June 13, 2010
In a response letter sent to Alan Grayson, the Fed chairman has the following brief retort to the question of whether “the Federal Reserve- alone or in concert with the Treasury Department or any part of the government- ever taken any action with the purpose or effect of supporting the stock market or an individual stock”: “The FederalÂ Reserve has not intervened to support the stock market or an individual stock.” Shocking. And we are confident that the fine people at Liberty 33 just sit all day, twiddling their thumbs now that the Fed is no longer in the MBS and UST monetization business. Furthermore, anyone who reads anything into the fact that the FRBNY is continuously ramping up its hiring of traders, both credit and equity, as posted in assorted public venues, is simply paranoid and does not understand that this is only due to Brian Sack’s fascination in being surrounded by 400 traders daily. On the other hand, at this point pretty much everyone is aware of the sad state of FRBNY intervention, whether it is in the FX market or the gold market, and indirectly via the discount window and the repo system, in which banks purchase bonds at auction, using discount window or other zero cost capital, only to repo it back, and to use the proceeds to bid up stocks. Maybe Mr. Grayson can ask the Chairman whether the Fed is actively endorsing primary dealers to bid up risky assets to create the impression that since the market is ramping higher (on no volume, mind you, but who cares) that the economy is doing so as well (we will shortly have something to say that refutes this thesis, compliments of none other than Goldman Sachs). All cynicism aside, Grayson at least still continues to ask the right questions: among these are 1) How does the fed plan on dealing with the $1.7 trillion in MBS on the Fed’s balance sheet, 2) Why Greenspan and Bernanke were so wrong in keeping the FF rate for so long, and how does the Chairman plan to reconcile the same bubble creation that blew up the economy last time ZIRP was around, with the deflationary threat to the economy, 3) Why does the Fed think a Tobin tax is bad (and, incidentally, why does the Fed even have an opinion on tax policy), 4) Why is the Fed failing at pushing unemployment lower even with ZIRP and QE, 5) How the Fed is lobbying on behalf of its, and Wall Street’s interest, 6) How much gold should the US government own, and many others.
Yet the most interest question in our opinion is whether or not the Fed, via its prior and ongoing liquidity swap operations, is actively pumping dollars into foreign CB at the unwind of a swap that has differing entry and exit cross fixings. This is actually a great question which will demand much more thorough analysis, as during the last liquidity crisis, the Fed pumped over $500 billion in capital in foreign banks at a time when the DXY was at then-all time highs, only to unwind these swaps as the dollar subsequently crashed, resulting in a massive net flow of dollars from the Fed to foreign banks. As such liquidity swaps are far more than mere liquidity backstops – they are yet another shadow mechanism to pump money into foreign CBs. Furthermore, the money outflowing in this manner, far outweighs any interest earnings on swaps, which Bernanke determines amounted to about $2.1 billion in 2009.
Another wonderful question to which Bernanke, unless he had completely lost his mind, gives a negative anwer, is whether any foreign banks that were the recipients of FX swaps, used the proceeds to buy US Treasuries. Obviously, Bernanke’s answer is no, as this would be yet another shadow monetization process. We do, however, wonder just how Bernanke knows precisely what foreign CBs did with all the excess cash: surely, this money thus created out of the Chairman’s printer thin air, is completely fungible, and to say that foreign CBs did not use that money to purchase USTs, would mean that foreign central Banks did not buy USTs at all during the period in question. Bernanke surely sees this problem as in another question he himself notes: “Because money is fungible, in general it is not possible to determine whether a counterparty used funds obtained from loans or through other transactions for a specified purpose. It is not possible to specifically connect the extension of particular loans by the Federa Reserve with the acquisition of US government debt.” And herein lies the rub – by outright denying that FX swaps were used to monetize debt, Bernanke may have cornered himself, as the next logical question is just what did foreign CBs buy with any FX lines that were not used up in further downstream liquidity facilitating operations. Does Bernanke in essence say that foreign Central Banks never purchase US Treasuries? That would be an amusing claim, and is certainly refuted by the definition of Indirect Bidders, conveniently provided by the Fed itself.
We surely do hope Mr. Grayson will take his line of questioning to the next logical step, which is catching the Chairman in outright lies. At this point, with so many loose ends over at Liberty 33 and the Marriner Eccles building, it is just a matter of time.
This article was posted: Sunday, June 13, 2010 at 7:53 am