Can the Fed buy anything it wants?

[madfranks]

Is it correct that the Federal Reserve can use its money printing power to purchase any asset it deems appropriate for its balance sheet? If so, and if they use that power to purchase tangibles, how does that fit in with the whole "money as debt" concept? Let me expand this line of thought: right now the Fed has been spending its QE money on taking over or monetizing debts, i.e. buying T-bonds (debt instruments) or right now mortgage securities (debt instruments). What if the Fed decided to print $1 billion and purchase gold on the open market? That $1 billion would not be debt-based money, there would be no "hole" into which the money would disappear when the proverbial loan is paid off, because it was injected into the economy without a debt attachment. And it doesn't have to be gold, it could be anything real, like properties or factories.

This line of thought occurred to me when I was considering the implications of a deflationary collapse of the FRN (thanks to Carl). If deflation threatens to take down the whole economy, could not the Fed pick favored owners of some commodity, pay outrageous amounts of money to purchase assets from this owner, with the intent that they would spend this "debt free" money into the economy, saving off deflation and making them incredibly rich in the process?

[Golden]

Yep. Helluva wrap around effect eh?

[Shami-Amourae]

They (http://en.wikipedia.org/wiki/Rothschild_family) have the power of God. They (http://en.wikipedia.org/wiki/Rothschild_family) are God now.

[gunDriller]

they can buy anything they want, but if the appearance of buying Commodity 'whatever' is inconvenient, the US gov. has thousands of proxies to do the work for them.

AIG was one example, they were initially used by the CIA because they had a lot of information about overseas infrastructure, because AIG insured a lot of it. this was a relationship that developed during the Cold War.

i.e. the CIA has their tentacles deep into AIG. that's for intelligence about foreign countries - that's the product for the CIA, insurance profits & misc. back-scratching benefits are the reward for AIG.

hence the need to keep AIG from going under. they have a lot of secrets, it would be inconvenient for them to go bankrupt.


there thousands of companies like AIG out there, servants to the US gov. & Israel.

and many thousands more private contractors.

along with the $Trillions that went 'missing' in the years preceding 9-11, one of the announcements about it being made on 9-10-01.

those $Trillions would be a lot of whatevers.


so yes, the US gov. can buy anything it wants. i don't know if the Fed can. i don't think they would want to get caught buying porn companies.

[Golden]

so yes, the US gov. can buy anything it wants. i don't know if the Fed can. i don't think they would want to get caught buying porn companies.

yea coz you know the justice dept. will come down hard on them. lol

[beefsteak]

Eye opening AIG comment I hadn't heard before, gunny. Thanks for headzup on that one. Interesting how "they think" as compared to the "rest of us."

[Sparky]

Technically, there are restrictions as to what they can buy, but as Karl Denninger has pointed out repeatedly, they simply ignore them.

They are essentially doing what you have described. Right now they are doing it with housing. By buying MBS's, they are propping up the price of the housing commodity. In essence, they will own every house for which there is a future mortgage default. However, they are buying them at such a high price compared to their present value that it will take a lot of future inflation and leveraging for them to turn a profit.

And of course they do this routinely with equities (stocks), which is why the price of stock is so distorted. But the stock market is much easier for them to manipulate and make a profit. And they buy equities when the market is falling, so they are paying a bargain price compared to present value. What they are doing with housing is quite different.

That's what make the current activity is so precarious, and a possible "end game" scenario in GSUS-speak. How do they unravel the trillions of dollars worth of mortgages that they now own? I think the answer is that they have embarked on a very long term plan that will ultimately rely on inflation.

Let's say the actual price they have paid for those mortgages is about half their true value, on average. How much inflation will be required to get their money back? At 5% annual inflation, compounded it will take 14.5 years. That's not horribly long in the grand scheme of things. At 10% inflation it would take a little over 7 years.

This is why I don't buy into the hyperinflation scenario. It's really not necessary for them to accomplish their goals. Ten years of moderate to high inflation (5-10%) should do the trick.

[madfranks]

Technically, there are restrictions as to what they can buy, but as Karl Denninger has pointed out repeatedly, they simply ignore them.

They are essentially doing what you have described. Right now they are doing it with housing. By buying MBS's, they are propping up the price of the housing commodity. In essence, they will own every house for which there is a future mortgage default. However, they are buying them at such a high price compared to their present value that it will take a lot of future inflation and leveraging for them to turn a profit.

And of course they do this routinely with equities (stocks), which is why the price of stock is so distorted. But the stock market is much easier for them to manipulate and make a profit. And they buy equities when the market is falling, so they are paying a bargain price compared to present value. What they are doing with housing is quite different.

That's what make the current activity is so precarious, and a possible "end game" scenario in GSUS-speak. How do they unravel the trillions of dollars worth of mortgages that they now own? I think the answer is that they have embarked on a very long term plan that will ultimately rely on inflation.

Let's say the actual price they have paid for those mortgages is about half their true value, on average. How much inflation will be required to get their money back? At 5% annual inflation, compounded it will take 14.5 years. That's not horribly long in the grand scheme of things. At 10% inflation it would take a little over 7 years.

This is why I don't buy into the hyperinflation scenario. It's really not necessary for them to accomplish their goals. Ten years of moderate to high inflation (5-10%) should do the trick.

This begs the question, does the Federal Reserve need to turn a profit? What if they take a loss? What are the implications for the market if the Fed overpays and accepts a loss for something?

If the Fed is able to take a loss on its purchases without deleterious side effects (and I don't know what the side effects would be), then in theory it could turn the tide of a deflationary recession by overpaying for tangible assets and accepting the loss. It's inflationary, but the new money is not debt money, it's permanently part of the economy.

[gunDriller]

while the Fed & the US gov are diddling the economic numbers with their silly games, the real economy is shrinking at real noticeable rate.

GNP growing at 2% a year, with 10% a year real price inflation = 8% a year shrinkage in the national economy.

because the population is growing, the economic numbers per capita are even worse.

obviously the 10% for inflation is a judgment call. i think it's an accurate number for US inflation, taking in food prices, energy prices, cost of living etc.

based on things i buy or price repeatedly over a period of years, e.g. 50 pound bags of birdseed, bags of sugar, 15.5" x 20" gray bus-boy trays, coffee, bacon, clothes, etc.

[Libertarian_Guard]

This begs the question, does the Federal Reserve need to turn a profit? What if they take a loss? What are the implications for the market if the Fed overpays and accepts a loss for something?

If the Fed is able to take a loss on its purchases without deleterious side effects (and I don't know what the side effects would be), then in theory it could turn the tide of a deflationary recession by overpaying for tangible assets and accepting the loss. It's inflationary, but the new money is not debt money, it's permanently part of the economy.


You've got your thinking cap on! Damn good questions.

I don't have the answers, but I'll check back, hopefully something logical can be injected here, but in the end (whenever that is?) you can't get something for nothing. A price will be paid.

[mamboni]

Technically, there are restrictions as to what they can buy, but as Karl Denninger has pointed out repeatedly, they simply ignore them.

They are essentially doing what you have described. Right now they are doing it with housing. By buying MBS's, they are propping up the price of the housing commodity. In essence, they will own every house for which there is a future mortgage default. However, they are buying them at such a high price compared to their present value that it will take a lot of future inflation and leveraging for them to turn a profit.

And of course they do this routinely with equities (stocks), which is why the price of stock is so distorted. But the stock market is much easier for them to manipulate and make a profit. And they buy equities when the market is falling, so they are paying a bargain price compared to present value. What they are doing with housing is quite different.

That's what make the current activity is so precarious, and a possible "end game" scenario in GSUS-speak. How do they unravel the trillions of dollars worth of mortgages that they now own? I think the answer is that they have embarked on a very long term plan that will ultimately rely on inflation.

Let's say the actual price they have paid for those mortgages is about half their true value, on average. How much inflation will be required to get their money back? At 5% annual inflation, compounded it will take 14.5 years. That's not horribly long in the grand scheme of things. At 10% inflation it would take a little over 7 years.

This is why I don't buy into the hyperinflation scenario. It's really not necessary for them to accomplish their goals. Ten years of moderate to high inflation (5-10%) should do the trick.

Good analysis Sparky. I think you've read the FED's plan perfectly. But let's not forget that the best laid plans of mice and central bankers often go awry. If money velocity turns higher in the US and/or all those trillions of US dollars held abroad suddenly come home in pursuit of hard assets via a dollar panic, then price inflation here will explode. Bernanke cannot control inflation in real time. He can only react to it and with uncertain effect.

[mamboni]

This begs the question, does the Federal Reserve need to turn a profit? What if they take a loss? What are the implications for the market if the Fed overpays and accepts a loss for something?

If the Fed is able to take a loss on its purchases without deleterious side effects (and I don't know what the side effects would be), then in theory it could turn the tide of a deflationary recession by overpaying for tangible assets and accepting the loss. It's inflationary, but the new money is not debt money, it's permanently part of the economy.

The FED does not need to turn a profit. In fact, the FED is insolvent right now. The only thing preventing a FED bankruptcy and dollar panic is an ignorant public and financial system that has no alternative to the extremely deep and large US bond/credit market - yet.

[Sparky]

This begs the question, does the Federal Reserve need to turn a profit? What if they take a loss? What are the implications for the market if the Fed overpays and accepts a loss for something?

If the Fed is able to take a loss on its purchases without deleterious side effects (and I don't know what the side effects would be), then in theory it could turn the tide of a deflationary recession by overpaying for tangible assets and accepting the loss. It's inflationary, but the new money is not debt money, it's permanently part of the economy.

Don't lose site of who the Fed is. It's all the big banks, with JP Morgan Chase as the big dog. Do they need to turn a profit? No. Will they? Yes. Is your experience that the big banks take action because they are benevolent? I don't think so. Like everything else that Congress does, they are accepting the short term help of the Fed in order to save them politically, with the promise that there will be a handsome payoff in the end. Remember, the Fed doesn't want the banking system to fall apart; they ARE the banking system. So they take several trillion dollars of liability on their balance sheet in order to keep their game going, they sit tight and let the illusion unfold over several years, and then they cash in via inflation.

Think about it: We're always talking about holding real assets (like land and precious metals) instead of fiat, because we know that fiat leaks value year after year. So what has the Fed just done? It's traded 3 trillion dollars of fiat for 1.5 trillion dollars of real assets (foreclosed homes), knowing that in time inflation will recoup their real losses and begin to pay a real gain. They're Mr. Potter from "It's a Wonderful Life", except they are forced to overpay in the short term to keep their rigged game going.

[Horn]

One of my principal objectives as Chairman has been to make monetary policy at the Federal Reserve as transparent as possible. We promote policy transparency in many ways. For example, the Federal Open Market Committee explains the reasons for its policy decisions in a statement released after each regularly scheduled meeting, and three weeks later we publish minutes with a detailed summary of the meeting discussion. The Committee also publishes quarterly economic projections with information about where we anticipate both policy and the economy will be headed over the next several years. I hold news conferences four times a year and testify often before congressional committees, including twice-yearly appearances that are specifically designated for the purpose of my presenting a comprehensive monetary policy report to the Congress. My colleagues and I frequently deliver speeches, such as this one, in towns and cities across the country.

The Federal Reserve is also very open about its finances and operations. The Federal Reserve Act requires the Federal Reserve to report annually on its operations and to publish its balance sheet weekly. Similarly, under the financial reform law enacted after the financial crisis, we publicly report in detail on our lending programs and securities purchases, including the identities of borrowers and counterparties, amounts lent or purchased, and other information, such as collateral accepted. In late 2010, we posted detailed information on our public website about more than 21,000 individual credit and other transactions conducted to stabilize markets during the financial crisis. And, just last Friday, we posted the first in an ongoing series of quarterly reports providing a great deal of information on individual discount window loans and securities transactions. The Federal Reserve's financial statement is audited by an independent, outside accounting firm, and an independent Inspector General has wide powers to review actions taken by the Board. Importantly, the Government Accountability Office (GAO) has the ability to—and does—oversee the efficiency and integrity of all of our operations, including our financial controls and governance.



Read more: http://www.businessinsider.com/ben-bernanke-speech-five-questions-about-the-federal-reserve-and-monetary-policy-2012-10#ixzz28JQp4K8X

[TheNocturnalEgyptian]

It seems like you are getting at "is it possible to set up a benevolent/non-destructive monetary system" and yes, it is. They just won't. I am sure all of us could think of ways to restructure the system so the currency supports society instead of draining it.