What's In Ben's Wallet: Roll the Printing Presses and The Fed Panics

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

Demise of the US MIddle Class: the Downward Spiral of Dumbness

A quick review of a recent blog entry titled Republican Presidents and Income Inequality in America might help clear up any mysteries after reading this NY Times story about how the US middle class has been economically screwed, first by one group of elitists, and then again by another.

If that does not do it for you, a quick review of this blog entry The Big Lie ought to be enough to get the message across.

If you understand no more needs to be said. And if not after all this, then there are none so blind as those who will not see.

The downward spiral of dumbness of the middle class in the US seems to be coming to an end with the over 50 crowd, at least according to the recent election polls. Let's hope that the middle class finally gets at least an even break.

April 9, 2008
Economic Scene
For Many, a Boom That Wasn’t
By DAVID LEONHARDT

How has the United States economy gotten to this point?

It’s not just the apparent recession. Recessions happen. If you tried to build an economy immune to the human emotions that produce boom and bust, you would end up with something that looked like East Germany.

The bigger problem is that the now-finished boom was, for most Americans, nothing of the sort. In 2000, at the end of the previous economic expansion, the median American family made about $61,000, according to the Census Bureau’s inflation-adjusted numbers. In 2007, in what looks to have been the final year of the most recent expansion, the median family, amazingly, seems to have made less — about $60,500. (Thank God there is no inflation right? - Jesse)

This has never happened before, at least not for as long as the government has been keeping records. In every other expansion since World War II, the buying power of most American families grew while the economy did. You can think of this as the most basic test of an economy’s health: does it produce ever-rising living standards for its citizens?

In the second half of the 20th century, the United States passed the test in a way that arguably no other country ever has. It became, as the cliché goes, the richest country on earth. Now, though, most families aren’t getting any richer.

“We have had expansions before where the bottom end didn’t do well,” said Lawrence F. Katz, a Harvard economist who studies the job market. “But we’ve never had an expansion in which the middle of income distribution had no wage growth.”

More than anything else — more than even the war in Iraq — the stagnation of the great American middle-class machine explains the glum national mood today. As part of a poll that will be released Wednesday, the Pew Research Center asked people how they had done over the last five years. During that time, remember, the overall economy grew every year, often at a good pace.

Yet most respondents said they had either been stuck in place or fallen backward. Pew says this is the most downbeat short-term assessment of personal progress in almost a half century of polling.

The causes of the wage slowdown have been building for a long time. They have relatively little to do with President Bush or any other individual politician (though it is true that the Bush administration has shown scant interest in addressing the problem). (This guy can't possibly be serious. Bush has been like death for the middle class. Not that Clinton-Rubin was much better with their sweetheart deals with China in return for campaign contributions. But it was certainly Reagan, Bush I & II that did in the great majority of Americans - Jesse)

The slowdown began in the 1970s, with an oil shock that raised the cost of everyday living. The technological revolution and the rise of global trade followed, reducing the bargaining power of a large section of the work force. In recent years, the cost of health care has aggravated the problem, by taking a huge bite out of most workers’ paychecks.

Real median family income more than doubled from the late 1940s to the late ’70s. It has risen less than 25 percent in the three decades since. Statistics like these are now so familiar as to be almost numbing. But the larger point is still crucial: the modern American economy distributes the fruits of its growth to a relatively narrow slice of the population. We don’t need another decade of evidence to feel confident about that conclusion.

Anxiety about the income slowdown has flared at various times over the past three decades. It seemed to crescendo in the first half of the 1990s, when voters first threw George H. W. Bush out of office, then, two years later, did the same to the Democratic leaders of Congress. Pat Buchanan went around preaching a kind of pitchfork populism during the 1996 New Hampshire Republican primary — and he won it.

Then came a technology bubble that made everything seem better, for a time. Record-low oil prices in the 1990s helped, too. So did the recent housing bubble, allowing families to supplement their incomes by taking equity out of their homes.

Now, though, we appear to be out of bubbles. It’s hard to see how the economy will get back on track without some fundamental changes. This, I think, can fairly be considered the No. 1 economic project awaiting the next president.

Fortunately, there is an obvious model waiting to be dusted off. The income gains of the postwar period didn’t just happen. They were the product of a deliberate program to build up the middle class, through the Interstate highway system, the G. I. Bill and other measures.

It’s easy enough to imagine a new version of that program, with job-creating investments in biomedical research, alternative energy, roads, railroads and education. On the campaign trail, Hillary Clinton, John McCain and Barack Obama all mention ideas like these. (We have lots of income creating programs its just that they are for large corporations like Halliburton, KBR, etc. - Jesse)

But there is still a lack of strategic seriousness to the discussion, as Bruce Katz of the Brookings Institution notes. After all, the United States spends a lot of money on education already but has still lost its standing as the country with the highest college graduation rate in the world. (South Korea and a couple of other countries have passed us, while Japan, Britain and Canada are close behind.)

The same goes for public works. Spending on physical infrastructure is at a 20-year high as a share of gross domestic product, but too much of the money is spent on the inefficient pet programs championed by individual members of Congress. Pork barrel spending does not add up to a national economic strategy.

Health care and taxes will have to be part of the discussion, too. Dr. Ezekiel Emanuel of the National Institutes of Health pointed out to me that a serious effort to curtail wasteful medical spending would directly help workers. It would spare them from paying the insurance premiums and taxes that now cover that care.

The tax code, meanwhile, has become far more favorable to high-income workers at the same time that they — and they alone — have received large pretax raises. That doesn’t make much sense, does it? (It makes a lot of sense to George W. Bush and his cronies - Jesse)

It’s a pretty big to-do list. But it’s a pretty big problem. Since the economy now seems to be in recession, and since recessions inevitably bring their own pay cuts, my guess is that the problem will look even bigger by the time the next president takes office.

E-mail: leonhardt@nytimes.com

Volcker: the Dollar is in Crisis, the Financial System Has Failed the Test of the Marketplace

Volcker Says Fed's Bear Loan Stretches Legal Power
By John Brinsley and Anthony Massucci

April 8 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker questioned the central bank's decision to rescue Bear Stearns Cos. with a $29 billion loan, saying it was at ``the very edge'' of its legal authority.

``The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices,'' Volcker said in a speech to the Economic Club of New York.

Fed Chairman Ben S. Bernanke last month agreed to lend against Bear Stearns securities, paving the way for JPMorgan Chase & Co. to buy its Wall Street rival. Bernanke, who worked with Treasury Secretary Henry Paulson to broker the bailout, last week defended the move as necessary to prevent ``severe'' damage to financial markets.

Volcker, the Fed chairman from 1979 to 1987, had implicit criticism for U.S. regulators and market participants who allowed ``excesses of subprime mortgages'' to spread into ``the mother of all crises.'' The Fed's Bear Stearns loan was unusual, he said.

``What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return,'' he said.

Wall Street Subsidy

Lawmakers, while praising the Fed and Treasury for averting a financial collapse, have also questioned the plan to subsidize Wall Street while the Bush administration resists using government funds to assist homeowners cope with the worst housing crisis in 25 years.

Volcker said the Fed's loan may send investors the wrong message.

``The extension of lending directly to non-banking financial institutions -- while under the authority of nominally `temporary' emergency powers -- will surely be interpreted as an implied promise of similar action in times of future turmoil,'' he said. (this is the very substance of moral hazard - Jesse)

Volcker said the modern financial system has ``failed the test'' of the marketplace.

When asked whether he predicts a ``dollar crisis,'' he said, ``you don't have to predict it, you're in it.''

The dollar has dropped 15 percent against the euro and 14 percent versus the yen in the past year.

$945 Billion in Losses

``What Chairman Volcker said in his remarks is that we need to make sure we are taking a look at the implications of the Fed decision,'' Glenn Hubbard, former chairman of President George W. Bush's Council of Economic Advisers, said in an interview. ``The question is: How do we then redesign regulation around a decision that bold?''

Volcker's critique comes as policy markers struggle to prevent the world's largest economy from contracting, a prospect Bernanke himself raised last week. The International Monetary Fund today said the global losses from securities tied to commercial real estate and loans to consumers and companies may reach $945 billion.

``The bright new financial system, with all its talented participants, with all its rich rewards, has failed the test of the marketplace,'' Volcker said.

As credit markets seized up, the Fed gave the 20 primary dealers in U.S. government bonds the same access to discount- window loans that had previously been reserved for banks. The central bank now auctions as much as $100 billion to lenders a month, and has cut the cost on direct loans to just a quarter- point above the overnight rate on loans between banks.

``The implications of these decisions, and the lessons from the unfolding crisis itself, surely deserve full debate and legislative review in the period ahead,'' Volcker said.

Fed's Response

The Fed has also lowered its benchmark rate six times since September to 2.25 percent from 5.25 percent, and traders anticipate it will cut by at least another quarter point this month to cushion the economy's downturn.

Volcker, 80, said the problems stemmed in part from trading of increasing complicated securities including derivatives that ``have taking on a trading life of their own,'' and said the turmoil ``adds up to a clarion call for an effective response.''

`There was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices,'' Volcker said. (that pressure ought to have come from the Fed. It is their job to 'take away the punch bowl.' - Jesse)

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: April 8, 2008 17:50 EDT

The Fed is Increasingly Concerned about Stagflation

If we get an inflationary recession, it is because of Greenspan and Bernanke, Clinton and Rubin, Bush and Paulson, and their inability to keep their hands out of the markets, tinkering and fine-tuning them to advantage their own ends and those of their cronies.

Will they never learn? Do they really care?

Fed minutes: Severe downturn possible
Tue Apr 8, 2008 2:40pm

WASHINGTON (Reuters) - Members of the Federal Reserve's policy-setting committee worried at their most recent meeting that housing and financial market stress could trigger a nasty slide in the economy, even as inflation pushed higher, minutes of the meeting released on Tuesday show.

"Some believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market," minutes of the March 18 meeting said.

A staff forecast buttressed that somber outlook, projecting "a contraction of real GDP in the first half of 2008 followed by a slow rise in the second half," the report said.

At the same time, Fed officials found recent inflation reports "disappointing," noting also with concern that some indicators of inflation expectations were edging higher.

Policy-makers said there were limits to what could be done through interest rate cuts to deal with problems underlying the collapsed housing market and the credit crunch, but agreed trimming borrowing costs might provide some help.

However, Fed officials said it would be hard to calibrate policy responses because their aggressive rate cuts in recent months would take some time to show their effects on economic activity.

The Fed has cut benchmark interest rates by three percentage points to 2.25 percent in six months.

U.S. rate futures rose on the gloomy Fed economic outlook, and the implied chance of the federal funds rate being cut to 1.75 percent by mid-year rose to 90 percent from 68 percent. U.S. stocks stayed weak after the minutes were released.

The Fed said that while exports were getting a boost from a cheapening U.S. dollar, there also was a risk that the devalued greenback will further add to inflationary pressures from costlier oil and other commodities.

(Reporting by Mark Felsenthal and Glenn Somerville; Editing by Theodore d'Afflisio)