Is This Pulling Out or is This Sticking It Back In??

Holy crap, are they actually pulling out? Not so fast, slick, it's only the Fed and Treasury doing what they do best, snowballing each other with liquidity. You can only debit the same blip so many times before it disintegrates. Kindergarten accounting teaches that For Every Transaction: The Value of Debits = The Value of Credits so what happens when they keep making it up and passing it around?

Wall St Cheat Sheet:

Today, Treasury announced as follows:

February 23, 2010

Treasury Issues Debt Management Guidance on the
Supplementary Financing Program

WASHINGTON –The U.S. Department of Treasury today issued the following statement on the Supplementary Financing Program (SFP):

“Treasury anticipates that the balance in the Treasury’s Supplementary Financing Account will increase from its current level of $5 billion to $200 billion. This will restore the SFP back to the level maintained between February and September 2009.

This action will be completed over the next two months in the form of eight $25 billion, 56-day SFP bills. Starting tomorrow, SFP auctions will be held each Wednesday at 11:30 a.m. EST, unless otherwise noted.”


We speculated after the September 2009 wind down announcement that it (1) would provide another $185 in liquidity for risk markets as the cash management bills that financed the program were not rolled over and returned to primary dealers, and (2) would increase demand for short term bills. Since the process will now be reversed, it is reasonable now to believe the outcomes will be reversed as well. Indeed, as Zero Hedge noted in a similar story earlier, demand is already disappearing from indirects in short term bill auctions.

With the brunt of the $200 billion cash management bill sales expected to be picked up primary dealers, this will have the same effect as adding up to $200 billion to bank nonborrowed excess reserves (NBER) on deposit with the Fed. As bank NBER is just north of $1 trillion, a 20% increase over eight weeks in the amount of non-borrowed money locked up at the Fed is material. At a time when Agency and Agency MBS are drawing to a close, and with M2 money supply flat, this de factotightening move is a bit alarming.

In other, more simpler terms via Econbrowser:

Whenever the Federal Reserve buys an asset or makes a loan, it simply credits new reserve deposits to the account that the receiving bank maintains with the Fed. The bank would then be entitled to convert those deposits into physical dollar bills that it could ask the Fed to deliver in armored trucks. Banks currently hold $1.2 trillion in such reserves, or more than a hundred times the average level of these balances in 2006, and more than the total cash the Fed has delivered since its inception a century ago. The traditional way the Fed would bring those reserves back in (and thus prevent them from ending up as circulating cash) would be to sell off some of its assets.

The Treasury's Supplementary Financing Program was introduced in the fall of 2008 to assist the Fed in its massive operations to prop up the financial system at the time. The SFP represents an alternative device by which the Fed could reabsorb the reserves it created. Essentially the Treasury borrows on behalf of the Federal Reserve, and simply holds the funds in the Treasury's account with the Fed. When a bank delivers funds to the Treasury for purchase of a T-bill sold through the SFP, those reserve deposits move from the bank's account with the Fed to the Treasury's account with the Fed, where they now simply sit idle, and aren't going to be withdrawn as cash. In a traditional open market sale, the Fed would sell a T-bill out of its own portfolio, whereas with the SFP, the Fed is asking the Treasury to create a new T-bill expressly for the purpose. But in either case, the sale of the T-bill by the Fed or by the Treasury through the SFP results in reabsorbing previously created reserve deposits.

In severely simple terms, it's important to point out here that though the Fed and Treasury are not one in the same, if you have ever jerked off with your left hand you know exactly what you're watching here. Stick with me, kids.

If you still aren't clear on what's happening before you, Jesse's Café Américain explains it perfectly:

It looks very much like a stealth bailout. It is even more of a scandal because of the Fed's resistance to any disclosures on the principles and specifics by which they are allocating taxpayer money.

Where this gets even more interesting is that the Fed in turn is buying Treasury debt after issuance through its primary dealers, debt that was issued by the Treasury to provide funds to the Fed.

Even more than a stealth bailout, this is starting to smell like 'a money machine.' Money machines are what Bernanke euphemistically called 'a printing press.' What is odious about this particular printing press is that the output is being given directly to a few big banks by a private organization which they own.

Sort of like JP Morgan serving as primary dealer when JP Morgan is really just some publicly-traded banking version of the Fed.

Yup. Definitely sticking it back in. At least be transparent about it, it's not like we can't feel our raw taxpayer asses aching over all of this.

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.


Anonymous said...

but.... I'm left handed. Jeff

stan said...

that must be one massive laundry mat they are going through for this...

Anonymous said...
Pinky Swear said...

I love your illustrations even when I don't understand them.