Bernanke�s next parlor trick
By Mike Whitney
Online Journal Contributing Writer
Jun 15, 2009, 00:15
Federal Reserve boss Ben Bernanke is getting ready to pull
another rabbit out of his hat and he�s hoping no one figures out what he�s up
to. Here�s the scoop; the Fed chief needs to �borrow up to $3.25 trillion in
the fiscal year ending Sept. 30� (Bloomberg) without triggering a run on the
But how? If the stock market keeps surging, investors will
turn their backs on low-yielding US Treasuries and move into riskier securities
hoping for better returns. The only way to attract more buyers to US debt is by
raising interest rates which will kill the �green shoots� of recovery and make
it harder for people to buy homes and cars. It�s a conundrum.
In the next year, China will buy roughly $200 billion in
T-Bills while the oil-producing states and the rest of the world will add about
$300 billion to their cache. That leaves more than $2 trillion for the domestic
market where cash-strapped investors are likely to avoid government debt like
the plague. So, who�s going buy that mountain of low-yield government paper?
The Fed has been helping the banks raise reserves for the
last year. In fact, excess bank reserves have skyrocketed from $96.5 billion in
August 2008 to $949.6 billion by April 2009. Nearly a trillion bucks in less
than a year. But, why? Are the banks expecting to expand lending at the fastest
rate in history in the middle of a depression?
Of course not. Master illusionist Bernanke is just arranging
the props for his next big trick. The fact is, Bernanke anticipated the current
wave of deflation and set up a straw man (the banks) to deal with it, so
it wouldn�t look like he was simply printing more paper to finance the
deficits. As soon as rates on 10-year notes hit 4 percent, the banks (that are
borrowing money at 0 percent) will probably start to purchase Treasuries and
keep the housing and retail markets from crashing even faster. It�s called �the
old switcheroo� and no one does it better than the Fed.
Bernanke pulled a similar stunt after Lehman Bros flopped
and he and Paulson decided that it was time to dump $700 billion worth of
garbage assets on the public. The Fed chief and Treasury figured out the only
way they could hoodwink Congress was to foment a crisis in the credit markets
and then moan that if they didn�t get $700 billion to buy up toxic assets in
the next 48 hours �there wouldn�t be an economy by Monday.�
Congress swallowed it hook, line and sinker, and weeks later
funds were allocated for the Troubled Asset Relief Program (TARP) Of course, no
one in the financial media noticed that the storm in the credit markets was NOT
caused by �troubled assets� at all (for which TARP funds have NEVER been used)
but by skyrocketing LIBOR and TED spreads and other indicators of market
stress. Market Ticker�s Karl Denninger was the only blogger on the Internet who
figured out that Bernanke had deliberately caused the crisis by draining over
$100 billion from the banking system just 10 days after Lehman defaulted.
As soon as Paulson and Bernanke had pulled off their
multi-billion dollar heist, the Fed chief created lending facilities
(completely unrelated to the TARP) which provided government guarantees on
money markets and commercial paper. This lowered LIBOR and TED spreads
immediately and relieved the stress in the credit markets. The crisis had
nothing to do with toxic assets. To this day, none of the junk securities have
been purchased from the banks under the TARP program. Seven hundred billion
dollars have vanished in a puff of smoke. Poof!
lives in Washington State. He can be reached at email@example.com.
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