Now I Get It! The Fed is the Bad Bank!!

I totally get it. It took me a minute and I thought for a moment there that we'd tossed out that boneheaded idea to nationalize banks (nationalize? How about swoop in and shut down instead?) but now it is painfully clear to me that we are moving forward with the Bad Bank idea. And guess who gets to be bad bank? The dirty Fed of course!


The Federal Reserve on Monday proposed letting banks set up interest-bearing deposits at the central bank, in the latest step aimed at unwinding the massive liquidity pumped into the economy to counter the financial crisis.

The Fed said that, under the proposal, it would offer banks interest-bearing "term deposits" through an auction mechanism. In this way, banks would be encouraged to park their funds at the central bank, helping to drain the extraordinary amount of money pumped into the economy since the end of 2007 to fight a severe recession.

The U.S. central bank said in a statement that the plan, for which it will receive comments over the next month, had "no implications for monetary policy decisions in the near term."

With the U.S. economy growing again and financial markets improving in the second half of 2009, the Fed has been gradually scaling back the emergency programs it came up with to deal with the financial crisis. To counter the downturn, the Fed's balance sheet has swollen to more than double the level before the crisis hit at more than $2 trillion.

The Fed said Monday that term deposits could be offered at one maturity or several maturities. The central bank expects the term deposits to have relatively short maturities, likely ranging between one and six months.

The Fed is in denial about from where monetary policy decisions come but I'll let that one go for now, they've got bigger fish to fry.

From the Board of Governors:

The Federal Reserve Board on Monday proposed amendments to Regulation D (Reserve Requirements of Depository Institutions) that would enable the establishment of a term deposit facility.

Under the proposal, the Federal Reserve Banks would offer interest-bearing term deposits to eligible institutions through an auction mechanism. Term deposits would be one of several tools that the Federal Reserve could employ to drain reserves to support the effective implementation of monetary policy.

This proposal is one component of a process of prudent planning on the part of the Federal Reserve and has no implications for monetary policy decisions in the near term.

Public comments will be accepted on the proposal for 30 days after publication in the Federal Register, which is expected shortly. The Federal Register notice is attached.

I will personally sign my comment letter with XOXOs just for you, Ben Bernanke. Muahz.

But before I get to writing my angry manifesto, how exactly does the Fed think a $2 trillion "vehicle" for money laundering won't affect monetary policy? Do they actually believe that or is it, like much of what the Fed has given us on their still-elusive exit strategy, just a ruse? Between inflation fears and Zimbabwe Ben's printing problem, I cannot possibly see a way this doesn't affect monetary policy. It's money, right? And they better hurry up and get it out of there before it hits the air and sends inflation through the roof, right? So WTF, where's the "not monetary policy" in that?

And how is this any different from what banks are doing now? First they get the money from the Fed, then they keep it at the Fed, then they don't loan it and now they get rewarded for holding onto the cash that they were supposed to inject into the economy with interest?


All they did was add interest. Way to come up with a really awesome plan, boys, I'm so fucking proud of you I could throw up.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


W.C. Varones said...

(cross-posted comment from WCV)

So the Dirty Fed floods the market with liquidity by printing hundreds of billions to buy up every Treasury and MBS in sight.

Then the Dirty Fed can't sell those bonds to withdraw liquidity because it would be selling at a large loss and the amount of the loss would be permanently left sloshing around the market.

So the Fed decides it will withdraw liquidity by printing even more money to pay interest on whatever Zimbabwe Ben dollars the banks temporarily park at the Fed.

And what is the exit strategy for this exit strategy?