Wall Street Journal's economic blog yesterday noted of the surge in the US Federal Bank's balance sheet.
WSJ's Tim Hanrahan reported, ``The U.S. Federal Reserve’s balance sheet expanded again in the latest week with asset holdings growing to $2.19 trillion Wednesday from $2.09 trillion a week earlier as reduced use of traditional lending facilities was again offset by a rise in the central bank’s holdings of mortgage-backed securities."
But according to Dallas Fed President Richard Fisher inflation isn't a threat or even a concern since the Fed would be able to engineer a reversal of these policies once economic growth kicks in.
``It is clear that we will grow our balance sheet even more as we complete our programs," Fisher said. "We are acutely aware ... that this may give rise to some apprehension among large holders of Treasuries and agency paper such as your (the Chinese) government," he said. But Fisher said the Fed is committed to short-circuiting "any inflationary consequences of its balance sheet growth."(Reuters)
This is highly presumptive for an institution that failed to foresee or even control this crisis from happening. Yet an exit strategy hasn't been publicly defined by the Fed or the US government, except for opaque general statements as the above.
On the other hand, the case against the Fed's ability to reverse the inflationary policies which risks the path towards hyperinflation has been strongly spelled out by Delta Global Advisors as quoted by Chris Whalen of Institutional Risk Analytics...
But according to Dallas Fed President Richard Fisher inflation isn't a threat or even a concern since the Fed would be able to engineer a reversal of these policies once economic growth kicks in.
``It is clear that we will grow our balance sheet even more as we complete our programs," Fisher said. "We are acutely aware ... that this may give rise to some apprehension among large holders of Treasuries and agency paper such as your (the Chinese) government," he said. But Fisher said the Fed is committed to short-circuiting "any inflationary consequences of its balance sheet growth."(Reuters)
This is highly presumptive for an institution that failed to foresee or even control this crisis from happening. Yet an exit strategy hasn't been publicly defined by the Fed or the US government, except for opaque general statements as the above.
On the other hand, the case against the Fed's ability to reverse the inflationary policies which risks the path towards hyperinflation has been strongly spelled out by Delta Global Advisors as quoted by Chris Whalen of Institutional Risk Analytics...
From Delta Global Advisors (all bold highlights mine)
``Historically speaking, the composition of the Fed's balance sheet has been mostly Treasuries. And the Federal Open Market Committee would typically raise rates by selling Treasuries from its balance sheet into the market to soak up excess liquidity. However, because of the Fed's decision to purchase up to $1 trillion in Mortgage Backed Securities (and other unorthodox holdings), it will not be selling highly-liquid US debt to drain reserves from banks. Rather, it will be unwinding highly distressed MBS and packaged loans to AIG. Not to mention the fact the Fed would have to break its promise of being a "hold-to-maturity investor" of such assets.
``Moreover, not only are the new assets on the Fed's balance sheet less liquid but the durations of the loans are being extended. According to Bloomberg, the Fed is contemplating extending TALF loans to buy mortgaged backed securities to five years from three after pressure it received from lobbyists and a failed second monthly round of auctions. That means when it finally decides it's time to fight inflation, the Fed will find it much more difficult to reverse course.
``But because of the extraordinary and unprecedented (some would say illegal) measures Mr. Bernanke has implemented, only $505 billion of the $2 trillion balance sheet is composed of U.S. Treasury debt. Today, most Fed assets are derived from the alphabet soup of lending programs including $250 billion in commercial paper, $312 billion of Central Bank liquidity swaps and $236 billion in mortgage-backed securities.
``Thus, our economy has become more addicted than ever to low interest rates. But because bank assets will now be collecting income at record low rates, when and if the Fed tries to raise rates it will only be able to do so on the margin. If Bernanke raises rates substantially to fight inflation, banks will be paying out more on deposits than they collect on their income streams. Couple that with their already distressed balances sheets and look out!
``Additionally, not only do the consumers need low rates to keep their Financial Obligation Ratio low, but the Federal government also needs low rates to ensure interest rates on the skyrocketing national debt can be serviced. Our projected $1.8 trillion annual deficit stems from the belief that the government must expand its balance sheet as the consumer begins to deleverage. In fact, both the consumer and government need to deleverage for total debt relief to occur, else we're just shuffling debts around and avoiding a healthy deleveraging entirely.
``In order to have viable and sustainable growth total debt levels must decrease, savings must increase and interest rates must rise. But that would require an extended period of negative GDP growth-a completely untenable position for politicians of all stripes. Ben Bernanke would like you to believe inflation will be quiescent and he can vanquish it if it ever becomes a problem. Just make sure you don't invest as though you believe him."
If the US government hasn't been able to resolve the issue of how to go about liquidating the banking system's toxic assets, it is equally absurd to believe that they can easily liquidate some of these into the market which are accounted for in the assets of the Fed's balance sheets.
As Professor Art Carden noted in the Mises Blog, ``Any social policy must be economically possible before it can be considered morally desirable".
The Fed's social policy doesn't seem economically possible, hence risks an undesirable moral outcome.
If the US government hasn't been able to resolve the issue of how to go about liquidating the banking system's toxic assets, it is equally absurd to believe that they can easily liquidate some of these into the market which are accounted for in the assets of the Fed's balance sheets.
As Professor Art Carden noted in the Mises Blog, ``Any social policy must be economically possible before it can be considered morally desirable".
The Fed's social policy doesn't seem economically possible, hence risks an undesirable moral outcome.
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