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Federal Reserve Issues a Blank Check

Posted by Larry Doyle on September 14, 2012 7:37 AM |

Well, I gather we will not be discussing the need for a 4th round of quantitative easing down the road.

Given that the Federal Reserve’s announcement yesterday put neither a dollar amount nor an end date on its pronouncement to purchase $40 billion in MBS (mortgage-backed securities) per month as needed, the great and wondrous Fed wizard Ben Bernanke effectively pre-signed a series of blank checks.

Thoughts and questions crossing my mind this morning include: 

1. Who pays for the Fed’s free flowing money spigot and what are the risks that the “hydrant” breaks and the liquidity provided floods the system?

We all pay in the form of heightened inflation expectations, a weaker currency (see photo above), and a transfer of wealth from creditor to debtor, the biggest culprit being Uncle Sam himself. Not exactly the model for pursuing the American dream. The chances if not the likelihood of stagflation are greater today than they were yesterday.

2. Whatever happened to the green shoots sprouting along our economic landscape?

All so much bulls*&$ touted by the carnival barkers masquerading as economists, public policy mavens, and politicians. Our economy is in far worse shape currently than anybody at the Fed or elsewhere would ever dare admit. The economic issues we face are structural in nature and have developed over a protracted period. Crony capitalism comes with a price and we are all paying it right now.

3. What about the Fed’s projections going forward?

A 7% mid-range employment projection for 2014? Means nothing!! Why? As we have all come to learn the unemployment rate can drop precipitously merely by people exiting the labor force as they did in droves just last month. Why doesn’t the Fed inject a degree of integrity into its projections and target a labor participation rate?  …. Anybody … anybody?  . . . Bueller?

4. Inflation projections? 

In regard to inflation, Fed projections of 2.0% for core inflation is also a central part of the charade being perpetrated upon the American public. Recall that core inflation excludes those “so called” volatile components of food and energy. I am reminded of the real rate of inflation in our nation today when I pay ~$4.15 to $4.20/gallon to fill my truck with regular gas. (I paid $4.39 this afternoon!!!) The cost of food? Don’t get me started.

The Fed’s blank check style of central banking alleviates the pressure on those charged with fiscal policy in our government. That is not necessarily a good thing. The dysfunction that runs rampant in Washington is a core part of the problem that brought us to this point on our economic landscape.

As I asked yesterday and do so again today and surely will tomorrow, where are our leaders who demand the truth and are willing to sacrifice personal political gain for the long term well being of our nation? What a pack of losers.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Andrew

    It is the socialization of the stock market. No longer will stocks trade on their business prospects, only their relative position in some index. As the index moves up, so does the price of the shares.
    As the value of the dollar is debased, purchasing power is destroyed. Rick Perry was right that Bernanke should be prosecuted for treason.

  • Andrew

    Since this is the “New World Order”, why don’t we open up our election for President to the entire planet. The electoral college be dammed, how did the Chinese vote? Photo id, please?

  • fred


    Look no further than the yield curve.

    In the real economy we are looking at a deep global recession which the markets continue to ignore, thanks to the Fed.

    The Fed has successfully “hypnotized” the markets into looking no further than the yield curve that the Fed has been manipulating, on both ends, since FY 2008; first to normal and now to steepening.

    As the public continues to pull money out of the markets, the Fed continues to pump money into the markets thru banks, via QE, which is then invested/traded by banks and classified as “hedges not to be confused with prop trading”, according to the law of the yield curve.

    How do you think all those TARP loans and now stock dividends are paid?

    Mr. Chairman, what happens when the yield curve steepens and the Fed has mark to market losses?

    Answer: no worries we’ll just hold to maturity.

    Mr. Chairman, I have a follow up question, what if the Fed can’t hold to maturity, even the scam artists on Wall Street factored in default and refi losses on MBS of aprox 4-5%? As the yield curve “girates” what if interest income on the Feds balance sheet can’t cover capital losses?
    Does monetary policy then become fiscal policy subject to fiscal cliff limitation and Congressional approval?

    Answer: Next question?

  • LD: Recommended

    I referenced previously and am compelled to do the same again an article published recently by the FT entitled, The Long-Term Impact of Low Rates,

    There are numerous evils to consider. For a start, the ultra low cost of borrowing removes any immediate incentive for governments to exercise fiscal discipline. Today’s trillion dollar deficits are relatively painless – for now, at least. Mr Bernanke admits that low rates are intended to inflate asset prices and promote consumption. Inflated asset prices result in lower future returns for investors. The S&P 500 is currently very overvalued. GMO models suggest that over the next seven years the real return from US stocks will be close to zero.

    While Alan Greenspan’s easy money delivered us the global financial crisis, Mr Bernanke’s policy of even lower rates may be damaging to the long-term growth prospects of the US economy. Low rates discourage saving – the US gross savings rate is currently around 10 per cent, which is 6 percentage points below GMO’s estimated “prudent” savings level. Mr Bernanke’s grand monetary experiment also creates uncertainty. Perhaps this explains why US companies, although flush with cash, refuse to invest. Very low interest rates also hinder the process of “creative destruction”. Since the mid-1990s, Japan’s zero-interest rate has kept businesses with poor profitability on life support while banks “evergreen” potentially non-performing loans.

    Not only do low interest rates threaten future income growth for American workers, they promote social discontent. As Mr White observes, leveraged speculators have been the prime beneficiaries of the Greenspan/Bernanke era of easy money. Prudent savers, on the other hand, suffer from negative real returns on their cash and fixed income investments. Mr Bernanke’s low rates are delivering what Keynes gleefully termed the “euthanasia of the rentier class”. Low rates have not even brought enduring benefits to the least advantaged, who have suffered most from the housing crisis and from subsequent high levels of unemployment. There is a growing sense that the distribution of economic spoils has become unfair.

    Beyond the white marble halls of the Federal Reserve in Washington, it is universally acknowledged that low interest rates fuel asset price inflation. In the past decade, we witnessed real estate bubbles in several developed market economies. Now the risks appear to be shifting to emerging markets. The negligible cost of borrowing the world’s reserve currency has encouraged investors to borrow in dollars and place the proceeds in countries with higher interest rates. Capital inflows from this global carry trade put upward pressure on emerging market currencies, threatening export competitiveness. Their central banks have responded with massive foreign exchange intervention. Since 2008, global foreign exchange reserves (excluding gold) have climbed by nearly $4tn. This extraordinary growth in forex reserves has loosened monetary conditions in several emerging markets, according to Andreas Hoffmann of Leipzig University. “The current low interest rate policy in advanced economies,” writes Prof Hoffmann, “may have planted the seeds for new bubbles.” Low interest rates in emerging markets have also encouraged an extravagant splurge of infrastructure spending.

    Mr White concludes that the Fed’s ultra-easy monetary policy provides “no free lunch”. Or put it another way, Mr Bernanke’s low rates have allowed us to continue gorging at the table, deferring the bill for the moment, but ever adding to the eventual tally.

  • Obsvr-1

    Has anybody determined where all these MBS live,

    if on the banks balance sheet, this is yet another bank bailout.

    if on Fannie or Freddie BS, then it is hiding the true loses which frees up money for congress to spend by not having to flood FNME and FRE with cash to float the crap load of bad loans they have purchased.

    what a shit show ….

  • LD

    I would not imagine that the MBS purchases would be directly from the bank portfolios BUT I would not be surprised that they do come directly from F/F’s portfolios and serve to bailout those wards of the state. recall that recent reports have highlighted that F?F will be downsizing their portfolios so this would make sense.

    We will likely never know but I will check with some friends in the market on this.

    The fact is the MBS market is a huge market and the movement in the mortgage rates is geared to stimulate both refi activity and the housing market as a whole BUT those benefits come at the expense of all the items I highlighted in my commentary along with the risks highlighted by the FT which I referenced above.

  • fred


    FYI, Zero Hedge posted a pdf file (150+ pages) yesterday written by Ray Dalio and Bridgewater Assoc. “How the Economic Machine Works”. Its a must read for anyone offering an opinion on the economy.

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