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    • Repurchase Agreements and Covert Nationalization [view article]
      Anyway, good point about inflation - I agree that domestically the money supply has increased even though no new money was printed.

      To explain my point about the T-Bills (correct me if I'm wrong) is that they are created by the US government and are given to the Fed as collateral when the government needs a loan to finance regular government operations.

      While the Fed holds on to collateral T-BIlls from the US government, it could then turn around and use the T-Bills as collateral for loans for itself from foreign central banks (such as BOC, ECB, BOJ, PBoC, etc). Since no further Treasuries were created to generate the cash the US has not gone any further into debt.

      The extra cash would be used to buy up toxic equity in ever increasing, revolving loans to the banks.

      Now here is a thought - is this a plausible scenario?:
      1) The Federal reserve continues to increase the size of the revolving toxic repos (currently at 200 billion) to 'extreme' proportions, so that the Fed is in a position where they hold the majority of the bad mortgages as collateral in these revolving loans.
      2) All at once the Fed discontinues the loans (doesn't roll over into the next month) causing the banks to default. If I'm not mistaken this means that the Fed would then own the mortgages and could then act on their own recommendation - to forgive negative home equity - under conditions of their choice. Once again they could finance the 'forgiveness' event with Treasuries sold to other central banks. This could reignite the economy. Is the possibility really that far off? It was the Feds own idea to forgive negative equity!

      Not many central banks would like the idea of buying Treasuries to support this if the US outlook would remain grim however they may buy into the idea when the alternative is further US inflation to finance the purchase. On the more positiive side they may buy into the idea because if it does reignite the economy then the US would be importing again, the US could raise interest rates again to add value to the currency (making it profitable again for exporting nations to export to the US), and it would probably give the Treasuries a positive real return.

      If the US continues to inflate on the other hand, other countries may take this grievously for the negative effects on their countries, and also, the big lenders will recognize that the ~9 trillion US dollars owed to them by the US governement is becoming less valuable under inflation (e.g. if the US devalues its currency by approx 10% then they have effectively eliminated almost 1 trillion of that debt in real terms without paying back a penny) - leading to conflict.       Mar 12 08:53 PM
    • Repurchase Agreements and Covert Nationalization [view article]
      This seems like the perfect solution.

      The Fed offers to give away cash to the banks (raised through the sale of Treasuries) in exchange for the toxic equity/mortgages sitting on their balance sheets, eliminating the credit crisis. The Fed may even be able to use Treasury sales to inject home equity into these mortgages before returning them to the banks to stem off the tide of foreclosures.

      This offer appears to be holding the rest of the world hostage - If they don't buy the Treasuries then the Fed will be forced to print more money (devaluing the US dollar) to pay for their buying binge of toxic equity.

      You can bet that countries that export heavily with the US will prefer to purchase the Treasuries instead of experiencing the pain of further devaluation of the US dollar (inflation, reduced demand for exports, etc).

      These Treasuries are simply IOUs that were given to the Fed by the US treasury. Now the Fed is passing them out abroad, but as a result the US government hasn't gone any further into debt and the currency hasn't devalued.

      Overall it appears to me that the Chinese & Japanese taxpayers will be left footing the bill for the housing crisis in the US.       Mar 09 10:40 PM
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