...(or, “Is That Your Retirement Account You’re Holding On To So Tightly? Or Are You Just Happy To See Me?” Said The Man From The Government)
So back in September 2008—in the throes of the Global Financial Crisis—the Federal Reserve under its chairman, Ben Bernanke, unleashed what was then known as “Quantitative Easing”.
They basically printed money out of thin air—about .25 trillion—and used it to purchase the so-called “toxic assets” from all the banks up and down Wall Street which were about to keel over dead. The reason they were about to keel over dead was because the “toxic assets”—mortgage backed securities and so on—were worth fractions of their nominal value. Very small fractions. All these banks were broke, because of their bad bets on these toxic assets. So in order to keep them from going broke—and thereby wrecking the world economy—the Fed payed 100 cents on the dollar for this crap.
In other words, the Fed saved Wall Street by printing money, and then giving it to them in exchange for bad paper.
Time passes, we move on.
Then, in November 2010, the Federal Reserve—still under Ben Bernanke—unleashed what is colloquially known as QE-2: The Fed announced that it would purchase 0 billion worth of Treasury bonds over the next eight months.
The rationale was so as to stimulate lending. But really, it was so that the Federal government wouldn’t go broke. The Federal government deficit for fiscal year 2011 is .6 trillion—the national debt is beyond 100% of GDP, at about trillion. The Federal government issues Treasury bonds in order to fund this deficit. Ergo, by way of QE-2, the Federal Reserve bought roughly 40% of the Federal government deficit for FY 2011. Add on other Treasury bond purchases by the Fed via QE-lite (the reinvestment of the excedents of the toxic assets on the Fed’s books), and the Federal Reserve is buying up half the deficit of the Federal government, as I discussed here in some detail.
In other words, the Fed saved Washington by printing up money, and then giving it to them in exchange for—well, not bad paper, but at leastquestionable paper.
So! . . . let’s see now . . . Fed money printing—check! Saving someone’s bacon (even though they shoulda known better)—check! Taking on dodgy paper—check!
Did it in 2008 for Wall Street, then did it again in 2010 for Washington.
But the key difference between these two events is, the banks didn’t have any more toxic assets, once they sold them all to the Fed.
But the Federal government will still have more Treasury bonds it will have to sell, once the Federal Reserve ends QE-2 this coming June.
The fiscal year 2012 deficit will be on an order of 10% of GDP—roughly .5 trillion. And 2013 and 2014? Around the same range.
Over at Zero Hedge, they are past masters at timing the funding needs of the Federal government. But we don’t need to go into the monthly figures of POMO purchases and Treasury auctions and all the rest of it. All due respect to Tyler and his wonderful team at ZH, all that is merely the mechanics of Federal Reserve monetization.
What we should look at is the simple, macro question: If the Fed ends QE-2 in June as they have said they will, who will take up the slack? Who will purchase between and 0 billion worth of Treasury bonds at yields of 3.5% for the 10-year?
To continue reading click the editorial link:
