When the Federal Reserve’s policy-making committee meets on Tuesday and Wednesday, 5 of the 10 voting members will arrive in open disagreement with the chairman, Ben S. Bernanke, about the direction of monetary policy. Three conservative members say the Fed has already done too much. Two liberals say the Fed needs to do much more.
Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge
The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.
The Fed’s quantitative easing programs increased the national debt by trillions of dollars. The debt is now so large that if the central bank begins to move away from its zero interest-rate policy, the rise in interest rates will result in the U.S. government having to pay hundreds of billions of dollars in additional interest on the national debt each year. Thus there is significant political pressure being placed on the Fed to keep interest rates low. The Fed has painted itself so far into a corner now that even if it wanted to raise interest rates, as a practical matter it might not be able to do so.
via Ron Paul: “Blame The Fed For The Financial Crisis” | ZeroHedge.
I agree that the Fed should not interfere with interest rates. It causes market imbalances that later lead to recessions and bubbles in stocks and housing and threaten the very survival of the banking system the Fed is trying to protect.
QE achieved the opposite of its stated objectives, raising long-term interest rates with lowering unemployment, but did not really increase the national debt by a dollar. Sales of bonds by the Federal Treasury to the Federal Reserve is like the US government selling to itself. The Fed is just an off-balance sheet, special-purpose entity (think Enron, bank CDOs and other bad smells) created by the government and banks in 1913 to bypass restrictions in the Constitution on the issue of bank notes. In all but name it is a division of the US Treasury. The majority of the “independent” board of directors are political appointments. Ever seen a dissenting vote coming from one of the political appointees? Regional board members, where most dissenting votes come from, are a minority appointed by regional banks. They can dissent, but when it comes to counting the votes they’re outnumbered.
A year later everyone is catching on about Fed policy and net interest margins | Credit Writedowns
“As I wrote in April: If long rates are largely determined by expected future short rates, the longer short rates are at zero percent, the lower long rates will go. That’s toxic for bank interest margins…..
Now that we are seeing more movement down on net interest margins (BofA and Wells Fargo both showed margin compression for example), the mainstream media is finally catching on to the connection between Fed policy and net interest margins. You heard it here first though.”
via A year later everyone is catching on about Fed policy and net interest margins | Credit Writedowns.
Bernanke Hangs Tough on Financial Reform
“Central banks certainly did not ignore issues of financial stability in the decades before the recent crisis, but financial stability policy was often viewed as the junior partner to monetary policy,” he [Fed Chairman Ben Bernanke] said. “One of the most important legacies of the crisis will be the restoration of financial stability policy to co-equal status with monetary policy.”
via Bernanke Hangs Tough on Financial Reform.
The problem with having two equal objectives is, when they conflict, which do you choose?
Fed’s Kocherlakota on Why Balance Sheet Expansion Need Not Be Inflationary – Real Time Economics – WSJ
I’ve mentioned how the Federal Reserve has bought over $2 trillion of government securities. It has funded that purchase by tripling the amount of deposits held by banks with the Fed — what are called bank reserves.
……. Banks have few good lending opportunities, and so they’re not trying to attract deposits. As a result, they are keeping nearly $1.6 trillion of reserves at the Fed in excess of what they need to back their deposits.
…… Some observers are concerned that ……. the banks’ excess reserves will serve as kindling for an inflationary fire. This concern would have been entirely appropriate three years ago. But in October 2008, Congress granted the Federal Reserve the power to pay interest on bank reserves. Right now, that interest rate is 25 basis points, or 0.25%. By raising that rate judiciously, the Fed has the ability to deter banks from using their reserves to create money, and through this mechanism, the Fed can prevent inflation.
Monetary expansion through further asset purchases by the Fed (quantitative easing) would be ineffective, simply boosting the level of excess reserves held by banks on deposit at the Fed. Monetary tightening would be more difficult, but could be achieved by raising the interest rate paid on excess reserves in order to discourage banks from using their excess reserves. That would raise the overnight rate (fed funds rate) in the market and restrict banks from expanding their balance sheets.
Dollar retreats, gold rises
The US Dollar Index is retracing to test support at 76.00. Respect of support would confirm the primary up-trend and offer a target of 84.00* for the next advance. A 63-day Twiggs Momentum trough above zero would strengthen the signal.
* Target calculation: 80 + ( 80 – 76 ) = 84
Spot gold is testing the declining trendline and resistance at $1700/ounce. Respect would warn of a decline to test $1500*. The primary trend remains upward and will resume if the Fed introduces further quantitative easing in the months ahead.
* Target calculation: 1700 – ( 1900 – 1700 ) = 1500
Fed Minutes: Some Favored Bolder Action – WSJ.com
“A number” of Fed officials taking part in the meeting thought that buying more securities would be “a more potent tool that should be retained as an option in the event that further policy action to support a stronger economic recovery was warranted,” the minutes showed.
The Sceptical Inflationist | Steve Saville | Safehaven.com
The reason we are in the inflation camp is that the case for more inflation in the US doesn’t depend on private-sector credit expansion; it depends on the ability and willingness of the Fed to monetise sufficient debt to keep the total supply of money growing. A consistent theme in our commentaries over the past 10 years has been that the Fed could and would keep the inflation going after the private sector became saturated with debt.
Up until 2008 there was very little in the way of empirical evidence to support the view that the Fed COULD inflate in the face of a private sector credit contraction, but that’s no longer the situation. Thanks to what happened during 2008-2009, we can now be certain that the Fed has the ability to counteract the effects on the money supply of widespread private sector de-leveraging. The only question left open to debate is: will the Fed CHOOSE to do whatever it takes to keep the inflation going in the future?
via The Sceptical Inflationist | Steve Saville | Safehaven.com.
Bernanke criticises China over currency – FT.com
The chairman of the US Federal Reserve has accused China of damaging prospects for a global economic recovery through its deliberate intervention in the currency market to hold down the value of the renminbi.
…..“Right now, our concern is that the Chinese currency policy is blocking what might be a more normal recovery process in the global economy,” he said. “It is to some extent hurting the recovery”.
Guest Post: Credit Spreads In The New Normal | ZeroHedge
A banking crisis implies easy money, ZIRP, various types of balance sheet expansion, and lower credit quality on central bank balance sheets. This acts to suppress credit risk, compressing spreads. This creates “artificiality” in credit market insofar as a central bank is not a natural buyer of higher risk securities. There will come a time when risk is moved off central books, and markets will have to learn how to re-price risk with no government support.
via Guest Post: Credit Spreads In The New Normal | ZeroHedge.