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The Bank’s Statement

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Yesterday Ben Bernanke, chairman of the U.S. Federal Reserve System, announced that the central bank is going to continue its “quantitative easing” strategy until significant improvement in labor markets reduces unemployment. An extraordinary pronouncement from the central bank, this move signals Bernanke’s commitment to action until the U.S. economy recovers and then some. Evidenced by the rally in U.S stock markets, the Fed’s decision will do much to restore much-needed investor confidence and promote economic activity throughout the economy. However, this may also suggest that the Federal Reserve has exhausted its arsenal of policy options to influence market conditions, meaning that a deadlocked Congress will have to step up and support the Fed’s monetary policy with appropriate fiscal policy.

So What Exactly Is The Federal Reserve Planning To Do?

For those unfamiliar, “quantitative easing” is a process whereby the nation’s central bank purchases predetermined quantities of assets from commercial and investment banks. As open market operations go, this type of move is reserved for when increasing the money supply through lowering interest rates doesn’t generate enough economic activity and new investment.

According to The New York Times, the Federal Reserve plans to purchase large quantities of mortgage-backed securities and “other assets” to encourage borrowing and investment. These purchases will continue until unemployment declines substantially. From what we know now, the plan is as follows:

  • First the central bank plans to buy $23 billion in debt-securities (bonds, asset-backed securities and the like) by the end of September.
  • Then, the Fed plans to buy up to $40 billion in debt-securities each month, with targets announced at the end of each subsequent month.

According to Bernanke, the Federal Resrve is looking to see “Ongoing, sustained, improvement in the labor market. It is not a specific number we have in mind.” In addition, the central bank plans to continue exchanging short-term securities for long-term securities which would bring total purchase amounts to around $85 billion a month.

What Does Additional Stimulus Mean For The Economy?

For U.S financial markets, continued bond purchases and low interest rates will provide the most accomodating (from a monetary standpoint) conditions for investment, even more so than QE 1-2. Purchasing asset-backed securities and other “toxic” investment products helps clear debt and liabilities from the balance sheet of America’s financial institutions while supplying them with cheap capital. Removing anemic debt securities and injecting new capital make investment and commercial banks more attractive for investment, providing a solid foundation for the banks themselves to invest in the general economy. For investors, the most important aspect of the Fed’s decision is the turnaround in market confidence in the central banks’ commitment to supporting long-term economic growth, which creates very favorable conditions for investment across asset classes.

However there is also a point of concern. Bond purchase programs like Q.E. are typically last-resort options for central banks, because taking on short-term debt (even at near-zero interest rates) can be problematic in an economy already troubled by debt. Guaranteeing bond purchases until labor markets turn around may be a sign that the Federal Reserve is out of options for providing additional stimulus to the economy. Between the Troubled Asset Relief Program (conducted with the U.S. Treasury), lowering long-term interest rates to near-zero levels, and two rounds of easing, the Federal Reserve has taken unprecedented steps as a central bank to combat the effects of the housing market collapse and contractions in U.S. credit markets. But this move is a last resort of last resorts, as Bernanke himself stated that “Monetary policy, particularly in the current circumstances, cannot cure all economic ills.”

With America’s central bank going all-hands-on-deck with Q.E the further recovery efforts must come from federal legislators in Washington, who can use fiscal policy to support the Federal Reserve’s monetary policy. However with the gridlock over spending, taxation, and fiscal policy issues between the Democratic Senate and the Republican House, the arrival of such initiatives is unlikely for the time being. If Democrats can hold the White House, it’s likely that Bernanke will be able to continue his bond purchase program unhindered, but it’s also more likely that little ground will be covered on additional fiscal policy. If Republicans capture the White House, Bernanke’s bond purchases could be in jeopardy, based on that party’s positions around debt and spending reductions from federal agencies, the plans to audit the central bank, and considerations of a gold standard to restrict the ability to expand its balance sheet.

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About Alexander J Smith III

  • pablo

    Pardon me while I puke. I have read some kiss ass articles about the FED, but surely this one takes the cake.

  • Alexander J Smith III

    Pablo

    So let me get this straight, first you again have no real line of argument (quelle honte) and second, an article that talks about how the Federal Reserve is out of gas = “kiss ass”. Seriously? That’s laughable

  • pablo

    I don’t need any argument Alex, I was just commenting. Yes it is a kiss ass article.

    As to being out of gas, the FED never had any to begin with. They just flood the market with new bogus capital that they create out of thin air and lend it to the rest of us at interest, or no interest to their crony friends, the rest of us have to pay 20%!

    You also act as if the FED has our best interests at heart, when in point of fact they have done everything in their power to fleece the working man of his bread and hand it over to their buddies over on Wall Street. I suggest that if you do want to get educated on this monstrosity you check out Max Keiser. As you obviously need some financial education, and fast.

  • Alexander J Smith III

    That’s the statement of a person that lacks a real position, but that’s largely unsurprising lol.

    The Federal Reserve has pursued expansionary monetary policies to correlate with the demand for money as the economy grew. The continued expansion was predictable and largely necessary. What I don’t understand is your failure to grasp the point that all money is created and presumed to have value as a unit of exchange, that’s the only reason it’s used.

    I don’t assume that the Federal Reserve acts in the best interest of the people, I do think that Chairman Bernanke is committed to making conditions for investment as accommodating as he can with the powers that he has at the Fed. Also, the statements on the labor markets (which I assume you allude to when you say I “act as if the FED has our best interests at heart”) were Bernanke’s own, feel free to read the article to see.

    Lastly, the Federal Reserve didn’t fleece the working man for his money, conservative politicians empowered commercial and investment banks to do that. See, The American Recession Parts 1 and 2 for that. Private enterprises are the ones that preyed on American taxpayers and the FED has spent five or so years trying to clean up the mess. As a supporter of the Gold Standard, I find it difficult to take your knowledge base seriously.

  • Glenn Contrarian

    Alexander –

    You support a return to the gold standard?

  • Alexander J Smith III

    Sorry, I realize that was poorly phrased lol. I was saying that its hard for me to take Pablo, who supports the gold standard, seriously lol.

    That’d be so contrary to write a piece against the Gold Standard and actually support it haha.

  • pablo

    The fact is Alexander is that I have never supported the gold standard per se. What I do support is that currency be backed by a tangible asses that requires considerable labor to produce. This is primarily so that Central Banks cannot produce wealth out of thin air. Is that such a difficult concept for you to grasp Alex?

    You could say that federal reserve notes are backed by paper! However paper does not require considerable labor to produce, or is it at this point rare, that could change soon however. Even then it would not matter though. As the FED now creates money out of nothing electronically.

    It is true that the FED is required by law to promote employment and keep inflation down. What is not ever discussed either in Congress or in the mainstream media is that the FED has private shareholders that they are beholden to, and oftentimes those interests are in direct opposition to what the congress has mandated.

    The fact of the matter is that one of the main powers of Congress was the issuance of currency, it has delegated that authority to private interests, and we are now seeing what that reaps.

    Don’t you think Alex if you want your readers to be more informed that perhaps you should mention that many of these mortgaged backed securities are nothing more than derivatives gone amuck? And where does the FED get the 40 billion a month to buy them? Well out of nothing of course! Like I said Alex your article is in my opinion not only piss poor but pandering to the very forces that have brought our economy to it knees.

  • pablo

    I meant tangible assets, but tangible asses will do. :)

  • Glenn Contrarian

    pablo –

    The fact is Alexander is that I have never supported the gold standard per se. What I do support is that currency be backed by a tangible asses that requires considerable labor to produce

    Hm. Democrats are obviously tangible asses – see our logo – and we are everywhere, so our value would therefore be small. Asses like those of Angelina Jolie and Jessica Alba, OTOH, while still incredibly tangible, are out of reach of almost everyone but the richest, so their asses would be right up there with works by Picasso and Rembrandt.

    And then there’s asses like Ann Coulter and Rush Limbaugh – asses in the purest sense of the word – who we would pay dearly for someone else to watch, so they would surely be of a negative value.

    But that reminds me of what you must want above all else – the perfect merger of asses and the gold standard – and the answer must lay in the first dead body that Sean Connery found in the opening scenes of Goldfinger.

    The mind boggles….

  • Alexander J Smith III

    -Pablo,

    On currency, what doesn’t make sense is your claim that money valued by the interest owed on the quantity issued, is somehow less valuable than money backed by “tangible assets that require considerable labor to produce”. Valuing paper currency with “tangible assets” doesn’t make that currency inherently more valuable, since the relation of “tangible asset” to currency is left up to market’s to determine and isn’t any different than issuing currency valued with an equally subjective interest rate. Any “tangible asset” you could choose as collateral for currency would only have as much value as markets perceived it to have.

    Speaking of educating, allow me to educate you. Article I of the Constitution does grant Congress the authority to print and coin money and “regulate the value thereof”. The Federal Reserve Act of 1913 doesn’t change this process, instead the U.S. Mint and the U.S. Treasury sell cash and coin to the Federal Reserve System who then is given the authority to regulate its circulation. To your point about shareholders, let be clear about who these shareholders are. Member banks, private banks who have elected to be a part of the Federal Reserve System, are required to have a 3% share in their regional Federal Reserve Bank. However, these member banks only elect 6 of the 9 seats on their regional FRB’s board and have no other influence on their Reserve Banks’ charter or organization which are set by the Federal Reserve Act and its subsequent amendments.

    Lastly, I have discussed the problems created through deregulation of financial markets, the advent of asset backed securities and the special purpose vehicles used to trade them in several of my previous pieces. The piece is only to provide short commentary on important financial news to look at what exactly was being discussed. Not exactly sure why you choose to misrepresent the work, but the only thing it actually does, is point out that the Federal Reserve may by out of options for stimulating the economy and that any more stimulus will need to come from Congress.

  • Alexander J Smith III

    Saying the Federal Reserve has done all that it can do doesn’t equate to “pandering” lol. Again, completely laughable.

  • pablo

    What you fail to see Alex, or just plain ignore is probably more like it, is that when currency is tied to a tangible asset, the FED can no longer issue something out of nothing and profit from it. It really is that simple. I do like how you ignored my derivatives mention, how cute.

    This quote is particularly amusing.
    “The Federal Reserve Act of 1913 doesn’t change this process, instead the U.S. Mint and the U.S. Treasury sell cash and coin to the Federal Reserve System”

    What cash might that be? I am not aware of any cash that the Federal government has on hand that aren’t federal reserve notes, are you? What we have plain and simple is a financial oligarchy that for all intents and purposes controls the very government that it is supposed to serve.

    So if anything here is laughable Alex it is your extreme misunderstanding of the current system, and your obvious pandering to it every chance you get, as did your recent gold article as well.

  • Alexander J Smith III

    -Pablo,

    When you post I wonder if you actually read what people say in response, but perhaps that’s a skill that goes unused in the reality that you live in.

    Again, you’re argument falls flat on its face when you consider that issuing paper currency backed by some “tangible asset” is creating something from nothing and profiting from its use. The value of any tangible asset is no less subjective than the currency its used to collateralize since markets have to determine the value of that asset and the relation of “tangible asset” to printed currency. What you suggest would merely limit the ability of a central bank to do this since there is a finite quantity of any given “tangible asset”, but does nothing to change the fact that regardless of what asset you choose, someone has to believe that it has value enough to be used as collateral and then determine what that value is. There’s no inherent difference between that and using interest rates, which are also subjectively designated, as a value mechanism.

    On your second point I love how your argument boils down to nada lol. We’ve already established that Congress prints money and that the Federal Reserve System borrows this money, which you can’t refute since its the law and all so idk where you’re going there but im sure you’ll try and make some other ludicrous point down the road so ill wait on that lol.

    Notice, that I said I’ve discussed the issues posed by derivatives in previous articles, and perhaps I was reaching when I assumed you would see the clear implication that you should review them lol. But again your point here on where the Federal Reserve gets that money from is moot because we know that the U.S. Mint and U.S. Treasury (who also hold the nations gold reserves btw) actually print the currency and loan it with interest to the Federal Reserve who is charged with monitoring its circulation through the economy. Yes they are printing fiat money, but again it doesn’t matter since any currency is fiat currency.

    Your ability to strawman and drop arguments while not having a legitimate position on the issue is hysterical lol.

  • pablo

    I see Alex, so now its the Treasury that LOANS out federal reserve notes to the Federal Reserve! LOL Sure buddy.

    By the way you should be thanking me, as I am about the only one who has even cared to comment on your lame article, no one else obviously gives a shit.

  • Igor

    IMO the FED has run out of leverage: there simply is not enough slack left in banking for interest rate manipulation to work. It’s like pushing on a rope.

    We need a big increase in market DEMAND, and direct employment increases. The hell with trying to bribe businesses to employ workers! The government must directly employ workers to build worthwhile projects, ala FDRs various schemes.

  • Alexander J Smith III

    -Pablo,

    As an FYI:

    “The Department of the Treasury operates and maintains systems that are critical to the nation’s financial infrastructure, such as the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government” From “Duties of the Department of Treaury” found at http://www.treasury.gov

    “The primary mission of the United States Mint is to manufacture and distribute circulating coins, precious metals and collectible coins, and national medals to meet the needs of the United States. In addition to producing coins and medals, the United States Mint also maintains physical custody and protection of the Nation’s gold and silver assets” From the “About Us” section at http://www.usmint.gov

    “The Federal Reserve Banks distribute new currency for the U.S. Treasury Department, which prints it. Depository institutions buy currency from Federal Reserve Banks when they need it to meet customer demand, and they deposit cash at the Fed when they have more than they need to meet customer demand” From “How Currency Gets Into Circulation” from http://www.newyorkfed.org.

    Interestingly, Title 12 of the United States Code requires that Federal Reserve Banks post collateral when they need the Bureau of Printing and Engraving (the body that actually prints the money who conveniently enough is an arm of the Treasury Department) to print additional currency to satisfy demand. Then the Federal Reserve Bank also pays the cost of production for the actual printing of the notes, about 4 cents per bill.

    So lets see here:

    Treasury and the U.S. Mint actually print the bills and mint the coins. Then the Federal Reserve Banks that want the money have to pledge collateral (usually Treasuries which are, very conveniently, debt securities issued by the Treasury Dept. )and pay production cost to get the money. Posting collateral for extra money? Now that sounds nothing like a loan right? Lmao.

    Copy/Paste and 15 Minutes was all I needed to make you look a tard lol. Thanks for playing!

  • pablo

    Perhaps you can show me the collateral Alex of the 14,000,000,000,000 that the FED recently loaned to its buddies all over the world.

  • Igor

    There is no physical collateral. US securities are backed by the “Full faith and credit” of the US government and the people of the USA.

    And ever since Alexander Hamilton established the policy (against the opposition of almost everyone else, including many of the Founders) and swore to repay all Revolutionary War debts, (instead of reneging, which was common at the time) that has been the best security in the world, outliving many specie-backed systems.

  • Alexander J Smith III

    -Pablo,

    So I perused the net to figure out what $14 trillion in loans you’re referring to, but I didn’t anything that remotely comes close to that kind of figure, so I would like to know where you’re getting that number so I can investigate it further.

    Here’s what I did find:

    According to its EOY-2011 Audit, the Federal Reserve Banks combined held $2.918 trillion in assets with $2.865 trillion in liabilities, of which a little over $1 trillion in Federal Reserve Notes outstanding. I also looked at the loans for all the Federal Reserves emergency projects from 2008-2009 and even if you add the principal balances loaned? They only come to about $3.5 trillion total, so ii’m definitely curious to see data on a $14 trillion worth of loans because everything i’ve looked through from the FED and the GAO don’t point to amounts anywhere near there.

  • pablo

    Alex,

    Obviously you did not look very hard. And it was 16,000,000,000,000.

    Citigroup: $2.5 trillion ($2,500,000,000,000)
    Morgan Stanley: $2.04 trillion ($2,040,000,000,000)
    Merrill Lynch: $1.949 trillion ($1,949,000,000,000)
    Bank of America: $1.344 trillion ($1,344,000,000,000)
    Barclays PLC (United Kingdom): $868 billion ($868,000,000,000)
    Bear Sterns: $853 billion ($853,000,000,000)
    Goldman Sachs: $814 billion ($814,000,000,000)
    Royal Bank of Scotland (UK): $541 billion ($541,000,000,000)
    JP Morgan Chase: $391 billion ($391,000,000,000)
    Deutsche Bank (Germany): $354 billion ($354,000,000,000)
    UBS (Switzerland): $287 billion ($287,000,000,000)
    Credit Suisse (Switzerland): $262 billion ($262,000,000,000)
    Lehman Brothers: $183 billion ($183,000,000,000)
    Bank of Scotland (United Kingdom): $181 billion ($181,000,000,000)
    BNP Paribas (France): $175 billion ($175,000,000,000)
    and many many more including banks in Belgium of all places

    Here is the official document including page number.

  • Alexander J Smith III

    -Pablo,

    Interesting tidbit of information that may have wanted to read before just posting figures. The data table you pulled that from, shows total loan amounts for the Federal Reserve’s various emergency programs, but what that data doesn’t account for are the differences in maturity of the loans.

    “Table 8 aggregates total dollar transaction amounts by adding the total dollar amount of all loans butdoes not adjust these amounts to reflect differences across programs inthe term over which loans were outstanding. For example, an overnightPDCF loan of $10 billion that was renewed daily at the same level for 30business days would result in an aggregate amount borrowed of $300billion although the institution, in effect, borrowed only $10 billion over 30 days” In essence, those figured are inflated because they reflect the amount of money borrowed over five years without compensating for the maturation of the loan.

    Quite conveniently however, there seems to be a table (on the very next page no less) that does take into account the maturities of the loans provided by the FED, and wouldn’t you know it, the total loan amount drops right down to about $1.139 trillion. Again, you really should take a moment and actually read these documents lol.

  • pablo

    Your funny Alex, your not even man enough to admit your own ignorance. I showed you the 16 trillion, I suppose that in order to print that money the FED had to ask the us government too! You are hysterical if nothing else. However we both realize don’t we Alex that those 16 trillion dollars were never printed by the US mint don’t we? Yes we do! Thanks again for showing me not only a piss poor kiss ass article, but not being man enough to thank me for showing you something you were completely ignorant of.

  • Alexander J Smith III

    Pablo,

    You sir, are priceless. At every turn, I’ve taken any “solid” piece of argument you’ve presented and refuted it. Even here, I took 5 minutes to actually read how the data presented in that table was compiled and despite the fact that I quoted them, word for word, somehow you still seem to either completely miss, or ignore really basic facts lol.

    It amazes me, that someone can quote the agencies being discussed and still you’re looking for some grand conspiracy that you can’t even attempt to prove exists! Yeah you pulled the GAO report on the loans, but then ignored how the data was compiled! As to what we know, we know what the LAW ACTUALLY SAYS! LOL. Who actually prints the money? the Bureau of Engraving and Printing…who actually mints the coins? The U.S. Mint. It’s incredible how someone can argue that what’s clearly stated in the law isn’t the truth when its put right in their face!

    Your comments have been entertaining, but honestly it much too easy to run circles around your unsubstantiated conspiracy claims. I suggest you push that fallacious nonsense on someone who doesn’t know any better lmao.

  • Glenn Contrarian

    pablo –

    You know what the really sad thing is? Your insecurity is so obvious to us, yet no matter how much we would tell you about it, you’d still refuse to acknowledge it. The secure man isn’t afraid to admit when he’s wrong, for he knows he’s just as human as the next guy. The insecure man, OTOH, never admits error – but that’s because he thinks that if he admits error in something, then he’s somehow a lesser man. That’s why he spends so much time tearing down other people – he has to, just to make himself feel better about himself.

    The proof? When was the last time you admitted error on BC, or thanked someone for showing you something you didn’t know? Maybe I’m wrong, and maybe you did at some point, but I sure haven’t seen it.

  • pablo

    Thanks for the critique fellas! It made my day.

  • Les Slater

    Alexander,

    Thanks for the information. I also suspect that the Fed has little room to maneuver. Likewise with Congress. I think looking at the situation in Europe can give us clues to the bind we’re in.

    As far as markets determining value, that’s not only got its limitations but also a source of danger. Much of the game is to manipulate those same markets.

    Les

  • Alexander J Smith III

    Lee,

    Thanks for your comment!

    Congress is of real concern in this situation because they don’t seem likely to move on fiscal policy so long as both sides remain unaccommodating. Bernanke really has done all he can as a central banker, so they’ve got to step up with some fiscal policy that makes sense.

    You bring up a good point in looking at Europe. I always thought that they were a perfect example of what fiscal policies to NOT do since they’ve allowed themselves to get further down the hole. My question for you, is what do you think America should take from the other side of the pond?

  • Les Slater

    The problem is not an ideological one. Policy is in the grip of the markets. That’s the lesson of Europe.

    Markets have components which are primarily driven by perceptions which are quite removed from fundamentals. Often markets are driven by misconceptions, errors. And there are quite sophisticated instruments that capitalize on the deviation from the ideal. This transfers wealth to those entities that prophet by manipulating perceptions in such a way to maximize that transference of wealth.

  • Brian aka Guppusmaximus

    Les,

    In #28, I think you basically pointed out why I feel that the stock market isn’t a true reflection of the economy or the economy at all. I could be wrong…

  • Les Slater

    Brian, we agree on that point.