The Fed's Decision: A Desperate Statement

Here's the Fed's Decision.

OK, so what does it all mean? The Fed is limited to what it can do and has resigned itself to sitting back and waiting things out. Lower rates (essentially zero) have not spurred lending or much economic activity and they are possibly about to purchase the worst assets on banks' books. The Fed now has a 2 trillion dollar balance sheet and that looks to grow. Growing it with quality assets is one thing, but to grow it now with banks' junk, well, that isn't good.

The big banks, JP Morgan (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citi (C) have received their TARP funds and will most likely not want more. This means the strings Congress want to impose on them to force lending will be toothless.

So now the Fed is forced to buy Treasuries to expand the money supply. What they will do then is add to the bubble already existing in them. The collapse of that bubble will cause interest rates to spike (that's really bad in a recession). Since the Fed is already essentially at zero, it can do nothing to stop the rise, except, buy huge amounts of Treasuries and maintain the bubble itself.

See where this goes? The Treasury will issue bills the Fed will buy while the Fed is buying the toxic assets on banks' books ... yeah ... this will end well, no problem.


Disclosure: Long WFC

Comments

[Sentinel]

Check out this article at iTulip.com.

Dovetails very nicely with this article. Lots of facts and charts.

Not a pretty conclusion.....but the logical one, I'm afraid.

www.itulip.com/forums/...

2009 Jan 29 05:45 AM

[tilut]

Thanks Sentinel for the link .

2009 Jan 29 07:11 AM

[Jim Hawthorne]

Thanks Todd! Great link, Sentinel!

2009 Jan 29 07:16 AM

[kelm]

It sounds like a toothless threat by the Fed. If they aggressively pursued this policy it would take an enormous flow of funds and I believe would drive many players out of he market (foreign especially) to escape such rampant government intervention. They have to realize that short of going to a Soviet era command economy, rates are going to move where they will based on the fundamentals. The direction that I am seeing the administration and the Fed going appears destined to fail.

2009 Jan 29 09:12 AM

[know nothing]

They should have come to this wait and see conclusion along time ago! To hand out money to failures is a joke, we live in a free market system, let the market sort this out...Throwing good money after bad is a mistake. If they would have saved their efforts for later in the game, they could have actually done some good, after the weak buisnesses and banks died off, and a new generation of buisness began.
It's kind of like being in a war that might take years to win, and in the first 6 months you use up all your ammunition.. Thats a hard lesson to learn, it hurts, and it's a hard way to win the war!

2009 Jan 29 09:47 AM

[Fabien Hug]

Thank you for the link.

2009 Jan 29 09:47 AM

[Jason Rines (iThinkBig)]

I am in agreement of iTulips analysis. The recovery period likely to begin taking shape in mid-2010 onward will be tempered by inflation but more specifically in the energy markets and trickle down effects. Government loves the tax revenues and feels the consumer can change driving/auto purchase habits. Sovereign debt holders will not forgive the debt and the U.S. will see higher interest rates. We'll have to see what happens with the banking system debate of Nationalize banks to RTC2 to deal with the toxix assets.


On Jan 29 05:45 AM Sentinel wrote:

> Check out this article at iTulip.com.
>
> Dovetails very nicely with this article. Lots of facts and charts.
>
>
> Not a pretty conclusion.....but the logical one, I'm afraid.
>
> www.itulip.com/forums/...

2009 Jan 29 10:51 AM

[canonicalman]

Biggest shakedown in world history. The Fed/Treasury giving good, taxpayer backed paper for garbage. $Trillions worth! All to maintain the fictitious values of made up paper assets. Maddoff has nothing on the Fed/Treasury guys. They make Maddoff pale in comparison as a complete small fry.

How is it that Bernanke and Paulson aren't in prison? along with the whole Wall St. crowd?

2009 Jan 29 02:55 PM

[User 283977]

I think it would be useful to identify the primary stake holders for corporate entities such as C. By doing that, we might better understand why our government is so set on not letting C go into bankruptcy. Following the money often results in enhanced understanding.

2009 Jan 29 03:10 PM

[Moon Kil Woong]

I doubt the banks you mention will not want more. They need it desperately. If they don't want to abide by strict regulations then just re-enact Glass Stegal and break them up. Also, you could force them to disclose their off balance sheet accounts. That will get them running to the government for handouts if they make it to the door before they go bankrupt.

For these banks... I would give them nothing. Not only are they sucking off the public funds and trust, they feel entitled to our money.

2009 Jan 29 11:15 PM