ABG

Is the $700 Billion Really for Bailing Out the Fed?

Today, bailout talks were basically running in circles, getting nowhere fast. Assuming there is no PPT, and that today's upward movement in the DOW is real, we seem to need no bailouts, because the fact that bailout talks are in disarray seems to have had no impact on market confidence. So, there you have it, Mr. Bernanke. The market is fixing itself! Or??????

Is the $700 Billion Really for Bailing Out the Fed?

The Federal Reserve is not technically a Federal Agency. It is a "non-profit" government entity that gains its authority from the Federal Reserve Act of 1913, and is collectively owned by the regional Federal Reserve Banks. Each regional Federal Reserve Bank is collectively owned by the national banks (and state chartered banks who choose to become members) of that region.

The Federal Reserve balance sheet is established by the U.S. Treasury. The Board of Governors has permanent representation on the FOMC, which is the committee that sets Fed policy. They outnumber the regional bank presidents. The Board members are appointed by the President with the "advice and consent" of Congress, just like cabinet members.
For all practical purposes, it is a federal agency.

The "doves", who tend to want to lower interest rates, are more often the political appointees on the Board of Governors. Historically, the "inflation hawks" have always been, and still are, the regional bank Presidents. One would think that the commercial banks regionally would want lower rates so that their banks can earn the "spread" between that rate and the money they loan out. But, it isn't so. The most likely reason for the anomaly is that a handful of the biggest banks have an big voice in choosing the political appointees. A lot of smaller, non-Wall Street based, regional banks have more say on choosing the regional Presidents, other than the President of the New York Fed.

Is the $700 Billion Really for Bailing Out the Fed?

Several commentors have stated that the Fed cannot go "bankrupt" and that, therefore, I am a "fool". Obviously, they have not read the article. If they had, they would know that I never stated that the Fed is "bankrupt" or that it will declare bankruptcy.

The Fed will never go to a courtroom, nor will it ever beg a judge for forgiveness, as individuals do. It won't ever receive a little slip of paper called a "bankruptcy discharge." It won't ever do any of these things, because a Federal agency cannot go legally bankrupt, and, if it becomes insolvent, as we are seeing, the higher authorities, in the form of the U.S. Treasury and Congress will act, in one way or another, to print money to keep it functioning.

I used the word "insolvent", not bankrupt, when speaking of the Federal Reserve. I use the word bankrupt, only when speaking about private banks, like Lehman Brothers, not about the Fed, itself.

The Fed will be insolvent when its obligations exceed its assets. That has not happened yet, but it is not far away. It is so close to insolvency that it does not have enough cash, at the moment, perhaps, to feed cash to their favorite Wall Street players, the way PPT theorists claim money has been feed to them in the past.

The Fed has a balance sheet which, until last week, totalled $939 billion. Because the U.S. Treasury has now sold $100 billion in additional T-bills to recapitalize the Fed, that balance sheet now has about $1.039 trillion, after the recapitalization. You folks who are so quick to call names, should take the trouble to click on the link that I have given so you can see the balance sheet's condition for yourselves.

Part of your problem is that you have no legal education. Contrary to what laymen believe, the Fed DOES NOT have legal authority to issue Treasury bills. They can only buy and sell existing T-bills. Only the U.S. Treasury can expand their balance sheet, and that is what it did, last week, when it issued $100 billion T-bills to recapitalize the Fed, last week.

The U.S. Treasury, however, only has standing authority to issue the number of T-bills already authorized by Congress. The $100 billion was within existing standing authority, previously issued by Congress. The money it is now seeking, for the $700 billion bailout, will require issuance of more Treasury bills than can legally be issued, right now. If that were not the case, there would be no ongoing debate in Congress. Hank Paulson would just issue however many Treasury bills are needed to bail out the banks, and the Federal Reserve.

Finally, I have not asserted anywhere, in this article, that the PPT is my personal theory, nor that it has been proven true. I merely note that a lot of sensible people believe in it, and that its makes certain events, that would otherwise appear irrational, make common sense again.

For example, back in October, 2007, stocks like Merrill Lynch, Citigroup and others were soaring each time they announced bad earnings. The worse their earnings, the high their stock seemed to soar. Such things are unlikely to happen in real markets that are governed by rational people buying and selling based on fundamentals. Whether or not this proves the existence of PPT is up to the reader. I make no comment except that it does make these events understandable.

The extreme defensiveness of certain commentors, and the failure on the part of the name-callers, to disclose their true identity, is quite interesting. Why be so offended? Why be so offensive? Who are you?

Are rational educated men prohibited, now, from considering or writing about the possibility that PPT exists? Do we live in a society in which discussion of controversial issues must be crushed? Is there something you are afraid of?