To Air is Human – The Fed Doubles Down

And so, the fairy godmother said, money is laid out as golden eggs from a golden goose. Got assets on your balance sheet that no one will buy and are tanking your “debt to equity” ratios to stop you from lending money? Is that what’s botherin’ you, bunky-bank? Not enough folks buyin’ those deficit-sustaining wonders – long term Treasury bonds (the Fed always buys and sells short term bonds to control the money supply) – Mister Government Man? Why jes’ let me get muh golden goose, and it’ll all be fine.

After all, gotta deal with those toxic assets; Dekom’s blogs told us we did. And Dekom pointed out that after AIG laid an EGG that wasn’t golden, we ain’t getting’ any new money anytime soon from Congress, so what’s a Federal Reserve Banker gonna do?! Bring out the financial M1A2 battle tank to blow those problems away or double down and double your last year’s release of that other M1 – money supply – outta thin air? Virtually “print” some big bucks to buy dem assets and tote dem bonds! Dekom said we needed at least $1 trillion, and by golly, we’re gonna increase the money supply accordingly. And so they did, on March 18^th.

The markets jumped up! Lending was around the corner, they hoped! Someone was answering their prayers and taking those bad assets away (or were they?)… But at what price? What do you pay for something, if you’re the Federal Reserve, that no one else wants to buy? What’s the fair price? The safe way is to buy those assets that aren’t really so toxic – government-guaranteed mortgage-backed securities – $750 billion worth plus the $500 billion they’ve already decided to buy earlier. But it does sort-of make mortgage-backed assets more valuable by creating a market. And now that the government is a direct lender, this does free up some other lending capacity in the private markets.

But what about those really bad assets still on the books? The Fed seems to hope that somehow the private markets, with a few more incentives from Uncle Sam, will start buying them critters. We’ll see… But this is still, to me, a bridge too far to see.

But if the someday your “virtual prints” will come is today, and if increasing the M1 money supply basically means there is just more money out there with no offsetting increase in underlying economic values, doesn’t that suggest that the dollar might lose its value and there might be an decrease in our buying power? Wouldn’t that make America corporate assets even cheaper for certain foreign buyers – who will remain nameless (but they aren’t in Europe or Latin America!)?

Let’s see what the market inflation monitors have to say about that theory. The March 18^th NY Times: “Gold prices rose $26.60 an ounce, hitting $942, a sign of declining confidence in the dollar. The dollar, which had been losing value in recent weeks to the euro and the yen, dropped sharply again on [the 18^th].” And the Fed is seeing increasing unemployment into 2010 even as other indicators suggest a possibility of a bottoming out in 2009. It ain’t nearly over folks!

Well, if you tweak one thing, some other problem is bound to pop up! Are we having fun yet?!

I’m Peter Dekom, and I approve this message.