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Wednesday, March 18, 2009


quantitative easing is here

the FOMC release via calculated risk.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments.

if foreign demand is off and domestic savings are inadequate, the alternatives are monetization or regurgitation from other capital markets.

UPDATE: john jansen.

UPDATE: karl denninger, earlier today previous to this announcement, on an underrated threat highlighted by a 7.35:1 bid-to-cover in the bank of england's purchasing of gilts this morning.

Back in January I posted a Ticker in which I made clear what was likely to happen if Bernanke actually attempted to do (as opposed to threatening) QE:

Bernanke bluffed and the bond market called it. He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off. In addition, the market no longer believes him, as evidenced by today's price action. A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans. If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float. That stunt will cause the dollar to implode and we wind up exactly like Iceland. Overnight. Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie. Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.

Ding. The BOE now has seen exactly what happens when you promise as a government to overpay for something - everyone hits your bid immediately!

UPDATE: my comment at zero hedge:

i'll just stupidly wager that this does nothing.

the fed will inflate its balance sheet by adding t-bonds to the asset side and currency in circulation to the liability side.

the treasury will take the fed's dollars and spend them, which will fill some but not nearly enough of the output gap. the spent cash will quickly find its way to the banks either as loan repayments or deposits. banks will thereby deleverage and/or put deposits on reserve at the fed because there's barely a decent credit out there. so the fed will see reserve balances balloon yet further, enabling it to go out and fund some more alphabet soup or buy some more treasuries.

ergo -- big big fed -- deleveraging banks -- massive excess reserves -- continuing deflation.

the reaction in the ten-year today, though, is certainly not nothing.

UPDATE: amid analyst reaction comes this illustration of what the announcement means for the fed balance sheet. the following commentary from monument securities' mark ostwald:

a) This looks to be an attempt to achieve maximum impact by co-ordinating the Fed move with the Treasury’s (Geithner’s) toxic asset plan details.

b) For that they have sacrificed the stated intention at the last meeting to wait and see the impact of the TALF before opting for what is the last card they have to play.

c) As for Bernanke’s cherished principle of transparency, that has now clearly been thrown overboard, and by opting to enact this just days after
Bernanke expressed the view that the US economy would recover in 2010, Mr Bernanke’s credibility is shot to pieces.

d) Will it work? Well it lower Treasury yields significantly, it will also offer market makers to stuff the Fed with Treasury paper at inflated prices, as the BoE’s QE buybacks has done for the BoE. Given that swap spreads ballooned out immediately, and that TIPS breakvens spiked higher, the intention “to help improve conditions in private credit markets” looks to be very wishful thinking in the first instance.

Sadly Anglo Saxon policymakers are digging an ever deep hole, with no signs that the measures do anything more than stave off an even worse outcome, but lacking the leadership qualities and ideas that would offer hope that they are capable of leading us out of this crisis. Should Mr Geithner’s tox asset plan continue to rely on market pricing mechanism (these are not functioning) and private sector capital funding for it, then the auspices for a resolution of the current crisis are very, very poor.

bernanke's credibility may not be missed, now that the fed has fired its last bullet. i will be extremely interested to watch excess reserves in the coming months, as will everyone else. i suspect that a lot of TALF and QE will end up quickly stagnated to excess reserves with no stimulative effect, and that government fiscal measures will continue to be the only important ones even as interest rates approach and exceed all-time lows.

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I agree with your comments, but would add the caviat that "no effect" would be the best possible outcome for this strategy. Until now we have been saved by the perception that the dollar is one of the few safe havens left in the world. With this move we are completely blowing our cover. While the treasury and the fed are different extensions of the US government, do they think they can fool people that the treasury can sell debt obligations and the fed can buy them and this is a legitimate customer / supplier relationship? Unless all the rest of the governments do the same thing (which is not beyond the realm of possibility) creditors will view this as a shell game. Our only two options going forward are taking on debt which will cap our growth for possibly decades, or inflate to pay the debt down with cheaper and more plentiful dollars. This move is the tell that we are taking the second choice. This changes perception from "safe haven" to "almost anything is preferable to this!" Is there something I am missing here?

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c -- remember this from earlier in the week?

“China is worried that the U.S. may solve its problems by printing money, which will stoke inflation,” said Zhao Qingming, a Beijing-based analyst at China Construction Bank Corp., the country’s second-biggest lender. “If the U.S. can make sure this won’t happen, then China will continue to invest.”

lol -- i can't imagine this kind of decision gets made without placing a call to premier wen jiabao, but it's panic stations in the neoclassicists camp and they could be running wild.

that said, imho our best solution is for gov't to sustain demand while private sector repairs balance sheet -- borrow out of the banking system what private sector pays into it through savings and debt paydowns. the banks can recapitalize on earnings over time while this goes on. GDP need not collapse, and the dollar needn't be annihilated in some monetarist idiocy. slow growth for several years, but in the end you get a heavily indebted sovereign and a clean private sector. then and only then can uncle sam start to control expenditures.

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