Government Lending Support Pledges and Measures At $7.4 Trillion

As correspondents and readers have pointed out, Fed chairman Ben Bernanke and the rest of DC is increasingly resorting to the playbook he suggested in various papers on Japan’s deflation.

The Federal government has said that it is willing to lend or backstop up to $7.4 trillion to get the credit markets moving again. This figure comes from Bloomberg as a tally of all the commitment ALREADY made. Note that many of these have not been drawn down, hence the Fed’s and Treasury’s balance sheet have not (yet) expanded correspondingly. And some of these are in the form of guarantees, such as $1.4 trillion by the FDIC. Note the Bloomberg article fails to provide a tidy table showing how it came up with this figure. Critics will argue that the mixing of guarantees and borrowing facilities is an apples and oranges comparison, but the flip side is that the guarantees are treated by the authorities as a cost-free exercise, which is also incorrect.

And there are a lot of flaws in the underlying logic.

First, while the freeze in lending is admittedly overdone (there is a fair bit of anecdotal evidence that indicates that good borrowers are getting the same treatment as the deadbeats), even if lenders were being dispassionate, they would be lending at a considerably lower level than in the bubble years and trying to get the weaker credits to reduce their balances. The powers that be refuse to acknowledge that the financial crisis is primarily a solvency crisis, that many of the loans made in the bubble years will either default or be renegotiated. Trying to prop up bad loans in place merely ties up valuable lending capacity, throwing good money after bad.

Second, this effort cannot achieve its stated aim. We have said before that the markets are too large for government to salvage. Paul Krugman also made this point in March:

….the financial markets are so huge that even big interventions tend to look like a drop in the bucket. If foreign exchange intervention works, it’s usually because of the “slap in the face” effect: the markets are getting hysterical, and intervention gives them a chance to come to their senses.

And the problem now becomes obvious. This is now the third time Ben & co. have tried slapping the market in the face — and panic keeps coming back. So maybe the markets aren’t hysterical — maybe they’re just facing reality. And in that case the markets don’t need a slap in the face, they need more fundamental treatment — and maybe triage.

The Fed inceasingly has been trying to stand in for private lenders, but it cannot take on the entire private sector. And let’s look at orders of magnitude.

US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount), but others are not included (second and third mortgages, and perhaps most important, contingent exposures like AIG’s credit default swap guarantees). It isn’t unreasonable to assume they net out.

The Fed’s proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG, for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks.

That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem. Per Krugman, do we really think this will work? And if it does not work, it will make matters worse by increasing the size of the debt overhang when it needs to contract.

Third, as Wolfgang Munchau said today in the Financial Times and others have pointed out earlier, the Fed seems worried solely about deflation, and not about a possible US currency crisis. This is a shocking oversight. The Fed (and many others) keep drawing analogies between the US in the Great Depression and its situation now. That is flawed and dangerous.

The US was a massive creditor before the Depression and ran a very large trade surplus, to the point where the gold accumulation by the US was destabilzing to the world financial system. Sound familiar? That is the role China plays now, not the US.

What happened to the nations that were in the US’s shoes at the onset of the Great Depression, the overconsuming, indebted European customers of the US? They devalued their currencies, defaulted (or partially defaulted and forced a renegotiation) on foreign debts, and suffered milder downturns than the US did.

But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans. And if you think recent dollar strength argues against it, think again. The massive dollar purchase are due to unwinding of dollar based debt. Similarly, the unprecedented rally in long-dated Treasuries was due to panicked short covering on shorts written many years ago in connection with funky products to lower the cost of the product. A Treasury short that was then so far from recent yields was seen as free money. It turned out not to be.

From Bloomberg (hat tip reader Rob):

The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Representative Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”…

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer. Yesterday, Citigroup Inc. received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Representative Darrell Issa, a California Republican on the House Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it, so who’s to say they’re right?”…

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent, and it’s all going to fall on the taxpayer.”…

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Co. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

Bernanke’s Fed is responsible for $4.4 trillion of pledges, or 60 percent of the total commitment of $7.4 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”….

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 12 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said…

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

‘Wells Fargo Notice’

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.

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  1. ndk

    But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans.

    The authorities may not be, but the markets sure are. 10 year Treasury CDS nearing 50, and TIPS continue to trade at levels that would be nonsensical if there were no risk premium.

  2. TulsaTime

    And just what happens to world trade when the benchmark currency turns toxic? Trade protectionism goes godzilla, film at 11….

  3. Anonymous

    This is such an important point!

    The US government believes the well is infinite and it can borrow its way out of the solvency problem.

    Unlimited credit and guarantees by the Fed coupled with massive fiscal spending as proposed by Obama means just one thing unprecedented growth in the Feds balance sheet and massive Treasury debt sales.

    When this blows up as it inevitably will it could have a bigger impact than the current credit crisis and financial market correction.

  4. miguel_swanstein

    “We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs”

    -Ben Bernanke, Nov 18.

    Gulp. Is it me or does that sound like the same kind of pitch Citi brokers would use to sell their ARS products to investors?

  5. K Ackermann

    Even if the faith in the dollar is not misguided, there is still the problem of interest on the debt.

    It can reach a point of embarassment. Even if it became no secret that we just print money at will and it is accepted, what do you say when the interest payments exceed GDP?

    Are we going to make a good faith effort at paying down the debt and raise taxes to 90%?

    I’m being extreme here just to show that there are in fact limits to the priviledge of being the reserve currency.

    Limits often have a way of being where they are never expected.

  6. cindy6

    The US was a massive creditor before the Depression and ran a very large trade deficit

  7. Don

    Wow! Another outstanding post today!
    If, as seems reasonable, the markets have grown too large, and the world of finance too bloated, how much must those bond, equity, FX markets shrink by, for healthy growth to begin again in the real economy [rather than just growing by increasing debt levels]?

  8. Anonymous

    Bernanke testified in Congress that he hasn’t lost a dollar of taxpayer money on the various lending facilities.

    The problem with this statement is, if I lend $100 on a three month basis at 40% interest, and when three months roll around I lend another $110 to the same credit, and three months subsequent I lend another $121, etc. there’s never a problem with getting repaid b/c the borrower is repaying the old
    loans and interest with new loans from me, the creditor.

    The losses are only realized when I stop lending.

    When the fed grows its balance sheet at 3000% annualized, or whatever the going rate is, you can be sure the previous is going on.

    Which is why Bernanke is either a liar or a fool, possibly both.

  9. Anonymous

    Bernanke is either a liar or a fool, possibly both.

    It would be nice to hear him justify the XMAS bonuses to CEOs and insiders of failed corporations and have him explain the value that has been created in the exchange of tax payer revenues. I think I’m still waiting to here that from this sack of dog feces!

  10. Taat Laet

    But the authorities are not even considering the possibility of debt default or a dollar crisis in their plans.

    Imagine they are considering debt default in their plans. Would the authorities behave different they do now?

  11. Jim T


    The tax payer gets what? A 7.8% STAKE! What a joke! $45 Billion invested is $25 Billion more than 100% of Citi’s Market Cap as of Friday’s closing price. And that doesn’t count the BILLIONS MORE the tax payer will pay on loses!

    The tax payer SHOULD HAVE A 100% STAKE with all other sharholders wiped out PERIOD!


  12. Massimo GIANNINI

    Sometimes, although I am an economist by background, I am lost with all these numbers, billion and trillions. But something comes up always to my mind: why don’t we tax all these financial transactions, particularly CDS and currencies revamping a Tobin Tax? Now it’s the right time…at world level.

  13. doc holiday

    Related old news?

    here are other factors at work, too. The much heralded and universally acclaimed corporate child of that avuncular multi billionaire from the heartland Warren Buffett, Berkshire Hathaway (BRK.A), has seen some trouble in its CDS spreads. The company is AAA but the CDS is wrapped around 400 and is 25 wider today. That has caused a bit of angst (and probably some schadenfreude) among participants in the corporate bond market. It reminds me of a Latin phrase, Quis custodiet ipsos custodes? Loosely translated it means, Who shall guard the guards themselves? The ever vigilant market is watching Berkshire and apparently does not like what it sees.
    Finally, the decision by Secretary Paulson to ask the Congress for a second tranche of TARP money has soured sentiment. In effect he has handed the credit market problems to the incoming Administration and unless there is something on the order of an AIG, Lehman or Bear he will watch the rest of the game from the dugout.
    Without the Treasury pumping money into the system the market has lost its marginal buyer, and in the current risk-averse environment there are too many days between now and the inauguration.

  14. Francois

    A Tobin tax?
    Only if electoral campaign funds are 100% public money.

    Otherwise, forget about that.

    “The powers that be refuse to acknowledge that the financial crisis is primarily a solvency crisis, that many of the loans made in the bubble years will either default or be renegotiated.”

    Question to the group: Why do they refuse to acknowledge it? What could be so terrifying in acknowledging this reality?

  15. doc holiday

    I found this interesting, because there seem to be a lack of innovation in regard to ways to stimulate the frozen mummies and keep the zombies from running into each other.

    The Bank of Korea said early on Monday it would print up to 5 trillion won to finance half of the government-led bond investment plan, which is aimed at helping cash-starved companies suffering short-term liquidity problems.

    The liquidity support plan for the ailing financial and corporate sectors needs more clarification regarding who will get the money under what conditions and how," Shin said.

    >> This gets back to the issue of gaming the market with policy that is being made up on-the-fly (globally). Not good IMHO.

  16. wintermute

    That $7.4tn as 50% of US GDP is 50% of the overstated, massaged, bubble-debt-fueled GDP. I keep thinking that the true figure of bailout debt as a percentage of real GDP is higher than the headline numbers suggest.

    Also – the “too big to bail” problem. Who is the biggest? Which domino is left after AIG, Citigroup and even Goldman Sachs wobbles? The grandaddy of them all: JP Morgan. This bank had $90+tn of derivatives going into the credit crisis. Let’s use a yachting analogy. Can you imagine bearing through a Cat 5 hurricane with full mainsail, jib and spinnaker? Well that is how JPM sailed into the biggest credit crisis of the last 80 years. No wonder the Fed does not want to disclose ALL the beneficiaries of its largesse. Who would have had their sails ripped out before now otherwise?

  17. patrick neid

    As I said in my email missive this morning, at some point the numbers just become insane.

    But, but thank god, like spagetti money grows on trees.

    If Citigroup breaks today’s low I think we are in the nut house.

  18. Dean P.

    Consider the $7.4 Trillion within the context of $30 Trillion lost in global marets to date. My point is the markets can make up the “pledge” within a few months and then some.

  19. CCT


    No “China” thread today, but I wanted to highlight comments coming out of Guangdong. You can see these comments as possibly overly optimistic, but it represents a movement within China to move in the opposite (non-socialist) direction from the developed nations.

    The party secretary Wang Yang (#1 guy in the province) has made it clear that he sees the current crisis as a way of burning away the under-growth, and Guangdong will not be investing resources to salvage low-margin manufacturers falling by the thousands. He believes that this is actually an opportunity for continued reform in Guangdong, an opportunity to revolutionize the economic value chain for southern China in particular, and all of China as a whole.

    There are plenty of (little s) socialists in China, and that comment is raising a lot of controversy. But he has repeatedly reiterated his statement, insisting that reform will continue, and failing manufacturers will receive no bailout.

    It’s basically like the governor of Michigan (except with more power) announcing that he hopes for a collapse of the automakers, because it will lead to growth of healthier industries.

    Refreshing, yes? I hope he gets it right.

  20. Anonymous

    @wintermute, “REEF THE SAILS” pronto before it ends up like the infamous Bass Straight race.


  21. Anonymous

    Check out 3-month Treasury chart:

    SUNDAY, NOVEMBER 23, 2008
    Chart of the Week: Ratio of VIX to Yield on 3 Month T-Bills…label/VIX% 3AIRX

    When it comes to measuring fear, VIX is only part of the story. The VIX:IRX ratio paints a much broader – and darker – picture of fear and the flight to safety

  22. Anonymous

    Let’s say that nominal GDP over the next 15-20 years goes to 20 trillion and the federal government revenue goes to 8 trillion (40% of GDP), then a 50 trillion dollar debt at an average of 6% seems pretty doable. Debt payments of 3 trillion per annum would be a little over a third of the federal government budget and only 15% of GDP. Maybe we don’t really want that. Maybe in real terms we’d be a lot poorer. But it seems like it is definitely doable and with 20 years of downdrafting expectations and falling life expectancy people might even be happy with it.

  23. Anonymous

    I’m expecting things to get bad in China. They are the US of the 1920s/1930s. They over produced, and now the demand has significantly lessened. Worst of all, unlike the US, they couldn’t turn their economy around into one more focused on domestic consumption because the gap in living standards is too significant. For China to make a drastic turn (and it would have to be drastic to make a different on the short term), they would risk collapse.

    When production in China slows significantly, prices for food and other commodities other than oil are likely to go up again, at that point China would find itself in a difficult position, so their actions in relation to their US dollars is unpredictable, but if they were to start liquidating their treasuries the US dollar would fall. High commodity prices, low US dollar. That would be the likely result if China was to try to turn around.

  24. Anonymous

    I’m curious as to why the credit card companies don’t just charge their customers 1000% percent interest. They can then legally repossess all their possessions when they fail to pay.

    It seems they can do anything they want and fall back on the law to protect them. Yet I thought that the citizens made the laws?

  25. john bougearel

    Richard Kline,

    ~ Thank you for your long replies to us all on Yves Oct 18 post on “Some curious parallels to the 1930’s”

    about perspective matrices, nodes and flows, remembering/reviving an old idea, remembering an old response, so it can reconstitute/replicate itself.

    and ultimately working towards a paradigm shift in the US economy overly reliant on the private enterprise capitalist Big Boys to act as intermediaries by creating non-profit credit unions in our local economies to lend to individuals and small biz at favorable rates and higher guarantees. “That would create a real alternative to the system as we have it and structurally alter nodes and flows” as you say.

    This solution (the credit unions which we already have in place on a small scale, so the structure is already there to implement – it would be a relatively easy plug-in) would work towards breaking the frame, breaking the flawed financial system that our lawmakers are so dearly trying to reconstitute.

  26. wunsacon

    When you’re in hell, keep going.

    The malinvestment has already taken place. People can cry about the inflation, deflation, or whatever else they want to blame on the next administration. But, the money is gone. With a debt-to-(inflated-and-sinking)GDP ratio of 350%, WE ARE ALREADY BROKE.

    The only thing to get us out of this is a fiction — monetization — that depreciates existing debt and encourages banks to lend money that will otherwise depreciate in value, too.

    Start stimulating. Start monetizing. It will make food and gasoline less affordable again. But, at the same time, it will encourage investment of “cash-that-will-otherwise-depreciate” into productive capacity that will yield a positive ROI.

    FWIW, this is 180 degrees from my viewpoint 6 months ago. I started off scoffing at Ben’s plan. Now, I’ve gained respect for it. (Well, after the decision to bail out Fannie/Freddie, I concluded the debt will not be serviceable. I.e., changed circumstances forced me to rethink.) If we’re lucky, this will look like the 1970’s instead of the 1930’s.

    Start stimulating. Start monetizing.

  27. wunsacon

    I should mention that I’m still against bailing out institutions, because that throws good money after bad. The “stimulus” should be (a) checks to taxpayers, (b) the Pickens Plan — so that we don’t send so much of our fiscal stimulus offshore, and (c) guaranteeing retail deposits and, probably, money in money markets. I’m against bailing out GM/F, because those companies have made every wrong decision there ever was to make.

    GM should go under for its multitude of sins, starting with its role in removing light rail from LA. (Although…there’s no one left from that crime to punish. It’s a case of “justice delayed is justice denied”.)

  28. ndk

    Start stimulating.

    I appreciate your newfound optimism, but the idea that Keynesian stimulation even works — a net addition to demand, rather than a net subtraction — is hypothesis. In fact, Japan has found that it doesn’t when government debt is too high already.

    Nobody is even willing to question that, though, and cultish devotion to an unproven principle scares me.

    The only thing to get us out of this is a fiction — monetization — that depreciates existing debt and encourages banks to lend money that will otherwise depreciate in value, too.

    Monetization is a fiction too, to some extent. Remember that our only tools are swaps and direct asset purchases. These, if done for bad assets, degrade the Fed’s balance sheet, which is already pretty rotten now. It’s also nearly impossible to do them on a scale that matters. To the extent it’s worked in the past, it’s due only to our willingness to believe.

  29. Independent Accountant

    Paraphrasing Everett Dirksen, US Senator from Illinois, “A trillion here, a trillion there. Sooner or later you start talking about real money”. We’re on the hyperinflation express. The closest analogy I can find to our current financial situation is not the US in 1929 or even Germany in 1922, but France in 1780. “Liberte, egalite, fraternite”. Oh yes, and off with
    their heads. Book suggestion, “Anatomy of Revolution”, by Harvard History Professor Crane Brinton, 1965.

  30. Anonymous

    And what was that logic? How would it even fix the interest rate problems you report within Europe?

  31. Anonymous

    Monetization is not a fiction as far as I can tell. There is a tool besides swaps and direct asset purchases: quantitative easing. Fed prints up more money and buys T-bonds with it. If foreigners won’t buy those T-bonds, the Fed can!

  32. ndk

    Monetization is not a fiction as far as I can tell. There is a tool besides swaps and direct asset purchases: quantitative easing. Fed prints up more money and buys T-bonds with it. If foreigners won’t buy those T-bonds, the Fed can!

    We’re already using quantitative easing, anonymous, through interest paid on deposits at the Fed. Check out the latest H.3 and you’ll see massive excess balances. They’re just sitting there on deposit, earning a negative spread, making the Fed’s balance sheet deteriorate slowly. Nobody’s lending them out because the risk-adjusted return on capital for lending these funds is too low to make it worthwhile.

    Risk is just too high, and that’s saying something, with yields of 20% or greater widely available in the junk bond market. We’d have to create a titanic amount of money and make yields go even higher in order to stimulate private lending, and that defeats the point.

    Essentially, you can throw the horse in the lake, but you can’t make it drink.

  33. Anonymous

    Not that there is any hope for it but again, the Treasury could have started a new banking system with the funds they have thrown overboard already. Kinda like along the lines of using the credit unions as a funding source(I say interest free loans),leaving the Federal Reserve to handle the bad debt for decades to come

    Congress now wants the truth, they can’t handle the truth. We’re broke.

    No one is saying what the total debt is that we are dealing with or not enough zeros available to delineate.

    So things are so bad, the markets go up today. Go figure. Inflation is the only answer whereas prices can go up but value in currency goes down.

  34. SlimCatlos


    Nice to see you (finally?) come ’round, although seeing the process unfold here is a little like bearing witness to a band-aid peeled off a tender shin, slowly no less.

    Alas, busting this nut is the only way out. Now, could you please get that mope Roubini onside? The guy is delusional and has apparently never been out of the country, at least to a place where the currency has turned to dust. I gather he has roots in Iran? Would you ask him what a Shah-era note buya him these days? My sense he would wouldn’t recognize hard money even if it were lodged up his left nostril.

    Devaluation. More. Faster. Please.

  35. Yves Smith


    Ahem, I have been hinting at a currency crisis for some time, but it has been appropriately done in code (I have repeatedly harped that the long term outlook for the dollar is for it to be weaker and that the US is at risk for a disorderly fall). As we keep having more and more money thrown at symptoms rather than root causes, the odds of bad outcomes keep rising, so I have gotten blunt.

  36. AudioTactics

    The world is too fragile for any changes to the status quo.

    Therefore, the dollar will remain the world’s currency and we will continue to luck out and avoid a currency devaluation. Remember that we are not the only economy facing disaster.

    And China will not abandon its investments in US Treasuries so we will continue to luck out there as well and avoid an interest rate crisis. We have an unspoken mutually beneficial relationship with China – we buy their exports and they buy ours. China exports manufactured goods and we export debt.

    Right now this country needs to focus on the light at the end of the tunnel because there is none. Therefore, we need to spark it ourselves and that means having a plan for the productive use of what little resources we have left. I agree with many here that we need to stop the continued malinvestment and determine how our resources will create growth in areas that are sustainable and forward looking.

    I’ve never been more worried about the future and I do think that this country (and the rest of the developed world) have become so soft that most people can’t even contemplate what we could be heading for.

    There are no easy answers to this perfect storm and I get the sense that Washington is out-classed by the nature of this threat. It’s a shame because by the time the Obama administration is in a position to try their new deal it will be overwhelmed by the power of this slowdown.

    From the political response thus far its clear that no one currently in Washington has the will or insight to make the tough decisions necessary to move forward in the right direction. This will just delay any potential recovery and extend this monster recession for years and years to come.

  37. Anonymous

    There are more than a few bloggers who would not necessarily agree with your view on the dollar. Mike Shedlock and Brad Setser have indicated that a dollar crisis is probably not imminent in their view. In theory as a reserve currency we should not expect much in the way of a crisis of trust, so you can perhaps see the conventional view point.

    I think being a reserve currency does give the dollar much better protection than the UK pound for instance. The key will be who currently has trust in the dollar, what could trigger a change in their view and what indicators would herald such a change.
    My thinking would be the perception that a bubble is building in the dollar could be the trigger for US investors to start diversifying away from the dollar. As to what could herald this, then I think I would be watching closely the yields on Treasury TIPS compared to yields on Treasury Bonds and Bills.
    Why have are those TIPS yields been on their way up towards the end of November (4.27 on the 24th as opposed to 3.85 at the 1st for 7 year TIPS)? We might also start to look at the gold bullion movement volumes although I am no gold bug forecasting gold prices will hit the roof.

    There is also the possibility that as recovery sets in and investment trends reverse, if the reversal is too quick the dollar could fall quickly leading to a panic. Ultimately the sheer volatility of the situation almost guarantees that something will trigger the dollar into a downward leg.

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