF is good for the overtime.

GeneMarchbanks's picture

You tell'em MDB! I'd much prefer this to being an Europeon.

I got the Bull by The Horns - HELP's picture

I agree with you. Provided the Governments of the Euro, wind back their socialist spending programs and restructure their Fiscal systems to ensure co-operation and restraint. If they don't the Moral Hazard will break the Fed in the future.

The economy was starting to recover, although at low interest rates. Recall the European fiasco broke the market recovery. Retirees view their wealth based on their 401K health. Poor health means less spending and a wind back in business investment.

Solving the Euro problems is the first step in the crisis. Adopting Fiscal restraint and bureaucratic efficiency is the next. Adopting modern energy solutions and infrastructure rebuilding is the final step (New Deal 2.0)

hedgeless_horseman's picture



The economy was starting to recover, although at low interest rates.

I call Bullshit.  US Treasury auctions were coming under real pressure.  That is why the USA attacked the Euro. 

The Fed isn't going to buy any significant European debt.  That would be aiding and abetting the enemy.  This is just more psy-ops to loosen Europe's sphincter for the Eurobond suppository.

GeneMarchbanks's picture

'The Fed isn't going to buy any significant European debt.'

What's significant?

'That would be aiding and abetting the enemy.  This is just more psy-ops to loosen Europe's sphincter for the Eurobond suppository.'

Who exactly is the enemy now? You realize the Eurobond simply cannot happen within the next couple of years at least? Here is a question: What can be done more covertly, the Fed buying Euro-feces or Europe getting a common Treasury Dprt?

With all the shit the Fed has gotten away with in the last, oh let's say thirty years, I'm not sure the answer is clear.


hedgeless_horseman's picture



You realize the Eurobond simply cannot happen within the next couple of years at least?

Come now, Gene.  All the hard work has already been done. 

WhiteNight123129's picture

You are both wrong on the enemy. The enemy currency is a non fiat currency from Asia that is innocuous and quite for now. It is not Gold (exactly) though.


GMadScientist's picture

Why not assess the core problem and eliminate the real threat to their balance sheets: their boards and executives!

True.North's picture

If the Fed monetizes and the collateral becomes insufficient, can we instate a VAT tax on these countries and treat them like colonies?


eatthebanksters's picture

So the Fed loans more money to groups that owe them more than they can afford to repay...hmmmm...why not just loan all the people on main street the money.  When the little people have their debt reduced and balance sheets strengthened don't you think they will satrt spending agian and perhaps stimulate economic growth?  Oh, that's right, but if the Fed does that then Jamie Dimon and his big bank (who won't lend to Main Streeters), along with the other TBTF banks, won't be relevent or neccessary anymore...and god forbid, he couldn't make his $30 million a year fucking people.  (I don't have any problem with someone making bazillions honestly...I just hate crooks).  Time to resetthe system.  Anyone want to get their guns and protest in front of the Fed with me?   I hear the black helicopters again!

Teamtc321's picture

Yawn MDB, now I'm going to go make you a hot lunch and leave you a napkin. 

RMolineaux's picture

Are they going to buy Israel bonds next?

Sam Clemons's picture

Seems obvious.  The whole existence of all central banks depends on keeping the Ponzi scheme going.  They will do whatever it takes to keep the show going.

Milestones's picture

I disagree! If the EURO fails, the entire idea of a one world currency fails--dramatically. Europe will collapse momentarily as will the USA and China. Two  to three years. Europe is THE linch pin of the Elites plan in my opinion. 27 Countries to manage into a world currency. I think that may well be the push in the middle east--try and herd those cats and make them into sheep-- a commonality of some sorts. That will also fail.

Then there is 1913. If I am not mistaken their 100 year lease(?) runs out on the FED in 2012. Renewal of that may be the start of a civil war right here in River City. The Boyz may well be rushing this thing due to time constraints. Maybe they'll just settle what they have looted, but I doubt it.

Man, there are enough theories to float a Barnum and Baily Circus with a full Carney runway.        Milestones

hugovanderbubble's picture

Can the ECB be in default? YES

Gubbmint Cheese's picture

they will do whatever pushes the stock markets up.. f*ing whores.

mayhem_korner's picture



If this was George H.W.'s watch, it would be the "new-cue-ler" option.

BTW, my answer is yes - it's advanced can-kicking, prevent-death-by-trade-deficit strategy.  Fed to merge with ECB, film at 11.

kralizec's picture

Stupid is as stupid does...

MsCreant's picture

Has anyone explained the concept of Moral Hazard to Ben? Do they cover that in an Economics Ph.D. program?

RopeADope's picture

Moral Hazard does not have any easily measureable data points, it therefore must not exist.

AldousHuxley's picture

moral hazard = bernanke


bernanke exists so moral hazard must exist