Greg's Note: The Fed is getting creative and that should worry us all. The Casey Report's chief economist, Bud Conrad, reports on our central bank's latest shenanigans. Reader discretion advised. Send all questions and comments to greg@whiskeyandgunpowder.com. Whiskey & Gunpowder
Under Bernanke's direction, the Federal Reserve has completely rewritten its mission. Many articles in the International Speculator and The Casey Report have reported the strange growth in the loans they have made and explained that Bernanke has, for a long time, espoused unconventional actions to avert deflation and to expand the economy. So the charts below tell that story, and it is truly amazing. The Federal Reserve was never envisioned to be lender of last resort to a whole slew of investment banks, money market mutual funds, and commercial paper issuers. ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~ Your Personal Bailout Package Is Here The greatest economic crisis ever is still gathering power…what's going on today is just a precursor. The time bomb of our national deficits is still ticking away. Don't be caught unprepared. Our offer is currently exclusive to Agora readers, but only until Dec 21 when we make it available to the general public. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The situation is not easy to sort out, for the simple reason that the extent of their actions is not presented by the Fed via clear and concise data. Instead, the data is complex and hard to analyze, partly because of the piecemeal way the actions were taken, but also probably due to a desire by the Fed to avoid public scrutiny and criticism. Digging into the details of the Fed's balance sheet reveals, however, the complete change of composition and direction of the Fed. The most obvious change is that they have doubled the size of their assets and liabilities. A year ago, the Fed's assets consisted almost entirely of government Treasuries and a little gold. That is a clean, safe balance sheet. The only important liability was the currency they issued (our paper dollars). They also had a small reserve of deposits from all the banks. When Greenspan wanted to give the economy a boost by lowering short-term interest rates, he would create some money and buy Treasuries. He could also do the reverse. Bernanke has turned this upside down. Initially he made focused loans to big banks. But then the loans became bigger than the reserve deposits, leaving the banks in total as net borrowers. The concept of a fractional reserve no longer applies when the reserve is net negative. To fund yet more loans, Bernanke then sold off half of the Fed's Treasuries. And he traded Treasuries for toxic waste of poor-quality mortgage-backed securities. And he encumbered half of the remaining Treasuries with "off balance sheet" swaps of about $220 billion. (Does this sound like Enron accounting?) The balance sheet started with $800 billion of mostly reliable assets and now has about $250 billion of unencumbered Treasuries. The biggest source of funding is from the Treasury. Banks are leaving deposits in the Fed now that the Fed is paying interest. ~~~~~~~~~~~~~~Special~~~~~~~~~~~~~~ Get Gold Cheap… Before It Takes Off Again Gold is giving you another chance to get in for the inevitable ride up at a bargain. Here's how to get it at a discount and multiply those gains. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ The important conclusion is that the paper dollars are now issued by a far less soundly structured Fed, an organization that is more interested in bailing out the financial community than defending the dollar. This chart below compares last year's assets, which were mostly Treasuries, to this year's twice-as-large and far more questionable mix:
The other side of the balance sheet shows that the Fed has borrowed and taken in deposits to fund the loans that are as big as the issuance of currency. In effect, the Fed has doubled its footprint and doubled its responsibilities. Mostly under the covers, they added almost $1 trillion new credit to the financial world in about two months.
There are additional important Fed actions not included in their balance sheet. For example, they invented a Money Market Investor Funding Facility (MMIF) to guarantee up to 90% of $600 billion of loans to that sector. They do this through special-purpose vehicles established by the private sector (PSPVs). The latest Commercial Paper Funding Facility (CPFF) started October 27 and has issued $143 billion so far. These are both in addition to the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility initiated September 19. The programs are beyond keeping up with. Nothing like this has ever been done before by the Federal Reserve. In time, the consequences in terms of confidence in the dollar will be bad. Regards, Greg's Note: A hearty thanks to Bud Conrad. This is Bud's first appearance in the Whiskey Room and we're thrilled to have him, but after reading that last bit I really need a stiff drink. Good thing this is a bar. "Nothing like this has ever been done before by the Federal Reserve." I can't be the only one who feels a little anxious after reading that. If you want to be able to sleep soundly tonight, you could take some Xanax…or you could just click here. |
Whiskey & Gunpowder Special Reports New "Backlash" Set to Rocket Oil Past $150...and Send Gas Soaring to Over $6 per Gallon The 10 Shocking Reasons for China's Pollution Problem Geothermal Energy: Investment in the Future Here's One Coal Stock That's Set to Skyrocket Investing in Exchange Traded Funds The Real Story Behind the True Gold Bull Market If someone forwarded you this copy, please look here to start your own subscription. Wanna let us know what you thought of today's issue? Now you can... click on this link. Whiskey & Gunpowder is a free e-mail service brought to you by a team of rebellious brigands. If you have not already done so, please click here to confirm your subscription. This will help us ensure you get every Whiskey & Gunpowder without interruption. Are you having trouble receiving your Whiskey & Gunpowder? You can ensure its arrival in your mailbox here. Please note: we sent this e-mail to finan4@finanmart.com because you subscribed to this service. To end your Whiskey & Gunpowder e-mail subscription, click here. Nothing in this e-mail should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice.We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of a printed-only publication prior to following an initial recommendation. Any investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. © 2008 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. This newsletter may only be used pursuant to the subscription agreement and any reproduction, copying, or redistribution (electronic or otherwise, including on the World Wide Web), in whole or in part, is strictly prohibited without the express written permission of Agora Financial, LLC. 808 Saint Paul Street, Baltimore MD 21202. |
