Tuesday, December 30, 2008

Fed's Attempt to Have Cake and Eat It Too

In a previous post [1], I linked to an econbrowser post that explained recent Federal Reserve operations by analyzing changes in its balance sheet. He published an updated post to further the analysis and shows how the Fed is continuing its attempt to "bailout" companies without having to print money and without having to sell current assets, i.e., sell its treasury holdings. He provides an excellent explanation (however, as an empiricist can not address the more fundamental implications).

If you use the "no free lunch" principle, it is pretty easy to understand what is happening. The Fed started to bail out these firms by selling its assets and then loaning cash but its running out of assets. It can "purchase" the bad debt with fake money but then it would create a massive inflation which it is trying to avoid. Instead, the Fed is actually borrowing money from the Treasury which is borrowing it from the public. Additionally, the Fed is now paying interest on reserves which encourages the banks to leave their deposits alone. This means that billions of dollars are being sucked out of the market and effectively invested in crappy banks. And that's not all. When the Fed holds Treasury securities, the Treasury pays it interest just as it pays interest to every bond holder. Well, guess what? By law, the Fed must turn over all of its profits to the Treasury which means that to the extent the Fed holds its securities, the Treasury doesn't really pay interest. Well, if the Fed sells its Treasuries to the public to raise cash it means the Treasury (the taxpayer) has to pay real interest. Also, if the Fed borrows from the Treasury and the loans do not perform, then who is on the hook? Of course, the taxpayers, who will owe about 1 trillion more in debt. In other words, the Fed is gambling with about $1 trillion or more of taxpayer money. Its "Plan B" undoubtedly will be to buy the bad debt with fake money which would create massive inflation.

In summary, the nationalized banking system (the Federal Reserve) has created a boom followed by an inevitable bust and to prevent further losses or bankruptcies at its pet banks, it is proceeding to saddle the American taxpayer with more than a trillion dollars of bad debt which will be paid for by future taxpayers either directly in interest, in higher dollar prices resulting from further credit expansion (inflation), in higher taxes, and/or in reduced productivity and reduced real wages due to the capital destruction caused by inflation.

Such a result is not an exception but inherent to fractional reserve fiat money banking and socialism in general. Indeed, destruction is the inevitable consequence of attempting to evade reality.

2 comments:

Superb Jon said...

Catholics destroyed American industry: Palmisano, Grasso, Damato, Langone, Dioguardi, Ranieri. The subprime construction mobsters had hookers deliver the mortgages to the banks. McCain's Keeting started it all. They find American cars too advanced for them to use or their mechanics to fix. Their slovenly, anti-intellectual work ethic produces vacuous, casuistrous blather. Ellis Island Popeholes brought in FDR. Carolignian Brzezinski spawned Zia al Haq, Khomeini, and bin Laden - breaks up superpowers via Aztlan and Kosovo as per Joel Garreau's Nine Nations. Brzezinski, Buckley and Buchanan winked anti-Semitic votes for Obama, delivered USA to Pope's feudal basket of Bamana Republics. Michael Pfleger and Joe Biden prove Obama is the Pope's boy. Talal got Pontifical medal as Fatima mandates Catholic-Muslim union against Jews (Francis Johnson, Great Sign, 1979, p. 126), Catholic Roger Taney wrote Dred Scott decision. John Wilkes Booth, Tammany Hall and Joe McCarthy were Catholics. Now Catholic majority Supreme Court. NYC top drop outs: Hispanic 32%, Black 25%, Italian 20%. NYC top illegals: Ecuadorean, Italian, Polish. Ate glis-glis but blamed plague on others, now lettuce coli. Their bigotry most encouraged terror yet they reap most security funds. Rabbi circumcizes lower, Pope upper brain. Tort explosion by glib casuistry. Bazelya 1992 case proves PLO-IRA-KLA links.

Anonymous said...

Was that Lois Cook?