Stimulus Checks Now Going To The Banks

Monday, October 20, 2008

After the helicopter drop of stimulus checks for Americans on Main Street in summer Ben Bernanke's money printing armada will point the flow of ever more Federal Reserve Notes (FRNs) on Wall Street, taking it from his testimony to Congress on Monday.
It is actually quite shocking to see the one-trick pony theory proven, as all the Fed can - and certainly will - do is create more debt.
An excerpt From the Testimony
In collaboration with governments and central banks in other countries, the Treasury and the Federal Reserve have taken a range of actions to ameliorate these financial problems. To address ongoing pressures in interbank funding markets, the Federal Reserve significantly increased the quantity of term funds it auctions to banks and accommodated heightened demands for funding from banks and primary dealers. We have also greatly expanded our currency swap lines with foreign central banks. These swap lines allow the cooperating central banks to supply dollar liquidity in their own jurisdictions, helping to reduce strains in global money markets and, in turn, in our own markets. To address illiquidity and impaired functioning in the market for commercial paper, the Treasury implemented a temporary guarantee program for balances held in money market mutual funds, helping to stem the outflows from these funds. The Federal Reserve put in place a temporary lending facility that provides financing for banks to purchase high-quality asset-backed commercial paper from money market funds, thus providing some relief for money market funds that have needed to sell their holdings to meet redemptions. Moreover, we soon will be implementing a new Commercial Paper Funding Facility that will provide a backstop to commercial paper markets by purchasing highly rated commercial paper from issuers at a term of three months.

Bernanke did not say anything really new. The Fed's decision to officially print unlimited of FRNs happened a week ago and markets are still reeling for more "liquidity." It is quite disturbing to see it proven again that all the Fed can is to offer more of its only product, i.e. fresh debt.
It is doing so at record rates, reports the Mogambo Guru.
...here in America, we destroy our money by creating more and more of it, which I measure with Total Fed Credit, which is the magical stuff that appears in the banks as an increase in credit available for lending.
And not only lending, but lending as a huge multiple of the increase in TFC, which went up by a staggering US$103.6 billion last week!
This is So Freaking Bizarre (SFB) that I slobber down my own chin when I say it exceeds the staggering irresponsibility of the days of Alan Greenspan since 1997 when he was driving the Federal Reserve over the dead, dying body of the dollar by increasing Total Fed Credit by $10 billion a month, which was enough to produce the current terrifying bubbles in stocks, bonds, housing, derivatives and growth of government!
Now, if $10 billion a month of new money and credit is enough to create all of that inflationary horror, then what in the hell is $103.6 billion in One Freaking Week (OFW) going to do? Gaaaaaah!
I find no consolation in the fact that the ECB conducted a €310 billion repo last week, outnumbering the Fed on the daily race into monetary inflation as never seen before in the past 35 years.
Is the Fed Only Buying Time Until After The Election?
One gets the impression that the Fed and especially Treasury secretary Henry Paulson are not really interested to find a solution to the gordian financial knot that threatens the global economy.
As Paulson has already made clear he won't be part of the next government it may be tempting to leave the mess to a Democratic president.
President Bush, probably having a hard time to grasp all these problems erupting in a place called Wall Street, New York, will also be more than happy to hang it all on the shoulders of his successor, no matter whether it will be Obama or McCain.
This may bring the current FRN strength to an end in November, once the realization sets in that the US is the world's biggest debtor and may only be able to repay after a good dose of hyper inflation. Then FRNs will be no exemption from the rule that all unbacked fiat currencies have ultimately returned to their intrinsic value.
With McCain in the drivers seat it may be a quick ride.
David Shvartsman has more analysis on Bernanke with a funny conclusion

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