Bernanke's Nightmare Chart
by Gary North
The Federal Reserve System on December 17 began a unique experiment: debt swaps with large commercial banks. The FED is now swapping at face value highly marketable U.S. Treasury securities in exchange for discounted mortgages. Nothing like this has ever been attempted before. It represents an innovation in central bank policy. It is called the Term Auction Facility (TAF). The initial offer was for $20 billion in swaps.
The rate charged is about 2%. This is why the FED has cut the FedFunds rate to 2% – not to stimulate the economy directly but to make available TAF loans at low rates.
Here is how the game is played. The borrowing banks can place the borrowed Treasury debt on their books at close to face value. This looks as though the banks are meeting their capital requirements.
What is really going on? Deception on a massive scale – a fully legal deception that the U.S. government's bank auditors understand and go along with.
With this as background, let us consider the words of the Federal Reserve System as of May 2.
In addition, the Federal Open Market Committee authorized an expansion of the collateral that can be pledged in the Federal Reserve's Schedule 2 Term Securities Lending Facility (TSLF) auctions. Primary dealers may now pledge AAA/Aaa-rated asset-backed securities, in addition to already eligible residential- and commercial-mortgage-backed securities and agency collateralized mortgage obligations, beginning with the Schedule 2 TSLF auction to be announced on May 7, 2008, and to settle on May 9, 2008. The wider pool of collateral should promote improved financing conditions in a broader range of financial markets.
Deciphering the FedSpeak, we learn that the FED is swapping U.S. Treasury securities for packages of loans on just about anything. I suppose this could include cars, if the FOMC decides the asset meets its wider standards.
Consider these words: "The wider pool of collateral should promote improved financing conditions in a broader range of financial markets." Let me translate.
The wider pool of eligible capital for swaps will allow banks to convince government auditors – wink, wink – that the assets on the banks' books need not be marked to market with a discount. Therefore, the banks will not have to call in loans in order to bring their loan-to-capital ratios back into line with regulations.
HOW LONG CAN THE GAME GO ON?
It can go on for as long as the Federal Reserve System has U.S. Treasury debt to swap. As Hamlet said, "There's the rub."
In November, 2007, two weeks before the first TAF auction was held, the Federal Reserve System held about $800 billion in Treasury debt. As of May 1, it held $539 billion. "May day! May day!"
The Federal Reserve's "creative financing" to bail out banks that have invested in creatively financed mortgages has a limit. The limit is its portfolio of Treasury debt.
It took from 1914 until November 2007 for the Federal Reserve to accumulate $800 billion worth of Treasury debt. It has take from December 17 to the end of April for the FED to divest itself of $260 billion of this portfolio, a decrease of one-third. In its place, it has placed AAA- rated mortgages.
At the current swap rate, the Federal Reserve System will be out of Treasury debt in December of 2008. But by adding car loans to the list of eligible paper, the FED has guaranteed that this rate will accelerate.
http://www.lewrockwell.com/north/north624.html/
To which I commented:
Doing the quick math exposes how close the Fed is to running out of Treasury debt to swap for this trash so as to perpetuate the bank fraud that Wall Street has brazenly accepted as "the end of the credit crisis". From December 2007 through April 2008 the Fed had swapped out $260 BILLION of it's $800 BILLION Treasury debt kitty. Two more auctions in May at $75 Billion each raised the total swapped out at the end of May 2008 to $410 Billion. Now add three more $75 BILLION auctions in June and the Fed will have exhausted $635 BILLION of its $800 BILLION in Treasury debt reserves. Almost 80% of the Fed's Treasury debt that it took 93 years to accumulate will have evaporated in SIX MONTHS! Pfft, gone!
As the Federal Reserve blows thru its assets to perpetuate a collosal bank fraud, the US Congress sits silent on the sidelines oblivious to the economic madness destroying this country's future for possibly the next two generations. The credit crisis is certain to sink this country. The leadership vaccum in Washington will see to it that it remains sunk.
I guess the game could not go on long enough. Sadly, the Fed's stash of Treasuries did not last until December. On September 17, 2008 the Fed realized and accepted the impossible...they were flat broke. The Federal Reserve of the USA was bankrupt. And then the US Treasury rode to the rescue...
September 17, 2008HP-1144Treasury Announces Supplementary Financing Program
Washington- The Federal Reserve has announced a series of lending and liquidity initiatives during the past several quarters intended to address heightened liquidity pressures in the financial market, including enhancing its liquidity facilities this week. To manage the balance sheet impact of these efforts, the Federal Reserve has taken a number of actions, including redeeming and selling securities from the System Open Market Account portfolio.
The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program, which will provide cash for use in the Federal Reserve initiatives.
Announcements of and participation in auctions conducted under the Supplementary Financing Program will be governed by existing Treasury auction rules. Treasury will provide as much advance notification as possible regarding the timing, size, and maturity of any bills auctioned for Supplementary Financing Program purposes.
http://www.ustreas.gov/press/releases/hp1144.htm
Self-Fulfilling Prophesy & The Fed is Already Bankrupt
In any case, Bernanke and the Fed know there is a significant chance that things could blow up and thus the helicopter engine is already being warmed up. I know some people have talked about the Fed already dropping money from helicopters but in reality that has not been the case (except as I discuss below). So far, all that has taken place with the various “credit facilities” and bailouts is a substitution of assets. No new money was created as a result. For example, when a bank borrows under a credit facility, it is exchanging an illiquid asset (such as certain agency MBS securities) for Treasury securities held by the Fed. The bank then goes into the market to sell the Treasury securities and uses the cash proceeds to meet liquidity needs.
But at this point it is no longer enough. A not-so-secret secret of our monetary system is that most Federal Reserve Notes — the actual paper money that people are now trying to withdraw in larger and larger droves — are physically held offshore (presumably by foreigners). Indeed, this statement on the FRB New York website is pretty shocking in light of what could imminently happen:
The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.
As an aside, the latest Factors Affecting Reserve Balances report (from Sep 25) indicates that an absolutely massive $472.8 billion of Federal Reserve Notes (59%) are now collateralized by non-federal (federal includes Freddie Mac, Fannie Mae, Federal Home Loan Bank, etc.) securities. In effect, this means the Federal Reserve itself is virtually bankrupt and the U.S. government will likely need to soon provide direct backing for Federal Reserve Notes if there is any hope of saving the monetary system. When considering this, it seems pretty silly that people are actually withdrawing Federal Reserve Notes from the banking system to hide under the mattress. And in fact, the Federal Reserve looks to continue even further along the current path to insolvency with the announcement just this Monday (virtually ignored by the media due to the focus on the $700 billion bailout plan) that the Term Auction Facility will be doubled from $150 billion to $300 billion.
But now let me discuss the first real preview of what a helicopter operation involving the Fed and Treasury will look like. This seems to have gone unnoticed by the media, but the U.S. Treasury Dept. has started to lend directly to the Fed under its Supplementary Financing Program. The way this program is explained is that the U.S. Treasury issues Treasury securities to the public and deposits the cash proceeds with the Fed. But in reality, what seems to be happening is that the U.S. Treasury is issuing Treasury securities to the Fed and then the Fed is exchanging these Treasury securities with banks for non-federal debt securities. In just the first week of operation, the U.S. Treasury Department has in essence loaned $160 billion directly to the Fed. Sure sounds like insolvency to me!
http://silveraxis.com/todayinsilver/2008/10/02/self-fulfilling-prophesy-the-fed-is-already-bankrupt/
The Fed is Bankrupt: Update on the Helicopter - The Secret Death of the Fed
Up until two weeks ago when the $700 billion bailout package came out of virtually nowhere, the Federal Reserve seemed content to continue swapping its liquid Treasury securities portfolio for the illiquid assets of banks, slowly destroying the Fed’s balance sheet in the process. But the impending failure of AIG and the actual failure of Lehman Brothers apparently did some serious damage to the Fed’s plans, because the most important monetary decision of this entire crisis was made in a big hurry, with virtually no fanfare. I suspect the Fed finally started looking more than a few days ahead and suddenly realized that it might quickly and completely run out of Treasury securities (see below).
So, the Fed and Treasury announced a seemingly innocuous Supplementary Financing Program on September 17. In reality, it was nothing less than a clandestine federal bailout, a de facto government takeover of the Federal Reserve that will officially materialize as such only at a later date. This radical “program”, which is by far the most extreme of all the Fed and Treasury actions in terms of monetary consequences, has received very little coverage so far in the media, on Wall Street, on Main Street, in the Capitol, or on the Internet. But I suspect this could soon change now that the $700 billion bailout package has been penned into law. Indeed, the Treasury bailout legislation seems to be the fuel for the Supplementary Financing Program, which is nothing less than the biggest monetary helicopter lift since the Weimar experiment with the printing press.
http://news.goldseek.com/GoldSeek/1223400153.php
Who's Bailing out Whom?
This just in. I hope you are sitting down.
The news that should be driving gold prices to the moon is out! The Federal Reserve released its latest weekly monetary data after the market closed Thursday.
The Federal Reserve has just expanded its balance sheet more in one month than it has in almost all of its first 86 years of existence. I am not kidding. Its assets, which represent the cumulative reserves the Fed has "created," totaled less than $700 billion at the turn of the millennium and continued to expand by about $50 billion per year after that, up until this month. In September alone, reserve bank credit inflated by almost $600 billion. It is a record, and has already affected the monetary base.
Up until September, the Fed had been careful to sterilize its liquidity provisions by selling Treasuries, reverse repos or simply by lending its securities off balance sheet. So while it has extended credit since August 2007, it has not monetized much of the liquidity.
Besides, usually, other factors offset the Fed's injection of "liquidity," such as cash withdrawals from the banking system (represented by an increase in "currency in circulation") and other activities that may increase money flows back into the Fed... like the money raised by the Treasury for the Fed under its recently created "Supplementary Financing Program."
Since announcing this new program two weeks ago, the Fed has received about $350 billion from the Treasury. Additional factors of decrease include about $80 billion in deposits that came into the Fed during September via reverse repos and "other" deposits, a $26 billion decline in outstanding repos and about $4 billion in currency (cash) leaving the banking system. The NET factor of increase to reserve bank credit for the month of September was about $170 billion. That is money created out of thin air... unsterilized.
http://www.safehaven.com/article-11453.htm
Bernanke's speech on economic conditions
WASHINGTON, D.C. -- Federal Reserve Chairman Ben Bernanke spoke Tuesday afternoon about current economic and financial conditions at the annual meeting of the National Association for Business Economics.
The following is a transcript of his remarks, as posted on the Federal Reserve Web site.
http://money.cnn.com/2008/10/07/news/economy/bernanke_remarks/index.htm
Inflation’s New Upward Trend
In our 3rd October email alert we wrote: "The Fed expanded its balance sheet by $254B during the one-week period ending 1st October, which follows a $204B expansion during the preceding week. As a result, the Fed's balance sheet has grown by almost 50% within the space of just two weeks. This, we believe, is unprecedented."
Last week's money creation by the Fed won't appear in broader money-supply data until the end of this week, but the week-before-last's expansion of the Fed's balance sheet has given the True Money Supply (TMS), our preferred monetary aggregate, a substantial boost. In fact, it has pushed the year-over-year (YOY) TMS growth rate from 3.75% to 7.0%, thus signaling a new major upward trend.
http://news.goldseek.com/SpeculativeInvestor/1223395882.php
Gold: Misconceptions vs. Reality
Ask yourself if you own some gold. Then ask the guy next to you if he owns any. Odds are the answer is “no”. The GLD gold ETF (the largest gold ETF in the world) has a market cap of just $16.7 billion. Compare that to the S&P 500, which has a market cap of $11.63 trillion (and that doesn’t even include equities outside of the S&P 500 or overseas equity markets obviously). Which asset seems overowned: equities or gold? You don’t have to be a rocket scientist to know the answer to that question.
Nobody owns gold, just as very few owned “stocks” in the early 1980s when you wanted to actually be buying them ahead of what would be the biggest and longest secular bull market in equities in history. Instead, people were loaded up with oil and gold back in the early 1980s, and then lugged them around for the next 20 years in a secular bear market. The fact that gold is so under-owned as an investment is precisely the quality one looks for in trying to find assets that are just beginning big secular bull markets and why gold has much further to go to the upside than anyone can currently imagine.
http://www.minyanville.com/articles/dow-gold-GLD-equities-spx-oil/index/a/18547/from/yahoo
And now the choppers full of money Bumbling Ben has promised us for so long are now fueled and fully loaded. Let the implosion of the US Dollar begin...and the explosion of the price of Gold commence.
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