Free Lunch for Bernanke and Paulson

Last week, the Treasury announced that it would purchase 600 billion dollars in Fannie Mae (FNM) and Freddie Mac (FRE) debt. Generally, the Treasury would need to borrow money by issuing bonds to finance such a purchase. However, the Treasury announced that the purchases "will be financed through the creation of additional bank reserves." The English translation of that is they are printing money in order to buy GSE debt.

In large part that is why Treasuries have been rallying. They are buying long term debt without issuing any long term debt, reducing the supply of long term debt on the market. There are two schools of thought on what the consequences of this will be. Some say that during the next economic expansion we will have hyper inflation as a result of the money printing. The other school of thought is that the deflationary forces are so strong that this will not make a difference.

Both outcomes sound logical and I am yet undecided on who I agree with. However, there is one outcome that I don't believe in. The one that Hank "The Tank" Paulson and "Helicopter" Ben Bernanke are betting on. That they will get this exactly right and be able to remove the stimulus before it causes inflation. They are playing with a type of fire that has never been experimented with in this country. They have proved themselves inept at dealing with more mundane issues. Bernanke oversaw the creation of this bubble as the regulator. Paulson is the one that convinced the SEC to allow the investment banks to go to thirty times leverage as CEO of Goldman Sachs (GS).

I am no monetary expert but I don't believe that the answer to this crisis is to simply print money and buy assets with it. Is life that simple? Is there such thing as a free lunch?

Comments

[TCFATBOY:]

HAnk Paulson..... THe definition of the fox watching the hen house. We are FU%$#)KED

2008 Dec 07 06:32 AM

[Fabien Hug:]

You are right. It looks like LALA land again and I don't like it. What Japan did, didn't work and they do exactly the opposite without thinking about the consequences. This is pretty scary.

2008 Dec 07 10:19 AM

[Ishortyou:]

well, certainly there is not free lunch, I probably am inclined towards the first school of thought that printing money to meet buying goals will create a hyperinflation to wreck the economy. But this is probably no different from that of a counterfeiting crook goals. The pro will be that this will attempt to unfreeze the credit markets somehow buy stablishing a false sense of confidence that everything is going fine.

2008 Dec 07 10:37 AM

[george9:]

its do or die. old mtgs must be bought up by the gov.

2008 Dec 07 01:33 PM

[Wesley Mouch:]

Printing money to reinflate the bubble has only one outcome, IMHO. Why would a foreign investor want to invest in long dated US treasuries at this point? Each new buy order is competing with a printing press, artificially inflating demand for the issue. There are a lot of articles in SA talking about the tipping point in this crisis, but I for one believe that showing up to a treasury auction with large bills that have not been cut from the sheets they were printed on is a significant occurrence. I do hope it works for all of us.

2008 Dec 07 02:05 PM

[Pipo:]

Jim Rogers is very bearish on US Government Bonds:

“Why anyone would give money to the United States government for 30 years at three or four percent is beyond comprehension,” said Jim Rogers


jimrogers-investments....

2008 Dec 07 05:59 PM

[diogenes:]

The printing presses will be going full tilt. When inflation picks up the fed will not be able to withdraw from the economy what they put in...it simple will not be politically accecptable hence welcome to Argentina 2001. The hard part of riding a tiger is knowing how and when to get off without being eaten. We have just gotten a blind date with destiny and it looks like she just ordered the Lobster!

2008 Dec 08 09:36 AM

[vinoverde:]

yes, but i must admit that i am stuck on the inflation/deflation knife edge as well. There is so much leverage, so much credit that the velocity of money could be restricting the money supply as fast as hank and ben are printing it up.

ponder....seems like a free lunch....can't be right....i think the catch is that there will be the same net money supply, but chasing fewer goods, that spells inflation in the end. but... we do not exactly have a lot of experience with the effects of a credit contraction.

2008 Dec 08 10:58 AM

[eternitus:]

Question... if we can simply create money out of thin air, then does it really have any value at all? This is the question that has undermined every fiat monetary system ever devised.

Sadly, I'm beginning to doubt that there is any recourse. Even sadder... why as a bank would I care about underwriting standards if the government can print money at any time and bail me out when loans turn sour?

2008 Dec 08 01:21 PM

[monday1929:]

Exactly- the odds of them getting this even close to correct are slim to none.
My bet is Deflation/Depression, then hyper-inflation, but either way the main point is that the "markets" are now a manipulated casino- only gamblers/traders should be involved. And THAT is a massive failure of the system.

2008 Dec 10 09:18 AM