Senator Jim DeMint (R-SC) is blocked by Senate Democrat Leadership from having a vote on his amendment to audit the Federal Reserve by Senator Ben Nelson of Nebraska who raised a “point of order” to prevent the vote.
After being blocked, DeMint directly challenges Senate leadership by pointing out the other GAO audits contained in the bill. The Senate president was forced to agree with Senator DeMint.
The bill is based on a bill authored by Congressman Ron Paul (R-Texas) in the House, H.R. 1207, and Senator Bernie Sanders (D-Vermont) in the Senate, S. 604.
Reuters reports:
Federal Reserve purchases of U.S. Treasuries have not produced a lasting drop in long-term yields, according to a study by the St Louis Federal Reserve…
The Fed shocked markets on March 18 with a $300 billion purchase program of longer dated U.S. Treasury bonds, which quickly reduced longer bond yields by about 50 basis points.
Here’s the funny part:
“The marked flattening of the yield curve associated with the (Fed’s) announcement has vanished. Instead, the yield curve has become more steeply sloped,” the study noted. It said it was not possible to single out what was driving up yields.
Duh, yields are going up because the purchasing power of the dollar is expected to fall with the FED’s announced monetization, er “quantitative easing”. But it’s not possible for the St. Louis FED to figure this out…
China has certainly figured it out. They are staying in the short end of the yield curve… From China Daily:
Shen Minggao, chief economist with the business and financial magazine Caijing:
I doubt the US government’s ability to ensure the safety of China’s investment in Treasuries. At least for the present, Washington has nothing to assure us on.
What the US government can guarantee is avoiding credit risk – it will not default on its debt. But that cannot provide any shelter for investors to avoid inflation, the depreciation of the dollar or risks in liquidity. These pose major threats to China’s holdings of Treasuries with maturities longer than a year.
John Hussman makes two excellent points…whether you are a bull or a bear, you have to accept the cold facts and see the forest as well as the trees:
1. “So where does the money come from to buy [all] these new Treasury securities? Clearly, the sale of those securities must absorb the savings of someone in the economy whose savings have not already been claimed. Alternatively, the Fed can directly purchase those Treasury securities and literally print money. In practice, we have a third option. The Fed can acquire $1 trillion of commercial mortgage-backed securities and other assets from banks and create an equivalent amount of “reserves” (which is essentially printing money) at the same time that the Treasury issues the $1 trillion in new Treasury securities. In this case, which is in fact exactly what has happened, the banks that previously held $1 trillion in commercial debt securities can now use their newly acquired reserves to buy the $1 trillion in newly issued Treasuries. Having done this, they have no more money to lend than they had before. There is no more “liquidity” in the system than there was previously, except that the “quality” of the bank balance sheets has improved.”
2. “It is an error to view outstanding debt securities as if they are “liquidity” poised to “flow back into the stock market.” The faith in that myth may very well spur some speculation in stocks, but it is a belief that is utterly detached from reality. The mountain of outstanding money market securities is the result of government debt issuance that must be held by somebody until those securities are retired. It is not spendable “liquidity” – it is a pile of IOUs printed up as evidence of money that has already been squandered.”
Zero Hedge ran a post this weekend revisiting Friedrich Hayek’s seminal Prices and Production, in which the professor recognized that when total debt outstanding rises, whether through conventional banking or shadow banking, that increased credit has been used to bid up consumer goods and investment asset prices:
“There can be no doubt that besides the regular types of the circulating medium, such as coin, notes and bank deposits, which are generally recognised to be money or currency, and the quantity of which is regulated by some central authority or can at least be imagined to be so regulated, there exist still other forms of media of exchange which occasionally or permanently do the service of money. Now while for certain practical purposes we are accustomed to distinguish these forms of media of exchange from money proper as being mere substitutes for money, it is clear that, other things equal, any increase or decrease of these money substitutes will have exactly the same effects as an increase or decrease of the quantity of money proper, and should therefore, for the purposes of theoretical analysis, be counted as money.
…but once they have come into existence their convertibility into other forms of money must be possible if a collapse of credit is to be avoided.”
In point 2, above, Hussman is emphasizing this point: when debt is created, it is simultaneously “attached” to some consumer good or investment asset, it is not sitting “idle” on the sidelines in liquid form…waiting to be attached to (say) stocks. To be attached to stocks, bonds, consumer goods or whatever it was previously attached to, must be sold down first. In point 1, above Hussman, is emphasizing that the recent FED activities has provided no new credit to the banks…only the opportuntity to “swap” a toxic asset for a US Treasury security. Currently, if the banks decide to sell the Treasuries to raise cash to lend or to invest in stocks (like Goldman)…the price of Treasuries goes down and the yields go up. If yields go up, the “recovery” is jeopardized.
Guest post: Angie – PoliticalPosts.com
Bloomberg elaborates on the FED’s losses from the Bear Stearns bailout:
In its biggest disclosure of the securities accepted to stabilize capital markets, the Fed said yesterday it had unrealized losses of $9.6 billion on the assets as of Dec. 31. The bonds, swaps and notes were taken in from Bear Stearns, once the fifth-biggest Wall Street firm by capitalization, and AIG, which had been the world’s largest insurer.
“The numbers basically confirm that Treasury is going to have to take some TARP money and reimburse the Fed,” said Whalen, whose financial-services research company analyzes banks for investors. “It is essentially up to the Treasury to get the Fed out of this.”
Bloomberg is doing the taxpayers a favor by suing the government to force disclosure of the names of the obligors of the collateral held by the FED. We should all be supporting them in their effort!
Calculated Risk’s post on the new industrial production and capacity utilization numbers released by the FED calls it “serious cliff diving”. Industrial production is down 13% since the recession began and capacity utilization is 69.3%, as low as it has ever been.
This chart of the S&P 500 in Eurodollars is from TPC:
The FED’s printing really is dollar destruction…and helps to destroy the most recent little rally too…
From Financial Times:
“The stunning news that [the FED] would buy $300bn (€222bn) in Treasury bonds (and spend a lot more on many other fixed-interest securities) also used another classic military strategy. It had the element of surprise…So why did the Fed do it? The theories are out there. With the AIG bonuses moving public opinion against bail-outs, this may be the only way to pump more public money into credit. Congress will not approve such a thing. Or the Fed may know something about the banking system that others do not.”Â
“one way to interpret the Fed decision to expand its balance sheet by $1,150bn at the meeting is that it is a commitment to keep rates at near zero for a long time – possibly up to two years.”
A two year period with zero bank rates….hmmm…..opportunity, crisis or both?
Chairman Bernanke in his 60 Minutes interview suggested that the biggest potential dangers facing the economy now was the potential for a lack of “political will” to solve the financial crisis. We wonder if that’s political will for making bank bondholders take a haircut…
He did say that the United States has averted the risk of plunging into a depression. “I think we’ve gotten past that,” he said. He also said a recovery by the end of this year continues to depend on the plan they have to “stabilize” the banking system. We, at SwampReport, “hope” it works and that the Plan, when it’s finally carefully described to the public is more than just the “Hope” often talked about by the administration.  See USA Today
In the video of his speech to the US Chamber of Commerce today Jamie Dimon, CEO of JP Morgan said JPM didn’t need TARP money and didn’t ask for it. He also said he is tired of the vilification of Corporate America. Hmmm, is he really still part of Corporate America? After all, his “firm” really is an arm of the US government, just like AIG, C, BAC, Freddie, and Fannie etc.
