5/14/2012 7:47 PM ET|
Can the central banks keep us safe?
The financial markets are holding their own these days, based on the idea the Fed and other central banks will save us from the worst. But what if they can't?
The financial markets' faith in the world's central banks would be touching if it weren't so scary.
In the late 1990s we had what was called the "Greenspan put." In the dark days when the collapse of a hedge-fund portfolio at Long-Term Capital Management threatened global financial markets, then-Federal Reserve Chairman Alan Greenspan led a massive intervention to stabilize the markets. Investors studying Fed policy concluded that the Fed would intervene to prevent any future collapse in asset prices and that, therefore, piling on risk was a good investment strategy. We all know how well that ended.
What progress we've made! It looks as if we've replaced the Greenspan put with a global put, backed not just by the U.S. Federal Reserve but also by the central banks of the eurozone and the People's Bank of China.
You're entitled to worry about how this will end.
Betting on stimulus
Wonder why European stocks and sovereign bonds haven't collapsed, even though we're contemplating a Greek default (an official one this time), the wreck of the Spanish banking system and another downgrade of France's credit rating? Because of the belief that if worse comes to worst, the European Central Bank can print unlimited amounts of money.
Wonder why Chinese stocks -- and the emerging-country stock markets that rise and fall with China's prospects -- aren't in a panic as a result of the latest numbers showing slower-than-expected economic growth in China? Because of the almost-universal belief that every bit of worse-than-expected economic news brings us closer to the day when the People's Bank of China will ride to the rescue with a cut in interest rates.
Wonder why the Standard & Poor's 500Index ($INX), is stubbornly hanging around 1,340, even as worries mount about a slowdown in U.S. economic growth? Because of a conviction on Wall Street that if the recovery is in real danger of faltering, the Federal Reserve will launch a third program of quantitative easing that will pump money into the economy (and the financial markets).
Each of these three major pieces of the global put is constructed in a slightly different way. Understanding those different methods of construction can provide some indication of how and when this global put will be resolved.
The Fed's $2.9 trillion dilemma
It says a great deal about how risky the overall global put has become that the U.S. Federal Reserve is now the most conservative player. That's not so much a reflection of a policy bent at the Fed as it is an indication that the Fed got started earlier down this road. The Federal Reserve's balance sheet stood at $2.9 trillion as of the week ended May 9. That's essentially even with the balance sheet in March and only $300 billion above the balance sheet total in September 2011.
To find the big expansion in the Fed's balance sheet, you need to go back to before the September 2008 Lehman Brothers bankruptcy and the global financial crisis. In May 2008, it stood at just $900 billion. In May 2009, it was $2.1 trillion. In May 2010, the Federal Reserve's balance sheet showed $2.3 trillion.
Only when talking about the Federal Reserve (or the U.S. budget) does an increase from $2.1 trillion to $2.9 trillion count as not very much. But it does fall into that category when compared with the total jump of $2 trillion from May 2008 to May 2012.
And what is on the Fed's balance sheet now that wasn't on the balance sheet in May 2008? $1.7 trillion in U.S. Treasury securities, up from $540 billion in May 2008, and $850 billion in mortgage-backed securities, up from zero in May 2008. That increase from 2008 to 2012 is the result of the Federal Reserve's purchase of U.S. Treasurys and mortgage-backed securities after the onset of the global financial crisis. The Fed did this buying as part of its effort to drive down interest rates in order to increase growth in the U.S. economy.
The Federal Reserve paid for the assets now on its balance sheet by printing money (the mechanics are somewhat more complicated than that, but the description is essentially accurate).That expanded the U.S. money supply, lowered interest rates, increased the short-term stability of the U.S. financial system, added something to growth and propped up asset prices in the financial markets.
To the degree that the money the Fed has added to the money supply hasn't gone into investments in productive assets -- and with economic growth this slow, companies haven't been rushing to expand capacity -- it has gone into other assets. These include stocks (either through the direct purchase of stocks by investors or through corporate buybacks and acquisitions) and bonds (which is one reason that bond yields are so low).
The challenge for the Fed is how and when to unwind that $2 trillion addition to its balance sheet by selling the Treasurys and other securities it has bought. That would take money out of the money supply and the economy, which would slow growth. With the economy was growing at just a 2.2% annual rate in the first quarter, that's tricky, and it's made even trickier by the need to reduce the federal budget deficit, currently projected by the Office of Management and Budget at 8.5% of gross domestic product for fiscal 2012. (To put that into context, the deficit as a percentage of GDP is 2 percentage points higher than Spain's projected deficit.)
The alternative, however, is a permanent expansion of the Federal Reserve balance sheet, which would have the long-term effects of adding to inflation, weakening the credit rating of the United States, leading to the depreciation of the dollar and, perhaps most important, limiting the Fed's ability to intervene effectively in any future crisis. (And there are a few of them looming.)
VIDEO ON MSN MONEY
The small, extremely wealthy group of private bankers that call themselves "The Federal Reserve" have been damaging our country (and continue to do so) since thier inception in 1913.
For a thorough explaination of who they are, how they came to be, and thier true agenda for our country, watch the lecture (is on YouTube) by G.Edward Griffith titled "The Creature Created on Jekyl Island".
To the degree the money the Fed has added to the money supply hasn't gone into investments in productive assets ..
Mr Jubak .. you hit it right on the nail head. The TARP bailout, QE1 and QE2 should have carried certain requirements and restrictions that prevented massive corporate executive bonuses and golden parachutes, as well as, certain conditions that stimulated employment through investments in productive assets. Both the monetary and fiscal policy should be coordinated. But what we have, with this dysfunctional Congress, is actions that are counter productive of the efforts of the Fed to reduce unemployment and hold inflation to modest numbers.
NO THEY CANNOT!
Wasn't it Ben and the Fed that bought all those Euro's with our tax dollars? Shame on the Fed again!
I am always amazed that there are so many economic smart people that think they know what is best for our country.
Remember: November 06, 2012
Boot all elected officials from office...we need new blood, even if they are not brilliant, common sense will do just fine!
the total value of the US stock market (NYSE and NASDAQ) is $23.34 trillion.
The total Greek debt is about $340B or 1.5% of the value of the stocks listed on the US markets. The US markets has gone down 600 pts or 4.5% or $1.05 trillon because of a $340b problem. Something ain't right? It seems like everyone is really over reacting to the Greek situation.
All the posturing and shifting of money to keep things afloat are like an overloaded lifeboat, bobbing about just about to take on water. I'm smart enough to know that Greece DID default on its debt, and WILL eventually drop out of the EU. The rest of the troubled EU countries will follow over time. The massive debt the US has will be paid by default on the currency. A large ratio shift in the dollars value will wipe out the debt but also leave all holding very worthless dollars. In 2013 the ball of yarn will unravel regardless of who is elected. The person who posted citing tax increases would solve the problem for government is Keynesian in thinking or some other folly analysis. Using taxes to shift money from one end to the other is redistributionist. Such policy has proven by historical standards to stall economies. Also, government is not qualified to spend money wisely, waste is at 50% of spending. AARA money was proven to be only 55% efficient, the waste was enormous.
The real cause of the problems lies in the nature of our money system in which interest on money is charged. Interest causes wealth to concentrate as the poor pay interest to the rich. Interest can therefore be seen as a tax on poverty to the benefit of the rich. The following example demonstrates this and also that interest on money is unsustainable and leads to crisis:
If someone brought a 1/10 oz gold coin to the bank in the year 1 AD, and the money remained there until the year 2000 AD, collecting a yearly interest of 4%, the amount of gold in the account would have been 3.6 * 10^31 kilogrammes of gold weighing 6,000,000 times the complete mass of the Earth.
If interest is charged on a limited scale or over a short timeframe then those problems do not surface. Interest is an insidious process. Over time it is unescapable that it reduces large numbers of people to a state of servitude to the money lenders. This is a long term development that transcends the life span of a human. Interest is the main reason why a number of civilisations have failed and why Western civilisation is about to fail. Therefore all interest is usury and the current financial system is a usury financial system.
There is a good solution for this issue and the economy can be back on track within a few years. More information can be found on the Naturalmoney.org website.
beware the moneylenders. they had no business in the temple, they could have set up shop in a side street. they went to the temple to gain credit for doing gods work as they paid rent to the high priests (polititians). they are still in bed with each other to this day. one brilliant, dazzling, impeccable man tried to throw them out ages ago. Who among you peons thinks you can do it now? You are all doomed.
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