What Will Banks Do with Bernanke's Money?

As of the last report, U.S. Commercial banks had about 1.25 trillion dollars in treasuries and agencies.

Apparently, Fed Chairman Ben Bernanke wants it all.

Okay, not really. Obviously there's going to be a lot of re-balancing. But still the dollar as taken a resounding whack, as it did when Chairman Bernanke dropped short term rates to near-zero.

Foreign banks are running from dollars, confident American colleagues will have rather more than they need for a while. Gold, not unpredictably, has soared on the expectation of inflation.

But what of that expected inflation?

Let's say you run a major bank – a primary dealer, even. What are you going to buy with all those deposits you just got from Uncle Ben? What's the surest, safest asset you can substitute for those government-backed securities?

A) Other government-backed stuff.

Obviously. Ben scratched your back, you can scratch his.

B) How about your own liabilities?

Among your 2.5 trillion dollars in borrowings, I bet you'll find something good.

Any other, more inflationary ideas?

Disclosure: No positions. You first.

Comments

[MattZN]

I think you're missing the point. It's not treasuries that are re-inflating the economy, it's the 750B+ the Fed is using to buy up mortgage-backed securities. He is forcing a bottom in home prices, forcing mortgage-backed securities to reprice upward on the open market, forcing mortgage rates down to 4% for at least a month or two, and unfreezing the market in mortgage backed securities allowing banks to originate more mortgages by cycling cash, not to mention allowing the Fed to sell those 750B+ back into the private market in less then 3 years.

The 300B+ in treasuries is being used simply to delay the inevitable inflation long enough for the recovery to take hold... better for the inflation to occur during the recovery instead of before the recovery starts. Then he's going to raise.

Oh yah, and all that TARP money? The banks pay them back. AIG is a basket case but the banks are not, particularly with this plan. And all those mortgage delinquencies? Easily absorbed with the massive boost in new mortgage and refi activity this plan causes. And the economy? Reinflated from the masses of middle class home owners who will be flocking to refinance their homes, putting more money in the hands of the banks in the form of fees, and putting more money in the hands of the home owners in the form of lower monthly costs. Win. Win.

Don't you people even bother thinking before you put pen to paper? Inflation has been on the horizon for a while. The Fed is taking measures to make it controllable, verses doing nothing and winding up with it uncontrollable.

-Matt

2009 Mar 19 12:24 PM

[dlaw]

Matt,

Thanks so much for the comment.

Very concisely and coherently describing Chairman Bernanke's strategy you write:

"[Bernanke] is forcing a bottom in home prices, forcing mortgage-backed securities to reprice upward on the open market, forcing mortgage rates down to 4% for at least a month or two, and unfreezing the market in mortgage backed securities allowing banks to originate more mortgages by cycling cash,"

I can only respond this way:

Well, he *think* that's what he's doing, but it has essentially no hope of success, in my view.

2009 Mar 19 12:52 PM

[conceptwizard]

I have a hard time understanding how lowering mortgage interest rates is going to stabilize a mortgage market that still has high job losses occurring that will have an impact on foreclosures, 25 -30%lower house values to re-finance and high debt loads for consumers to qualify debt to equity wise.
Doesn't matter if the interest rate is up or down 1% for the home occupier, this will only benefit the first time buyers, of which their are not enough to offset the vacancies and eliminate surpluses.
New home starts showed an increase last month of 22% but only n multiunit. I think developers are building more apartments to house the folks losing their homes.
I belive the more important statement in this review is "foregn banks are running from the dollar". This is the start of a major devaluation of the Greenback. There is still several trillion left to be injected and with each annoucement the dollar will get hit.
I am not a gold bug but it looks safe, I like silver better.

2009 Mar 19 01:42 PM

[dlaw]

Sorry to comment again here, but Mr. ConceptWizard has hit some nails very squarely.

I put it to readers that although there will be a bump - even a big one, as some pent-up demand busts out - lower mortgage rates will not increase net home home sales much and and I'm not sure they've even meant to. They help banks generate near-term refinancing fee income and reduce out-year interest load on the most-stable borrowers.

The stressed buyers are going to get crushed or the losses on their houses will become an enormous burden for the taxpayer if the "bad bank", banker welfare plan goes through - the GSE for banks.

New home starts tell me the story of developers who have lots on their hands trying to get rid of them and, in the process, loading the housing market with more supply.

Find me bankers who are looking to put securitizable volume of any size through the system - and then re-loan - and I'll believe Bernanke's tale of a housing recovery.

2009 Mar 19 02:41 PM