With Geoffrey Batt
With everyone's attention drawn to each and every step the IMF takes, while contemplating the imminent Greek bailout, which without exception and with the grace of a drunk 3-ton bull in a China store, leaves nothing but annihilation and currency boards in its wake, is the popular opinion once again getting the Houdini treatment courtesy of the mainstream media? 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. After singlehandedly rescuing every Wall Street bonus in the prior year, is the Fed now the shadow backstop for the Greek economy as well?
Cutting straight to the chase, and to Bernanke's musings:
Central banks typically hold a variety of as- sets, and the composition of assets on the cen- tral bank's balance sheet offers another potential lever for monetary policy. For example, the Federal Reserve participates in all segments of the Treasury market, with most of its current asset holdings of about $650 billion distributed among Treasury securities with ma- turities ranging from four weeks to 30 years. As an important participant in the Treasury market, the Federal Reserve might be able to influence term premiums, and thus overall yields, by shifting the composition of its holdings, say, from shorter- to longer-dated securities. 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 but not most private-sector assets, such as corporate bonds or stocks.)
We hope that some enterprising congressman will find the courage to ask Bernanke on the record tomorrow whether the Fed has at any time in both the far and recent past, purchased Greek Government Bonds in order to artificially inflate their prices. Because if the Fed has the ability to do something, it usually does, especially if it means extending the bankrupt global status quo by at least one more day. And even if the Fed has not bought any GGBs at yields of 6.8%, will it do so when yields hit 8%, or 10%, or when bondholders finally start dumping GGB in industrial amounts and the only available buyer becomes Mr. Ben "Endless Reserve Currency Pockets" Bernanke himself? And with Goldman one of the biggest sellers of Greek CDS (forget that AIG BS, the Goldman boys now are directly taking on lack of novation risk), how long before the MTM for Goldman quickly works out against them and those hotline into Bernanke's office start flashing. Oh but don't worry, at that point the Federal Reserve will join the EU in blaming all those other pesky CDS speculators (Goldman, of course, excluded), whom it was the Fed's patriotic duty to defend against. And, after all, with only about 200 people understanding the mechanics of every lie involving CDS, the opportunity cost for yet more acts of treason are ever so low.