The big picture here is something like this. The banking system has a lot of lousy loans on its books. It didn’t mark them all down or fully because that would reveal that many banks are insolvent. They would need to be re-organized. The insolvent banks didn’t want this done. The Fed rode to the rescue by exchanging its good securities for bad loans from the banks – some of them, not all. Meanwhile, bad loans began to crop up elsewhere in the system. The Fed took on some of those too. In the process, it has created far too high a level of bank reserves, a level that is highly inflationary if put to work making new loans. By issuing long-term debt, the Fed would complete the process it began. The banks would now have as assets the better securities the Fed loaned them plus they would have Federal Reserve bonds. As for the Fed, its balance sheet would now carry as assets many troubled loans that the banks once held. On the liability side, the Fed would have issued its own bonds. Its financial leverage would have increased dramatically even as its asset quality decreased dramatically. Some of the shakiness of the banking system would be transported into shakiness of the Fed as a bank. This would not resolve all the problems because the total amount of shaky debt in the system, in the U.S. and worldwide, is so great that the Fed can absorb only a small fraction of it.His analysis is a bit more thorough than mine. Of course, he is/was a professor of finance and actually knows what he is talking about, while I am just a simpleminded amateur. Plus I only get to do this for about an hour a day, so I'm unlikely to catch up anytime soon. Anyway, this is a just-for-fun blog. If you were looking for real expertise, you came to the wrong place. He goes the long way around, but seems to arrive at more or less the same conclusions I do: price inflation gets postponed, dollar is put further into jeopardy as the layers of government debt-cake pile on deeper and deeper. Rozeff's a good guy to stay up on. I'm putting him on the recommended reading list.
Friday, March 27, 2009
Rozeff Opines on FED Sterilization
Michael Rozeff is an Austrian guru on finance. Apparently, he looked at the possibility of the FED issuing its own bonds several months ago: