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Source link: http://archive.mises.org/10352/does-the-fed-need-an-exit-strategy/

Does the Fed Need an Exit Strategy?

July 27, 2009 by

Since the summer of 2008, Bernanke has more than doubled the Fed’s balance sheet. In essence, the Fed wrote checks on itself — drawing on money created out of thin air — in order to buy mortgage-backed securities and other “toxic” assets from financial institutions that had made horrible investments during the housing boom. FULL ARTICLE


greg July 27, 2009 at 8:25 am

The Fed’s balance sheet has increased and the majority of it is backed by assets. Yes, they are in the red with AIG and Bear Stearns, but they are in the black with all the other investments. When the economy recovers, and it will, this may be one of the rare event where the government makes money. The real question is what will the government do with the profits?

ShedPlant July 27, 2009 at 8:56 am


If the Fed’s balance sheet is made up of great investments, why were they in such trouble that they needed to be bailed out by the Fed in the first place?

YN July 27, 2009 at 9:10 am

Why does not anybody discuss raising the minimum reserve requirement as a way to mop up the excess liquidity? Isn’t it a better way to solve the problem than for the FED to sell stuff and/or pay interest on the bank reserves?

Lucas M. Engelhardt July 27, 2009 at 9:18 am


I think the answer to your question has two parts:

(1) Some people DO discuss increasing the reserve requirement (especially Austrians). In fact, I’ve done so on this blog – and have written to the Board of Governors (mostly for my own amusement) making just this suggestion. I posted my letter to the Fed here: http://blog.mises.org/archives/009471.asp

(2) Ben Bernanke doesn’t suggest it because he’s a student of the Great Depression. During the Depression, the Fed raised reserve requirements. Therefore, the Fed should not raise reserve requirements. Obviously, the argument is lousy. But, it is, in essence, what is in Bernanke’s head at the moment, I suspect.

YN July 27, 2009 at 9:36 am

Is it possible that they do not consider raising the minimum reserve requirement because they will crash the banks that did not get money from the government (the smaller ones)? In other words,is there some practical problem to implement this solution?

C July 27, 2009 at 9:57 am

Some questions to ponder:

Who owns the Fed?

Do the cartel’s owners get a say in whether the “excess reserves” stay in their accounts, or get sucked back into thin air by the Fed? Wouldn’t they prefer to keep the money and earn interest, as well as lend it out for more interest than the Fed pays?

When the Fed raises its rates, won’t rates for commercial and consumer loans also follow upward? In that case, would not the owners of the Fed (its member banks) make more money lending out their reserves than letting the Fed pay its rate for holding them?

How can pundits claim the Fed can magically make these “excess reserves” disappear when they “belong” to a private bank? Would not the Fed have to pay a higher interest than the market can provide? would that not then drive interest rates up further?

And where does the money come from to pay the interest on those reserves? Out of thin air, or by selling “balance sheet” equity (which was originally also created out of thin air!)?

How will the Fed be able to eliminate the “excess reserves” in a way that deflates the money supply, rather than inflating it?

Please enlighten me!

Rafael Garcia July 27, 2009 at 9:59 am

Note that PIMCO profits enormously from the government bail-outs. It has the biggest advisory contract from the administration, and it is one of the biggest recipients of the TALF subsidies for fund managers who buy up distressed assets from the government.


cy July 27, 2009 at 10:13 am

Robert Murphy (and others)-

I’d like to echo the question of another commenter.

How does the Fed pay interest on the bank reserves it holds?

Were the fed legitimately paying interest on the reserves, it’d have to mean that they’re loaning out those reserves to someone else and charging even higher interest. The fed is obviously not making loans to consumers, so who is ultimately paying the interest the banks receive on the deposits? Is this purely a counterfitting operation?

I have not heard anyone fully address this topic, and would appreciate any thoughts out there.

ktibuk July 27, 2009 at 11:46 am

“Is this purely a counterfitting operation?”


Berneake thinks the problem is the losses of banks.

He thinks “Banks have made mistakes and thus faced enourmous losses. For most of them their already insufficient capital is wiped out. This is the biggest and main problem facing the economy. If the banks make profits and replenish their capital every thing will be ok.”

So first he takes toxic assets off their hands for cash and T bills and fixes their balance sheet. The cash can be used to create money ten fold thorugh the system but it is risky in this enviroment. The safest way to bolster the banks profit is to pay interest directly. Also this way the high power money doesnt create more money and price inflation is contained.

Banks have 1 trillion dollars of excess reserves. If the FED is paying 5 percent this means 50 billion a year risk free profits. Adding to the regular banking revenue and profits. If this goes on for 3 years that is 150 billion dollars of free money to the banks.

But Dr Murphy is right. This is a short term fix.

Because when things start looking good banks will want to make more money. The fed cant compete with this because the banks can turn 1 trillion to 10 trillion through fractional reserve. So the the fed must give close to ten times more interest on the excess reserves. 5% on 1 trillion is notehing compared to say 3% on 10 trillion.

So the excess reserves must be pulled back by either raising reserve requirement, which would be very good but not many banks could survive. Or the fed must sell assets. If they sell T bills the interest rates would sky rocket because the treasury is trying to sell record amounts And they cant sell back the junk mortgage securities.

So there are two possibilities.

Either a very deep deflationary recession, which is very unlikely.
Or stagflation. High price inflation and growth in nominal terms but contraction in real terms. GDP may increase 5% in a 30% inflation but that would be it..

YN July 27, 2009 at 12:07 pm

An idea for Ben! Raise the reserve requirement on a bank by bank basis. That is: an individual reserve requirement.

mikey July 27, 2009 at 12:14 pm

“How does the Fed pay interest on the bank reserves it holds? ”

Thanks for asking this. How is this 2.5% interest paid exactly? Anyone??
Plus, can anyone get in on this? This is a lot higher than the rate I get now.

C July 27, 2009 at 12:17 pm

“So the excess reserves must be pulled back by either raising reserve requirement, which would be very good but not many banks could survive. Or the fed must sell assets. If they sell T bills the interest rates would sky rocket because the treasury is trying to sell record amounts And they cant sell back the junk mortgage securities.”

I am not sure I can follow this logic. If the Fed sells the $300billion of T bills it is buying this year, which interest rate will skyrocket?

According to the Chart, there is close to $900Billion in excess reserves. So there would still be $600B available to lend, and at fractional rates, that could be as much as $6trillion new loans. No?

How will the Fed suck up that excess?

Current July 27, 2009 at 12:27 pm

Has anyone here noticed that Anna Schwarz has advocated a (simplified) form of ABCT in her article in the New York Times.


greg July 27, 2009 at 1:39 pm


I bought some banks at the same time the Fed was buying, I am up over 200% in 4 months. Let me see, is that better performance than gold?

Just wait for GM. When they come out of bankruptcy and go public again, the government is going to do very well with liqudating their holdings into the market.

You really need to look at the whole picture, if you are fixed on one aspect of the economy, you will miss opportunities.

Bruce Koerber July 27, 2009 at 1:40 pm

They do but this exit strategy failed!!!

Education and Ethics
Monday, July 27, 2009

Bernanke And Public TV Show What Is Truly Counterfeit!

Why is the town meeting on public television? Has the unConstitutional coup lost its ability to control the content of the broadcasts if they take place on the other networks? Would they not be able to prevent the interviewer from asking questions that expose the Federal Reserve as a counterfeiting operation necessary for the unConstitutional coup to try to hold together its empire building?

Is the collusion between public television and the unConstitutional coup so blatant that from now on Jim Lehrer will be know as Jim Liarer. Shame on him for his lack of ethics. As accomplished as he is he could have stood up for principle if he had any. Shame on him.

As for Bernanke, he is nacissistic and has become a compulsive liar. His counterfeiting has made him completely a counterfeit in every aspect of his reprehensible life!

The unConstitutional coup better hope that their expanding censorship of the internet has some teeth because otherwise this pathetic propaganda farse will be the laughing stock of America and will only increase the outcry to get rid of the Federal Reserve and the unConstitutional coup behind it all.

Curious July 27, 2009 at 1:44 pm

“…commercial bank makes additional loans because of the increase in reserves”

Not true. Banks always make all the loans they can.

If a bank has a credit worthy customer willing to pay high enough interest, bank will lend regardless of its reserves.

Subsequently, if it turns out that it needs more reserves, it will borrow in the fed funds market or at the fed discount window.

the fed pays 0.25% on reserves.

Econ Guy July 27, 2009 at 1:49 pm


The FED pays the interest by creating money out of thin air. The bank’s account at the FED is increased through an electronic bookkeeping transaction. They just increase the account by punching a few numbers into a computer. The money the FED creates to pay interest is called high powered money, meaning it can be multiplied through the system. In other words, they just create more excess reserves. As Professor Murphy explained, this makes the problem of excess reserves even worse.

I don’t think there’s any direct way for you to get in on this.

YN July 27, 2009 at 1:51 pm

The problem with mopping up the excess reserves can be stated like this. How can FED get something which is located within it and has no material form (i.e. just numbers in some computer)? Notes are prined against the reserves only when needed (to the best of my knowledge). Answer: declare an emergency financial situation and remove some digits from the reserves (or better “quarantine” some of the reserves).

ktibuk July 27, 2009 at 2:05 pm

“I am not sure I can follow this logic. If the Fed sells the $300billion of T bills it is buying this year, which interest rate will skyrocket?”

If the supply of T bılls ıncrease (if the fed starts selling on top of treasury department) their price falls. Which means the interest rate will increse because the price and interest work inverse in the bond market.

Also I am suspecting the Fed is monetazing US dept indirectly through other central banks. The 500 billion dollars extended to other central banks are being used to buy US treasuries. Since before the crises other central banks were keeping us dollars and us t bills as reserves, it is also in their short term interest to keep US interest rates low, thus keeping treasury prices high.

But this can not go on.

After montary inflation there are only and only two options.

Money supply can deflate. Bringing higher interest rates and many more bankruptcies.

Or all other prices adjusting to the new level of money supply. Which means monetary inflation and again high interest rates, this time because inflation premium added to the real interest rate.

S Andrews July 27, 2009 at 2:21 pm

I bought some banks at the same time the Fed was buying, I am up over 200% in 4 months. Let me see, is that better performance than gold

I’m sure you will exit your imaginary position at the exact right time. If you are looking for investment advice, you are in the wrong place.

Beta Hater July 27, 2009 at 2:26 pm

Great article. However, Dr. Murphy doesn’t consider banking fees. When a bank grants a new loan, they earn lots of money on fees (points, loan origination, etc.) These fees constitute a significant opportunity cost for banks who don’t put their excess reserves to work. This is an important complication for advocates of the “interest on reserves” exit strategy.

joebhed July 27, 2009 at 2:28 pm

central government planner here

jeezum, there’s more to this story than meets the local keyboards.

“where does the Fed get the money to pay this interest?”
such a simple question.
I haven’t seen a real answer.

“The fed creates it out of thin air”.
“It’s only a quarter of one percent (NOW!).”

Come on Mises people.
Don’t you know the answer?

YOU and WE are going to pay for it.
Not because of the obvious matter of “One Country – One Money System”.

It goes like this.

WE pay the FED interest on all the money it creates and lends to US.

The FED deducts ALL of its costs for salaries and paper clips and suchwhat and then makes a “re-payment” back to the Treasury of it’s “excess” earnings”.

Now, guess what, gang?

When the Fed makes a payment of interest on its excess reserve holdings, those interest costs are PART OF the cost of doing business like the paper clips and suchwhat.

An increased cost is equal to a decrease in excess earnings, is equal to a lesser payment to the Treasury, is equal to an increase in taxation.

Therefore, we SHOULD care.

David C July 27, 2009 at 2:39 pm

Just a thought. If the federal reserve starts paying interest on the bank reserves – the banks would want to put more of their own money in these reserves. They would start offering customers attractive interest rates on their savings accounts. Customers, even countries, would start to prefer depositing their profits over investing them. Investment would continue to decline till the FR stopped paying enough interest to make it attractive, at which point the dam would break and money would flood into the economy.

Ned Netterville July 27, 2009 at 4:13 pm

As Dr. Murphy points out, “interest rates are prices,” which the Fed manipulates, always to the detriment of some individuals and some businesses who fail to anticipate the Fed’s action. Some whose rainy-day funds are insufficient to weather the “Fed-effect” are forced into bankruptcy or out of business. In the early 1980s I helped a friend write his resume, which he needed because his once-flourishing business as an independent mortgage broker dried up completely, not because he wasn’t working as hard or as smart, but solely because the Federal Reserve pushed interests to such astronomical levels in the late 1970s that mortgage lending virtually ground to a halt. No individual or group of individuals should possess such unholy power over the lives of others.

Michael Orlowski July 27, 2009 at 5:06 pm


I hardly believe that, most of those assets are mortgages. Fannie Mae and Freddie Mac have about half the market in their gauranteed mortgages($12 trillion),and they have been bailed out. The government’s fiscal deficit isn’t even up to that height(The deficit they report that is, not counting other social programs). Housing hasn’t gone all the way down yet. There’s no way it is going to go back to its boom-era price. I doubt the Fed is going to get a profit, since so many of their assets are in mortgages. Also keep in mind, people are losing their jobs and that means that more mortgages won’t evenbe paid off. Some people are not paying their mortgage and still living in the property! It takes months for them to get evicted.

ShedPlant July 27, 2009 at 5:16 pm

“Just wait for GM. When they come out of bankruptcy and go public again, the government is going to do very well with liqudating their holdings into the market.”

I can’t forecast how Government Motors will perform (though has much changed?), but as for the banks, AIG etc., I never before heard of a genuinely temporary nationalisation. Remember how Amtrak was going to be sold off at a profit after three years?

If a company needs a state bailout, that suggests it’s a poor investment, and if it succeeds in getting one, that makes it even worse because of moral hazard, political control etc.

A. Viirlaid July 27, 2009 at 6:44 pm

To Ned Netterville, I can relate to your friend. And I agree with you 100% — very well written:

No individual or group of individuals should possess such unholy power over the lives of others.

I wrote similarly in 2005 at http://www.businessweek.com/the_thread/hotproperty/archives/2005/07/past_housing_bu.html

Partial Quote from Hans September 28, 2005 12:38 PM:

“Sadly, the FED (and other central banks around the world) will not soon leave the stage, nor will the extreme damage they cause soon be alleviated. Their raison d’être is supposedly to “smooth” the business cycle and diminish the pain. Ha! There is no greater instigator of instability in the business cycle, than is the proverbial Central Bank. It creates the pain and keeps itself in business by promising to mitigate that pain. What a fraud! What extortion!”

For most readers of this site, no proof of this grievously harmful cycle of artificially induced UPS and DOWNS that the FED orchestrates in the economy is really needed.

You have all seen the evidence in many different manifestations at different times in history. Whether it was John Law around 1720 in France, or the French Assembly around 1790 (read about Assignats), or the German Central Bank in the early 1920-s, these MoneyPulations always end in disorder and tragedy. Their enactment should never be considered by rational humans. History has recorded one too many Holocaust already.




From http://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_germanhyperinflation.html

But although the country [Germany] functioned again, the savings were never restored, nor were the values of hard work and decency that had accompanied the savings. There was a different temper in the country, a temper that Hitler would later exploit with diabolical talent. Thomas Mann wrote: “The market woman who without batting an eyelash demanded 100 million for an egg lost the capacity for surprise. And nothing that has happened since has been insane or cruel enough to surprise her.”

Just like we should never forget the Holocaust or other Historical Tragedies, it serves us well IMO to occasionally remind ourselves that even very intelligent and well-meaning Central Bank chief executives can be behind this grievous harm.

And it does not always have to end in a Holocaust for real harm to be done to real people.

So it is not relevant to the matter of harm whether, for example, the FED Chairman was someone like the esteemed Arthur Burns or if the defacto leader was someone like Benjamin Strong.

As recorded at http://www.lewrockwell.com/rothbard/rothbard96.html

The autocratic ruler of the Federal Reserve System, from its inception in 1914 to his death in 1928, was Benjamin Strong, a New York banker who had been named governor of the Federal Reserve Bank of New York. Strong consistently and repeatedly used his power to force an inflationary increase of money and bank credit in the American economy, thereby driving prices higher than they would have been and stimulating disastrous booms in the stock and real estate markets. In 1927, Strong gaily told a French central banker that he was going to give “a little coup de whiskey to the stock market.” What was the point? Why did Strong pursue a policy that now can seem only heedless, dangerous, and recklessly extravagant?

FED Chairmen can be swayed by their political masters, irrespective of the FED’s supposed “political independence”.

From http://www.britannica.com/bps/additionalcontent/18/23270281/How-Richard-Nixon-Pressured-Arthur-Burns-Evidence-from-the-Nixon-Tapes

He was an authority on business cycles and published extensively with Wesley C. Mitchell. Although Arthur Burns was an eminent economist, Nixon was probably more impressed that he was a sympathetic Republican loyalist.

Burns sees lots of liquidity in the banking sector and fears a rapid rise in interest rates coming from a rise in inflationary expectations if monetary policy is judged to have “gone wild.” Nixon, on the other hand, is perturbed that liquidity isn’t growing fast enough.

Thus, a monetary stimulus helped to boost the economy in time for the 1972 election, helping to deliver Nixon’s landslide victory. However, the excessive ag- gregate demand stimulation prior to the election created serious problems for the economy that took nearly a decade to resolve.

(It took the strong hand of Paul Volcker to bring sanity back to the FED. Sadly, as we know by now, this sanity was not to last.)

With fewer than eleven months until the election and four days until the next meeting of the Federal Open Market Committee, Burns and Nixon have a private telephone conversation. Burns states that “I wanted you to know that we lowered the discount rate . . . got it down to 4.5 percent.” “Good, good, good,” replies Nixon. Burns indicates that the announcement of the discount rate reduction would be accompanied by the usual statement that it was done in order to bring the rate into line with market conditions, but with an added statement that it was done to “also further economic expansion.” Burns exclaims that he also lowered the rate to “put them [the Federal Open Market Committee] on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.” “Great. Great,” replies Nixon…

The point to take away from this history is that what is the Federal Reserve in America, is just another Central Bank in any other country — they all are capable of doing this grievous harm.

If there was no Arthur Burns being swayed by a Nixon, there would be no need for a Paul Volcker to “keep the FED in business by promising to mitigate the pain”.

And does anyone honestly believe that the current FED chairman (or the next, or the next) will not be swayed by whatever Administration is in power in Washington?

mikey July 27, 2009 at 6:51 pm


the fed pays 0.25% on reserves.”

Right, Curious, I dunno where I got the higher figure from, I think the steel plate in my head is to blame.

A. Viirlaid July 27, 2009 at 8:13 pm

I have to apologize for going a little “off message” in my first post, but to me, Central Banks are just plain harmful.

Nothing in history suggests otherwise.

Now, as to whether The FED Needs An Exit Strategy…

The money that the FED injected with its purchases of ‘toxic’ and other ‘assets’ was meant to alleviate the banks’ lack of lending; it was intended to ‘thaw out’ the frozen credit markets, to alleviate the ‘credit crunch’.

It was intended to restore the banks’ impaired reserves. Those reserves had been diminished by the collapsing value of the ‘toxic’ ‘assets’ — assets which had until recently not been toxic, and which had until that time fulfilled the role of being a ‘normal’ part of bank reserves, and which thereby contributed to the overall reserves against which banks could legitimately lend.

If those reserves were diminished by the threatened downward revaluation of such toxic assets, then the FED felt it had to step in to take the toxic assets off the banks’ hands so as to reset the banks back to their former ‘lending power’.

It was intended to give the banks back their Lending Mojo.

So if the banks were actually to lend out the money given to them by the FED (sorry, exchanged for the assets), would not the banks be carrying out the initial will of the FED?

Apparently not, according to people like Paul McCulley.

Mr. McCulley talks about ‘excess reserves’ that the banks now won’t lend out due to their being able to make more money by keeping those funds with the FED and just earning interest. Thus there will be no danger of money supply inflation or resulting price inflation.

So what was the point of restoring the banks’ impaired reserves in the first place?

I love Robert Murphy’s analogy with the rats behind the restaurant and how the owner would have to put more and more food out to keep the multiplying rats from entering the restaurant.

But back to the point — so what exactly was the point of the additional, or at least ‘replacement’ reserves that the FED put into the banks?

Was it not to LEND THEM OUT TO CLIENTS to ‘stimulate’ business activity? Or am I missing something?

Since I accept Robert Murphy’s overall thesis that there is unavoidable inflation in the wind, how do I square the circle? That is how do I personally also see unavoidable inflation?

Because if the money represented by the previously non-toxic assets — those that are now toxic, that is, now worth less or worthless — was part of normal bank reserves, where would the inflation come from?

It would come from the inflated value of those assets.

Banks had assets on their books that were inflated value-wise many times over their intrinsic value. And many times over when compared to the funds expended from banks’ capital reserves to acquire those ‘assets’ in the first place.

That is, these assets — which banks had within their own quickly expanding reserves — were inflated (by the ongoing manipulation in the financial marketplace) to a valuation far beyond what our fractional reserve banking system could easily have absorbed without artificially boosting the overall money supply and thus price inflation.

That is the danger of a fractional reserve banking system. The recent financial collapse which prevented that eventuality, has now been putatively revoked by the FED’s recent actions. But that still leaves the inflation in the pipeline, as Robert Murphy writes.

So it is my contention that these inflated-value assets would have (on their own) caused a problem without FED intervention had the financial game-playing continued unabated.

As one post mentioned, the job of banks is to lend against the reserves they have on hand. Any other strategy leads to suboptimal profits and a ratings downgrade against the performance of less conservative banks.

From http://www.reason.com/news/show/38384.html

Friedman: I would prefer the Fed to follow a much simpler course: to take as its operating magnitude not the federal funds [interest] rate but the quantity of money. Pick whatever definition it wants—M2 [one of many measures of the money supply, including currency, savings, demand deposits, and certain liquid time deposits] is a good definition. I’d just as soon the Fed announce it will increase M2 by 5 percent per year, year after year, month after month. But they are not going to do that.

Reason: Why won’t they do what you suggest?

Friedman: They don’t want to become irrelevant. It’s human nature. You would do the same thing if you were there, and I’m afraid even I would.

Reason: But it would be preferable to abolish the Fed entirely and just have government stick to a monetary growth rule?

Friedman: Yes, it’s preferable. And there’s no chance at all of it happening.

More from Anna Schwartz:


And by the way, this timely, currently relevant, warning from Milton Friedman to President Obama:


We’ve had socialized medicine in Germany, in Sweden, in Britain, in Canada. All of these countries are having difficulty with it. There’s not one of them that doesn’t have long waiting periods, in which expenses have not been going up, in which you don’t have a real problem. So we’re not going to solve our medical problems by socializing.

Where are the savings promised by all these activities?

Even a wealthy country like America will find itself with a steadily declining standard of living if it continues down the present path.

Bennet Cecil July 27, 2009 at 9:46 pm

Banks that took bailouts should be required to hold excess reserves compared to their competitors once the economy heats up. All of the too big to fail banks should also be split into multiple small banks either with antitrust laws or with new legislation.

Instead, we will get high taxes and stagflation.

A. Viirlaid July 28, 2009 at 3:02 pm

Greg, you wrote at 8:25 AM on July 27, 2009 that:

The Fed’s balance sheet has increased and the majority of it is backed by assets.

Yes, they are in the red with AIG and Bear Stearns, but they are in the black with all the other investments. [my italics]

When the economy recovers, and it will, this may be one of the rare event[s] where the government makes money.

The real question is what will the government do with the profits?

ShedPlant makes a valid point with his post on July 27, 2009 8:56 AM:

If the Fed’s balance sheet is made up of great investments, why were they in such trouble that they needed to be bailed out by the Fed in the first place?

Greg, could I ask you where you obtained your information? I am curious because while I would love to see the FED make money for the government, I doubt that they are going to make any $$$ back with the trillion or so in subprime and toxic securities they currently hold. And make no mistake — the money they used for the purchases of this junk was printed from thin air.

In fact, exactly THAT is one of the problems associated with the whole FED mess. We wonder why it would be necessary to offer interest payments to banks so that they would not lend out the money that they received from the FED. One reason seems to be that the ‘normal’ alternative would not work.

That is, under your scenario, with market ‘normalization’, the FED could indeed instead sell off its multi-trillion dollar warehouse of pawned financial junk. The FED could then retire the money so obtained and thus reduce the outstanding money supply by a corresponding amount. But that cannot happen IMO.

For that to happen, the FED needs to get 100 cents on the dollar — that is, what it paid out. Good luck Virginia, it ain’t gonna happen.


The FED acted as a huge clearing house for ‘junk’ that even pawn shops wouldn’t accept. And as far as I know, the FED paid 100 cents on the dollar for everything they vacuumed in — that is, while any prudent pawn shop that wants to stay in business might pay only about 20 cents on the dollar for even “non-junk”, the FED did no such thing.

A going-concern pawn shop would lend maybe only about 20 cents on the dollar (depending on the ‘asset’ pledged) because then it knows that it can sell that asset in the marketplace for say, 40 cents on the dollar, or more, if the original borrower never comes back to pay back the original loan and reclaim the asset pledged for that loan.


As far as I know, even Congress cannot get the information from Bernanke that you seem to have from some unknown source. Bernanke simply refuses to say. He says he has to defend the FED’s right to set monetary policy without ‘political interference’.

Now Bernanke is out on his own Dog & Pony Show at Town Hall Meetings and on various media outlets, asking everyone, in essence, to help him preserve the FED’s ‘independence’.

I suspect that the reason Bernanke doesn’t want to tell anyone about the FED’s pledged assets, is that they are essentially worthless. He would risk a ‘run on the American dollar’.

Please see “Fed Refuses to Disclose Recipients of $2 Trillion” at


“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.

“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.

The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.

“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”

The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.

“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”

The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.

“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.

Then Greg, you later wrote on July 27, 2009 1:39 PM:

I bought some banks at the same time the Fed was buying, I am up over 200% in 4 months. Let me see, is that better performance than gold?

Just wait for GM. When they come out of bankruptcy and go public again, the government is going to do very well with liqudating [sic] their holdings into the market.

You really need to look at the whole picture, if you are fixed on one aspect of the economy, you will miss opportunities.

Am I reading you right?

As “joebhed” wrote, “An increased cost is equal to a decrease in excess earnings, is equal to a lesser payment to the Treasury, is equal to an increase in taxation.”

Or to put it a different way, your gain is the FED printing money, which is indirect taxation of the rest of us, which saved your bank, which increased its stock price, which is money in your pocket.

Sure that ‘gain’ was available to those of us who would want to gamble, but how exactly is society better off?

That was money from one person’s pocket put into someone else’s pocket, thanks to the FED. Let’s not be surprised though — this is what the FED (and the Government also) is good at.

Do we really need another mystic mumbling Maestro of Money Manipulation in the FED chairman’s catbird seat uttering more magical mysterious incantations in front of some Congressional banking or finance committee? Oh sorry, that was the last guy.

Not a dime of additional net wealth or wellbeing was created for anyone with this manipulation. In fact some people were hurt to enable others to do well. That is the old continuing saga of the FED’s MoneyPulation.

From the story “Bernanke’s road show: It’s about more than economics” and subtext “Poll gives low rating to Fed Performance” at


A clutch of protesters picketed outside the building, demanding more disclosure from the Fed.

Mr. Bernanke, whose term as chairman will end in January unless renewed by the President, is also facing attacks from members of Congress uneasy about the Fed’s big footprint in financial markets. In particular, several members have voiced concern about the Fed’s behind-the-scenes role in the AIG bailout and Bank of America’s takeover of Merrill Lynch.

A bill now in the House of Representatives would give the investigative arm of Congress – the Government Accounting Office – free rein to audit everything the Fed does. Mr. Bernanke has argued that the legislation would threaten the Fed’s ability to run monetary policy without interference from Congress.

During the town hall, he bristled when asked about the measure, saying: “I don’t think the American people want Congress running monetary policy. That’s exactly what [the bill] would do.”

Mr. Obama and other administration officials have applauded Mr. Bernanke’s handling of the financial crisis. So far, they haven’t said if he’ll be granted another four-year term.

Greg, do you too “applaud” the FED Chairman’s handling of the financial crisis?

A. Viirlaid July 28, 2009 at 6:34 pm

From http://www.theglobeandmail.com/report-on-business/bernankes-road-show-its-about-more-than-economics/article1232869/

I’m answerable to the American people,” he insisted.


The Gallup poll found that only 30 per cent of respondents rated the Fed as doing a good job – giving it the lowest score of nine federal agencies, including the Internal Revenue Service, FBI, CIA and Homeland Security.

Including the IRS? What gives?

Furthermore from http://www.bloomberg.com/apps/news?pid=20601087&sid=apx7XNLnZZlc

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP. [my italics added]

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, [italics added] in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

So is it any surprise that only 30% of respondents report that they trust that the FED is doing a good job?

When the FED and the Treasury get in cahoots to frustrate the will of the people via the frustration of the will of the Congress, by using the TARP for something it was not intended for (GM, equity investments in banks, etc.), and then use the printing presses of the FED to do what TARP funds were supposed to be used for —- what?

Am I or You supposed to be surprised?

This is not demoCrazy — this is just Plain Crazy!

And it most certainly is ANYTHING BUT being

…answerable to the American people…

Ned Netterville August 13, 2009 at 2:15 pm

A. Viirlaid: Wow! When a brief statement of an opinion of mine draws forth such kind words of support plus an extremely interesting and erudite commentary on the Fed with great references, commentary that solidifies my own position and justifies it far better than I could, I’ll certainly be commenting more often and praying that you both see and agree. Thank you.

A. Viirlaid August 18, 2009 at 4:11 pm

Thank you Ned, you really are TOO kind.
But then I guess you can tell I am pretty passionate about the harm that the FED can and has created.

If you are a student of history, you know that (as you personally say) NO ONE should have that kind of power over others — if only because they (The FED) are human, and are thus prone to mistakes that can grievously harm others.
I think Americans (and others in the world that the FED also affects negatively) deserve better.

Why is the FED so wedded to pushing Debt on everyone?
You would think that the FED should at the very least be neutral, even if it did not actively promote personal saving?

But, forgive me; I did not want to start another diatribe here.
So let me just say that we are all human, and like-minded people can find some solace together, even if we cannot change institutions like the FED.
I thank you for your support too, as you have thanked me.

And, if we are really fortunate, others, like those who run this Mises organization, and other like-minded folks, as they are over at The Daily Reckoning (dailyreckoning.com) site, might even reach a few folks in Congress and may thereby eventually help to ‘effect’ some positive changes.
Bill Bonner and his colleague at DR, Addison Wiggin, have even sent copies of one of their books (Empire of Debt) to EVERY member of Congress to TRY to help them understand what we all face.

Another person whose opinions I value is Doug Noland over at Prudent Bear (prudentbear.com). His opinions usually appear in the last 2 pages of his weekly 12-page article (usually posted late Friday).

Last of all, none of us should forget that there is at least one person (and probably more) in Congress who shares our specific concerns — that person is Dr. Ron Paul.
He has managed to convince even many of his colleagues that there is a great harm being done to all of the states of the great United States. There is hope after all.

Gerry Flaychy August 23, 2009 at 3:52 pm

Robert P. Murphy wrote: ” McCulley’s most significant claim is that the Fed will be able to hike interest rates without selling off the assets on its balance sheet: ”

But McCulley doesn’t seem to have say that here:

Paul McCulley wrote: ” Thus, by hiking the rate it pays on excess reserves, the Fed now has the ability to enforce a rising Fed funds rate target – even before it “unwinds” its bloated balance sheet. “

The way I understand it, is that the fed will use the two tools: hiking the rate it pays on reserves and selling off the assets on its balance sheet, but not necessarily at the same time.

A. Viirlaid September 1, 2009 at 10:04 am

Another small note to Ned Netterville who had earlier written “No individual or group of individuals should possess such unholy power over the lives of others.”

Ned, please see the link http://mises.org/daily/3632

A post by Lilburne about the Ben Bernanke-equivalent from the 19th century, a fellow named Nicholas Biddle. Absolutely fascinating parallel story.

Libertarian historian Lord Acton said, “Power tends to corrupt, and absolute power corrupts absolutely.” And the corrupt banking magnate Mayer Amschel Rothschild said, “Give me control of a nation’s money and I care not who makes the laws.” Those two dictums, taken as dual premises, lead inexorably to the conclusion that men like Biddle and Bernanke should be challenged with eternal vigilance by all people who would be free.

A. Viirlaid September 7, 2009 at 2:54 pm

Ned, you might want to read

END THE FED by Dr. Ron Paul at


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