El Guapo, on Wednesday, July 27th, 2011, 1:11 PM, said:
Hmmm. I would like to hear from MK on this, now I am actually not sure. But I know the Federal Reserve hold a huge amount of liquid capital for overnight loans to banks. The also use it to increase and decrease the money supply, but I have never heard that they can just all of the sudden type in "1,000,000,000,000" into a ledger and now they have that much more money.
Typically, this is correct, but the Fed does have its own balance sheet, of course, which they've obviously expanded a great deal in a response to the credit crisis, and how they've done this is actually fairly complicated and boring unless you're into wonky monetary policy stuff. Typically they buy or sell assets using reserve deposits which are like credits to accounts which banks hold with the Fed. Before all the sh
it went down, the Fed's portfolio was ~$800b in Treasury securities. When stuff went nuts and the entire system started to violently de-leverage, the Bernank sought to provide a large amount of short-term loans to financial institutions in order to prevent the whole thing from seizing up (which was imminent post-Lehman). Typically, he'd do this by creating new reserve deposits, but that would've ballooned the money supply rapidly, and he didn't want to do that. He essentially 'sterilized' the loans by selling off the Fed's treasury portfolio as they took on new short-term loans so the money supply didn't change but the amount of loans did. So that $800b obviously didn't go all that far which prompted them to implement the supplementary financing program through Treasury wherein Treasury auctions securities directly to the public and then leaves the proceeds in an account at the Fed, which has the net effect on the balance sheet as if the Fed had sold the securities themselves out of their portfolio, allowing the sterilization of a lot more in loans without ballooning the money supply. So now banks are just sitting on those reserves (not turning them into cash) and the Fed can and will reabsorb those reserves back in with sales of Treasuries. So the Fed has been very creative in finding ways to effectively type $1x into the ledger and in theory they could step in and delay a default with a number of methods, but they won't do that. There's no reason Congress can't do what they've done dozens of times before.
AmScray, on Thursday, July 28th, 2011, 6:08 PM, said:
Maybe I have you confused with someone else (To me, FCP is like 4 or 5 posters, with everyone else being categorized into a gray, non-descript mass) , but aren't you a bond trader?(If) So, you basically make your living (and presumably, a very nice living) in the fiat paper chase?
Nah, I'm just some dumb young kid who hangs out in Wrigleyville.Well, I mean, sure fiat currency has a great history obv but pegging to a gold standard or something similar would be instantly disastrous. Do we want to have that discussion?