NY Times: Fed Considering Buying Commercial Paper

Now we see how the Fed’s toolkit is not well suited to the problem at hand, and its next-best moves are dubious indeed.

Acute conditions in the commercial paper market, a vital source of short-term funding for large corporations and banks, threaten to produce a sharp contraction in business activity. Commercial paper defaults have been rare (unlike structured credits, corporate ratings are less difficult for the rating agencies, and perhaps more important, it isn’t overwhelming for investors and analysts to make their own assessment). However, due to the knock-on effects of the Lehman bankruptcy, not only has the total of unsecured (non-asset-backed) commercial paper fallen, but maturities have also contracted. Issuers who could once easily place 30 to 90 day paper are now rolling it on a day-to-day basis.

Commercial paper issuance tends to be limited to relatively sound companies; excluding Lehman (which the officialdom belatedly realizes it should have salvaged) there have only been 7 defaults since Penn Central in 1970. Thus a guarantee would be a cheap way to backstop the market (some attention might need to be paid to how to deal with moral hazard, but a short-term backstop of three to six months would not lead to big changes in behavior)

But the Fed can’t issue a guarantee. Instead, it appears to be considering the balance sheet ballooning approach of buying commercial paper. And once the Fed steps in as a major player (major is required to have any impact), how does the Fed wean the market of its support?

Warm up the helicopters, and welcome to central planning. We said goodbye to the greenback some time ago.

And the stress in the US press is constantly of the impact to taxpayers. There is perilous little attention paid to the fact that taxes will most assuredly not be increased in an amount sufficient to cover these needs. We continue to rely on the support of our foreign creditors, and how long will they play ball?

From the New York Times:

Under a proposal being discussed with the Treasury Department, the Fed could buy vast amounts of the unsecured short-term debt that companies rely on to finance their day-to-day activities, according to officials familiar with the discussions. If this were to happen, the central bank would come closer than ever to lending directly to businesses…

“There is a growing recognition that not only has the credit crunch refused to be contained, it continues to spread,” said Ed Yardeni, an investment strategist. “It’s gone truly global.”

Investors are worried about what the evaporation of credit will do to an already-weakened global economy.

In the United States, consumers appear to be significantly curbing spending; last month, employers cut more jobs than any month in five years. The $6 decline in oil prices, which settled at $87.81 a barrel, stemmed in part from fears that demand will slacken in the face of a deteriorating economy.

Yves here. While these are all Very Bad Things, the logic is flawed. These developments were in motion before the latest seize-up in the money markets. Yes, that will unquestionably make matters worse, but by discussing the Fed’s commercial paper idea and the accumulation of economic woes, it creates the unwitting impression that further Fed intervention might reverse the deteriorating fundamentals, when the best feasible short term result is to halt them (and that we deem unlikely given the magnitude of the credit overhang).

The Fed plan is intended to renew the flow of credit on which the economy depends. Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

The cost of borrowing from banks and corporations remained high on Monday, increased in part by a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.

The United States government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered.

Buying commercial paper could open the Fed to difficult conflicts of interest, because it would be juggling the goals of protecting its investment portfolio with its traditional goals of promoting stable prices and low unemployment.

“The Federal Reserve really would become the buyer of last resort, trying to jump-start the commercial paper market by taking on credit risk,” said Vincent Reinhart, a former top Fed official who worked under Alan Greenspan, a former Fed chairman, and Ben S. Bernanke, the chairman now.

The Federal Reserve has already stretched its resources to the limit by providing hundreds of billions of dollars in short-term loans to banks, Wall Street firms and money market funds….

To pay for its burgeoning responsibilities, the Fed has no choice but to keep printing more money. To prevent that flood of new money from reducing the central bank’s overnight interest rate to zero, the Fed also announced on Monday that it would start paying interest on the excess reserves that banks keep on deposit at the Fed.

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  1. walt

    If you look at the latest Fed release, you’ll see the actual drop in non-financial non-asset-backed commercial paper is pretty small — less than a billion. It’s clear why nobody wants financial or asset-backed paper, but regular industrial paper seems to be doing okay.

  2. Matt Dubuque

    You state “we said goodbye to the greenback some time ago.”

    I don’t see much evidence the markets agree with that statement.

    Treasuries are surging and the dollar is doing pretty well. Fifteen month highs for the dollar does not constitute a run on the currency.

    Are the world’s deepest, most liquid and most efficient markets completely wrong here?

    Are hundreds of billions of dollars flocking to Treasuries because they are clueless?

    The only logical interpretation I see of the historic bull market in Treasuries is that the world is giving a resounding vote of confidence to the Fed.

    They trust the Fed.

    This is what the markets are saying.

    By contrast, what are the markets saying about the Euro, darling of the American media?

    Matt Dubuque

  3. Steve

    The phrase `X of last resort’ when used by a central banker these days means of course `X of first resort’: the Fed is now the liquidity provider of first resort (cheaper rates) and no doubt will become the CP buyer of first resort as well, for the same reason.

  4. viking

    the euro is taking the brunt of the adjustment; once it’s pounded into dust, the dollar will be next

  5. Yves Smith


    The outstandings do not tell the most important part of the story. It is well nigh impossible to sell normal maturities. Companies are used to selling 30 to 90 day paper. To be rolling it overnight is just plain scary. And a further indicator of stress is how much the yields on CP has risen.

    And I would not dismiss the contraction in financial CP either. Where do you think loans to small and medium sized businesses come from? They come from banks and others that rely on CP as one of their important funding sources.

    If I were BigCo in this situation, I would be putting every major project on hold and paying all my bills as slowly as possible.

  6. Yves Smith


    Actually, an object of policy at this point would be to trash the dollar. That is a consequence of reflating. In 1934, the example Bernanke takes to heart, the dollar fell by 40% and the US began to show some growth again.

    Competitive devaluations to get economies going by giving them an export price advantage was one of the beggar-thy-neighbor strategies of the Depression. Economists are in as universal agreement as you ever see in that field that the Fed made a huge mistake in the Depression by waiting so long to abandon the gold standard.

    And with such massive Treasury issuance in store, the fate of the dollar is assured. The open question is when it arrives. Currencies are known for their ability to trade out of line with fundamentals for sustained periods.

  7. Anonymous

    One more tenent of central banking cast aside. Never lend without collateral. It may be necessary to do this but there will be hell to pay for it.

    Just a minor point and I could be easily mistaken but I think that bank holding companies rather than banks issue commercial paper, usually to fund their non-bank subsidiaries. I don’t think that normally, and possibly as a matter of regulation, that they do or can downstream it to the bank subsidiary. A very minor point.

  8. Yves Smith

    The point about holding co versus regulated sub is an important distinction…..and I believe you are 100% correct, apologies for the miscue.

    But inability to get funding at the holding co level (if you though you had ready access to funding and suddenly find it costly and/or hard to get) can bring down the whole entity, so it still can have a negative impact on the bank subs while the parent is in crisis (presumably, they’d be salable, however). A holding co liquidity crisis is what lead to the AIG bailout, for instance, even though many (most? all?) of its subs were fine.

    I will be more careful about making that point in the future, thanks.

  9. bg


    I think you are a god, but I am trading against your advise on the dollar. It is the “compared to what” argument. I totally get the printing gobs of money argument. But these helicopter dollars are getting gobbled up without going to asset values. We have a full blown asset deflation in the works, and the rest-of-worlds assets were more inflated than the US’s.

    Also the ECB has more room to cut rates.

    The question is ‘where is the money going to go’ after it leaves the US?

    Asia will appreciate, Japan the most. But everyone else will need to print money even faster than the US before it is over. And most of them have higher debt to GDP already.

  10. buzzp

    Further to the point, go look at the Fed chart on CP – overnight A2/P2 is 3.82%, with AA asset-backed @ 2.02%, yet AA financial and AA non-financial are both 0.60% or under – go out to 30 day, and the A2/P2-AA spread is still 338 bp – look at the discount rate spread chart, and you see the abyss (invert the chart)

  11. Anonymous

    A quick not about the Dollar – this is NOT a rush to quality _- it is the results of FORCED buyback of dollar debt by foreign buyers. This debt is being called and that requires dollar settlement. A huge amount of FOREIGN EXCHANGE is occurring but it is Not safe haven dollar buying. I also suspect very strong dollar repatriation from abroad by US investment players.—–Dan Norcini found @ jsmineset.com

  12. Sergei

    I am wondering about the mechanics of the Fed purchasing CPs. The Fed cannot simply credit the reserve accounts of banks when it purchases the CPs, so it will actually have to pay them with cash. In this case, I assume that the Fed will be intermediating between the MM funds and corporates, ie. whereas before MM funds lent directly to the corporates, MM funds are now purchasing treasuries, and the Fed is using the proceeds to lend to corporates. As the Fed is simply intermediating, it doesn’t look like a large increase in the money supply, since there won’t be a multiplier effect. Please let me know if my reasoning is wrong.

  13. Yves Smith


    We have different time horizons. I am not big on short-term trading strategies.

    I have said for some time (might have been as early as January, need to check) that the ECB would have to cut rates to salvage the banks. That was contrary to everything the EU officials were saying.

    The dollar will do well until the powers that be figure a way to plug the leaks in the liquidity water mains. If they fail, we have a global collapse. But if/when they succeed, investors will quit fixating on the need for a safe have and realize the Treasuries they hold will be worth a lot less due to the supply calendar. Higher yields on bonds will hurt Treasuries, and Treasuries and the dollar are a highly correlated trade.

  14. Anonymous

    Watching the TED spread and the LIBOR rate, you’ll get the idea.

    On OCT. 3 TED reached 388bps.

    If companies can’t even rollover even overnight debt to acquire operating costs, there must be something wrong, don’t you think?

    Maybe a bank holiday is in the offing when things totally freeze up. That might give you a clue after more rate cuts don’t work.

  15. Anonymous

    Why is the Fed buying commercial paper outright rather than setting itself up as a risk-absorbing intermediary?

    Seed a commercial paper facility with a few billion then issue 14 day bonds at the overnight rate to raise further capital. Lend from the facility without prejudice at overnight + half of TED. Use the revenues to build a contingency fund for further bailouts and in case of a commercial paper default.

    Borrow and lend would be inflation/deflation neutral, be revenue neutral unless somebody defaults, and could be gradually withdrawn at the end of the crisis by gradually pushing up the lending rate to match the prevailing libor.

    Is this good policy or am I missing something?

  16. SlimCarlos

    >> Are the world's deepest, most liquid and most efficient markets completely wrong here?


    Adding salt: How can an astute observer look at markets in what we now must agree is (was?) a dysfunctional and unbalanced system and conclude that the "markets know best"? That they are "telling us something"? My god, have we learned nothing?

    Cash is the last bubble. The biggest yet. And the most transparently worthless. I mean, run a book value analysis on that. Jeez.

  17. FairEconomist

    I think the Fed needs to support commercial paper, but how can they possibly do the evaluation of which paper on such short notice? I’d prefer an auction window where a bank could swap the majority of its risk for a portion of the profits. That way the banks could do the eval without incenite fo d

  18. doc holiday

    Here is fun index:


    Here is fun story:
    O/n interbank calmer but overall lending still frozen

    Overnight euro deposit rates were indicated in a range of 3.75-4.35 percent, close to the ECB’s base rate of 4.25 percent.
    Three-month dollar deposit rates were indicated as high as 5.10 percent. That was higher than Friday’s fixing of three-month London interbank offered rates by the British Bankers Association of 4.33375 percent and ICAP’s three-month dollar New York Funding Rate of 4.7318 percent.
    Rates for three-month euros were indicated in a range between 5.20 and 5.30 percent.
    These deposit rates are purely indicative levels, posted by banks on Reuters screens but not necessarily levels at which they are lending or borrowing. In the current climate of extraordinary market tension, they’ve been especially volatile.
    “There are clear signs of top-rated industrial companies no longer having access to credit markets. There is a complete loss of trust in counterparty,” strategists at Credit Suisse wrote in a note on Monday.
    “We need a systematic not an ad hoc approach in Europe. We need immediately to take at least half a percentage point off rates and to see the yield curve steepen. The crisis is as much European as U.S.,” they added.

  19. doc holiday

    Look who wants bailed out again and obviously Warren will be at the trough in the morning on CNBC:

    Re: Bill Gross, who manages the world’s biggest bond fund, said the Federal Reserve should act as a clearinghouse to guarantee that transactions are completed and buy commercial paper to renew confidence in financial markets.

    Credit markets are currently “frozen,” Gross wrote in a note to clients published today on Newport Beach, California- based Pacific Investment Management Co.’s Web site. Without confidence in the markets, “our economic center cannot hold.”

    Rates on commercial paper, or short-term IOUs sold by companies, soared today and the interest banks charge each other for overnight dollar-denominated loans in London increased as banks remained reluctant to lend. Buying commercial paper would allow the Fed to make unsecured loans and encourage borrowing at rates beyond overnight levels.

  20. doc holiday

    One more thing,

    Re: “And a further indicator of stress is how much the yields on CP has risen. “

    See: Investors Buy More Agency Bills, Stay Wary Of Commercial Paper

    Fannie and Freddie were taken over by the U.S. government on Sept. 7, but investors’ appetite for these bills didn’t change much. Of late, however, the bills with shorter maturities have gained popularity with investors both for their higher yields and less-risky profiles.
    Money market funds, especially, were reallocating more of their resources to these and other less-risky assets from commercial paper, analysts say.
    In a reflection of this demand, yields on newly issued Freddie Mac short-term bills tightened dramatically at an auction held Monday.
    Freddie sold $1 billion of three-month bills at a yield of 2.02%, about 0.79 percentage points below the 2.81% elevated yield it paid last week at an auction of similar bills.
    The mortgage finance giant sold $1 billion of six-month bills at a yield of 2.358%, 0.88 percentage points lower than the 3.242% it paid last weeks for bills of this maturity.
    On the other hand, nervous money market funds, which make up more than a third of the investors in the commercial paper market mostly sat out of that market on Monday.
    The impact of the crunch on European banks and nations spooked investors, Kevin Giddis, fixed-income strategist at Morgan Keegan.
    “Credit is significantly tighter, and it’s difficult to get funding for more than 30 days,” he said.
    The rates that companies pay to raise short-term funding was almost the same as Friday. Companies with better credit like American Express (AXP) paying 2% on one- to seven-day paper, which is about the same as the Fed fund rate, he said.


  21. Anonymous

    The New York Federal Reserve will host a meeting Tuesday with banks and buy-side firms amid multiple efforts to streamline the credit default swap market through an exchange or industry-led clearinghouse.
    People close to the discussions expect multiple solutions to emerge from the discussions with the Fed, rather than a single clearinghouse for the U.S. market.
    However, expectations that the Fed will back exchange-led initiatives helped push shares of CME Group Inc. (CME) and IntercontinentalExchange Inc. (ICE) sharply higher amid the broader market slide Monday.
    The New York Fed is expected to emerge as a key regulator of the CDS sector in the U.S., amid concerns that inefficient processing and lack of transparency in a market with $55 trillion in notional trades poses a systemic threat to the financial system.

    http://www.easybourse.com/Websit…0& NewsID=535643

  22. Anonymous

    Fed, Dealers to Meet on Default Swaps Clearinghouse


    New York Fed President Timothy Geithner has stepped up pressure to create a central counterparty since the near-collapse of Bear Stearns Cos. in March raised concern the market could fail if a major market-maker couldn't make good on its trades. The bankruptcy last month of Lehman Brothers Holdings Inc., among the top 10 counterparties to credit swap trades, intensified concern that market stability is in jeopardy amid the worst financial crisis since the Great Depression.

    The Clearing Corp., a Chicago clearinghouse owned by some of the biggest credit-default swap market-makers, has faced delays in setting up a system for guaranteeing trades as the Fed pushed it to obtain a banking license that would place it under the central bank's watch.

    `Moving Aggressively'

    The company and the banks are “moving aggressively to launch the CDS clearing platform by the end of this year,'' Clearing Corp. said in a Sept. 29 statement. Testing and validation of the system was nearing completion, the company said.

  23. Anonymous

    Large increases since Sept 15th in AA ABCP from under 50% of total CP market to up to 68% of total market volumes up 80-90% to 200bn+

  24. satan

    Hate to say this, but I think that this is a good move. I have never been a believer in fighting the last war or sticking to dogmas. Sometimes the demons created by our imagination are not as bad as the demons outside the door.

  25. Michael

    Yves wrote, “investors will quit fixating on the need for a safe have and realize the Treasuries they hold will be worth a lot less due to the supply calendar.”

    what does supply calendar mean?

    NYT writes, “the Fed has no choice but to keep printing more money.” — What do they mean by print more? as in just lend more out?

  26. thomas j

    Yves wrote, “investors will quit fixating on the need for a safe have and realize the Treasuries they hold will be worth a lot less due to the supply calendar.”

    Sold to you.

    The problem is you fail to understand the nature of the game that is being played here.

    The greater the supply of Treasuries available in the credit markets the more crowding out and deleveraging that occurs in the private debt and equity markets. And, consequently, the more upward pressure there is on the dollar. There is a reason the FCBs hold mostly US Treasuries. But, of course, you assume they are ignorant and incompetent just as they have brainwashed you to believe.

    They are members of a banking cartel seeking to extend their power and influence to all sectors of the economy. Or did you think it was simply happenstance that AIG, GS and MS are now wards of the Fed. US Treasuries represent the only secure store of value in a deflating world reserve currency. And will remain so for a while.

    Given that the world’s central banks own most of the world’s marketable US Treasuries, do you really believe they will now act in a way that will devalue Treasuries and destroy their iron fist rule over the financial markets?

    “In the land of the blind, the one-eyed man is King.”

  27. Anonymous

    Printing money (in lieu of selling t-bills or bonds because overseas has stopped buying our debt..er I mean paper) means they raise the national debt ceiling and keep raising it until enough money is in the system or we implode whichever comes first.

    With banks not trusting each other to pay back loans between themselves, credit it tight or freezing up. Arm twisting doesn’t seem to help.

    There is reported money flowing in and out of the system like the daily Federal Reserve numbers then the unreported funds that enter markets in stealth like when the SOW jumps up into the close to make us feel better. Prices on the shelf usually reflect that stealth money.

  28. Michael

    TO the anonymous user above, I am not sure what you mean

    printing money means raising the national debt ceiling? Isn’t a set ceiling just a legal limit set by Congress? How does it tell how much the Fed is “printing?”

    I am reading Wikipedia and I am assuming, printing money = debt monetization. Can anyone tell me if I am on the right track?

    I find this blog and its community feedback to be extremely insightful and educational.

    Thanks all

  29. Yves Smith

    thomas j,

    You did not go back and read my entire comment. The paragraph (which you can find above) said:

    The dollar will do well until the powers that be figure a way to plug the leaks in the liquidity water mains. If they fail, we have a global collapse. But if/when they succeed, investors will quit fixating on the need for a safe have and realize the Treasuries they hold will be worth a lot less due to the supply calendar. Higher yields on bonds will hurt Treasuries, and Treasuries and the dollar are a highly correlated trade.

    The supply calendar is the Treasury auction schedule.

    Funding the TARP alone is roughly $2000 a person, and that assumes the damage is $700 billion. The way the legislation works, that is simply the maximum Treasury can have outstanding at any one time. That total exceeds the DoD;s annual budget and the hard costs of the Iraq war to date.

    With the economy as weak as it is, there is simply no way that this amount will be paid for by tax increases. A high proportion will fall to Treasury bond sales.

    And the Fed seems to be expanding its balance sheet on a daily basis. And how is that to be financed? Through the Treasury, even higher bond sales. So we don’t have the foggiest idea of what the total damage will be yet.

    And with our import falling due to our economic weakness, do you think China is going to be so keen to lend to us to support our banking system, as opposed to financing their exports?

    Continuing to buy Treasuries is starting to become a bone of contention among mid-level Chinese bureaucrats. They see us as having snookered them into buying paper that may not be worth so much. China has also been talking up the need for a new reserve currency.

    Another factor (mentioned in the Ambrose Evans-Pritchard post) is that the demand for dollars isn’t just a symptom of flight from quality, but is fact is a direct result of the deleveraging.

    This is a “short squeeze” on those who have used the dollar for a vast global carry trade. International banks are facing margin calls on their dollar leverage. It is why the Fed is having to provide $1.25 trillion in dollar liquidity for the entire global system, according to estimates by Brad Setser from the Center for Geoeconomic Studies.

    The comment above also pointed out we have said for quite some time that the ECB would be forced to cut rates, and that would lead to a weaker euro.

    So if you have a massive increase in supply and no corresponding increase in demand, you will see falling prices. And as we said, Treasuries and the dollar are highly correlated.

  30. The Social Pathologist

    I suppose I’m a bit out of my league here, but if the banks can borrow from the Fed, then why can’t they lend it out and roll over the commercial paper. I mean this is the perfect time to provide guido loans to businesses who are both desperate and creditworthy for cash. I mean it’s not like non-financial businesses–who don’t have this toxic stuff on their books–are in serious danger of default in the short term. I’m getting the impression that banks may not be lending to each other out of fear, but they may not be lending money to businesses because they simply don’t have the money to lend.They have run out of cash.

  31. thomas j

    Yves said “Continuing to buy Treasuries is starting to become a bone of contention among mid-level Chinese bureaucrats. They see us as having snookered them into buying paper that may not be worth so much. China has also been talking up the need for a new reserve currency.”

    Who gives a damn about what some “mid-level” Chinese bureaucrats supposedly said or didn’t say? Looks to me like the purchase of US Treasuries by the PBOC and other foreign CBs is turning out to be the shrewdest investment possible.

    This is a controlled demolition, I mean “worse financial crisis since the Great Depression,” which is obviously nothing more than a pretext for the greatest power and property grab in the history of man.

    Expanding the supply of Treasuries allows the Fed to control the process of deleveraging and debt destruction akin to keeping the patient on life support during organ harvesting. The Fed knows this. Less than $6 Trillion of marketable US Treasuries, owned primarily by foreign CBs, are being used as the ultimate store of value while tens of Trillions in value of credit and equity markets, foreign and domestic, are eviscerated.

    Now the Fed wants the Treasury to backstop its entre into the CP market as the Fed places a lock hold on yet another vital financial artery.

    But I forgot I’m suppose to believe the PBOC, along with all the rest of the foreign CBs, have been snookered by the bumbling Fed and the asshats at Treasury.

  32. thomas j

    Perhaps all that talk coming out of the Fed about eliminating bank holding company rules in order to facilitate foreign CB controlled, SWF financed private equity ownership of US money center banks is simply idle chatter.

  33. kevin de bruxelles

    What we really have here is a battle between the Fed and the Market. Seen through the lens of military strategy, clearly the Fed is trying to impose its will on the Market. Their strategy however seems to no better than your average street corner Jihadi who just got his first AK-47; basically it is just spray and pray, but instead of bullets the Fed is spraying liquidity at the Market.

    The concept of an OODA Loop (for Observe, Orient, Decide and Act) is critical for understanding why the Market is winning this war. This concept was developed by USAF Colonel John Boyd for military conflicts but works equally well in the business world. A conflict is analysed by studying how the two (or more) sides process these loops. The most critical process is Orient, here the Fed is clearly at a loss, relying too much on ideology instead of clear thinking in deciding what the Markets are doing. By the time the Fed is ready to Act the market has already adjusted and the Fed has to start the loop all over again, only this time with that much less ammunition.

    In fact it is folly for the Fed to think that it can impose its will on the Market. The ECB is taking a more realistic approach by trying to just push to Market at the edges instead of trying to overwhelm it with Shock and Awe.

  34. dd

    thomas j,
    your perspective is worth pursuing and would appreciate continued thoughts as it is value added to the entire picture which is almost impossible to grasp. Notice that it is not just SWFs and CBS but also home grown PE that is amassing a fortune:
    U.S. Private Equity Firms Raise $222.6 Billion in First Nine Months of 2008, on Pace to Break 2007 Record

    Then too there was the Fed move relaxing the rules on PE bank investments:

    Last there is the Fed supported CDS private market movement and it has done everything possible to circumvent all regulation of these securities that now overlay all regulated securities.

    So what looks like and is reported as a "central planning" coup may in reality be the total stealth deregulation of financial markets and the wholesale sale of the financial structure to PE, SWF etal.
    Just a thought.

  35. dd

    The end result would then be a globalized financial system embedded in the US system with the appearance of a sophisticated regulated structure that operates as such for the “small” players but a private overlay that operates in a different sphere based on “principles” for designated global players.
    That certainly is the end result in the master plan as proposed. Here are two blueprints:



  36. Matt Dubuque


    The Plaza Accords in the mid-1980s showed that a massive devaluation of the dollar can be accompanied by very low inflation, as the Kansas City Fed predicted at the time.

    Language like “Goodbye to the dollar” encourages the uninformed who assume that such a move is ALWAYS accompanied by a flight from Treasuries.

    What that uninformed but wildly popular scenario typically overlooks is the Fed’s proven willingness, when inflationary expectations are properly managed, to RAISE interest rates if necessary to protect their Treasury book.

    Matt Dubuque

  37. thomas j


    Yeah you got it. Social engineering.

    Let the plebes build up the wealth then take “private” ownership in one fell swoop.

    Only children believe the clowns are the most important part of the circus.

  38. chintzzz

    I understand that you are opposed to the Fed’s latest decision to jump into the commercial paper market and the affect it will have on dollar, long-term. However, with the global markets deleveraging, everyone is looking for “safe haven”. If not the dollar, then what else? I understand that deflating the dollar might actually do our economy good as we try to get out of this mess but if that can’t be done, then what else? What do you think is a practical way to address this problem? Do you think not doing anything and letting the deleveraging spin out of control will be acceptable either?

  39. doc holiday

    Re: ") there have only been 7 defaults since Penn Central in 1970. Thus a guarantee would be a cheap way to backstop the market (some attention might need to be paid to how to deal with moral hazard, but a short-term backstop of three to six months would not lead to big changes in behavior)"

    >> You nailed that one Yves, and I would suggest that during that period in the 70's, confidence was not restored in a matter of hours, days or weeks! This Fed and Treasury, along with the entire spectrum of political corruption is what the voters and investors are pondering going forward!

  40. doc holiday

    . >> If not the dollar, then what else?

    The yen comes to mind for institutional cash, but all tides are falling as one and although the dollar is going to be the biggest ship on the waters, its future value is linked to Treasury debts, which implies less future value and probably higher taxes.

    Then again, maybe instead of Treasury bailing out wall street with bogus synthetic cash infusions, maybe mainstreet can get new synthetic bridges, roads and infrastructure funding without raising taxes?

  41. chintzzz

    >>>The yen comes to mind for institutional cash, but all tides are falling as one and although the dollar is going to be the biggest ship on the waters, its future value is linked to Treasury debts, which implies less future value and probably higher taxes.

    I think you said it yourself, the ships are sinking together and the dollar is the biggest one out there.

    Look, I'm not criticizing anyone but I'm reading a lot of conflicting information here. One one hand, I hear Yves and the readers complain about the Fed buying commercial paper but on the other hand, I hear Yves and Roubini (http://www.nakedcapitalism.com/2008/10/roubini-fed-fiddles-while-rome-burns.html)
    say just the opposite, buy commercial paper and help the liquidity crisis in the corporate sector. Those are two contradicting things said within the space of a day! It's just not making any sense.

    I'd like to hear if anyone has any credible and practical plans to address the liquidity crisis rather than criticize the Fed (not that I'm a fan of theirs either but they are doing something).

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