Helicopter Ben Starts the Printing Press (Updated)

the Treasury is applying some elbow grease too. From Bloomberg:

The U.S. Treasury said it will sell bills to allow the Federal Reserve to expand its balance sheet, a day after the government agreed to take over American International Group Inc.

“The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve,” the department said in a statement today. “The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program.”

Needless to say, expanding the Fed’s balance sheet is inflationary. The Federal Reserve chairman is employing the remedy he has long recommended, that a determined central banker can always reflate. If he is right, bye bye dollar, but in 1930, the central bank increased bank reserves but money supply contracted nevertheless because consumers and business hoarded cash due to distrust of failing banks. If the run on the shadow banking system continues, we may see similar results even though traditional bank will (hopefully) not see a cash exodus.

Update 11:30 AM: FT Alphaville, putting none too fine a point on it, calls its post “The Fed’s run out of money,” and provided the text of the Treasury’s press release. This bit caught my eye:

The Treasury Department announced today the initiation of a temporary Supplementary Financing Program at the request of the Federal Reserve. The program will consist of a series of Treasury bills, apart from Treasury’s current borrowing program, which will provide cash for use in the Federal Reserve initiatives.

“Temporary”. If you believe that, I have a bridge I’d like to sell you….

In all seriousness, just like the Term Auction Facility and the other supposedly temporary special facilities, it will be very hard to wean the financial system off central bank support.

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  1. Alan

    Very true. Bernanke’s immense knowledge of the Depression and his theories of how to prevent its return have not been effective, to put it mildly.

    One wonders how soon we will return to the policies that actually worked at that time.

  2. Anonymous

    My two cents is that this is just the beginning. Helicopter Ben has just barely dipped into his bag of tricks. He will continue printing and printing even if he encounters the types of headwinds encountered in 1930. The US has the reserve currency and its debts are denominated in that currency. It seems to me that an intransigent democracy-in-denial with the reserve currency will never have the political will to right the ship (i.e., stop consuming more than it is producing) by any means other than an inflation and subsequent debasement of the currency by an “unelected” body like the Fed (the actions of which the public barely understands). The voting public and the politicians are never going to voluntarily put the brakes on consumption. No self-interested politician wants to risk a severe recession on his or her watch. As we know, what cannot go on forever eventually ends. The state of the US consuming more than it is producing will eventually end. Seriously, if anyone has a more plausible scenario of how it’s going to end, I am all ears. I would love to be proven wrong. I do not think debasement is going to be pretty.

  3. Matthew Dubuque

    Matthew Dubuque

    The Treasury markets are fine, yields are in great shape, bull market.

    If there is a dramatic selloff in Treasuries, everything changes and the Fed will not hesitate to RAISE interest rates to protect its portfolio.

    In the meantime, the clear and growing risk is for a deflationary burst and Bernanke knows that.

    The goal is to engineer a very hard landing instead of an absolute and complete global crash. We may not make it.

    Just keep your eye on the Treasury market.

    That is the key.

    MASSIVE inflows into Treasuries are pointing to a dramatic surge in DEFLATIONARY expectations.

    The Fed is trying to manage these DEFLATIONARY expectations.

    For those concerned that the implications of this move are inflationary, I might ever so gently caution them, with a maximum amount of deference, caution and sweetness, that they might want to step off of the railroad tracks to avoid the onrushing deflationary train.

    Just a thought.

    Matt Dubuque

  4. Stuart

    And it comes full circle now. Little wonder the commercial traders (bullion banks) have their greatest exposure long gold and short the dollar in recent memory. Smart money.

  5. David Habakkuk

    As someone who has waiting for some time with trepidation to see whether Bernanke’s handling of the effects of the collapse of the housing bubble would vindicate his readings of interwar economic history, I am puzzled as to how the situation might develop, if your analogy with the aftermath of 1929 holds good.

    Those who have long thought that the Fed was pursuing a strategy of serial bubble blowing have commonly found it all too easy to see how the endgame might end in deflation, but equally easy to see how it might end in inflation.

    If as seems increasingly likely we are going to see a contagion of distrust in financial institutions, the deflationary outcome would indeed some more likely. And this could easily spread well beyond the shadow banking system. Indeed, in the wake of the problems which have appeared with HBOS in London, some private investors here have been taking money out of cash and putting it into gilts.

    So how might things play out, if Bernanke turns out to be wrong in his conviction that central bankers can always reflate?

    1. Let us assume — for the purposes of argument — that a significant further number of financial institutions turn out to be threatened with bankruptcy. Let us further assume that in a number of these cases, there are, as with AIG, credible grounds for arguing that allowing them to go bankrupt might have lethal systemic effects. (Because a system has been created with so many linkages that nobody understands, it may be very difficult to know whether this is so in a given instance — and policymakers may understandably not want to put the matter to the test, even if they are deeply anxious about the effects of bailouts. Micawberism is not always an irrational strategy.)

    2. Let us further assume that, while some may be allowed to go the way of Leman, a significant number are not. And let us further assume that the bailouts are in essence funded by Bernanke’s printing press — but that these attempts to reflate fail to assuage the collapse of confidence in the shadow banking system, leading to the kind of hoarding of cash which happened after 1929.

    What then happens? Do we see a situation where deflation takes root in the economy, at the same time as the balance sheet of the U.S. government looks like that of a banana republic? What would be the effect on the behaviour of foreign holders of the dollar, should that happen? Are they reassured by the absence of inflation? Or do they begin to think the unthinkable, and ask whether the traditional assumption that the credit rating of the U.S. was unquestionable is valid any longer?

    What kinds of options would be open to the U.S. authorities, in a situation where deflationary trends could not be combated but the public finances were a total shambles?

    A possible moral of current developments is that appointment of Bernanke may have been a major mistake.

    It is a problem with making policy in financial crises that prescriptions rest on a reading of a relatively small number of cases, which are only approximately comparable — and where counterfactual claims are commonly made with much more confidence than the evidence warrants.

    One does not need to be disrespectful of Bernanke’s academic work to suspect that no analysis of the economic history of the Thirties can establish beyond reasonable doubt whether the argument that the fundamental failures were in monetary policy post-1929 is either accurate about the past, or (presupposing it is accurate) relevant about the present.

    But one suspects that Bernanke has to believe that the argument is both accurate and relevant — because if it not both accurate and relevant the whole worth of his professional career is called into question. This may not encourage flexibility of thinking, in contemplating the possible limitations of monetary policy in current circumstances.

  6. Cash Mundy


    Free! It’s all Free! And there’s a whole bunch more where that came from, Earl!
    Ol’ Cash may control $2.3 trillion, but he ain’t about to forget Main Street, Bison Forks, Texas, nor Main Street, Santa Cruz, Cali-forn-I-A, neither!

    [Minions Missive: 4th refueling. We have been over the California coastline for some hours. Mr Mundy is hurling garbage bags full of paper from the loading ramp. They explode when they hit the slipstream: quite pretty, really. He has ordered ten thousand toner cartridges delivered with the next refueling.]


  7. dearieme

    “the policies that actually worked at that time”: but apart from stopping the run on the banks, none of the policies of that time actually worked.

  8. K Ackermann

    Jesus, David…

    You’re running models right down to the Fed’s head.

    You’ve probably made a ton of money at this.

    I have to ask a question that is sort of off-subject: you’re an intelligent man, but do you too think Palin was a wise choice for McCain?

    I’m asking because I am stunned at how intelligent people are capable of resorting to faith over observation at times.

    I have the barrel of a gun in my mouth, what’s your answer?

  9. Chris

    Bernanke’s academic expertise is well known, and is no doubt why Bushco chose him, and gave him the White House internship as a transition.

    I think his expertise might make him like those Generals who always know how to fight the last war, and neglect to study how the world has changed. With our debt we are now in a position more comparable to the one reparations saddled Germany found itself in. Hoover’s America was the source of credit for post-war Europe. Isn’t there a difference there between Bernanke’s America and Hoover’s, like mirror images of each other?

    Doing the opposite of what was done before is no guarantee of success, any more than driving with the rear view mirror is the best way for someone to arrive at their chosen destination. Does Bernanke have the expertise to work on turning the US into a creditor nation again, by way of restoring balance to public and private accounts? If not he shouldn’t be in the job.

    So Bernanke’s expertise is Hoover in reverse: Rev Ooh! Or put it another way: that’s not a vacuum, its a pump. You gotta know the difference between when to suck and when to blow. It seems like Rev Ooh just knows how to blow. Credit where credit is due it is the right time of year for it. And of course, in the late 1920’s they didn’t have the kind of powerful blowers we are now able to buy from China with borrowed money. Sic transit…

  10. Anonymous

    The entirely plausible scenario postulated by DH above sounds very much like Japan’s lost decade in the 90’s (and beyond) when no amount of liquidity provided by the BOJ combined with ZIRP was able to lift the economy out of its deflationary funk.

    Who can know at this point whether it will be deflation or inflation? To this layman, the absolute scale of the systemic financial problems now faced by the US, and by implication the ROW, seems much greater than it was in Japan.

    And then there is the qualitative matter of national dispositions, for want of a better term. Americans no longer strike me as capable of stoicism (gaman) and deferred gratification as the Japanese and accordingly would prefer to be inflated out of their morass, money illusion or not. No?


  11. Moopheus

    “If the run on the shadow banking system continues, we may see similar results even though traditional bank will (hopefully) not see a cash exodus.”

    Already working on it.

  12. Anonymous

    you have a bridge to sell……??

    f@@k that…IJUST BOUGHT A BRIDGE FROM AIG….!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

  13. doc holiday

    The U.S. Constitution says that Treasury can only tap into about five (5) Super Supplementary Financing Programs, so we aint even close to being anywhere near there yet, and as we continue to speed along this path, the rules are obviously open to discretionary adjustments and of course not something for Congress to challenge…. SNARK!

  14. doc holiday

    Oh yah, I forgot the more obvious, which is that the mechanisms of “positive inflation”, i.e, unlimited printing, while although theoretical in nature, will be pushed to the edge of this envelope in a do or die attempt to determine how much cash can be printed (within the shortest amount of time). I think there is some inverse relationship in this catch-22, but I assume that in a liquidity trap, logic and models will not be needed. Snark mode off, but thank God Palin is waiting in the wings with her SIFMA backers, who like God have a plan, which brought us to this point … I’m not sure what that means, but does that matter?

  15. Spectator

    Ah, the inflation-deflation debate, that unknowable future. All depends on how the Fed tries to reflate and how the public reacts. Those that know don’t predict, and those that predict don’t know.

    Can’t hope for anything but a downward trajectory for at least a year. We’ll need a bubble, say emerging markets, green energy, infrastructure, or some combination, as well as inflation, to get us out of this.

    A lost decade is still possible, but I’m encouraged by Lehman and the fallout, and think PT Barnum described the American public quite well, “There’s a sucker born every minute.” American ingenuity should find a way to get cheap credit flowing again.

  16. anon

    “Needless to say, expanding the Fed’s balance sheet is inflationary. The Federal Reserve chairman is employing the remedy he has long recommended, that a determined central banker can always reflate.”

    Sorry to spoil the party, but you’ve got this wrong. That’s not what’s going on.

    The deflation speech with helicopter remedy was about preventing deflation by goosing bank reserves and money supply.

    That’s not happening here. The government will put the money it raises from bills on deposit with the Fed and the Fed will use it to finance the asset expansion. Government cash balances with the Fed will be locked in as a funding source. Bank reserves won’t change and the broader money supply won’t be affected. It’s a technical balance sheet adjustment from the liability side rather than the asset side, leaving the monetary base unchanged as a result.

  17. Anonymous

    There are $1.222T of outstanding T-bills held by the public. See http://www.treasurydirect.gov/govt/reports/pd/mspd/2008/opds082008.pdf

    T-bills have maturities of less than one year. http://www.answers.com/topic/treasury-bill

    It’s at least remotely possible that after this round of buying of bills is over, the U.S. could have problems rolling over that debt. That’s what the sharp rise in credit default spreads on U.S. debt is indicating (in part)(and may also be what’s got the gold bugs hopping – gold’s up $85 now). The foreigners who hold our debt may decide – to borrow a phrase from Ken Lewis – that they’ve had about as much fun in the “safety” of U.S. debt as they can stand.

    Where could the government get the money to redeem those bills and fund its operations? Incredible as it may seem, the long end of the government market may be less risky than the short end and agencies may actually be less risky than T-bills. Why? Because there is less long dated debt outstanding, and it’s not due for a relatively long time. With respect to agencies, not everyone will default on their mortgages and the defaults that occur will not all happen at once.

    On the bright side, AIG’s common stock is only down 40% today. Since the government took an 80% stake in the company in the bailout, it indicates that the market is somewhat optimistic about the chances for success. AIG closed at $3.75 yesterday (before the bailout was announced). A full 80% dilution would indicate a price of $.75. This seems like a fairly good indicator. If the price of AIG common looks like it’s going to sink below $1.00, head for the hills!

  18. doc holiday

    Re: “one does not need to be disrespectful of Bernanke’s academic work “

    Hold on right there.

    The problem with models or theory is that people like Bernanke fail to make correlative leaps into the future and then filter out the irrelevant aspects of the past which are not related to relationships with the chaos today. Bernanke obviously does not have a working model that is even close to working — thus he and his fellow retards are making this all up as they go, versus implementing risk emergency planning which should have been engineered into regulations, enforcements and policy efforts years ago. This government is filled to the brim with lobby-back corruption!

    The group effort to turn a blind eye to fraud many years ago with Greenspan and then this fateful collusion with The Bush Ownership Society and the resulting free for all orgy of derivative abuse is now the tsunami of fraud unwinding like a neutron bomb. Bernanke is an idiot that has been smashed against the rocks of reality and his academic crap is meaningless, just like the belief that hyperinflation will slow down deflation; the hope is to give to wall street, while taxpayers take unlimited pain, but why?

    We would not have this crisis if The government would have done its job to curb abuse and to place its fellow Friends Of Angelo in prison, versus rewarding them, and now giving them taxpayer funding. This is historic abuse not seen since maybe The Nazi era. Did anyone think it was retarded to send Dodd out to suggest that all was well? What a bunch of out-of-touch morons!

    See Dodd, et al: http://www.portfolio.com/news-markets/top-5/2008/06/12/Countrywide-Loan-Scandal

  19. Anonymous

    no the term “super bank” the one that merged, purchased, and is indoctrinated and controlled by the “FED” will soon be in existence. This vessel will consume all or most of the largest financial institutions thus giving the Fed more control of the free market and its management. Why not? well we are bailing out the markets right now and will be in debt for the next 50 years. The interest rates need to be lowered below prime rate and warrants issued against the housing assets to stabilize the housing debtor taxpayer class. The other financial services such as retail, industrial, commercial, and corporate fiance can allow the market to dictate interest rate negotiation between seller and buyer. The above scenario has to occur if not we will not only lose the ability to obtain a mortgage the entire infrastructure will be non performing and sold and acquired for less than the prices of the 1900’s. A ripple effect will occur thus causing a global depression and the entire value of the dollar will be worthless and ofcourse the United States will be bankrupt.

  20. Anonymous

    “Needless to say, expanding the Fed’s balance sheet is inflationary … bye bye dollar.” — Yves Smith

    That is certainly my reaction, and the gold market’s as well. Bloomberg’s article offers this claim from the Fed:

    “The Fed will offset the impact of the new bill sales on its balance sheet so as not to affect the stance of monetary policy.”

    Sterilization, in other words. More often promised than delivered.

    Meanwhile, Anon 3:48 pm (several posts above) offers the plausible explanation that Treasury balances at the Fed, which were only $4.72 billion in the last H.4.1 release, presumably will be amped up to $44.72 billion by the special bill sale.

    This must mean that on the asset side, the Fed’s holdings of cash increase by $40 billion too. True, this doesn’t directly increase bank reserves. But it does expand the Fed’s balance sheet (both assets and liabilities) by $40 billion.

    Are we to understand that Treasury is just using the quasi-private Fed as a passthrough, to accomplish transactions that fall outside Treasury’s legal authority?

    This is where I get lost. It’s an absolutely vital question. Is the dollar’s value being diluted, or not? I would really welcome further comments from those with a deeper understanding.

  21. RebelEconomist

    I think Anon at 15.48 is correct. The operation described is not what I would call “printing” money. In this case, the Treasury is borrowing more money from the market by increasing its bill sales and passing this to the Fed to lend to AIG etc as the Treasury’s agent. If the Treasury felt they had the financial expertise and the market presence, they would not need to involve the Fed at all.

    Printing money occurs when the Treasury borrows from the Fed.

  22. FairEconomist

    As several have pointed out, this operation will not be inflationary.


    3m T-bills are at 0.06% As Krugman observes, the liquidity trap is sprung. And I note we’re not to end-of-quarter rush even. There is a time and a place for everything, and it is time to run the presses.

  23. RebelEconomist

    And to answer Anonymous at 16.50, no, this is not diluting the dollar. It does however, by increasing government debt to acquire assets (loans to AIG) that may become worthless, increase the danger that the government will reach a stage when they feel unable to raise enough in taxes to repay the dollars they have borrowed and lost. If that day arrives, they may well turn to the Fed for finance, as in Zimbabwe. Arguably, the operation also increases the danger of inflation by compromising the Fed’s independence of government.

  24. Anonymous

    Thanks, rebeleconomist. Let’s consider the next step, after the Fed hands over its unusually large cash balance to AIG. Then, its asset is not cash, but “balance due from AIG” to the tune of $40 billion. But the Fed is still liable to the Treasury for its $40 billion deposit, which can be (though won’t be) called at any time.

    This is a classic example of borrowing short and lending long (for two years).

    Also, as has been demonstrated, the Treasury is capable of collecting amounts due to it by nationalizing the debtor, using its sovereign power. (Recall that the Federal Reserve is nominally owned by its member banks). But the Fed’s corresponding asset is an amount due from a near-bankrupt company that’s in desperate straits.

    Isn’t the Fed now in an analogous position to AIG, Bear and Lehman — holding depreciating, junky assets, while having hard liabilities (to the Treasury, plus all the Federal Reserve notes it has issued)?

    Although this situation may not correspond to classical “printing press inflation,” if the entity which issues the US currency has junked up its balance sheet and eroded its equity, should the dollar be viewed as a safe, “hard” currency? I don’t think so.

    I would appreciate any comments as to the Federal Reserve’s effective leverage ratio, after mark-to-market adjustment of its assets. Does the Fed actually have any net worth? How does it differ from Fannie Mae, other than the fact that Federal Reserve Notes bear no interest and can’t be redeemed?

  25. Anonymous

    “Printing money occurs when the Treasury borrows from the Fed.” — rebeleconomist

    If that route had been taken, the Fed would have taken $40 billion of Treasury debt into its assets. Its liability — a $40 trillion Treasury deposit created from thin air — would have been paid over to AIG by Treasury. Treasury would end up with a $40 billion “due from AIG” asset.

    In the current transaction, the Fed ends up with $40 billion due from AIG, while the Treasury’s asset is a $40 billion deposit at the Fed. AIG still ends up with $40 billion of cash.

    My question: is not the $40 billion in AIG’s hand still “cash created from thin air” by monetizing bad debt? If the Treasury and Fed are viewed as a consolidated entity, are these two transactions not equivalent in effect? Isn’t the Fed simply a pass-through middleman, which can be eliminated after consolidation (particularly if the Fed has no equity)? And thus, isn’t it inflationary?

  26. anon

    “My question: is not the $40 billion in AIG’s hand still “cash created from thin air” by monetizing bad debt? If the Treasury and Fed are viewed as a consolidated entity, are these two transactions not equivalent in effect? Isn’t the Fed simply a pass-through middleman, which can be eliminated after consolidation (particularly if the Fed has no equity)? And thus, isn’t it inflationary?”

    The Fed isn’t monetizing bad debt. It’s funding bad debt with government debt – which is the essence of what the loan does.

    The chain is that Treasury issues bills and puts cash on deposit with the Fed which makes the loan to AIG. The net cash effect on the system is that the Treasury takes it out with the bills and AIG puts it back in with whatever it does (in this case it may use it to post collateral with counterparties).

    From a monetary and inflation perspective, the key to the transaction is the liability side of the Feds balance sheet. The transaction doesn’t create new reserves or new money supply – it creates locked in government funding for the Fed and shifts existing money supply around. That’s a lot different because the monetary base doesn’t change.

    Anon 3:48

  27. Anonymous

    OK, thanks for the follow-up. It still seems to me that they are monetizing bad debt. But since AIG is not a bank, there is no multiplier effect, as there would be with newly created bank reserves spreading from bank to bank with successive new loans and deposits.

  28. RebelEconomist

    Anonymous at 19.17,

    Once again, anon at 15.48 (this time at 20.04; wouldn’t it be better if people used noms de plume?) is correct. The next step would be that AIG uses the cash to purchase an asset, such as by repaying a debt or depositing more in a margin account. So, for the system as a whole, the non-AIG private sector has exchanged a claim on AIG for a claim on the state, and the public sector has taken the opposite position. This does not amount to monetisation of a claim on AIG, except insofar as a treasury bill is more like money than a claim on AIG.

    Whether the state loses money in this operation depends on whether the private sector is being irrationally cautious. If so, and the AIG debt is not bad, then the state is going to get repaid and make a carry profit over the negligible return on the treasury bill. If not, then the state loses and will have to use taxation to fill the hole.

    Whether it would be the government or the Fed that would bear this loss I do not know, because the Treasury did not say whether the Fed is doing the lending to AIG as an agent of the Treasury or on its own book. But as long as the Treasury would gift the Fed additional capital to make up any losses they might make, it does not make much difference.

  29. Brian

    anon said:
    “From a monetary and inflation perspective, the key to the transaction is the liability side of the Feds balance sheet. The transaction doesn’t create new reserves or new money supply – it creates locked in government funding for the Fed and shifts existing money supply around. That’s a lot different because the monetary base doesn’t change.”

    This is the part that I am struggling with … if no new reserves are created, then why the substantial increase in “Reserve Bank credit” in the H.4.1? The “Total factors supplying reserve funds” (asset side) must increase because the “Total factors, other than reserve balances, absorbing reserve funds” also increased because of the Treasury deposit of proceeds in the “U.S. Treasury, supplementary financing account” line on the H.4.1 (the proceeds from the Treasury debt auction under the Supplemental Financing Program).

    In other words, it seems that Treasury credit was increased here, not Fed credit. But the H.4.1 represents it as an increase in Fed credit.

    Thanks for your input.

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