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Behind the Scenes . . .

Posted by Larry Doyle on April 9th, 2009 7:14 AM |

A mixed bag of items you may have missed in the midst of some of the daily noise and pandering:

1. Bloomberg reported this morning that the government (Treasury and Federal Reserve) expects ALL 19 banks undergoing the Bank Stress Tests to pass!! Wahoo!! Bloomberg further reported, however, that certain banks may continue to need ongoing capital injections. Would the proctors of the exam please release the questions so the FDIC can provide a more thorough review? What a SHAM.

Please review, Bank Stress Tests: Major Sham?

2. The Federal Reserve yesterday released the minutes of its March 18th meeting. The Fed revised its projection for a bottoming of unemployment to mid-2010 from the end of 2009. Additionally, they lowered their projections for a turn in the economy. Lastly, in regard to the Fed’s purchases of government and mortgage-backed securities, they had differing opinions as to how to approach these purchases. The FT reports:

one Fed policymaker wanted to stick to buying mortgage-related securities. Another wanted to add only more Treasury purchases. Buying both was a way to keep everyone happy and hedge the Fed’s bets in the light of uncertainty as to which type of asset purchase might prove effective.

“Several members noted that working across a range of assets and instruments was appropriate when the effects of any one tactic were uncertain,” the minutes say.

Michael Feroli, an economist at JPMorgan, said the “uncertainty rationale” was novel. It added up to an experimental, portfolio-based approach to policy rather than one driven by strong conviction.

For what it is worth, on the day of the Fed’s announcement to buy both government and mortgage-backed debt, rates rallied close to 40 basis points, a truly historic move. Since then, those rates have totally reversed. While the Fed is buying, obviously somebody else is selling. Who may that be? The U.S. Treasury for one. I mean, the Treasury could literally walk the government notes and bonds down the street in Washington to the Fed and put these securities in their vault while the Fed simultaneously puts cash deposits into the Treasury vault.

Do you get the sense, though, that Fed officials are winging it to a large extent? I do. (more…)






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