The Bernanke Conundrum 34 comments
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Or: Why Stimulus Won’t Stimulate….(Bloomberg)
The biggest price swings in Treasury bonds this year are undermining Federal Reserve Chairman Ben S. Bernanke’s efforts to cap consumer borrowing rates and pull the economy out of the worst recession in five decades.
The yield on the benchmark 10-year Treasury note rose to 3.90 percent last week as volatility in government bonds hit a six-month high, according to Merrill Lynch & Co.’s MOVE Index of options prices. Thirty-year fixed-rate mortgages jumped to 5.45 percent from as low as 4.85 percent in April….Costs for homebuyers are now higher than in December…..
“The Fed is stuck in a very difficult place,” said Mark MacQueen, a partner at…Sage Advisory Services Ltd…“You can’t have it both ways. You can’t say I’m going to stimulate my way out of this problem with trillions of dollars in borrowing and keep rates low by buying through the other. I don’t think that is perceived by anyone as sound policy”…..
“To the extent yields are going up because the economic outlook is brighter, the answer would be, don’t do anything,” Federal Reserve Bank of New York President William Dudley said in a transcript of an interview with the Economist last week.
Surely Dudley and the other Fedsters know that rising mortgage rates are the neutron bomb that will obliterate their monetary-induced “recovery.” If the “brighter” economic outlook to which he’s referring brings with it median-reverting mortgage rates it will lead to a renewed deflationary spiral. And yet, even as Treasury yields and mortgage rates climbed last week, the Fed didn’t step up asset purchases. Holdings of Treasury Securities rose only $9 billion last week, and MBS holdings fell $3 billion; agency debt holdings were flat. And the prior week the Fed was only marginally more aggressive: $17 billion increase in Treasurys, $5 billion increase in agency debt, flat MBS.
The Fed still has hundreds of billions left to spend under their previously announced $1.75 billion asset purchase plan. Why are they waiting?
Perhaps it’s because they know that nothing, not even the printing press, is strong enough to fight off bond vigilantes who see $3.25 trillion of Treasurys set to be dropped on the market. Remember when Hank Paulson spoke of the Federal Government “bazooka” that was going to protect Fannie Mae (FNM) and Freddie Mac (FRE)? With explicit government backing, he argued, there wouldn’t be a run on Fan and Fred debt. The Chinese weren’t impressed, sold their F/F debt, forcing Paulson to take the two into conservatorship.
What’s the moral of the story? As big a balance sheet as he has, Uncle Sam doesn’t have the resources to corner the bond market.
As powerful a tool as the printing press is, the Fed doesn’t have enough electronic ink to corner the bond market either. Not when Congress needs to borrow trillions to meet its fiscal commitments.
Is it possible Bernanke is playing chicken with Washington pols? Last week he made headlines by calling for deficit reduction. He knows runaway deficit spending will neuter his monetary-induced “recovery.” He needs Congress to get serious about deficit reduction. Now:
Clearly, the Congress and the Administration face formidable near-term challenges that must be addressed. But those near-term challenges must not be allowed to hinder timely consideration of the steps needed to address fiscal imbalances. Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.
Somehow I doubt that Bernanke is comforted by the administration’s promise to cut the deficit “in half” by 2013. Letting rates rise may just scare Obama into cutting it down to size much sooner…
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The truth......However the rest of
You people still don't get it.
The Central banks along with the Federal Reserve, Fractional reserve banking procedures, and absence of the Gold standard are the spring boards of happiness for these cartel counterfeiters to rake the entire world over the coals and out of existence.
Federal Reserve Notes are near extinction. Rightfully so, because they(FRN) are worthless paper not soft enough for biological purposes and have no value without Gold standard backing it.
The rest of the world is starting to realize the USD (Federal Reserve Note) is the ROOT CAUSE OF PRESENT GLOBAL CHAOS.
Use the Gold Standard and get rid of Federal Reserve Notes and start having the U.S Government Treasury print United States Notes backed by gold reserves only producing allotments as needed to balance goods and services.
Abolish the Federal Reserve Act of 1913,Fractional Reserve Banking, the IRS, Ben Bernanke and the entire Federal Reserve System.
Then you will be able to understand and open your mind and eyes and move on to a better economic level of survival.
In other words remove 96 years of bend over vaseline jobs from the Federal Reserve System.
Just a thought ............. Have a good day,week,month,year and next decade.
Stephen
John Maynard Keynes – General Theory Chapter 24
The Keynesians are now running Executive and Legislative branches of US government. Consider this quote the “rational” justification of everything they will do.
"The Fed still has hundreds of billions left to spend under their previously announced $1.75 billion asset purchase plan. Why are they waiting?"
Sad isn't it, to look at the 70's somewhat favorably?
"Foolish consistency is the hobgoblin of unelectable politicians."
have enjoyed your posts, and while you point out one aspect of the problem I think we must address another. As many pundits have noticed there is a great deal of funny business going on in the market not letting it correct. The big stick saves at the end of the day. Today there was one (6/8/9) on the S&P.
You have to ask who has the billions to throw into the market.? the pattern has been clear fro a while.
This has had a huge impact on the 10 year note.
I would ague that the fed has made huge amounts of money available to the wall street banks who are using the money to keep the market from correcting. this has an impact on the dollar, and t bond yields.
In effect we have given these banks the ammunition (esp in low volume markets). to fight waht the fed and gov't wants to do. I hope everyone see how nasty this really is. We bail out the banks they use the money to prop up the markets, increase their trading profits and buy securities (actually increasing risk). this props up all other world markets and effect the dollar We then have to pay more for our debt, get higher future inflation, etc.
I have sent many letters to the sec, gov't detailing what is going on. The issue you have to ask is why our government and regulatory authorites are standing by and letting the people we bailed out screw us?
All the points you make are very interesting, but you have to tie everything together into a story that fits together. The very banks we bailed out that wrecked havoc with our system are now wrecking havoc again in order to ensure they make trading profits and the securities on their books do not drop any more. that means future inflation, lower dollar. I also wonder which one has positions on lets us say oil which will benefit from what they are doing.
Our entire financial system is effectively working to subsidize the banks and the average citizen will be much worse off in the end.
I truly hope everyone out there sees the ties and how they fit together. Zero hedge, david Fry, Phillip Davis have all talked about the clear manipulation. You are addressing t-bonds and the effect that will have, other people have addressed future inlflation and the dollar.
What I am telling you is that all there things that appear to be separate issues are in fact not. The issue is why manipulation of the S&P/NYSE is OK, and why the larger effects it is costing our society. and how they tie together. The money we gave to goldman via AIG and low interest rates is being used on the futures/options market to actually work against the best interests of this country.
I predict this will truly end in a disaster for our country. we will have very rich bankers, the wealth gap will increase, our society may actually become unstable. The connections are as clear as one can see to me.
My personal investment advice is to not invest a penny in the american market. this will cause the banks to keep propping up the us market in order to such people in. emerging markets will therefore continue to outperform. You have to use these people the way they are using you.
new high, 970 drop to 940/935 one day up, see at the open the next day (that would be yesterdays gap at open. rebuy (that would be todays 925, and the sell target is 970 now.
goldman will not allow the market to correct until more folks join in the party. so play other markets and let them your tax dollars work for you>
It is end game.
Hmm. Maybe he shouldn't get them to borrow more... maybe, just maybe, they should save. The only problem I see is it is hard to find something worth putting your money into... to save it properly and be hedged against inflation and market fluctuations at the same time. The system is just soo corrupt. And politics always gets involved and screws things up so investing long-term is made difficult - if they don't confiscate your gold, they'll control the gold trading market and hold it artificially low. If they don't do either of those, they'll increase taxes dramatically so any gains you get are spoken for anyways. If they don't do that, they'll devalue the currency so fast your savings weren't worth saving to begin with.
It is odd that so many people on this site are hoping against hope that the "great hoi polloi" will ignore all the above and and borrow and spend like there is no tommorrow. We call this recovery. It would be a form of collective madness. We all know it won't work.
So just who are we kidding?
That said, Bernake is equally responsible for pouring inflationary $ into the market. He is foolish if he believed this would have no effect.
Stop being so hard on the administration. Did you not hear their PR yesterday, all of this spending has actually saved 150K jobs! I even bet they will find one job that has been saved and use it as proof of their genius and more reason why they desire, better yet entitled to, more power.
-AM
-AM
There are a LOT of govt bonds to float - I don't think people are going to want to pick them up which means the fed is going to have to step in or let interest rate rise. If rates rise, the economy falters again... if they step in a purchase t bills, then we'll probably see inflation.
Based upon Bernanke's actions so far, I'm preparing for inflation.
We have been too long and too competently screwed by the special interest groups in this country. We need to get back to a time when we at least believed our politicians were capable of putting their patriotism ahead of their ambitions for reelection or even higher office.