Remember back when Ben Bernanke was a still a political neophyte? He was a thoughtful academic thrust into the slam bang, fast lane, laugh in the face of death, spit in the eye of disaster world of high finance, and was still innocent enough to be surprised by things that looked obvious to we more hardened and jaded professionals – things like the way Barclays asked for a guarantee to buy Lehman like the one that JPMorgan got when they bough Bear, for example.
Anyway, those days of the doe eyed and innocent college professor are now clearly behind us. Let me explain.
Ben Bernanke has said that he will be using ‘sterilized’ dollars for any further asset purchases. What that means is that the size of the Fed’s balance sheet won’t be expanding any further because for every dollar of long term debt he buys in the open market in an effort to suppress interest rates, he will be issuing an equivalent dollar in 28 day notes. For every dollar he lends, he will be borrowing a dollar – so it all equals out. No more “printing” of money.
But the Fed never “printed” any money. When they increased the money supply they did so by lending it into existence through the overnight lending facility available to member banks. So the real difference between Sterilized and Unsterilized QE is the same as the difference between the overnight rate and the rate the Fed will have to pay on its 28 day notes. The math here gets a little tricky, so let me see if I can work it through. With rates in the short term at zero, the actual impact of the ‘sterilization process will be … hmmm… carry the decimal place….. uumm…. Here it is: Zero.
But in the meantime our elected officials and journalists – admittedly not the sharpest tools is the shed, have all heard ‘sterilized’ so everything is all OK. Compare that to Bernanke’s behavior in heat of the 2008 crisis, this is very sophisticated stuff. Brilliant in fact. It’s precisely the kind of three card monte that they so love in DC.
The long term plan is for the Fed to buy mortgages from the Fannie and Freddie (who still need an annual bailout to stay solvent). And this will untie his hands to do that very thing. Very crafty.
12 comments:
sterilizing the debt can eventually lead to some bad endings..if/when interest rates go back up whos going to take the loss on all those treasuries the fed has been buying? me??? unless they hold them till maturity... sterilizing reminds me of ? charles durning in best little whore house intexas...." now you see me, now you dont."
The hazards of borrowing short term and lending long term are well documented in the banking industry.
tom.im sure bernie madoff has an algorithm to help ben out....
Cute but totally unfair. Madoff was a felon - that's all.
Agree with what Bernanke is doing or disagree, but it's clear to any honest observer that he's doing his best to do his job within the law. He's not lying, he's not cheating, he's not enriching himself. He may be wrong, but most of us wrong about all kinds of things. And I don't think it's fair at all to compare him to one of the greatest financial criminals in history.
dont get me wrong. i like ben...unfortunately hes surrounded by idiots.. he can try to keep interest rtes down but eventually the bond sharks will win.. eventually all this qe will end badly .ben will get blamed... right now hes the only adult in dc...i think --so far-- he has kept us from repeating the first big D...but right now evrything i see in dc is a ponzi scheme...social security. medicare both are.and when the music stops on the treasuries your kids and their kids will be paying for that also.
Mike Shedlock owns Jo Weisenthal at this link re Bernanke and the gold standard i.e. short term borrowing and long term lending hazards: http://globaleconomicanalysis.blogspot.com/
Most distressing are attached videos that show Bernanke's complete misread of events as they are taking place 2005 - 2007.
In my direct experience with the Fed civil service I can verify that if you don't tout the party line, don't kiss ass, or are in any way "controversial" or thinking outside the box i.e. a critical thinker, you will not be promoted. I suspect this is the case from a lowly GS-11 to the SES. Seems to carry through here.
I can't believe Bernanke doesn't see the nonsense of his words and if he doesn't he is either unintelligent, dimwitted or... a True Believer of the party line.
i do think over the past severl appearences before maxine and the dwarfs that he has tried to be somewhat more outspoken.. at least outspoken for the fed...hes gotten more to the point that the "game" cant continue or itl be ended for us by the bond boys..hes sorta in the rock and hard place. on one hand i think he relly beleives he can help steer the ship.. on the other hand he knows he has very little control cause of all the spending.if he opens his mouth he gets the boot and cant help corrrect what the idiots are doing. if he stays quiet it appears he is winking and nodding at the spending game.. tuf spot.
@Anonymous:
you just reiminded me why I took Business Insider off of favorites several months ago. By far the worst financial website ever imagined.
@ Ikaika,
I've found him quite informative and yes, I am a freshman in this world. I'm a big on gold too. Most who get paid to watch/manage markets missed '08. I get paid to manage people and have no clue how the markets work but if you understand people you understand markets, in a round about way. '08 was no surprise to me. Go figure. Mish seems insightful, no more or less so than everyone else, particularly since most of the "Pro's" missed the biggest dump since '29.
"Most who get paid to watch/manage markets missed '08."
I disagree. I don't know anyone who was completely blindsided by 08 and I know many (myself included) who made a considerable amount of money since then when the markets sold off.
Tail events are unpredictable by definition. But by the time Bear folded I don't know anyone who didn't already have the hatches battened down.
You should be aware that when you say "most people who manage money" I don't think you're actually talking about 'most people'.
Thanks for the input...
I am not in the profession. The perception is, among folks like me, and maybe this explains the popular antagonism towards "Wall Street," (i.e. at least perceptions that lead to such sentiment) that the financial sector-type professionals... did not, across the board, understand what was happening in 2007/'08 in what was a build-up to the bubble bursting, because had they understood... there is an assumption, they wouldn't have allowed it to happen.
A lasting effect of that event has been tremendous mistrust from Main Street towards Wall Street as lay people don't have the time, inclination or aptitude to understand the machinations of this industry and though we love to benefit from it there is, I think, a consensus, that while losses may be anticipated, no one expected The Great Recession.
Generalization ("most people") is not ideal but we all do it, particularly in our leisure time when posting on blogs. I'm sure a few of us have generalized "liberals" in the course of writing here but we know well and good we are painting with a wide brush and there are all stripes and colors of them just as we too come in all varieties. I would certainly prefer to be generalized as a "conservative" rather than then opposite.
I'm sure many of the financial professionals did understand what was happening and made off like bandits to boot.
For the rest of us, who due to their own fault (i.e. had not the capitol) or the fault of the loan industry, banks, and gov't, who in my opinion should have been looking out for them, had no clue what was about to happen and said, to paraphrase Bernanke, "Everything is okay... This is not a bubble" circa 2006. That was atrocious and irresponsible. I live in an economically depressed area, made more so by this event and I want, the political leadership, if they can't do anything else right, to at least keep people from losing their shirts. Apparently they can't do that. If we live in a political/economic system where it's our own fat luck if we lose our shirts, then there will be change. I am not denying personal responsibility and that was a contributing factor but people were mislead.
If you can't listen to your gov officials and you're not in the industry and have a weak grasp of how modern finance works you eventually start reading everything you can.
Shedlock's blog, which ikaika dismisses (and I'm sure he has his reasons) started tracking BoA "special investment vehicles" and credit default swaps in '06 and by 2007 had, in a publicly accessible format, i.e. his blog, come to the conclusion that there was a big domino effect implosion about to happen and it was going to start with a company called Bear Stearns...
Luckily I had stumbled into all this and being the suspicious, conservative type that reads blogs like RFNJ, made some choices based on my inherent sense that we were wayyyy-into an enormous bubble and reading people like Mish.
Perhaps RFNJ was also tooting horns about this time re the impending mess, I was not here yet but for most of us, who among other things, derive income from not working in an office... it's called blindsiding.
I am not at the level in my understanding and abilities with modern finance that I can go up against you guys as to who knew what, when, why and how it all happened but I can provide insight into a fellow conservative's outlook, and the outlook of many, who I feel this way and have their reasons for doing so.
RFNJ continues, for me, to provide valuable insight, at least anecdotally, into the mentality of the Wall Street world and cements my belief that it can certainly be, to those of us on the outside, a double edged sword.
@anonymous
I didn't dimiss Shedlock. I refer to "Mish" often when discussing the inescapable conclusion of the Euro. I respect his personal efforts.
It is Business Insider I completely dismiss, and I'm surprised Mish still contributes there - or allows them to glom his content.
Wiesenthal and the other division II "journalists" at BI are laughable.
What is most sad is how they steal directly from ZeroHedge (until ZeroHedge warned them to stop ripping off content).
As a real observer, to read BI and other "outsiders" claim to know end-all, be-all or some other such nonsense. They are chronic in believing their own bullshit.
Their blind and sometimes frivolous support of OWS was the last straw.
It was as if any journalistic credibility was tossed aside to ride a wave of mob-popularism.
It was the same kind of journalism you'd expect to find during the salem witch trials.
Business Insider reads as if it were published by teenagers with a twitter mentality or the attention span of a goldfish.
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