Thursday, Sep 25, 2008
Is the Federal Reserve itself nearly bankrupt?
The Oil Drum: Paulson and Bernanke ratchet up the blackmail talk
The Fed has lent out $600 billion of its $800 billion balance sheet in an alphabet soup of emergency liquidity facilities innovated over the past year. Under Enron-style accounting, toxic waste securities were used as collateral for US Treasuries at 85% of face value. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. The Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended.
The Fed is effectively "broke." This is not supposed to happen to a central bank, which can print money without restriction. In order to take on more toxic collateral from the banks, it would need to actually print money, which would immediately be visible and would be seen as very inflationary.
24 Comments
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1. malct said...
OK here's the Bush smirk video - ironically complete with exonmobil advert
http://www.cbsnews.com/video/watch/?id=4476789n
2. mark wadsworth said...
I watched these people on telly yesterday, and they are just like the global warmenists. The more they talk about impending crisis the less I believe them.
Here's what I posted elsewhere on how this could and should be fixed:
"Banks do not trust other banks, that would appear to be true.
This is easily fixed. Just merge ALL banks into one mega-bank. There is then no net counter party risk. They can collapse and cancel all their inter-company balances*, hey presto, problem (largely) solved.
There remains the problem that even the consolidated mega bank probably has negligible or negative net assets. The next step is to come to an arrangement with long term bond holders for them to forgive 20% of the debt and swap this for new share capital. Hey presto, bank recapitalised!
Banks' long term bonds are trading at 80p in the £ anyway, so this is only crystallising a loss priced in by the markets. For sure, existing shareholders will be wiped out or diluted down to diddly squat, but again, so what? Their shareholdings have gone down 80% or 90% in value in the past year or two, is it so terrible if they lose another 90% of what's left? Bringing total losses to 98% or 99%?
And not a single penny of taxpayers' money is involved!
* The rate of churn is staggering. Never forget that banks are just middlemen. Total UK mortgages and loans outstanding (assets) are about £1.5 trillion and total household savings, banks' corporate bonds etc are also about £1.5 trillion (net assets negligible, but we knew that).
But if you add up the balance sheets of the big UK banks, total assets/liabilities are shown as £5 trillion. In other words, money goes round in a circle three times."
3. malct said...
from Richard Benson
One of my recent articles explained why the US Treasury deficit, without financial bailouts or government stimulus, was heading towards $600 billion a year. Another one forecasted that the bill for the financial bailouts would also be huge. This week, the cost of the bailout was confirmed with the nationalization of Fannie, Freddie, and AIG, added to the failure of Lehman Brothers, and the new massive $700 billion plus Treasury "Taxpayer Cash for Wall Street Trash" legislation. The total bill for this legislation plus existing bailouts will cost taxpayers more than a trillion dollars paid out over the next three years.
It's important to realize that this bailout plan adds nothing to economic growth and was necessary to prevent a worldwide global collapse of the financial system. The proposal will shift hundreds of billions of taxpayer dollars to purchase rotten financial assets from Wall Street institutions and banks for more than they are worth. This is all happening as our economy has been weakened by higher unemployment and non-financial corporate failures, and we're bracing for a worldwide recession that is unfolding in never-ending newspaper headlines. Even now, before America has a newly-elected President and a fresh Congress in office, legislators in Congress have already started discussions to launch another stimulus package. My bet is that the stimulus needed will total at least $500 billion. Trillion dollar federal deficits for the next few years are now inevitable and as this truth sinks in, the consequences will be enormous. Here are the reasons
4. planning4acrash said...
FYI, Peak Oil is a scam and its bloggers are CIA fronts, but, theoildrum has some great resources.
5. drewster said...
Isn't anybody going to comment on this particular article, rather than just on the crisis in general? The idea that the Fed itself needs saving would explain why Bernanke is behind this plan. The bailout is the best way for Bernanke to cover his back and avoid the blame for having lost so much of the Fed's reserves. It always seemed strange to me that this quiet academic economist with an in-depth knowledge of the Great Depression would support such a bailout, but now the motives have become clear.
6. stillthinking said...
That rang a bell. The crack up occurs when the government cannot improve their financial position even by printing money. I am absolutely certain Von Mises said this but I can't find the exact bit cos in a rush.
7. drewster said...
p4ac,
The historical evidence for peak oil is pretty compelling. America peaked in the 1970s, the UK's north sea oil peaked in 1999 or thereabouts, it follows that sooner or later every country's oil production will peak and decline. But hey if you know of a miraculous way of producing oil cheaply and indefinitely then drop me a line and we'll enter into business...
8. planning4acrash said...
9. layers said...
@Drewster - regarding 'Peak Oil' - check the USSR's research on drilling extremely deep wells (2 miles plus), where they discovered that they could hit oil every time - not saying this is cheap, but evidence suggests that oil is a macrobiotic substance produced by the Earth, and not by dead dinosaurs (and really, was that ever seriously proposed as a source of the black stuff ;-)
And also if oil were finite then why do certain wells replenish themselves?
My bulls**'ometer is usually calibrated inversely to what is being portrayed as mainstream, generally accepted fact.
As for the article, Al Martin (almartinraw.com), used to talk about Bushonomics and that by 2010 the US, due to huge debt, won't be able to service its debt levels and will default, which now, given all this extra lending is more much more likely to occur. I wouldn't be surprised if this is one more raid by Bushco. before the US collapses. However, one wonders too, if this could be the excuse Bush et al have been looking for to suspend the coming elections and rule by decree - notice how McCain has said he's postponing his campaigning until this 'crisis' is over!
This lot are cunning as foxes, so any predictions are quite futile, however, again, if 'they' want $700billion, it's for a VERY good reason, and it will have nothing to do with them wanting to help the average person.
Will Congress do anything, unlikely, given how many of them are already bought and paid for.
Full-tilt fascism is the only game in town.
And, can you believe that Paulson has snubbed meeting Brown – the US really are going it alone a la Germany circa 1935….
10. planning4acrash said...
peak oil is a fraud/scam as a cover for currency devaluation.
11. fubar said...
Anyone who says peak oil is a scam needs their head examined. It's proof that you don't know anything about it and haven't bothered reading any of the science. Yes the Oil drum is a fantastic resource. How the hell do you know they are CIA stooges?
12. fubar said...
Oh I know. It's because they DISAGREE with the conspirajunta. Must be CIA moles.
13. fubar said...
Should have posted this above.
14. baroo said...
"Quick, they're saying things that I don't agree with: Call in the CIA!"
15. drewster said...
P4ac,
You make a good point. From what we've seen in the last year, a lot of the price changes in oil have been caused by speculation rather than by fundamentals of supply and demand. A lot of money is invested in generalised commodity funds which buy up oil, gold, and many other commodities lumped together; rather than picking individual commodities. This largely explains why oil and gold (and many other commodities) have risen synchronously.
My main counterpoint is that global peak oil has barely begun. In the past supply was rising sufficiently to offset increased demand. Since 2005 oil production has been flat. It might be too soon to see a direct effect on the oil price today, but there will be an effect sooner or later.
As a secondary point, note that Peak Oil is a theory about only the production levels of oil, nothing else. The links between supply, demand, and price contain too many variables to make a reasonable prediction on prices.
layers,
There's no evidence of these magic Russian wells. There are a few thousand conspiracy websites all devoted to this nonsense but it's about as plausible as the water-fuelled car.
In the 17th century, Galileo's ideas about the Earth being round caused a storm in the Vatican. It took a long time for his ideas to become mainstream. Peak Oil was proposed in 1956 and was widely ridiculed until the 1973-4 oil crisis proved it to be true. Your bulls***'ometer would have been correct in Galileo's time and in the 1950s, but you'd be wrong to rail against either Peak Oil Theory or Round Earth Theory today.
16. drewster said...
Btw before this descends into yet another flame war, there's actually a fairly interesting article at the top of the page. It's about the Federal Reserve itself having to be bailed out by the taxpayer; the alternative being printing more money, which would cause inflation and massive loss of confidence in the dollar. Kinda worth a read, I thought....
17. planning4acrash said...
The Federal Reserve is incapable of becoming bankrupt, post Bretton Woods agreement, this is the problem. They can't become bankrupt, but they can bankrupt all others who do not hold unleveraged real assets or physical gold and silver:
Lew Rockwell 17. Austrian Theory of the Business Cycle Lew Rockwell interviews Jörg Guido Hülsmann
18. planning4acrash said...
Drewster, no, speculators have helped their customers hedge against fallout from dollar devaluation, helping to retain some wealth in the populace. Without them, your pension would be fried. I am a speculator by buying gold to save my sorry ass. Am I the culprit? VIVA LA FREE MARKET, VIVA LIBERTY!!!! VIVA LA REVOLUTION!!!!!!
19. beartil2010 said...
That's the point of the article isn't it - they become effectively 'bankrupt' ie. insolvent, meaning they are left with the printing press. This then goes into overdrive and causes hyperinflation, which crushes the dollar, menaing nations all over the world will depeg from the dollar and it will no longer be the defacto gloabl currency. This damages American pre-eminence.
I thought the article was extremely interesting and explains why this attempt at a bailout is so brazen.
20. drewster said...
bear,
I'm glad somebody understood it. I really despair in this country's educational system sometimes...
21. layers said...
Drewster - OK, Russian thing could be disinformation, I agree, but you conveniently left out the bit about wells re-filling, or is that conspiracy too? Either way Peak Oil is rubbish, there's plenty of oil in the world, but I wouldn't be so rude as to say people who disagree with this need their heads examined ala FUBAR.
Also, not sure what's causing you to despair of the country's educational system, but if it's based on the bloggers here, then I find your comment very odd. Care to disclose your highest level of education? Personally I have a Masters.
22. fubar said...
Moi....? heheheh.
23. shipbuilder said...
21. layers said...
"Drewster - OK, Russian thing could be disinformation, I agree, but you conveniently left out the bit about wells re-filling, or is that conspiracy too?"
Could this be how wells are refilling, perhaps?;)
http://www.youtube.com/watch?v=LywM3WYo-9Y
24. p. doff said...
21. layers said...
Personally I have a Masters.
I bet you five bob it's not in geology or palaeobotany!!!