“Phone Banking” for Peter Schiff in the final week of this election could spark a revolution in Connecticut.
http://schiffforsenate.com/
http://www.schiffstorm.com/
Economy, Federal Reserve, Gold, Mining Stocks, Politics, Rumor
Fed Exit Strategy? (An Update)
In late July of last year, I provided an analysis of the tools the Federal Reserve was proposing it might use to facilitate an exit from the substantial amount of bank reserve creation (and resultant balance sheet expansion) since September 2008 (http://financialsense.com/fsu/editorials/2009/0729a.html). Also discussed were some of the problems I felt the Fed would encounter when attempting to execute a real exit. Months later, despite Bernanke’s recent press release concerning the Fed’s exit strategy, the Fed has not offered anything substantially new.
I would like to begin by offering that the tools the Fed is considering and the use of these tools does not constitute an exit strategy. These tools, such as the 1) continued paying of interest on bank reserves and potentially raising the interest paid on those reserves, 2) paying interest on term deposits, and 3) executing reverse repurchase agreements, are not exit tools. They are delay tactics. Paying interest on reserves (including term deposits) is simply locking up excess reserves or sterilizing them (reserves are not drained). That is, the Fed is using this as a tool to discourage banks from lending and/or investing these excess reserves into the economy, which would result in increases to the money supply and eventually price inflation (all other things being equal). Reverse repurchase agreements are temporary (short term loans to the Fed that drain reserves) … once they mature, reserves flow back into the commercial banking system. The Fed will likely use reverse repurchase agreements to test the waters this year. But this is not a permanent solution and it is debatable whether the Fed will obtain the information it seeks over such a short duration (maturities are typically less than one month), even with a comprehensive set of staggered reverse repurchase agreements.
The Fed must commence a hearty program of selling assets (assets it purchased in significant quantities since September ‘08) to execute a real exit strategy. Anything else is simply stalling and does not reduce the Fed balance sheet in any meaningful way. I outlined the problems the Fed will likely face in selling these assets in the above linked July ‘09 article. The three principal assets the Fed holds on its balance sheet are agency mortgage-backed-securities (MBSs) ($977 billion), treasuries ($777 billion), and agency debt ($165 billion). Bernanke hints that selling assets is well into the future (I have no doubt this is the case). Meanwhile, the Fed may allow maturing MBSs and select maturing treasuries to expire without rolling them over into new securities (which will drain reserves). But this will be minimally impactful to the present size of the balance sheet.
The financial press has been fixated on interest rates influenced and/or set by the Fed, particularly when the Fed might begin increasing its target rate for federal funds (currently managed between 0% and 0.25%) as well as the discount rate (currently 0.50%). But focusing on these interest rates is not keeping the proverbial eye on the ball. Monetary policy targeting the federal funds rate (and discount rate) is impotent now (as discussed in the July ‘09 article). Massive bank reserve expansion by the Fed made sure of that. Banks are presently flush with reserves. $1.16 trillion in reserves are held on deposit with the Fed alone, significantly more than the roughly $10 billion held on deposit in early September of 2008. The Fed would need to drain a significant amount of reserves from the banking system simply to get the federal funds rate to drift meaningfully north from where it is today (near zero). Bernanke knows this. This is why he suggests that the interest rate paid on reserves will play an important role in implementing its objectives (an understatement). But simply increasing this rate does nothing to drain reserves and decrease the size of the Fed balance sheet. The discount rate is mostly irrelevant as well. There is little traffic at the discount window now. Primary credit offered by the Fed shows a balance of less than $15 billion.
But by speaking out about how the Fed is going to get tough with interest rates, Bernanke can fool most into thinking that the Fed is really tackling the tough problems and is executing a real exit strategy. But he is not. He is buying time … allowing the Fed to determine the best option spread out over the longest time period possible. Such Fed actions will, however, have a psychological impact on investors accustomed to monetary policy before September of 2008 and believing that such policy is as impactful now as it was then.
At some point this year, the Fed will likely increase the interest rate it pays on reserves. The Fed may even move to increase the discount rate sooner (pinch me). In conjunction with the rate increase on reserves, the Fed will increase the target rate for federal funds to match. But this move to match will be meaningless for the reasons described above. The interest rate the Fed pays on reserves obviates the federal funds rate. As far as timing is concerned, there is not a compelling reason for the Fed to move now as it is paying only 0.25% on reserves and the banking system still has over $1 trillion in excess reserves. If the banks are not lending these excess reserves now, why would the Fed pay them even more (increase in interest on reserves) to still not lend these excess reserves … except maybe to send a little more cash their way? But again, this will not reduce the size of the Fed balance sheet.
The real action is going to be when the Fed decides it is time to seriously trim the size of its balance sheet … permanently. That will be something worth analyzing. Or are we at (or near) a new normal (as Gary North suggests) with respect to the size of the Fed balance sheet and the permanent payment of interest on reserves as the key tool in implementing monetary policy at the Fed? This will not work either.
Brian Benton
Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds.
J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically en¬rolled in this “universal” workplace retirement system.
He said that officials have discussed the possibility of making a low-risk life-cycle or target date fund the default investment option for these auto-IRAs, which would be mandatory for employers if they don’t offer a retirement plan to their workers.
CARACAS, Jan 9 (Reuters) – Venezuelans rushed to the shops on Saturday, fearful of price rises after a currency devaluation that will let President Hugo Chavez boost government spending ahead of an election but feeds opposition charges of economic mismanagement.
In a bid to jump-start the recession-hit economy of South America’s top oil exporter, Chavez on Friday announced a dual system for the fixed rate bolivar.
It devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar in place since 2005, giving the better rate for basic goods in an attempt to limit the impact of the measure on consumer prices.
The opposition seized on fears that prices for imported goods will double as shoppers formed lines of more than a hundred people outside some stores in the capital Caracas.
“It was a Black Friday, tinted red,” said sales executive Diana Sevillana in reference to the crimson color of Chavez’s socialist party. She stood in a line of 30 people outside an electrical goods store in a middle class neighborhood.
The socialist Chavez believes the state should have a weighty role in managing the economy. During his 11 years in office he has nationalized most heavy industry, and business and finance are tightly regulated.
The devaluation is politically risky but means every dollar of oil revenue puts more bolivars in government coffers. That allows Chavez to lavish cash on social projects and fund salary increases ahead of parliamentary elections in September.
Opponents were quick to criticize the socialist, who a year ago promised the global financial crisis would not touch “a hair” of Venezuela’s economy. He announced the devaluation on Friday night during an important baseball game.
By David Weigel 12/31/09 12:00 PM
Two years ago, many Republicans couldn’t stand him. The longtime congressman from Texas made his quixotic presidential campaign all about the Constitution and the Federal Reserve, seemingly to the exclusion of other issues, and for his trouble he was excluded from some of the debates. Reporters, hungry for soundbites and attack lines, and interested more in who would win the nomination than what the candidates thought, found him tiresome — at the very first GOP debate in 2007, Chris Matthews muttered “Oh, God” when Paul started talking about “original intent.” He raised $35 million and won 1.2 million primary and caucus votes, but when 2008 ended, his slogan sounded extreme. The “Ron Paul Revolution”? What did that word have to do with modern American politics?
But at the close of 2009, Paul seems less like an outsider and more like a pioneer. For the first time in his congressional career, he got every Republican colleague on board with a piece of legislation: HR 1207, an attempt to “audit” the Federal Reserve’s activity. His rhetoric and some of his imagery (like Revolutionary War re-enactment) have been copied wholesale by the Tea Party movement. The beliefs held by Paul that were once considered out of the mainstream — a collapsing dollar, obsession with the Fed, an encroaching North American Union, gold as the only safe investment — are now de regueur for Republican candidates. What presidential loser has had more of an impact on the party that rejected him?
http://washingtonindependent.com/72875/cons09-1
