Thurs. the 8th Bernanke was said to have said in response to the insolvency crisis that decisive, creative action was due....what did he have in mind? He has essentially infinite amounts on his mind.
The Fed’s Emergency Meeting
By Duncan DavidsonApr 4, 2010, 11:49 PM
The Fed called for an emergency meeting Monday morning, which likely means they will raise the Discount Rate a second time. They raised it on Feb 18, and the USD strengthened. Monday is a bank holiday in Europe. so reaction may be muted until they Euro banks wake up Tuesday am. (Also, the recent pattern of a Monday Pump up may be delayed to Tuesday, due to this holiday.)
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Or is something else going on? After ObamaCare passed, the Fed had a hard time with auctioning off Treasuries, and has more to offload this week. Perhaps this emergency meeting will reconsider ending QE so the Fed can prop up the auctions.
Also, last week the Fed revealed that its Maiden Lane program (where it bought mortgage backed securities – the toxic waste of the housing bubble) has left it holding $2.4T of assets of questionable value. The Maiden Lane III portfolio is only worth 39c on the Dollar. This means the Fed has assumed an impaired balance sheet, and needs to fix it. One way to do this is to sell off or swap out the toxic debt, and buy Treasuries to slowly return to its historical quality of reserve assets. Thus rather than explicitly continue QE, it may begin a swap program.
Whichever, the Fed is in a bit of a pickle: it needs to successfully fund the huge deficits, and at the same time exit from extraordinary measures. More after the Fed’s meeting.
Reasons for panic at the Fed
The Fed had a hard time with auctioning off Treasuries, and has more to offload this week. Treasury Yields are breaking up. Worse, the Fed is out of room out on its balance sheet, as can be seen in graphic below.
(The Fed also has outstanding commitments to buy 104 billion mortgage-backed securities not shown in the chart below)
The Fed faces the envious choice of allowing the treasury market to slowly breakdown or resuming its quantitative easing (money printing) to prop up auctions (which would fan inflation fears and scare investors out of the dollar, causing either the breakdown of the treasury market or even more quantitative easing).
In any case, the last thing the Treasury and Federal Reserve need at this point is anything else that would put pressure on treasury prices, which explains why Secretary Geithner is rushing off to China.
Isn't that also known as...."counterfeiting"?