“So far, purchases of Treasuries have not resulted in lower rates, and it may be likely that the volume of purchases to accomplish that would be sufficiently large that the balance sheet might have to explode even more, further exacerbating the exit-strategy problem,” said Robert Eisenbeis, chief monetary economist at Cumberland Advisors Inc. and a former research director at the Atlanta Fed.
Once again, the Fed has dissimulated its intention by feigning incompetence or impotence: I claim that the Fed sought, through the Treasury buy-back, to merely buy time for greater fools to suck the beta out of key DI's and the Fed itself.
I am pretty lazy, but I think it's time to def
er to some data to substantiate this:Last I checked, losing $40B in liquidity is... deflationary. Are we then surprised at all that commodities this week were under pressure? The Fed is going long duration/credit and offloading risky assets, with substantial progress to make in meeting its supposed Agency purchase commitments.
In other words, the Fed is reloading. The interim periods between Fed pumps and the attendent tankage of Treasuries are known as, "rallies". Without a Fed pump to prime liquidity, we should see a quick bout of healthy deflation before Obama's stimulus comes to fore, helping purge some of the speculative excesses from the market that ultimately tax the economy (ahem, oil speculators) and move capital into markets that help restore the consumer's wealth (cheaper mortgages).
However, you can not allow a deflation, however brief, without creating another Minsky moment unless DI's, especially key DI's, are understood to be well-capitalized and clear of crap... a bank holding crap into a deflation is a disaster, but a bank holding treasuries into a deflation...
2 comments:
Can you talk to me like I am stupider than you? It would help a lot.
Is it:
Central bank is buying treasuries (as a proxy for DIs) right now and selling (as a proxy for DIs)bad debt/toxic assets.
When the Fed cuts off the credit facilities, this kills liquidity (no one else is loaning $$$).
This causes deflation, making Treasury yields rise.
The Treasuries are then sold to DIs so they have a solid capital base to loan (on margin) against, the Fed shuts off liquidity to banks, deflation sets in and banks get floods of deposits as markets tank and their balance sheets are rock-solid treasuries.
Then the banks resume their traditional role as the lender--do I have it?
The Fed's goal is to forestall systemic risk. Everything else: propping up markets, etc, is really Congress' "job".
S&P @ 666 was caused not by bad earnings, but hysteria regarding the health of the banks. Your understanding of the banks is mostly right, but they are still inherently levered, and so any further stress will FORCE the Fed to expand its B/S.
The Fed can expand its B/S so long as Treasury yields are low: it's a see-saw: expand when yields are low, deflate when high.
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