Thursday, March 22, 2012
- Ben Bernanke's Increasing Political Capital
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.