Not to worry about the Fed's Balance Sheet as reported in The Dollar Is Being Devalued. As suspected, the Treasury and Fed have plans to print plenty of money in case the bankers feel the need, as outlined in the WSJ story below.
Will there be austerity plans on Wall Street? Besides the inevitable layoffs-- the Street always eats its young. Thinner bonuses? Get real. More banks cutting the dividend? F-- the shareholders, but don't touch the options. Johnnie Walker Black instead of Johnnie Walker Blue for après-fraud? Oh all right. K instead of coke? Damn. Cabs instead of limos? Ouch. Scandals instead of Scores? Oh the humanity!
Sacrifices must be made, and all you rubes must do your part. Perhaps CNBC can host a telethon: PigAid.
Not to put too fine a point on this, but since about ninety-nine out of a hundred readers will not understand the implications of "the Plan," let's just say that IF the Fed and Treasury actually go through with this as described, depending on how its structured our fiat currency has just kicked it up a notch and the money machine is switched to "on." And for what? Bonuses for the uber rich?
No, afraid not. There's a more likely possibility. Its worse, MUCH worse than they are letting on. The US financial system is teetering on the edge of a nasty fall, and the Fed and Treasury are in a panic. They are concerned as the word of how bad this is reaches the global public awareness, and not for stocks per se. The stock market is an important player, but the Bond and the Dollar are the franchise.)
Fed Weighs Its Options In Easing the Crunch
By GREG IP
April 9, 2008; Page A3
WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.
Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.
• The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
• The News: The Fed is considering several contingency plans for getting more lending capacity so that won't happen.
• The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.
No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.
British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools. (The ECB should thank God for the German memory of Weimar - Jesse)
The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates. (more like break the bill and strain the acceptability of US debt to all but captive subordinate financial entities like US taxpayers [and client states like the Saudis and Japan] - Jesse)
The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally. (reluctant but could be persuaded, no? Those strumpets. LOL - Jesse)Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities. Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.
The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasuries or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.
Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such "quantitative easing" only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.
Weighing the Possibilities
So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury. (that's a bookkeeping nicety at best. The Fed is trying to get a little bit pregnant, to keep it from showing. - Jesse)
Treasury's principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday. In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics. (they also have another constraint, the value of the US dollar in world trade - Jesse)
Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.
Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level. (as opposed to raising the minimum reserve requirements and tightening the rules on sweeps? - Jesse)Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.
The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain.
Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management. Such holdings wouldn't help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.
Write to Greg Ip at greg.ip@wsj.com1
