Fed Offers Re-Repos to Stop Inflation

[ArcticSplash]

Business and Financial News - The New York Times

It looks like Bernanke is going to try his luck at reverse repos (a reverse repo is an overnight loan a member bank makes to the Fed, in this case they will be longer than overnight) to get rid of all that slush money floating around in the economy.


Right now, most of that money that Bernanke printed over the last 2 years is sitting locked up tight in all the banks that took TARP/TALF and liquidity injections. That money was moved to reserve accounts to cover loan losses so the banks appear healthy and stable on paper so that way investors don't get scared and pull all their money out of investments.


Now that banks have been foreclosing on people and selling assets, that huge mountain of vault cash (or electronic reserve accounts) has created a situation where people are afraid the banks will start lending it out like crazy--and inflation will ignite.



This is a good sign. What will happen now is banks will dump their reserve cash into a "CD" at the Fed, and they can't withdraw the money. The Fed will pay interest on the account (by creating money). That will temporarily make a lot of this cash disappear.


The Fed can then stagger the securities so that banks don't get their cash back all at once, so they can control how much credit gets released back into the economy that way.



It's easier to just raise interest rates but that will destroy the fragile housing market. This way the Fed can stop excess credit from the back end instead of fighting it off at the front end.

[DrDoom]

Bernanke is pulling on a string and his extend and pretend game is going to be challenged by the bond vigilantes. Although it is true that the velocity of money is what ultimately sets off inflation, his high wire act without a safety net isn't going to do much for the real economy. Credit destruction is outpacing money creation (via credit) despite his kabuki theatre act.

[rjj]

Business and Financial News - The New York Times

It looks like Bernanke is going to try his luck at reverse repos (a reverse repo is an overnight loan a member bank makes to the Fed, in this case they will be longer than overnight) to get rid of all that slush money floating around in the economy.


Right now, most of that money that Bernanke printed over the last 2 years is sitting locked up tight in all the banks that took TARP/TALF and liquidity injections. That money was moved to reserve accounts to cover loan losses so the banks appear healthy and stable on paper so that way investors don't get scared and pull all their money out of investments.


Now that banks have been foreclosing on people and selling assets, that huge mountain of vault cash (or electronic reserve accounts) has created a situation where people are afraid the banks will start lending it out like crazy--and inflation will ignite.



This is a good sign. What will happen now is banks will dump their reserve cash into a "CD" at the Fed, and they can't withdraw the money. The Fed will pay interest on the account (by creating money). That will temporarily make a lot of this cash disappear.


The Fed can then stagger the securities so that banks don't get their cash back all at once, so they can control how much credit gets released back into the economy that way.



It's easier to just raise interest rates but that will destroy the fragile housing market. This way the Fed can stop excess credit from the back end instead of fighting it off at the front end.

so the banks will give the fed cash to put into a interest bearing account right? so the fed printed the excess $, gave it to the banks, now the banks will give the $ back to the fed and make $ on it? unreal.

[DrDoom]

so the banks will give the fed cash to put into a interest bearing account right? so the fed printed the excess $, gave it to the banks, now the banks will give the $ back to the fed and make $ on it? unreal.

This shell game has been in effect since the credit crisis occurred..it's actually nothing new.

If you remember Obama met with a dozen small banks a week or so ago urging them to keep lending in a crappy economy. This of course came after his phony "time out" PR session with the "Fat Cat" big banks urging them to "keep lending".

He did not have to tell that to the small banks. There are about 6500 mostly AAA rated, regional and community banks that have been happily lending away despite being burdened with massive FDIC fees that insure the casino banks. Its how they earn their money.

The larger banks, on the other hand, are the ones who have cut back lending dramatically. This is especially true of the 10 biggest banks.

Why have they cut back lending? Well again in an economy bleeding jobs it's basically the rational thing to do.

These banks STILL have too much debt, too little capital. Their books are loaded with bad loans (toxic crap), which, thanks to our corrupt Congress, they no longer have to disclose appropriately or they have moved to the Fed balance sheet. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off in the private market hence the Gov't stepping in and paying the banks par. The purchase of crap MBS securities by the Fed has run up a trillion plus bill thus far and is set to be extended indefinitely although they last said they would stop in March. However, the gov't is getting set to give Freddie and Fannie a blank check to continue the extend and pretend game.

Neverthless, lending money is a risky business in a bad economy as we all know; there is the possibility of loss. Under-capitalized banks feel they cannot take that chance. By not lending, their capital base goes up. It is the rational thing to do from their perspective, especially if they want to dole out bonuses, but it is killing the real economy of goods and services hence the continued job losses and credit contraction.

Rather than engage in traditional money lending, these banks have decided to simply borrow from the Fed at 0%, and make risk free loans to the Treasury at 3%.

And, these banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND.

Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios (i.e. ****ty risk management thanks to the Fed's easy money policy and the collusionary gov't hacks needing access to the money tree to fund their campaigns)

This is yet another unintended consequence of bailing reckless bankers from their folly. Their place in the economy is so distorted, as to become nearly economically meaningless . . .but this is not viewed as "throwing" money away by some. It is even erroneously referred to as "stimulus" when it's anything but stimulus. It is a massive giveaway to an unproductive zombie sector of the economy. We're squandering the nation's future on a bunch of parasites and getting no ROI whatsoever. Yeah let's not invest in HSR or people who make up 70% of the consumer economy. Brilliant job by Bernanke, Geithner and Summers...but again they only care about the financial economy and the politicians that depend upon campaign money do as well....hence the situation we're in.

[DrDoom]

Here is a pretty good piece by Reich who offers a good explanation of the difference between the real economy and the financial economy that not many people understand. Treasuries are going to be the toxic "assets" going forward as the government takes on more and more debt (private and gov't induced) which will kill the real economy and could cause a sovereign credit and monetary crisis in the near future. It would be a boon for PIMCO however......Get used to a lower standard of living (via credit destruction) and greater economic divide (via asset inflation) if the financial economy continues to take precedence over the real economy...which I'm sure it will given the positive feedback loop and public-private revolving door between the financial oligarchs and their government enablers in Congress....

In September 2008, as the worst of the financial crisis engulfed Wall Street, George W. Bush issued a warning: "This sucker could go down." Around the same time, as Congress hashed out a bailout bill, New Hampshire Sen. Judd Gregg, the leading Republican negotiator of the bill, warned that "if we do not do this, the trauma, the chaos and the disruption to everyday Americans' lives will be overwhelming, and that's a price we can't afford to risk paying."

In less than a year, Wall Street was back. The five largest remaining banks are today larger, their executives and traders richer, their strategies of placing large bets with other people's money no less bold than before the meltdown. The possibility of new regulations emanating from Congress has barely inhibited the Street's exuberance.

But if Wall Street is back on top, the everyday lives of large numbers of Americans continue to be subject to overwhelming trauma, chaos and disruption.

It is commonplace among policymakers to fervently and sincerely believe that Wall Street's financial health is not only a precondition for a prosperous real economy but that when the former thrives, the latter will necessarily follow. Few fictions of modern economic life are more assiduously defended than the central importance of the Street to the well-being of the rest of us, as has been proved in 2009.

Inhabitants of the real economy are dependent on the financial economy to borrow money. But their overwhelming reliance on Wall Street is a relatively recent phenomenon. Back when middle-class Americans earned enough to be able to save more of their incomes, they borrowed from one another, largely through local and regional banks. Small businesses also did.

It's easy to understand economic policymakers being seduced by the great flows of wealth created among Wall Streeters, from whom they invariably seek advice. One of the basic assumptions of capitalism is that anyone paid huge sums of money must be very smart.

But if 2009 has proved anything, it's that the bailout of Wall Street didn't trickle down to Main Street. Mortgage delinquencies continue to rise. Small businesses can't get credit. And people everywhere, it seems, are worried about losing their jobs. Wall Street is the only place where money is flowing and pay is escalating. Top executives and traders on the Street will soon be splitting about $25 billion in bonuses (despite Goldman Sachs' decision, made with an eye toward public relations, to defer bonuses for its 30 top players).

The real locus of the problem was never the financial economy to begin with, and the bailout of Wall Street was a sideshow. The real problem was on Main Street, in the real economy. Before the crash, much of America had fallen deeply into unsustainable debt because it had no other way to maintain its standard of living. That's because for so many years almost all the gains of economic growth had been going to a relatively small number of people at the top.

President Obama and his economic team have been telling Americans we'll have to save more in future years, spend less and borrow less from the rest of the world, especially from China. This is necessary and inevitable, they say, in order to "rebalance" global financial flows. China has saved too much and consumed too little, while we have done the reverse.

In truth, most Americans did not spend too much in recent years, relative to the increasing size of the overall American economy. They spent too much only in relation to their declining portion of its gains. Had their portion kept up -- had the people at the top of corporate America, Wall Street banks and hedge funds not taken a disproportionate share -- most Americans would not have felt the necessity to borrow so much.

The year 2009 will be remembered as the year when Main Street got hit hard. Don't expect 2010 to be much better -- that is, if you live in the real economy. The administration is telling Americans that jobs will return next year, and we'll be in a recovery. I hope they're right. But I doubt it. Too many Americans have lost their jobs, incomes, homes and savings. That means most of us won't have the purchasing power to buy nearly all the goods and services the economy is capable of producing. And without enough demand, the economy can't get out of the doldrums.

As long as income and wealth keep concentrating at the top, and the great divide between America's have-mores and have-lesses continues to widen, the Great Recession won't end -- at least not in the real economy.

Wall Street bailout -- the great sideshow of 2009 -- latimes.com