1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/7865/bennie-and-the-monetary-jets/

Bennie and the Monetary Jets

March 3, 2008 by

How does Bernanke jump-start the banking system? Bernanke decided that, instead of waiting for timid customers at the discount window, he would announce a series of auctions called Term Auction Facilities, or TAFs, where the high bidders would get the bank reserves. This maintains the bank’s privacy, or at least reduces the onus of approaching the discount window, and it guarantees that new reserves will enter the system.

Some commentators say that the Fed has merely taking charge, rising to the occasion, and attempting to “shake it loose together.” However, others would say this is all an act of desperation. If desperate circumstances call for such drastic actions, then Bernanke’s actions — rather than words — indicates that we are in desperate circumstances.  Stick around to find who’s right and who’s wrong. FULL ARTICLE

{ 46 comments }

jeffrey March 3, 2008 at 10:06 am

Here another musical take: Bennie and the Feds

Diego Alban March 3, 2008 at 10:14 am

I love this article!

Although, maybe I went off course somewhere since I’m a layman.

It sounded like Bernanke is promising to treat a Recession by laying the groundwork for a Depression?

Does this mean Bush, Bernanke, etc.. were telling the truth? We are going to get out of this recession…. by going into something worse???

David Spellman March 3, 2008 at 10:29 am

It is a great article pointing out the shadowy machinations of the Federal Reserve. Japan already went down this road to disaster, but the destruction of the dollar will ripple in much larger waves.

The person, layman effect is that your investments and retirement is becoming worthless at a rapid pace. The currency is being devalued in breathtaking leaps and bounds.

Hyperinflation, anyone?

Fullcarry March 3, 2008 at 10:41 am

The FED had decided it needs to recapitlize the banking system. Lower Fed Funds rate and the Term Auction Facility accomplish this.

The lower Funds rate guarantees a higher price level as the return on money goes down and the TAF subsidizes bank borrowing during this inflation.

Jake March 3, 2008 at 10:59 am

Mark,

There is something else going on here.

If you look at this graph of Shadowstats, you’ll see M1 declining, M2 remaining stagnant and M3 soaring.

http://www.shadowstats.com/alternate_data

Gary North posted the following article at LewRockwell.com, “Bernanke’s Surprise”
where he comments on the same thing.

http://www.lewrockwell.com/north/north608.html

Mike Shedlock discusses Gary’s article further. (scroll to the middle of Mike’s post where he picks up on Gary’s article)

http://globaleconomicanalysis.blogspot.com/2008/02/manufacturers-pass-on-costs-as.html

So, it appears that the wool is being pulled over our eyes. The Fed is providing liquidity to banks, not capital. And it appears that the Fed is deflating, not inflating. However, the M3 growth confuses me since it appears that these guys dismisses M3 as the main factor to follow for inflation.

Interesting thoughts and arguments going around. What’s the correct answer?

Jake March 3, 2008 at 11:00 am

Mark,

There is something else going on here.

If you look at this graph of Shadowstats, you’ll see M1 declining, M2 remaining stagnant and M3 soaring.

http://www.shadowstats.com/alternate_data

Gary North posted the following article at LewRockwell.com, “Bernanke’s Surprise”
where he comments on the same thing.

http://www.lewrockwell.com/north/north608.html

Mike Shedlock discusses Gary’s article further. (scroll to the middle of Mike’s post where he picks up on Gary’s article)

http://globaleconomicanalysis.blogspot.com/2008/02/manufacturers-pass-on-costs-as.html

So, it appears that the wool is being pulled over our eyes. The Fed is providing liquidity to banks, not capital. And it appears that the Fed is deflating, not inflating. However, the M3 growth confuses me since it appears that these guys dismisses M3 as the main factor to follow for inflation.

Interesting thoughts and arguments going around. What’s the correct answer?

Jason March 3, 2008 at 11:00 am

What sort of assets can borrowing banks put up for collateral? Can they put up their own reserves?

billwald March 3, 2008 at 11:39 am

If manufacturers pass on increased costs should not demand for those specific products be reduced?

Economic analysis of the Great Depression generally ignores the effect of the dust bowl conditions and that 75% of the people lived on the farm and were dirt poor, many having to borrow money for seed and then when the crops failed for several years . . . can’t blame the Fed for the weather

The Two Towers March 3, 2008 at 11:48 am

The Two Towers of Destruction: Big Ben and Big Bush are combing together to expedite their destruction of US society.

If Big Ben is secretly reducing the money supply then he should be dead set against using USGOV deficits to hand out money to the citizenry. If he is growing the money supply through different means than interest rates then he would be for such stupid ideas.

All the while Big Bush runs two wars and expandes the Government at a 6 to 11 percent clip.

The real problem here is: There ain’t no Frodo to save us this time.

fundamentalist March 3, 2008 at 12:47 pm

Jake: “Interesting thoughts and arguments going around. What’s the correct answer?”

Curious. Very Curious. I watched some of Ben’s testimony on C-span this week, and he certainly claims to be inflating. A possible explanation is that the Fed doesn’t have absolute control over the money supply. The Fed may want to inflate, but if banks don’t want to lend because they’re in trouble, and/or if no one wants to borrow, then the money supply won’t increase through the banks. Banks may use the new money frin the Fed to improve their balance sheets and not for making loans. But the increase in the money supply will come later when business confidence returns and banks feel safe to lend the new money. In other words, there may be a lag between Fed actions and an increase in money due to the condition of banks and businesses. The Fed may want to increase the money supply now and can’t; instead, the new money created by the Fed may enter circulation when the Fed least wants it to–during a business rebound from the recession.

As for the Fed’s open market activities, they may not increase the money supply because people are simply switching from gov assets to commodities.

mike March 3, 2008 at 12:55 pm

Shedlock’s commentary is interesting. He is convinced we are in a deflation (referring to monetary aggs) and that the Fed is unsuccesfully trying to provide liquidity and cannot provide capital. I am having a hard time refuting him.

Granted, all the Fed can do is loan out money (provide liquidity). But if the Fed permanently loans out money at 2%, in the sense that the market understands those will be the rates on debt renewal for the indefinite future, how is that different from providing capital? When the inflation of money starts up the economy again and we hit hyperinflation, the borrowers will easily find means to pay both the 2% and any gradually increased rates, using depreciated “money”.

Eric March 3, 2008 at 1:21 pm

I think the only thing we know is that we don’t know what’s going on at the FED. Ben is trying his best to be like Alan, who did admit (on the Daily show I think) that his purpose when testifying before congress was to be as ambiguous as possible thus providing the least information – his theory being that the FED that governs best is the FED that informs least. This may be just to keep congress at bay, since they do still have the power to shut down the FED. Or perhaps he has some other agenda besides immediate self interest. He may actually think he can inflate his way out of trouble and wants to be the man on the white horse.

Ben is trying to steer a giant oil tanker ship using the two arrow keys on his keyboard, up and down. That’s all he has to work with. He is either hoping to postpone big trouble on his watch and is trying to figure a way to steer us clear of the ice, not looking at the glacier we are heading towards – or he really believes in Milton Friedman’s theory of the causes of the 30′s depression.

I am inclined to trust Rothbard more than Friedman, but I am reminded of Friedman’s line about there’s a lot of ruin in a country – meaning a country can take quite a hit and remain standing. I don’t know how bad it can get, and as the author said, we will need to wait and see who’s right and who’s wrong.

jp March 3, 2008 at 1:42 pm

Cudos to Mises.org for putting the spotlight on TAF.

Even though TAF has added $60 billion to money supply, overall M1 continues to fall, as Shadow stats and Shedlock have pointed out.

How has this occurred? The $60 billion jump has been offset by a >$60 billion drop in the Fed’s long term government bond portfolio, or SOMA. Historically, whenever a long term bond (2 year to 30 year) in the SOMA portfolio matured, the Fed simply rolled it over. The cash it had spent to buy that bond therefore stayed in the economy.

Since August or so the Fed has been redeeming SOMA’s bonds, not rolling them over. The face value of the bond has been paid back to the Fed, the effect being that money is being withdrawn from the economy. The effect of redeeming bonds and withdrawing circulating cash outweighs TAF’s influence on increasing the level of circulating cash. Overall M1 is decreasing.

The Fed’s decision to roll over or redeem is a policy decision. Unlike open operations, it doesn’t depend on the willingness of commercial banks to lend the money the Fed injects into the banking industry. I sort of agree with Shedlock on this one – the Fed seems to be following a policy of shrinking money supply.

At the same time, the TAF accepts a lot of questionable collateral (mortgage backed securities, comm paper, corp bonds and more). This change in the assets backing the dollar (from relatively safe government bonds to the above) can only hurt the purchasing power of the dollar, especially if the Fed is lax on monitoring what it is accepting as collateral.

Jake March 3, 2008 at 3:31 pm

The discussion is getting very interesting.

I would like to see this post and it’s comments stay alive.

David Spellman March 3, 2008 at 4:44 pm

Bernie and the Jets (with apologies to Elton John)

Hey Feds, shake it loose together
The interest rate hit something
That’s been known to be bell weather
We’ll make the golden calf tonight
So all bow down
You’re gonna hear eclectic musings
Soft economic ground

Say, Keynes and Rothbard, have you seen them yet
But they’re inflated now, Bernie and the Feds
Oh but they’re calm and they’re confident
Oh Bernie he’s rarely seen
He’s got a printing press to make a mess
You know I read while on thorazine
Bernie and the Feds

Hey feds, the dollars are so goldless
Maybe we’re blinded
But Bernie makes them worthless
We shall survive, let us lead the angry throng
Where we fight governments out in the streets
To find who’s right and who’s wrong

Mark Thornton March 3, 2008 at 4:58 pm

The Fed’s biggest weapon is misinformation. If we knew what they were going to do they could not move the economy the way they want.

I coined a term for the Fed’s doubletalk:

“Greenspam”

It appears that they are flooding one area of “liquidity” while draining from another to help achieve their two goals of reflating the financial sector but preventing a complete breakdown of the dollar.

Fred Kaifosh March 3, 2008 at 5:10 pm

The time series in second graph has the possibility to be meaningful. However, the first graph does not. Rarely does a graph used in economics, or elsewhere, based on two points, provide enough information from which a meaningful conclusion can be drawn. The Fed’s data, for the first graph, is shown below:

Title: Term Auction Credit
Series ID: TERMAUC
Source: Board of Governors of the Federal Reserve System
Release: H.3 Aggregate Reserves of Depository Institutions and the Monetary Base
Seasonal Adjustment: Not Seasonally Adjusted
Frequency: Monthly
Units: Billions of Dollars
Date Range: 2007-12-01 to 2008-01-01
Last Updated: 2008-02-15 10:01 AM CST
Notes: For more information, see
http://www.federalreserve.gov/monetarypolicy/taf.htm.

DATE VALUE
2007-12-01 11.613
2008-01-01 44.516

M E Hoffer March 3, 2008 at 6:01 pm

with this: “It appears that they are flooding one area of “liquidity” while draining from another to help achieve their two goals of reflating the financial sector but preventing a complete breakdown of the dollar.”

I think Thornton is getting the picture dialed in..

leading to more bankruptcies among those furthest from ‘the spigot’…

Mark Thornton March 3, 2008 at 6:06 pm

I believe that the newer data will have the “graph” flatline until they decide to increase or decrease the size of the auction.

D Childree March 3, 2008 at 9:37 pm

Bernanke’s tenure as Fed Chairman is notable for how clearly it has demonstrated the Fed’s lack of transparency and public accountability. Although the word “monetarist” is not actually a combination of the words “monetary” and “socialist,” it ought to be.

If Gary North is indeed correct that Bernanke is deflating while attempting to convince the public it is inflating, it certainly validates the “conspiracy” theory of Fed action. If Murray Rothbard had lived to write about Bernanke’s tenure, it would have made a great addendum to The Case Against the Fed.

newson March 3, 2008 at 9:47 pm

to jake:

check out stefan karlsson (economist of the austrian persuasion). key “mike shedlock” in the search window, and it’ll take you to a number of articles where karlsson debunks the gary north/mike shedlock/frank shostak definitions of money supply. this is, after all, the key to establishing whether we are experiencing deflation or inflation. for karlsson, it’s clearly inflation, and the commodities markets seems to bear out his judgement.
.
the link is http://stefanmikarlsson.blogspot.com/

newson March 4, 2008 at 1:56 am

ps to jake:

here’s another argument for the inflationary scenario, rather than the deflationary one (shedlock et al). the author is an austrian-style investment analyst, steve saville. here he compares the us with the japanese situation post-bubble
-http://safehaven.com/article-4908.htm

Denis Langlais March 5, 2008 at 2:42 pm

I believe in openness or transparency!
The banks should be required to
submit correct information on all their assets
There should be a deadline of 2 weeks to complete this! CEOs who provide false
info would go to jail!

Short term, it would be very painfull and some banks
might collapse but at least we would
know situation long term!
The banks that collapse deserve it
and can be bought by a strong bank.
Any depositors money should be covered so they don’t suffer!

Mark Thornton March 5, 2008 at 4:37 pm

With regard to the types of collateral the Fed is willing to accept Professor Reisman points out the following:

According to a front-page article in today’s NY Times, “Under the program [TAF], banks have been able to borrow money for up to a month or so, pledging collateral that includes mortgage-backed securities, even if the securities are not tradable in today’s markets.

This could imply that they are taking at least some non-performing loans, but in any case they are accepting collateral that is not priced in the market place.

JIMB March 5, 2008 at 5:32 pm

The dollar first responds to excess or shortage of liquidity … which is cash and electronic cash at the Fed (reserves) used to clear settlements. When demand for dollar assets collapses, the dollars are no longer needed. You can bet there’s a lot of “excess” reserves that aren’t being used for exchange of dollar assets now.

However we are facing two situations: excess liquidity and a collapse of credit. It’s an inflationary deflation. Take your pick. The Fed is not inflating, btw, because base money has not increased substantially on their balance sheet (unless they are rigging the #s which I seriously doubt).

However, giving the banks liquidity (the collateral ratio is 50% and any bank can suffer a margin call … you can bet the TAF isn’t the “flood the market” that is implied here) isn’t quite what is happening. Plus the banks have gone a long time in “lockup” where the ability to get critical funds was almost nonexistent. For those interested in the facts of the TAF according to the Fed, they can find them here: http://www.federalreserve.gov/monetarypolicy/taf.htm

Whether this is inflation or deflation, take your pick. BTW, over time, deleveraging effects will likey cause 2-3 trillion in credit contraction.

KY Leong March 6, 2008 at 2:01 am

OK, if sneaky Ben@theFED has been swapping USGS for questionable commercial papers – bailing out his friends on Wall St. whilst pretending to reflate the sliding US economy – then who’s been helping the FED soak up the “redeemed” US Treasuries? Is it the Chinese? Arabs? ECB? And despite the declining value of the Dollar? Did I miss something here?
Appreciate if anyone has any idea/data on this? Thanks.

jp March 6, 2008 at 9:21 am

When the Fed redeems instead of rolls over, the U.S. Treasury Dept pays the Fed the face value of the bonds, and the bond is extinguished. The Treasury gets the money to repay bonds from taxes, other bond issues, etc. Once the Fed gets paid the money disappears from the economy. Except for the fact that now Brnanke et al lend it out via TAF to private actors like Citigroup.

I don’t know how much the Chinese or Arabs have to do with the redeeming process. The Fed is essentially slowing the rate at which it monetizes government debt. It now subsidizes a slightly smaller chunk of the US national debt than before. Some other party must have stepped in to take the Fed’s place (assuming government spending has gone on at the same rate). These new buyers of government debt could have been the characters you mentioned.

JIMB March 6, 2008 at 3:13 pm

Mark — Your article is misleading regarding the TAF. The TAF (Term Auction Facility) has been largely neutralized by counterbalance draining reserves in other places, which you can see by comparing the current to the older reports here:

http://www.federalreserve.gov/releases/h41/

Reserves have not expanded hardly at all for the enormity of the credit problems. The fed is NOT expanding money much at all (if the #s are to be believed). The inflation so far, was in the past.

Mark Thornton March 6, 2008 at 3:47 pm

Yes, that is a good point. They are putting US govt securities into the bank and taking out the less credit worthy securities. This would supposedly improve their books.

But this maybe just short term. There is nothing stopping them from expanding the TAF while also stopping the sale of Treasuries. Thus, they now have monetary jets!

Scott Lahti March 6, 2008 at 3:50 pm

Back in October of 2007, my Old-Eltonian email thus, “Benny and the Debts”, to Austro-Virginian (keeping in mind another, non-Viennese U.Va.) blogger BK Marcus made for a cartoon-enhanced post at his blog “lowercase liberty”:

http://bkmarcus.com/blog/2007/10/failedpunner-joe

Failedpunner Joe
October 22nd, 2007 by bkmarcus

And now a word from Scott Lahti (1, 2):

…I pass along my latest Austrian-”inspired” drive-by, prompted by a caricature of Fed chairman Ben Bernanke’s presumed intention to inject ”liquidity” into the rattled credit markets (attached image), sent to me by my roommate at Hillsdale College (1980-1), a Misesian-Austrian economist…. Only those ignorant of 1970s pop lyrics are assured of being spared the worst.

Bern, Baby, Bern (Fiscal Inferno), or -

Benny and the Debts! *

*You know I didn’t read it in a magazine…**

**And ever since our ”raining”, pennies-from-Heaven monetary carjackers began to sing along to ”Goodbye, Yellow Brick Road”, abandoning (g)old standards in favor of ”payola”, they’ve made the nation’s Brink’s trucks as vulnerable to blowouts as a candle in the wind…***

***At least one band had the better part of hard-money wisdom in singing ”Give me silver, blue and gold”, which is not Bad Company to find yourself in when inflation is rampant – dunno about the ”blue” part, but, hey – ”two out of three ain’t bad”, or, Half a (Meat) Loaf is Better Than None…

JIMB March 6, 2008 at 4:20 pm

Mark – The funds are only to replace the lockup of the fed funds market.

The ratio of the funds given in comparison to the collateral is very small (<50% plus potential for margin call) and they accept only excellent collateral.

If they did not do this, banks could get no additional reserves no matter the demand for money (remember money = settlement or cash and everything else is credit). Depositors could not get their funds.

More here:

http://www.federalreserve.gov/monetarypolicy/taf.htm

Mark Thornton March 6, 2008 at 5:02 pm

Yes Jim, you are correct.

That is the desperate situation the Fed has placed the financial markets in.

Bernanke decided to take desperate measures to bail out the banks.

Why not let banks make their own reserve requirements by offering us higher interest rates on CDs? Cut back on loans? The reserve requirements in place today are almost non-existent and they can’t be met internally?

Where is Paul Volcker when you need him?

JIMB March 6, 2008 at 6:14 pm

Mark – Banks cannot create reserves. They can only create credit. They could pay more for CDs and attempt to attract cash from outside the banking system, however should that prove insufficient to meet demand for deposit redemptions (in case of panic … which it appears we are there), the banking system would collapse.

In my view, the huge inflation occurred in the past — trillions of it in mortgage credit.

Mark Thornton March 6, 2008 at 7:04 pm

Banks can create reserves by doing nothing other than stop loaning money and paying market rates for savings. Is there any doubt of this?

As a positive economist, if the banking system needs to “collapse” I can only analyze why this takes place and offer remedies. I don’t offer ways to help one group versus the others, or keep schemes afloat.

Personally, I’m against schemes.

Mark

Mark Thornton March 7, 2008 at 8:57 am

Everyone needs to read Sean Corrigan’s entry on the blog and the Fed’s press release.

TAF is being expanded by 67%.

I really hate to say “…………………………….”

jp March 7, 2008 at 10:45 am

Does anyone have any commnts this long winded question?

The Fed’s actions the last few months seem to be a simple switch of collateral. It is selling it’s long term bonds while accepting certain questionable securities via TAF. The net change on the financial assets the Fed holds is 0, the net change on circulating currency is 0. (Of course, this could change with the new announcement)

From the above, Austrian theory tells us that since there is no expansion of the money supply, there will be no decline in the purchasing power of money. Yes, the policy creates perturbations in the economy. The money enters the economy via TAF recipients who, flush with cash, push prices up. But at the same time, money is being withdrawn from the government sector as the Fed redeems long term bonds. Cash strapped, government begins to demand money, pushing prices down. The net effect is that the two activities cancel each other out. The overall price level stays the same, though relative prices will change. Does that sound right?

Here is a more extreme version of the actual one above. Imagine a central bank that has issued $1 million in notes and has 1 million ouces of gold in its vault. Like the Fed is doing today, it decides to substitute gold collateral for another asset, say the same sort of questionable assets the TAF is accepting like mortgage backed securities (MBS). The bank stealiy sells all its gold. For each dollar it receives it then loans the dollar out at the going market price of the MBS, receiving those MBS as collateral. In the end, whereas each dollar was backed by gold, now they are backed by MBS.

What does Austrian theory have to say about this scenario? The bank hasn’t increased the money supply, it is still at $1 million. All that has changed is the assets the bank holds. We cannot say any inflation has occurred, yet intuitively it would seem that substituting gold for MBS would be an unwise thing to do. Are there any books or articles you can recommend that deal with the importance of the asset side of a central bank?

JIMB March 7, 2008 at 11:48 am

Mark – Reserves of the system as a whole are about 915 billion supporting a pyramid of 50 Trillion in credit. That is the nature of fractional reserve banking. The system cannot delever without additional base money.

Here are the debt levels for reference.

http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf

JIMB March 7, 2008 at 11:59 am

jp – The market evaluates both the supply / demand and the collateral value. Example: your mortgage debt is evaluated both by supply / demand and LTV (loan compared to the current property value).

In this case, it appears the Fed is heavily over collateralizing their issuance of reserves.

fundamentalist March 7, 2008 at 1:11 pm

jp: “Are there any books or articles you can recommend that deal with the importance of the asset side of a central bank?”

The asset side mattered only when gold was considered money. Once off the gold standard, I don’t think many people would argue that the assets of the Federal Reserve matter, since the whole set up is a fiction, anyway. Nothing backs the US$ except various forms of IOU’s. Does it matter that some IOU’s are backed by mortgages while others are backed by government IOU’s.

The important point is whether or not the money supply has increased. The Fed can’t always increase the money supply at its whim; lenders and borrowers must participate. However, the Fed may be creating a “latent” inflation by pumping so much “liquidity” into banks. When banks and borrowers think the time is right to invest in new production, the built up inventory of “liquidity” will gush into the marketplace, inflation the money supply and drive prices skyward.

jp March 7, 2008 at 2:18 pm

JIMB: “The market evaluates both the supply / demand and the collateral value.”

Just to clarify that you mean what I think you mean. The supply/demand and collateral value refers to that of the central bank issued money, right? As for the Fed overcollateralizing – don’t you think we’d need to see what it has actually been accepting at the TAF window to know for sure? To the best of my knowledge this is classified info.

Fundamentalist:
What Jake, JIMB and myself have been pointing out is that money supply has not been increasing, even with the new TAF facility in place. Therefore Professor Thornton’s point about inflation (as in increase of the money supply) doesn’t hold, and the general price level will not increase.

It also makes his observations such as record high prices in all sorts of commodities, and a falling dollar, hard to explain. If the Fed has not been increasing the money supply, why have we been seeing a collapse in the dollar’s purchasing power?

I think Prof Thornton has it right when he says “It appears that they are flooding one area of “liquidity” while draining from another to help achieve their two goals of reflating the financial sector but preventing a complete breakdown of the dollar.”

In essence, Austrian theory can only say that the TAF is bringing about redistibutional effects, changes in relative pricing. ie. draining from one sector to give to another. This hurts the overall economy by artificially sustaining some at the expense of others.

But Austrian theory, as far as I can see, cannot criticize the TAF regarding its effect on the dollar. The overall money supply hasn’t been changed. Therefore Austrian theory cannot say that the currency has been debauched. It has trouble explaining the collapse of the US dollar to record lows against the Euro, for instance.

My implied earlier point was that the change in collateral (from safe government bonds to questionable assets like MBS) could be considered a debauching of the currency. You say the Fed’s assets don’t matter. But if the Fed sold all its gold and substituted this with subprime MBS without actually inflating the money supply, don’t you think this would matter? Especially in the face of a meltdown in housing prices? Switching gold-backing for MBS-backing given what is going on would only be bad for the dollar, in my opinion.

JIMB March 7, 2008 at 2:47 pm

jp – Perhaps … but advances against the collateral are given only to 50% of the value of the collateral and for 28 days. You are right about ‘what the collateral is’ being essential information … although probably even more essential is who is doing the borrowing.

I’d like a policy of full disclosure … the more secret the TAF is, the less confident people can be of the currency … hence the selloff.

In my view, the immediate effect of a lockdown in the markets where bank assets cannot be known to be valuable is a dollar sell-off because the U.S. is a net seller of dollar debt … if a foreign economic actor cannot know the position of another actor in the U.S. financial system, they have no way of knowing the solidity of their obligations. In that case, the number of settlements drops significantly, and a flight to hard goods begins with any of the remaining financial assets gained by trade. An “inflationary credit deflation” occurs.

Later the process will reverse if the deflation progresses far enough so that purchasing power of the citizenry contracts.

In effect, the markets are forcing the Fed to deflate.

JIMB March 7, 2008 at 2:57 pm

jp – BTW, here is copied info from the Fed’s FAQ on the TAF…

*****

What kind of collateral is acceptable for the TAF?
The same collateral that is eligible to be pledged by a DI as security for discount window loans is acceptable for the TAF. Advances under the TAF to a Participant will be collateralized by the same pool of collateral as its borrowings from the discount window primary or seasonal credit programs. See Discount Window and PSR Collateral Margins Table at http://www.frbdiscountwindow.org/discountmargins.cfm?hdrID=21&dtlID=83

*****

The discount margins …

http://www.frbdiscountwindow.org/discountmargins.pdf

jp March 7, 2008 at 4:11 pm

JIMB:
Thank you for the links.

Here is another one: http://www.newyorkfed.org/markets/pomo/display/index.cfm

It gives the CUSIP numbers for all the bonds the Fed holds in its long term portfolio, or SOMA.

I couldn’t agree with you more on the transparency issue being linked to the dollar’s fall. SOMA data is there for all to see. One knows how much each SOMA instrument worth, and who the issuer is.

With the TAF, we have no idea what the collateral submitted was, nor as you pointed out, who the counterparty was.

By emphasizing TAF and de-emphasizing SOMA, the Fed is a much less transparent organization than before and its liabilities deserve to valued for less.

fundamentalist March 7, 2008 at 5:02 pm

jp: “Therefore Professor Thornton’s point about inflation (as in increase of the money supply) doesn’t hold, and the general price level will not increase. ”

Not necessarily. The lag between increases in the money supply and price inflation can be quite long, 18 months on average. If you add a lag between Fed action and its effect on the money supply, you have to wait a long time to see the effect. And keep in mind that increases in the money supply cause prices to rise with the caveat ALL OTHER THINGS BEING EQUAL. Usually, they’re not. The Fed’s actions will eventually increase the money supply, but it’s hard to say when.

jp: “It also makes his observations such as record high prices in all sorts of commodities, and a falling dollar, hard to explain. If the Fed has not been increasing the money supply, why have we been seeing a collapse in the dollar’s purchasing power?”

The lag between increases in the money supply and prices is about 18 months +-6 months, so the effects you see today are the result of changes to the money supply at least 18 months ago. The recent levelling of the growth in money will see its effect in less than two years.

Mark Thornton March 7, 2008 at 5:35 pm

That is correct. There is a lag between the actions of the Fed and the overall money supply and if banks aren’t lending and people aren’t borrowing then Fed action has little or no impact.

Bernanke has the twin problems of monetary inflation coming home in terms of price inflation and a falling dollar combined with a shaky banking structure and economy.

The general point is that he is resorting to new and unusually policy actions that could be considered desperate.

Jeff Berwick September 30, 2010 at 12:21 pm

http://www.youtube.com/watch?v=7YUalN7PK98&feature=player_embedded – Here is a song done by the Dollar Vigilante entitled Bennie and the Feds!

Comments on this entry are closed.

Previous post:

Next post: