Bernanke's Play = Monetizing the Debt

Quote from Daal:

inflation is a problem no doubt about it, but just let a few major players collapse and a spirals of margin calls take place and you would see inflation risk turn to dust. credit could collapse staggering amounts and deflation would prevail no matter what oil did, m3 would sink like a stone and the economy would freeze. you dont want that to happen even if it means a weaker currency
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I would tend to agree with this view.

The worldwide search for liquidity just doesn't stop with the "bad" collateral . . . it eventually gets to the "good" collateral as well. A lot of people here on ET fail to realize this, or simply cast it off as some sort of neat little economic Darwinism and that we will all be the better for it. They seem to think that this is merely an issue with the Citi's, and Countrywide's, and BofA's, and Merrill's of the world. Yet, nothing could be FURTHER from the truth!

Moreover, most of these people who are kicking and screaming the loudest about "Helicopter Ben" weren't even born yet when this Country was trying to come out of the 1980-1982 recession, let alone the '73-'74 debacle.

It's pretty easy to TALK tough when one wasn't even alive at the time to experience it.
Pretty amusing actually.

:D
 
Quote from gnome:

The Pandora's Box of monetizing bad debts has been opened... for anything and everything they "need" to or "want" to... "for the good of the people", you know... :mad:
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Gnome, with all due respect this is nothing new.
It has been going on for decades.
 
Quote from gnome:

Today, it's "AAA paper" [wink, wink].

Soon it will be junk bonds.

Then, title to foreclosed mortgages.

Eventually, it will become.. "Got a non-performing asset? Bring it to the Fed and we'll print some more money and take it off of your hands... the tax payer will buy all of your mistakes".

For "the good of the banking system", or "for the good of the country", or "for the good of the people".

You CAN connect the dots on this one, right?

I suspect the Fed has also taken similar actions covertly with T-Bonds... printing money and buying bonds to keep bond yields ridiculously low.
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Rather than buying bonds, i suspect the Fed trading desk has been, on balance, selling bonds into the weakening market. This would make more sense, and help keep the money supply in check.

The Feds hands are tied by the heavy deficits created by the Bush administration. Ultimately the only way out of this is to decrease expenditures (i.e, stop invading other countries and bring down costs of medical care) and/or increase productivity.

In the meantime we will continue to monetize the debt because it is our only politically acceptable option.
 
Quote from piezoe:

Rather than buying bonds, i suspect the Fed trading desk has been, on balance, selling bonds into the weakening market. This would make more sense, and help keep the money supply in check.

The Feds hands are tied by the heavy deficits created by the Bush administration. Ultimately the only way out of this is to decrease expenditures (i.e, stop invading other countries and bring down costs of medical care) and/or increase productivity.

In the meantime we will continue to monetize the debt because it is our only politically acceptable option.
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1. Money supply is NOT "in check"... racing ahead at a 18% annual clip right now.

2. "politically acceptable option"? Not acceptable to me... politically or otherwise!
 
Quote from Landis82:

Gnome, with all due respect this is nothing new.
It has been going on for decades.
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Directly monetizing bad debts is another step in the wrong direction... a BIG one.

I'd think everyone would be less sanguine about it...
 
Quote from gnome:

1. Money supply is NOT "in check"... racing ahead at a 18% annual clip right now.

2. "politically acceptable option"? Not acceptable to me... politically or otherwise!
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If you read my post again you will see that i did not say "the money supply is in check". Though you might reasonably have inferred that from my comment. It is true, however, that selling Fed assets will help hold down the rate of supply increase. Check the Fed website, i think you will find, contrary to popular ET thinking, there have been recent periods when the money supply (according to Fed calculations anyway) actually decreased.

The Fed can continue to hold up the market by weakening the dollar up to the point that no one wants dollars. That is a long way off.
 
Quote from gnome:

Today, it's "AAA paper" [wink, wink].

Soon it will be junk bonds.

Then, title to foreclosed mortgages.

Eventually, it will become.. "Got a non-performing asset? Bring it to the Fed and we'll print some more money and take it off of your hands... the tax payer will buy all of your mistakes".

For "the good of the banking system", or "for the good of the country", or "for the good of the people".

You CAN connect the dots on this one, right?

I suspect the Fed has also taken similar actions covertly with T-Bonds... printing money and buying bonds to keep bond yields ridiculously low.
More...

heads risk taker wins

tails taxpayer loses
 
Quote from gnome:

Directly monetizing bad debts is another step in the wrong direction... a BIG one.

I'd think everyone would be less sanguine about it...
More...


Is it? Hoover tightened the money supply in the early 1930's and most economists today say that deepened the Depression. Dollars became more scarce but debts remained unchanged, making it harder to make payments. Defaults increased and bank failures ballooned.

Inflation is the debtor's friend. Pump more dollars into the system, dilute the currency and debts are easier to pay off.* Everybody loves to trash Bernanke but I think we'll see in the long run that his approach will cause less pain than Hoover's.

*except for variable-rate notes!
 
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