America's Ad Hoc Fiscal and Monetary Policy

What is this Supplementary Financing Program, under which Treasury is essentially lending money to the Fed? Does it mean that the Fed's run out of money, as Paul Murphy would have it? Does it mean, pace Tyler Cowen, that central bank independence is gone and that American government has become dysfunctional? Alternatively, looking at things from Yves Smith's point of view, has Ben Bernanke started up the printing press? Will the program mean a huge uptick in spending and therefore in the budget deficit, with potentially disastrous echoes of 1966? Or is it simply, in the words of the Treasury press release, no more than a "liquidity initiative" with essentially zero fiscal implications?

All answers gratefully accepted. Because I have no idea.

I certainly see no useful distinction to be made right now between Treasury and the Fed: Just look at the AIG (AIG) bailout, where the Fed is providing the line of credit, but Treasury gets the equity warrants. On the other hand, I think that's a good thing. Central bank independence exists to prevent politicians from determining monetary policy -- but when it comes to regulatory arm-twisting and game-changing bailouts, you want Treasury and the Fed to be on exactly the same page. Similarly, I see no way whatsoever in which hyper-politicized kibbitzing from the Federal legislature at the height of election season would be anything but noisy and unhelpful. Insofar as America's Congressional representatives are letting the executive get on with things, good for them.

I suspect that when the dust has settled, we'll have seen a lot of money being moved around in circles, but we won't have seen a significant increase in actual government indebtedness. Contingent government indebtedness, yes: There's now an implicit sovereign guarantee not only on Frannie but also on AIG. But the good thing about contingent indebtedness is that it doesn't cost any money up front. And in the meantime, thanks to the FTQ trade, US borrowing costs have never been lower. Which is a good thing, fiscally speaking.

All the same, one does get the distinct impression that Paulson, Bernanke, Geithner & Co are making this up as they go along, and that they're very much behind the curve. If the US government needs to borrow billions of dollars to make this crisis go away, it will: Short-term necessity will override any concerns about long-term indebtedness. That's the way it always is, in crises. And frankly I'm glad that at least the US government still has the ability to borrow essentially unlimited amounts of money to sort these things out. Because no one else can.

Comments

[anvor:]

Hell-o-o-o, socialism! Let the government bail out everyone, own everyone, deside for everyone. Way to go :)

2008 Sep 17 05:23 PM

[phdinsuntan...:]

not with my money !

2008 Sep 17 06:16 PM

[Kath H.:]

"not with my money !"

They don't need to take your money; they just print their own. Your money drops in value due to the government's printing press. That way they don't need to dirty their hands by mugging you with force.

2008 Sep 17 08:07 PM

[HARM:]

Right now all we have is socialism for the rich and well connected, not for the working classes. As long as I'm being forced to pay taxes to keep executives from Lehman, AIG, Bear-Sterns, etc. from having to realize an actual *loss*, I might as well ask for a small slice of that socialism pie myself. How about asking Uncle Sugar for some "socialism" that benefits the working class for a change? Like national healthcare, for instance?

Oh, right... I forgot Galbraith's dictum: socialism is only respectable when it's for the rich.

2008 Sep 17 08:14 PM

[Alan von Al...:]

"Unlimited amounts of money." Like Zimbabwe, in the sense of more zeroes on the bank notes? Or more chits against future tax revenue? More foreign ownership of US assets?

Get real.

2008 Sep 17 09:52 PM

[hardball22:]

According to Citigroup Investment Research released to the public tonight, the Fed holds ~$480b ttl in Treasuries. Of that sum, $85b now belongs to AIG, plus $200b for the Term Securities Lending Facility (opened 3/11/08 to aid bank liquidity), which leaves ~$200b unpledged.
That's not much to play with, but add to that this new Supplementary Financing Program that'll provide the Fed w deposits fm short term T-bill issuance proceeds while beefing up bank reserves.
The Treasury seems to be laying more pipeline between itself and the Fed. If the Gov't's checkbook lies wide open, there's only $1trill more in sustainable debt.

2008 Sep 17 10:26 PM

[hardball22:]

Also, HARM, without this government intervention that you call "socialism," the taxpayer would be a lot worse off. If AIG went bankrupt, I assume you've considered the ripple effect.
Further, don't blame the scapegoat CEOs. The "hands-off Wall Street" Republican ignorance (actually, it's been a bipartisan oversight) has forced banks to overleverage, etc. If you're a CEO and you're not "cheating within the rules" by overleveraging, subprime lending, or loading your balance sheet w speculative derivatives, you're out of a job because your corporation's not keeping up with the competition. Catch-22!

2008 Sep 17 10:37 PM

[NObama:]

They are all blaming each other now. Congress & Greenspan are the suspects in the destruction of wealth that we are witnessing now.

2008 Sep 17 11:11 PM

[MarvinMBA:]

The new wave of financial instruments started years ago by brilliant financial nerds are now back to haunt us. What happened to the real deal of paying 25% down and the local bank took the mortgage. We might be going back to the old days where a buck was a buck and creative financing was nonexistant. Working ourselves out of this mess is going to take perhaps 10 to 20 years. Meanwhile were going to go thru more pain and Depression is just a short time away as we "mark to market" the excesses. My only hope is that pension funds survive to give the retiree that paid in with real hard earned bucks the opportunity to enjoy a few years. But I suppose thats wishfull thinking...I'm retired and going to paint the Apple Cart left over from my Grandfather in the garage from 1932, so I can haul it thru town selling a few apples.

2008 Sep 17 11:27 PM

[bearfund:]

The real FTQ trade began in earnest today. Treasuries? Well, I guess they're safe... but I'd much rather have gold was the mood today. Which is a sign that the BS is reaching an end and push is finally coming to the ultimate shove. The government should load up on debt now while it can, because the cost of borrowing is going to head higher. There is no trust, anywhere, in anything. Nor should there be.

2008 Sep 17 11:30 PM

[Smarty_Pants:]

Watching the FED and Treasury deal with all the current financial industry problems reminds me of Lucy and Ethel working at the chocolate factory.

As the conveyor belt continues to move faster and faster, they find that they can't keep up with all the chocolates.

There's no way the FED or Treasury can keep up with all the dominoes that are being nudged over from the events of the last few weeks.

First it was 'just' Bear Stearns.
Then, 'just' Fannie and Freddie.
Then, 'just' Lehman, AIG, and Merrill Lynch

Next: WaMu, Morgan Stanley, GM, Ford, and ?

After that: Delta, United, Hedge Fund X, ?, ?, ?, ?

It's not slowing down any time soon. Eventually the FED will run out of their stash of Treasury debt and need to resort to actually printing more money, or they will have to abandon the field and let the chips fall where they may.

Neither option will be optimal.

2008 Sep 18 12:23 AM

[Getridofthe...:]

>>There's now an implicit sovereign guarantee not only on Frannie but also on AIG.

All top banks in the U.S. are GSEs, just like FNMA and FHLMC. That's the essence of TBTF doctrine. You think the Paulson&Bernanke Inc. will let BAC go down? JPM? Citi? Not a chance. These are public utilities, and as a public policy matter we really ought to be debating if an oligopolistic financial system is what the American capital market end-game should look like.

2008 Sep 18 01:21 AM

[bbzz24:]

Felix: 'I think that's a good thing. Central bank independence exists to prevent politicians from determining monetary policy'

Isn't money supply monetary policy as well? According to Wiki and many textbooks it is: 'Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy.'

2008 Sep 18 02:46 AM

[vanyali:]

I don't know who the rich and well connected people are who are benefiting from all of this. It looks to me like the investor class in the country is losing its shirt. Hank Greenberg said yesterday that he just lost most of his wealth because he had it in AIG stock.

2008 Sep 18 07:42 AM

[Smarty_Pants:]

The underlying reason for the current 'Ad Hoc' activities of the policy makers results directly from the need to counter the market imbalances caused by their prior monetary policies of "growth" through borrowing.

As anyone with a whit of common sense knows, consumerism is not a long term viable means of getting ahead. You can't borrow your way to a better lifestyle forever, like the government has be trying to do for nearly 100 years.

If you would like to read a short article which outlines what has been going on since 1913 you can find one here:

www.usagold.com/gilded...

Amusingly enough, this was written by 'Maestro' Greenspan himself in 1967. He's no dummy. He actually understands what's going on and why, but apparently his ideals crumbled when he found out how much the money lenders were willing to pay for his services.

2008 Sep 18 09:56 AM