Thursday, March 19, 2009

Bernanke's Really BIG Bet

Market Ticker:

The problem with the direct Treasury [bonds] purchase is the potential precedent.

See, Ben will effectively "overpay" for these bonds. As we saw in England with their buy this results in an immediate "sold to you!" response. Their "bid to cover" was insane, showing that essentially everyone and their brother was attempting to unload these bonds into the Bank of England - knowing full well that once this policy starts it always ends badly, and when you are given the opportunity to sell at higher than actual market value you take it.

(The Bank of England's offer to purchase Brit bonds is what he's talking about. Bond-holders offered SEVEN++ times the bonds that the BoE had offered to purchase.)

The danger is that in trying to suppress the long end of the curve is that it can fail. That is, the move we had today (which was massive) can be fleeting - and then reverse. This of course would force Ben to do it again, and again, and again. Ultimately he could wind up owning the entire long end of the curve or even worse, the entire $6 trillion public Treasury float.

This is the "economic collapse" scenario, because further government spending in such a situation requires the dilution of all existing money in the system by the same amount spent.

The article is a bit technical and covers a few other bases. Ticker offers two outcomes--one which is slightly optimistic about the recovery paying off the nuke-waste mortgages and other credit in some orderly fashion--the other suggesting that you should be prepared to grow your own veggies and chickens and get up to speed on barter.


Anonymous said...

Follow up reading:

“[W]e simply do not see a viable exit strategy to all the money that is being thrown at the system” because there is no viable exit strategy. We are either going to have serious inflation, or the Fed will have to tighten up so severely at some point in the near future that it will kill economic growth anyway.

Anonymous said...

More follow up reading:

Here is the thing. They have never done anything remotely like this before. Nobody has, at least not on this scale. Will it work? Frankly, I have no idea. My point is that neither does anybody else, including the policy makers, and this alone is reason to be worried.

My fear is that this approach will sacrifice the real economy in order to prop up fake asset values, that the best case outcome is now 5-10 years of economic stagnation, and the worst case is an inflationary depression. But anybody who says they know for sure is lying. We have just entered not so much a new chapter as a new book.

Anonymous said...

Finally a source, with great charts, for the motivated reader:

Much attention is paid to the health of US banks, but a more pressing problem as the Flow of Funds reveals is that the magic securitized debt machine broke in the final quarters of 2008 that for decades fulfilled the endless demand for credit by households and businesses. Now that unemployment is rising, demand for credit is falling, and with the securitized debt machine broken, the supply of private credit has dried up, too. Where does that leave us?