The Fed Must Be Crazy

To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets.

- FOMC Statement, March 18, 2009

The Fed really shocked everybody today with its aggressive actions. They are essentially going to print even more money to buy another $750 bil in agency mortgage backed securities, $100 bil in agency debt and $300 billion of Treasuries. In other words, they just announced another $1.15 trillion in purchases!

This is pure inflationism and the reaction in markets has been dramatic: The dollar is getting crushed, gold is surging, treasuries are getting a huge lift, and the stock market is surging.

Basically, they are diluting the dollar to inflate asset markets to prop up our bubble-based economy.

Comments

[Andy Abraham:]

With yesterdays action with mortgage rates at extreme lows... why would banks lend to borrowers ..even good borrowers when judges can cram down ( reduce mortgage notes) mortgages.. this is total insanity.... Inflation is knocking on our door... and the FED let the door open VERY wide..

Mar 19 12:12 PM

[James Quinn:]

What would Kramer say.

theburningplatform.com...

Mar 19 12:37 PM

[DaveinCali:]

They are trying to stop the downward spiral of the banks assets (mortgage backed securities). The banks are tenuous because no one knows the value of the underlying assets, mainly the value of the real estate. If they can stop the foreclosures, the value of the houses stops falling. Once we know where we stand, the banks can start making loans again. Hopefully at 4%, people will start snapping up all this available real estate. the oversupply is causing the values to erode.


On Mar 18 03:55 PM SteadfastMason wrote:

> The stock market is surging on this news....why and for how long?
> I would think that, once this latest "sugar high" wears off, the
> result will be a sell-off that drives financials (and the market)
> down.
>
> I can't see how fabricating another $1.15T is a net benefit for our
> economy or for the markets. if anyone out there can explain the case
> for this latest money crreation being a driver for a sustained (1
> to 10 week) boost in bank stocks, please feel free to do so.
>
> Call me crazy, but I just don't see it.
>
>
> SteadfastMason

Mar 19 02:03 PM

[wavelength:]

Einstein famously observed that you don't solve problems using the same thinking that created them. Maybe Mr Bernanke and Mr Obama are bright guys, but they are obviously no Einsteins.

Mar 19 02:38 PM

[Chris Uhlir:]

Last night I was at the casino and won $1000. So I bought all my friends drinks. Then I ran out of money so I bought another round on credit card. Then the casino comped us a round. My hangover was severe but I had no money. So the casino offered to comp me breakfast as long as I was gambling (on credit now of course). So I ate and felt better and lost more. Two weeks later I got the hotel bill, the credit card bill, & my zeroed bank statement. Ouch. But the casino said I am welcome back anytime! Imagine that!?! Can't wait for the next trip.

Mar 19 03:33 PM

[yank:]

dcb:
you hit the nail on the head. A completely corrupt, unethical banking system that completely "mispriced" risk is now being rescued by a Fed & Treasury that can't stomach the thought of anything but this corrupt "casino" that they run. As for the Republican-bashing please spare me the hypocrisy on that front. Frank, Dodd, Schumer and Pelosi all have "blood" on their hands. In fact it was Sen "Chucky" (Or should I say "Schmucky") Schumer who more than likely deliberately "caused" IndyMac to fail with his "leaked" comments to the media. He should be in jail. Yeah, the Dems are the party of fiscal restraint, I suppose. Take a hike and dream on fool. The Dems are the most morally and ethically bankrupt political party in Washington. And now they are controlling things while Obama leads a "pied piper" march where all of us rats follow him off the cliff. He simply doesn't get it. Soaking the rich and other Hoover-like initiatives is what EXTENDED the Great Depression. Obama has "no clue" what he is doing. He is a "babe in the woods" who will lead us all into a Depression that will make 1929-1937 look like a walk in the park. Wake up people!!!!!!!!!!!!


On Mar 18 05:23 PM dcb wrote:

> Everybody keeps looking at the fed, treasury, congress, and white
> house actions in isolation. That is silly because you are missing
> the real picture. All are acting to continue the wealth transfer
> back to the already wealthy. I challenge anyone to explain the entirety
> of these actions any other way. you can't, and I know because I have
> tried. The fed is not interested in helping the economy, it is interested
> in keeping the money flowing to the banks. Didn't even Liddy say
> today the fed knew about the AIG bonus. Today, I have negative real
> interest rates, destroying the savings I have worked my life for.
> my dollars in my account dropped 3% against the Euro, robbing me
> once more. What does this do to my purchasing power, and how does
> that effect the economy? If I am on unemployment, fixed income or
> my salary isn't going up, how does this help my purchasing power?
> Lower energy prices, stronger dollar increases my spending power,
> a controlled deflation helps me, it hurts wall street banks. AS rogers
> keeps saying these guys are either idiots, or they are in on the
> game. This is the only way that makes all the pieces fit together.
> If the market appears to be turning, if the banks are starting to
> make profits again, if fed ex is saying the global economy is stabilizing,
> why are we doing this now? The largest transfer of wealth in the
> history of man is happening back to the have from the have nots and
> it is directed by our government in exchange for lobby money and
> well connected jobs. Christopher Dodd removed language that would
> have prevented the Aig Bonus scandal. Congress got caught with their
> hand in the cookie jar, and now they are pretending outrage. It's
> all false!! Paulson, Thain. Lay, Look at the Goldman connection,
> did you know industry chooses who runs the NY fed? Now it's a goldman
> guy. Why is the only person doing any investigation the NY state
> AG (Cuomo)? Because the federal Government doesn't want it ti happen.
> Why were Goldman et al paid in full for CDS's that haven't defaulted?
> The list goes on and on, and there is no other way to explain it.
> I did not used to think this way, but all of the evidence points
> to it, and then everything makes sense. Mark to Market, the TALF
> (low interest loans to private equity and hedge funds with loss provisions)
> with no income limitations, TARP, how do these things help me? They
> don't, but they help wall street. Wake up people!!!!!

Mar 19 05:08 PM

[dcb:]

Dude, who is running the Fed. Same guy, allows for continued conspiracy. Who ran NY fed while this started. Geitner. This allows for conspiracy. While I'll give Obama the benefit of the doubt at this time, you can't give it to the other folks. Lets see, Summers. isn't he the guy under clinton that allowed CDS contracts not to be considered insurance so you didn't have to provide back up capital. Or was he the guy who allowed companies to determine their won value at risk models to determine capital requirements. I do know Paulson lobbied hard to get those, and gietner was also Paulson's man. In truth I am not a conspiracy nut job at all, but when the overwhelming amount of evidence fits (even if it is circumstantial) you have to put it in your analytic pardigm and see if things fit together when you do so. Since this is the only way I have been able to understand the entirety of actions by the Fed and others at this point it's up to you to prove me wrong, because I have a very rational way to explain almost everything. There are also many respected financial experts (rogers, schiff, faber) who think what is being done is crazy. So, change your assumption on why it is being done, and it aint crazy anymore.


On Mar 18 08:24 PM lbator wrote:

> Agree with you on the run up to the war. However, the rest of your
> argument does not advance beyond an intro to sociology course. It
> was the governments unwillingness to take action that increased the
> intensity and the duration of the great depression. Every move is
> not a murky government conspiracy. At least not since Bush/Cheney
> left office!

Mar 19 05:41 PM

[dcb:]

I will point out that the European central bank has a different approach than the fed and I trust Trichet a lot more than Bernake.


On Mar 19 05:41 PM dcb wrote:

> Dude, who is running the Fed. Same guy, allows for continued conspiracy.
> Who ran NY fed while this started. Geitner. This allows for conspiracy.
> While I'll give Obama the benefit of the doubt at this time, you
> can't give it to the other folks. Lets see, Summers. isn't he the
> guy under clinton that allowed CDS contracts not to be considered
> insurance so you didn't have to provide back up capital. Or was he
> the guy who allowed companies to determine their won value at risk
> models to determine capital requirements. I do know Paulson lobbied
> hard to get those, and gietner was also Paulson's man. In truth
> I am not a conspiracy nut job at all, but when the overwhelming amount
> of evidence fits (even if it is circumstantial) you have to put it
> in your analytic pardigm and see if things fit together when you
> do so. Since this is the only way I have been able to understand
> the entirety of actions by the Fed and others at this point it's
> up to you to prove me wrong, because I have a very rational way to
> explain almost everything. There are also many respected financial
> experts (rogers, schiff, faber) who think what is being done is crazy.
> So, change your assumption on why it is being done, and it aint crazy
> anymore.

Mar 19 05:43 PM

[dcb:]

Thank you. I have spent a great deal of time thinking about this stuff. It isn't the ranting of things that can't be supported by fact and evidence. I didn't reach this conclusion because I wanted to. In truth it has saddened me greatly and I don't want to believe it. But as a trained scientist I have to believe what the data is telling me.


On Mar 19 05:08 PM yank wrote:

> dcb:
> you hit the nail on the head. A completely corrupt, unethical banking
> system that completely "mispriced" risk is now being rescued by a
> Fed & Treasury that can't stomach the thought of anything but
> this corrupt "casino" that they run. As for the Republican-bashing
> please spare me the hypocrisy on that front. Frank, Dodd, Schumer
> and Pelosi all have "blood" on their hands. In fact it was Sen "Chucky"
> (Or should I say "Schmucky") Schumer who more than likely deliberately
> "caused" IndyMac to fail with his "leaked" comments to the media.
> He should be in jail. Yeah, the Dems are the party of fiscal restraint,
> I suppose. Take a hike and dream on fool. The Dems are the most morally
> and ethically bankrupt political party in Washington. And now they
> are controlling things while Obama leads a "pied piper" march where
> all of us rats follow him off the cliff. He simply doesn't get it.
> Soaking the rich and other Hoover-like initiatives is what EXTENDED
> the Great Depression. Obama has "no clue" what he is doing. He is
> a "babe in the woods" who will lead us all into a Depression that
> will make 1929-1937 look like a walk in the park. Wake up people!!!!!!!!!!!!
>

Mar 19 05:50 PM

[dcb:]

Look, I'm a high school educated idiot. House prices are going up so I wnt to buy something. I go into a mortage broker and he directs me to some product with no money down, that interest rates can change later, but I'll always be able to refinance. because of the tax deduction It's cheaper than rent. He/She makes a bonus for selling me that product because it's for a larger amount and because the interest rates go up later and I have to pay more because at first it's interest only. I believe him of course because that's his job and he is a professional. Then shit hits the fan. I can walk away from the house, then because of foreclosure the banks take a big hit and loose income stream as the new selling price is a lot less. so you modify the loan. and everyone can end up happy. Why are the banks fighting this. Because then they would have to realize the loss which they are doing everything they can to hide. Let us be clear you aint going to get the expected income stream from that security no matter what. So, you have a strange system that to protect their own failures (asses) the banks fight what would be good for everyone in the long run. Why do we have a system that encourages the banks to do things that are bad for society so they can avoid taking writedowns that everyone already knows is there. Unfortunately, since the banks aren't behaving in a logical manner, they need to be forced to do so. If I'm a CEO and I acknowledge the write downs I may not get my bonus!!!

On Mar 19 12:12 PM Andy Abraham wrote:

> With yesterdays action with mortgage rates at extreme lows... why
> would banks lend to borrowers ..even good borrowers when judges can
> cram down ( reduce mortgage notes) mortgages.. this is total insanity....
> Inflation is knocking on our door... and the FED let the door open
> VERY wide..

Mar 19 06:05 PM

[Gedankonomist:]

Crazy? Perhaps. Methinks however that there is a method to the madness.

Mar 19 06:08 PM

[dcb:]

We can have orderly bankruptcies of most of these firms so they don't disappear overnight and the continue to function while the are retired from our economy. direct support can be given t the consumer lower his debt level (real interest rates on savings accounts, lower credit card interest rates, mortagage support, reduction of payments, or resetting the property value closer to reality not bubble peak). All of this will support consumer spending and we will still have an economy. None of this supports wall street, but it does help our economy. Do you think it is going to happen? Why not? Why are all of the measures taken so far 9not all, but the great majority) funnel money to wall street. American's don't need consumer credit flowing again. they bneed to get out of their debt burden to fix the economy. Unfortunately fixing the problem this way does not put money in wall streets pockets. Think about the talf. We are going to give hedge funds and private equity a trillion dollars of very low interest loans interest loans that if the securities on them default the tax payer will be stick with over 80%. This is no risk money. almost certain big profits on the interest spread, and they don't take the loss. Why can't we make the same offer directly to the consumer cutting out wall street allow the public to reduce debt levels. I don't know, you tell me.


On Mar 19 09:32 AM frosty wrote:

> If not the fed who will re-ignite the economy? Congress? Wall Street?
> The free market?
>
> Congress is gridlocked once again, this time over the issue of executive
> bonuses and won't be able to act on anything for awhile, at least
> until every one of them weighs in several times on the issue, and
> we have a few more hearings on the matter. There have only been
> a few times in our history when both sides of congress actually worked
> constructively together and most of these were times of war. Congress
> is where great (and not so great) debates occur and that's what they
> will do. Don't look for real long term solutions here.
>
> Wall Street is on life support and won't be able to do much on its
> own. In this regard, the fed and the administration are their doctors
> who might just bring them back to life. It looks like a long recovery
> however and they will not be the freewheeling playboy gamblers they
> once were. Medicare has saved more than one life and that's a good
> thing. In the final analysis we really need a Wall Street but they
> will have to be carefully monitored in the future because your health
> and mine are a stake.
>
> Admitedly, the free market will also work, however its solution would
> be too tragic to contemplate. Try to consider what would happen
> if all congressional, executive and fed initiatives were removed
> (or didn't happen in the first place). For starters, dozens and
> dozens of large financial and manufacturing firm bankrupcies causing
> massive unemployment which would lead massive federal spending for
> unemployment compensation, pension fund takeovers, and welfare.
> State and local governments would also fail due to loss of tax revenue.
> We would also likely see the beginnings of anarchy as literally everyone
> loses hope of a better future. If the American economy dies, the
> rest of the world economy dies with it setting the stage for all
> sorts of trade and shooting wars. Allowing this to happen is probably
> the quickest way to get us to a socialist-authoritarian government.
> Free market advocates, in the strictest sense of that definition,
> believe in a theoretical, idealistic dream world inspired by John
> Galt that has never existed except in the pages of Atlas Shrugged.

Mar 19 06:20 PM

[dcb:]

I don't think it's that people don't want something done. It is they way things are being done, and how the money is being directed towards certain very well connected people who have paid a lot of lobby money and have access. At the same time they are the people who knew the party was going to end, but continued to sell the trash (and this is well documented. how they ignored their own risk management, fired them, or had them transferred). to the world because it increased their pay while gutting shareholder value. They of course get to keep the crap they made selling the junk and now the government is paying them to buy back the stuff they sold at a reduced price. at the same time CEO pay has gone from 30X the average worker (which I'd think is reasonable to 300x) , while real wages have fallen, chummy boards that pay out crazy amounts despite poor performance because they are all friends). The concept that the owner (shareholder) of a company can loose everything while management profits from this and the tax payer has to cough up isn't kosher (actually more Ponzi) says something is very wrong. The fact that it has taken government involvement to get rid of some of these practices. where have all the pension funds and mutual funds been. Aren't they to be looking after my welfare. Not only that but until there was public outrage and congress was afraid they weren't going to be elected, they were happy to continue the system. If that isn't screwed up I don't know what is. HOW DOES DICK FULD ET AL. RUIN A COMPANY , MAKE A FORTUNE, AND LEAVE ME THE OWNER WITH NOTHING. THAT ISN'T CAPITALISM, THAT IS A SCAM.


On Mar 18 10:19 PM CJJ wrote:

> The old connumdumb for the Austrian Economists. They would love
> for the world to do nothing, let everyone go bankrupt, everyone who
> actually produces things to stop producing due to non-existent demand.
> Only then will growth return and all the evil doers will be justly
> punished(oh yea, so will everyone else). Great Plan.
>
> I guess they forget to mention that from 0 the only direction is
> up. They are just so darn smart.

Mar 19 07:02 PM

[Jonathan Ch...:]

I am CONFUSED!

1. Bush got us into trouble by spending too much money.
2. Bush only spent money approved by Congress.
3. Democrats have had majorities in the Congress for the past two years.
4. Spending increased with the Democratic Congresses.
5. Bush is responsible for spending too much money.
6. Obama wants to spend more money than Bush did.
7. Congress is agreeing that we need to spend more money
8. Bush spending too much money got us into trouble
9. Spending more money than Bush will get us out of trouble.
10. Therefore Bush got us into trouble by not spending enough money

I am confused!

Mar 19 07:22 PM

[Just Say Whoa!:]

>1.All worth is based on Gold.

Absurd!

Clean air is worth something, ain't it? You can't survive 3 minutes without it. Is that based on gold? No.

Pottable water is worth something, ain't it? You can't survive 3 days without it. Is that based on gold. No.

There ain't enought gold to cover the US Dollar, much less all other currencies.

There is NO WAY there is enough gold in the world to base 1:1 on anything of value. It would have to be fractional. Which is EXACTLY what we have now, more or less.

Mar 19 07:40 PM

[Kunst:]

Their treasuries increase in value every time the interest rate drops. I believe they are converting US bonds to tangible assets as quickly as they can. So far, the Fed's actions have all benefited China.


On Mar 18 06:21 PM SW Richmond wrote:

> Your statement is just disingenuous. Their windfall is of course
> only if they sell; it's a "paper" gain. I'm sure you know that.
> I'm also sure you know they know they're now virtually guaranteed
> to be paid back with devalued dollars. I'm sure they're not happy
> about that.
>
> Call the Chinese central bank and congratulate them on their windfall,
> see what they have to say about it.
>
> AsiaTimes may grace us with a response tonight / tomorrow. Expect
> them to officially express "concern" but to say nothing that would
> crash their current holdings. Expect them to continue to convert
> their dollars into real assets like arable land and mines.
>
> On Mar 18 05:04 PM Respirate wrote:

Mar 20 01:56 AM

[Kunst:]

I think that is the key. Big Ben wouldn't do this if he thought previous acts had the economy on track to recovery. This means things are even worse than we've been thinking. He has inside information we won't get for a while. He knows, and it's obvious he scared at what he sees.


On Mar 18 08:36 PM The Mad Hedge Fund Trader wrote:

> They must be desperate. ♦

Mar 20 02:02 AM

[Kunst:]

Our economy is built on consumption and debt. It's a Ponzi scheme. If the bicycle stops, it falls over. So we have to keep peddling forever, you see?


On Mar 19 08:12 AM Ganesh Sastri wrote:

> It is high time the US as a nation encourages THRIFT. Why encourage
> borrowing to spend on consumables? Instead Americans should spend
> if they have money in their pocket and not from somebody else's.
> That should mean increasing the rates of interest. There will be
> short term pain but gain in the long run.
> At any rate FED's actions will ensure that interest rates skyrocket
> possibly into double digits.

Mar 20 02:09 AM

[monday1929:]

You hit the nail on the head! America will cling to its Delusions as long as it possibly can.


On Mar 18 04:16 PM Kevin Walmsley wrote:

> The Fed is doing everything in its power to re-inflate bubbles that
> the free market is determined to pop.
>
> It's hard to see just how buying $300 bn worth of Treasuries will
> help "free up" logjammed credit markets. Treasuries are the most
> liquid securities on earth; banks are holding them on their balance
> sheets not because they can't unload them, but rather it's more logical
> to park their cash there instead of lending it out. Now the Fed has
> just made, in one stroke, Treasuries much more valuable, so why should
> banks sell them?
>
> The Fed has been outstanding in telegraphing, in advance, where the
> problems in the economy are. There must be great concern that the
> Treasury market will be the next to fall. Given the fact that Treasury
> buyers from China, Saudi, and Japan won't be having any trade dollars
> to recycle back into buying US assets, the Fed itself is having to
> step up.
>
> Keep selling.

Mar 20 07:59 AM

[Allan Frain:]

Trust one's precious metal to a Safety Deposit Box ? Nope. That lesson was taught by FDR.


On Mar 18 07:51 PM Long John Silver wrote:

> The Fed created this mess and I guess the Fed is now going to create
> the next mess: total destruction of the creditworthiness of America.
> It's been coming for 30 years. Gold and Silver in a safe deposit
> box makes sense along with a year's supply of commodities.

Mar 20 11:10 AM