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How low can the Fed go?
Jerry Mazza
Online
Journal
Friday, Dec 12, 2008
According to the Wall Street Journal, Federal Reserve officials
have approached Congress about a debt sale of its own, including
the issue of bills or some other form of debt. At this point,
no one knows whether these feelers will produce a formal pitch
or Fed action. The only rub is: The Federal Reserve Act doesn’t
explicitly permit the Fed to issue notes beyond currency. And
that’s too much already.
But, the Fed is faced with a $25 billion drain in temporary reserves
from the banking system when it organized overnight reverse repurchase
agreements. And to further lower spirits, the Fed’s balance
sheet has zoomed from under $900 billion to more than $2 trillion
since August, as it propped up new markets like commercial paper,
money-market funds, mortgage-backed securities and ailing companies,
such as the infamous American International Group (AIG).
The inflating balance sheet is making life hard for the Fed.
In the early phases of the present mayhem, Fed officials funded
their programs as they drew down holdings of Treasury bonds. They
used the proceeds to finance new programs. But officials don’t
want the backroom pile to get too low -- like your savings account,
credit rating, Social Security, or my bond portfolio. The Fed
nut is now at $476 billion, with a chunk of it committed to other
programs. The Fed has actually asked the Treasury Department for
cash. Bernanke offered to go out in the street with his hat in
hand.
(ARTICLE CONTINUES BELOW)
Fortunately, the Treasury responded by issuing debt, leaving
on deposit the proceeds with the Fed for it to use as it sees
fit. But as bailout-o-mania continues, Treasury is pulling back
on the Fed offer. Treasury has its own humongous borrowing program
to digest and it faces, believe it or not, legal limits on how
much it can borrow. But the Fed has recently started funding its
programs by chewing through the financial system money it created,
euphemistically known in central-banking circles as bank reserves.
The Fed also used its money to make loans and buy up assets.
Wasn’t that what the Fed was explicitly created not to
do: add another currency?
Some economists take issue with the outcomes of this approach.
Fed officials could find themselves in a pickle to rake in the
money from the system once markets stabilize and the economy gets
better. Don’t hold your breath. So far it’s not “a
problem,” but it could be later and cause inflation if they
don’t act soon. Even the fed-funds rate for overnight borrowing
between banks has fallen below the Fed’s 1 percent target.
It’s supposed to reduce that level next week. So, once more,
how low can the Fed go?
The WSJ reports that “Louis Crandall, an economist with
Wrightson ICAP LLC, a Wall Street money-market broker, says the
Fed’s interventions also have the potential to clog up the
balance sheets of banks, its main intermediaries” He adds,
“Finding alternative funding vehicles that bypass the banking
system would be a more effective way to support the US credit
system.” The question is could Fed-issued bonds create new
problems, like devaluating Treasury paper as it issues tons of
debt itself. And golly what will it do to our money, like drive
its value into the ground.
You’ll have Fed bills out there selling with Treasury debt.
Well, there’s nothing like competition and free enterprise,
right? Wrong. With T-bill rates nearly at zero, Fed debt shouldn’t
push Treasury rates higher, though one day it might become a problem.
Additionally, there are real questions about whether or not the
Fed has the authority to even do this. This is what one of the
problems that comes with turning your country’s money over
to a private company. See my recent Bag the Fed!
In fact, since the Fed wants to go its own way with its own debt,
maybe the time for separation and divorce has come. Even a former
Fed senior staffer, Vincent Reinhart, commented, “I had
always worked under the assumption that the Federal Reserve couldn’t
issue debt.” He feels it’s an action more appropriately
suited for the Treasury Department, which has clear congressional
authority to borrow on behalf of the government. Well, I would
suggest this might be a good time for Congress to consider rescinding
that power and letting the Treasury stand on its own two wobbly
legs.
This could be a start towards avoiding a central bank system
that from the very start loaned the federal government two million
dollars to issue 10 million in currency, the balance raised from
people in America and Europe. Unfortunately, it left the newborn
dollar with an inherited addiction to debt. What the Fed is about
to do will only worsen the pain.
So why not cut the cord? Or nationalize a new kind of transparent,
non-secretive Fed into an equally transparent Treasury. Hopefully,
in the long run we could eliminate debt as an exponentially expanding
constant, like some kind of hump on the back of our economy. Imagine
that. To stand up straight and walk like a healthy people again,
a new high for us. Do I hear Andrew Jackson crying, yes, yes,
from the beyond?
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INFOWARS:
BECAUSE THERE'S A WAR ON FOR YOUR MIND
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