I’ll keep this short, but it bears watching because it has a lot do with whether a lot of us get to keep our jobs.
In previous rants I’ve decried what the Bush Fed, which is still the Bush Fed, did on the eve of Bush leaving office. While Shrub did warn in off-the-cuff remarks that ending the wars he started would be someone else’s problem (the sheer magnitude of that incompetent arrogance should rank right up there with Louis XV’s "L’apres moi, le Deluge."), he left US with a much larger problem, not only systemic, but historic, that being the Bailout with no provision for sustaining the actual living breathing economy (i.e., the working and small business classes).
Now the same Fed Chairman who brought us the formal merger of Wall Street and the US Government is supposedly considering how to extricate the Fed (and the US Treasury) from that merger, according to headline articles in the print news, notably the Washington Post. Here’s what’s about to happen.
The TALF, the Fed’s vehicle for loaning out bucks the banks won’t lend to business, whose value no one is sure of, is about to expire next month. So, without a Stealth TALF staying in place, there will be even less money in the system for businesses which need to meet payroll, etc., to whom the big 5 banks, who control 60% of the private market cash, also aren’t likely to be lending because they can play the spread between the Fed’s low rates and international markets instead of giving a good damn about American small business who employs 50% of the workforce.
Second, the Fed wants to phase out the TARP. The assets the Fed holds, it now wants to begin selling, so not only will the Fed stop supporting the banks who are either playing the spread or who will collapse without free money, the Fed also wants to start selling the fragile mortgage backed securities it took as assets at 100 cents on the dollar when likely they were worth only 60 cents on the dollar to begin with (the difference being – you guessed it – us taxpayers are on the hook).
If the Fed begins selling these MBS, the price is anyone’s guess, sine housing prices have not recovered, so the assets may still only be worth 60 cents, or possibly less. Additionally, if the Fed goes into the market as a seller, it will stop backing more MBS which are still being packaged and sold to the Fed by the banks out there who are still taking on mortgages because they have – or, soon, had – a guaranteed market for them called Fannie and Freddie – both of which are likely due for yet another bailout.
With the end of TALF and the TARP, the Fed will seek to recover its balance sheet, but what happens to interest rates? The Fed has ZIRPed (Zero Interest Rate Policy) already, it can’t lower interest rates past zero. It also can’t raise rates when joblessness shows no forecast of easing. What does it want to do?
That is why everybody ought to be watching Bernanke on CSPAN (DVR, Tivo, or calling in sick). The news says there is pressure to raise rates. If that happens we can kiss the housing recovery goodbye – as anemic as it already is – and even more importantly, the economy will be teetering on a cash flow crisis because the bank rates will go up, too, as if anybody needed that.
Supposedly Bernanke still has an ace in the hole which is reserve interest rates – the new power of the Fed to pay interest rates on cash the banks park at the Fed because they don’t want to lend it out because they can at least be sure they’ll get their money back. Bernanke wants to soak up more bank cash – which the banks won’t lend – by raising those reserve deposit rates.
And Obama wanted Bernanke to stay at the Fed why?
To stabilize the economy?
To support bank lending?
Really.
You can guess what will happen to the $30 Billion Obama wants to lend to small businesses after Bernanke starts to drain more cash from the markets. It will be used by small businesses just to keep the doors open, never mind new jobs. And that’s assuming the idea gets past the idiots in the Senate who are even now, thank you again, Max Baucus, et al, trying to downsize the federal crumbs (your tax money!) that might fall off the table for us small fry.
The sheer monumental stupidity of the Federal Government impresses me more very day.