Who will bail out the Fed? Tom Smith

The credit-worthiness of the Fed is not looking too good.

Here's the crux of the problem: In an effort to fix the current crisis, the Federal Reserve is massively expanding its balance sheet while seriously diluting the quality of the assets on that balance sheet. . . . On Jan. 14, 2009, the Fed's balance sheet showed $2.1 trillion in assets. That supported $881 billion in currency in circulation. . . . That $2.1 trillion was a huge increase from the $868 billion on the Fed's balance sheet on Jan. 16, 2008. At $813 billion, the cash in circulation a year ago wasn't a whole lot less than what's in circulation now. As everybody from then-Treasury Secretary Hank Paulson to a newly inaugurated President Barack Obama has kept telling us, banks aren't lending. They're hoarding currency by keeping it on deposit with Federal Reserve banks. . . . The Fed is due to report on the value of those assets sometime in the next week. It could report huge declines in the value of that paper, since AAA-rated securities backed by commercial mortgages fell 11% in the fourth quarter and A-rated securities fell almost 50%. That would raise questions about the size of the liability the U.S. taxpayer will eventually face from the Fed's efforts to support the financial system, and I'd expect to hear howls of protest from Congress and taxpayers if it turns out that these assets that the Fed accepted as collateral are now worth much less than their original values. Shouldn't the Fed have given the price of these assets a bigger haircut when it accepted them as collateral in order to protect taxpayers? . . . It's a question that will resonate loud and clear in Congress as the Obama administration thinks about buying up bad assets from banks in order to rescue the financial system. The sticking point in setting up such a program using what's called an aggregator bank has been what price the government should pay for these illiquid assets without reliable market prices. A big loss for the Fed certainly wouldn't make Congress more interested in throwing more taxpayer money down a rathole. Nor should it. . . . There's also a good chance that the Fed will cook the books by fudging the value of its assets. That's what private-sector bankers have done throughout the crisis. . . . As politically attractive as that course may be, though, it, too, has its long-term costs. If the discrepancy is too blatant, the decline in balance sheet values too small, then the Federal Reserve will have squandered a little more of what ultimately is its most valuable asset in ending this financial debacle: its credibility.  And once credibility is lost, it's awfully hard to regain.

WELCOME Instapundit readers.  Check out the video from 2007 below the fold.

Comments

[MC-Shalom]

You Bail Them Out, We Opt Out.

Dear [May Be Too Much to my Taste, OK!, It will rather be:] Expensive Chairman Ben S. Bernanke,

All of Our Economic Problems Find They Root in the Existence of Credit.

Out of the $5,000,000,000,000 bail out money for the banks, that is $1,000 for every inhabitant of this planet, what is it exactly that WE, The People, got?

If my bank doesn't pay back its credits, how come I still must pay mines?

If my bank gets 0% Loans, how come I don't?

At the same time, everyday, some of us are losing our home or even our jobs.

Credit discriminates against people of lower economic classes, as such it is unconstitutional, isn't it? It is an supra national stealth weapon of class struggle.

Credit is a predatory practice. When the predator finishes up the preys he starves to death. What did you expect?

Where are you exactly in that food chain?

Credit gets in the way of All the Principles of Equal Opportunity and Free Market.

Credit is a Stealth Weapon of Mass Destruction.

Credit is Mathematically Inept, Morally Unacceptable.

You Bail Them Out, We Opt Out

Opting Out Is Both Free and Strictly Anonymous.

My Solution: The Credit Free, Free Market Economy.

Is Both Dynamic on the Short Run & Stable on the Long Run, The Only Available Short Run Solution.

I Am, Hence, Leading an Exit Out of Credit:

Let me outline for you my proposed strategy:

✔ My Prescription to Preserve Our Belongings.

✔ Our Property Title: Our Free, Anonymous Right to Opt Out of Credit.

✔ Our Credit Free Money: The Dinar-Shekel AKA The DaSh, Symbol: - .

✔ Asset Transfer - Our Right Grant Operation - Our Wealth Multiplier.

✔ A Specific Application of Employment, Interest and Money.
[A Tract Intended For my Fellows Economists].

If Risk Free Interest Rates Are at 0.00% Doesn't That Mean That Credit is Worthless Already?

Since credit based currencies are managed by setting short-term interest rates, on which you have lost all control, can we still say that they are managed?

We Need, Hence, Cancel All Interest Bearing Debt and Abolish Interest Bearing Credit.

In This Age of Turbulence The People Wants an Exit Out of Credit: An Adventure in a New World Economic Order.

The only other option would be to wait till most of the productive assets of the economy get physically destroyed either by war or by rust.

It will be either awfully deadly or dramatically long.

A price none of us can afford to pay.

“The current crisis can be overcome only by developing a sense of common purpose. The alternative to a new international order is chaos.”

- Henry A. Kissinger

What Else?

You Bail Them Out, Let's Opt Out!

Check Out How Many of Us Are Already on Their Way to Opt Out of Credit.

Let me provide you with a link to my press release for my open letter to you:

Chairman Ben S. Bernanke, Quantitative [Ooops! I Meant Credit] Easing Can't Work!

I am, Mr Chairman, Yours Sincerely [Like do I have really the choice?],

Shalom P. Hamou AKA 'MC-Shalom'
Chief Economist - Master Conductor
1 7 7 6 - Annuit Cœptis
Tel: +972 54 441-7640
http://edsk.org/

[Jonathan]

Default risk on US govt debt, formerly infinitesimal, is now something to be considered.

[ALEXISTAN]

STARVE THE BEAST.

TAX STRIKE!

[ajacksonian]

With the money going to banks that played along with the Congressional rules on lending and not enforcing standard good-sense practices, we will be bailing out those organizations that sought political gain by sacrificing economic good sense. Further, Congress has not repealed the CRA or follow-on banking rules to make such lending practices possible, which was and is the source of the problem.

Just who is Congress Representing? Not the people as whole, any more, and they are playing with the long term financial safety of the Nation by doing so.

We appear to be destined to raise the banner 'No Taxation Without Representation' yet again against our own aristocracy Upon the Hill.

[fedgovernor]

Who will bail out the fed?

You're not serious with this question are you? Mom and Pop America will bail out the Fed, that's who. You will bail out the Fed, and you'll smile while you do it to, or they'll come take your house away from you, biotch.

Nancy and Harry are about to give $350 billion more of your tax dollars to the millionaires over at the Fed, so John Thain can get a nicer $100,000 rug to pace on in his million-dollar office. That's who is going to bail out the Fed.

You're gonna. And if you don't like that, then tough titty, bub.

You folks (you working folks, you schmucks who are taxpayers unlike myself who is a tax receiver) ... you're going to bail out the fed, while I laugh all the way to my mattress with the government check I receive each week thanks to your hard work.

Thanks schmucks.

[Concerned Citizen]

The Japanese, Arabs, Chinese and Europeans won't be able to bail much out this year. That leaves 401K's and IRA's to do the job for this year. There are about $2 trillion sitting around in those accounts. The greedy congress will look to that low hanging fruit to "nationalize" these savings to pay this year's bill. They will tell you when you can withdraw the money (when you are 80 years old), they will tell you what to invest in (U.S. treasuries paying 3%).

Next year? They'll print money and steal through inflation, there is no other place to get more money.

If I had a 401K, I'd pay the penalty for early withdrawal, buy gold and put it in hole in my back yard.

[Pat]

Mr. Smith writes, "A big loss for the Fed certainly wouldn't make Congress more interested in throwing more taxpayer money down a rathole."

Unfortunately, it is the rat-infested Congress who created that rathole in 1913, and have been enlarging it ever since.

Congress and the media will simply grandstand with their usual buck-passing, blame-non-existent-capitalism bluster, then go ahead and bail out the FED anyway - or come up with some new, even more destructive, statist scheme.

As I see it, they have 2 fundamental choices:

1) Admit the truth that government interference in the market - by its looting and subjective nature - is destabilizing and destructive; therefore, we'll return to objective, gold-backed currency and gradually abolish the 9 parasitic of the 15 cabinet agencies. Any movement in this direction - more freedom / less controls and tax theft - will be bullish.

2) Continue with their increasing statism and pretend they can prevent the depression (25% unemployment) or hyper-inflation that ensues when the latest round of unprecedented artificial credit creation has been finally "un-clogged." This will be bearish. At best, under this course, they'll prevent the hyper-inflation in the nick of time - one last time - only to finally go bankrupt with a few years.

Of course, there is zero evidence to forecast option 1. I believe the entire US government will continue in its current panic mode until either collapse or total statism (fascist or communist dictatorship, etc. - take your pick).

Nothing, including "the full faith and credit of the US Treasury" is immune from the law of cause and effect. You can't create subjective, arbitrary currency and credit that exceeds one or more generations of Americans' capacity to produce -- without going bankrupt. Looting what capital remains to reward more (now quasi-) private sector recklessness only hastens the demise.

The chickens are coming home to roost - at the disgusting destruction of the savings and lives of millions of hard-working Americans and foreign investors - from honest janitors, artists, and moms, to honest CEOS.

I won't say the victims are entirely innocent, however! You've been asking for it at the ballot box for decades, brother! Wake Up Now! Demand a government that exists solely to protect individual rights. (PS and don't forget that the Republicans are arguably even more statist than the Democrats).

[sean]

You neglected to mention the $600 billion in swap lines with foreign central banks who are lending the dollars to their member banks - mostly uncollaterlized. We recently gave Mexico $30 billiion. The ECB line is well over $300 billion. We are in effect backing the Euro. This is the largest fiscal transfer in history and Congress has not said a word.
In your example of the fed expanding its balance sheet at least it is taking in domestic assets in an attempt to support US asset prices - the value and expected value of which drives all lending/borrowing decisions.