Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is there anything the US Federal Reserve WON'T do?

Interest-Rates / Credit Crisis 2008 Apr 11, 2008 - 09:38 AM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleThat's the question I'm asking myself here as I watch it go further and further down the "extreme activism" road.

As I've pointed out, it's not just the Fed, either. Congress and the Bush administration are stepping up their plans to intervene and support the housing and mortgage markets, too.

I'm half-expecting to wake up one day and read that the government has decided to buy and then bulldoze every foreclosed house in the country to rid us of the inventory overhang.

Seriously, though, I'm fine with some of the things being done. They make sense.

But ...

Other measures are a clear violation of the free market principles this country was founded on. And some may not even be legal!

Not to keep flogging the Wall Street Journal or anything, but there was another great story this week called "Fed Weighs Its Options in Easing Crunch." It said the Treasury Department might sell excess debt — beyond what it needs to keep the government running — and deposit the money at the Fed. The Fed would take those funds and buy Treasuries in the open market.

The Fed's aim? To replenish its rapidly dwindling pile of top-quality debt securities. It's shrinking because the Fed has opened the door to just about any old crummy paper Wall Street and the nation's top banks can throw its way (More on this in a minute).

Federal Reserve Chairman Ben Bernanke is confident that government regulations and incentives will compel Wall Street participants to be more honest.
Federal Reserve Chairman Ben Bernanke is confident that government regulations and incentives will compel Wall Street participants to be more honest.

The Journal also said the Fed is considering selling its own debt securities, then using the money to buy assets or make loans.

Some on Wall Street want the Fed to go even further — actually buying mortgage-backed securities outright as opposed to temporarily taking them off the hands of primary dealers and banks.

But if you can believe it, the Fed might not even stop there. There's the possibility the Fed could go the route of the Bank of Japan in a real emergency. Specifically, it could print vast amounts of money, drive the federal funds rate to near-zero percent, and go hog-wild buying securities or making loans — a process called "quantitative easing" in econo-speak.

The fact these measures are even being discussed shows just how serious this credit crisis is.

And That's Just the Half of It!

Take the Term Securities Lending Facility, or TSLF. That's the series of auctions at which the Fed swaps its Treasuries for other debt securities.

The auctions were initially going to be focused on things like residential mortgage backed securities. The idea was that investors were irrationally dumping everything, including top-quality debt backed by prime-credit, conventional mortgages. So the Fed "had" to step in and help liquefy things to enable mainstream borrowers to purchase homes.

Sounds good, right? But since then, the TSLF plan has morphed into something else. It appears that after some lobbying and coaxing from self-interested parties, the Fed decided to expand the eligible collateral to include commercial mortgage backed securities (CMBS).

What do CMBS have to do with the housing crisis? Nothing. But Wall Street is taking a pounding on the value of those securities — which they made billions of dollars bundling and selling over the past few years, by the way. So the call for relief from the Fed went out, and voila, the Fed obliged.

But that's not all. A Bloomberg story this week, citing analysts at Morgan Stanley, chronicled how Wall Street firms are apparently starting to bundle corporate buyout loans into securities for the express purpose of turning around and using those securities to borrow from the Fed!

Specifically, Morgan Stanley noted that at least one Collateralized Loan Obligation (a bundle of loans, including those used to fund takeovers) appeared to have been structured so that it could be used as collateral at the Fed's Primary Dealer Credit Facility. The PDCF was just rolled out to allow non-bank institutions to access Fed liquidity — something that hasn't happened since the Great Depression.

What do these new moves mean? In plain English, the Fed has gone from ostensibly trying to help poor, little old ladies on Main Street who are facing foreclosure ... to greasing the credit wheels for developers who want to build high-rise office properties and Wall Street dealmakers who spend their days plotting the takeover and restructuring of America's corporations.

And don't even get me started on a provision in the Senate's latest housing and mortgage reform bill. It would allow corporate home builders to take losses they've racked up in recent times and use them to offset profits earned up to four years ago.

In other words, they'd be able to qualify for potentially billions of dollars in refunds of taxes they paid during the bubble days!

After intense lobbying efforts, the National Association of Home Builders was recently rewarded as Congress rolled out a proposal designed to bailout builders.
After intense lobbying efforts, the National Association of Home Builders was recently rewarded as Congress rolled out a proposal designed to bailout builders.

Why did this provision find its way into the Senate bill? Does it make good policy? The line from the home building lobby is that this is good for the housing market and will save jobs.

But I don't believe it — the last thing we need is for builders to continue operating on taxpayer-funded life support. We need to cull the weak from the herd. That will help further reduce construction activity, and get inventories under control — the only recipe for stabilizing prices in the long run.

One more sidebar here: The National Association of Home Builders announced in mid-February that it would "cease all approvals and disbursements of BUILD-PAC contributions to federal congressional candidates and their PACs until further notice."

I'm sure it's pure coincidence that this builder bailout proposal was rolled out just a few weeks after the home building lobby said it will stop funneling reelection money to Congress.

Where Does It All End?

Look, I get that we're in a crisis here. The International Monetary Fund — a group not exactly known for exaggeration and hyperbolic predictions — just released a report pegging the total cost of the credit crisis at an eye-popping $945 billion! Said Jaime Caruana, head of the IMF's Monetary and Capital Markets Department:

"Financial markets remain under considerable stress because of a combination of three factors ... First, the balance sheets of financial institutions have weakened; second, the deleveraging process continues and asset prices continue to fall; and, finally, the macroeconomic environment is more challenging because of the weakening global growth."

So maybe this is just a case of desperate times calling for desperate measures. But don't we have to stand up and ask: "Where does it all end?" How far are we going to allow the Fed to go to subsidize Wall Street? What the heck happened to free markets? Capitalism?

Maybe investors aren't being irrational. Maybe they're shunning all the paper Wall Street is burdened with because they're making a perfectly rational investment decision: Namely, they've decided it's not worth much.

They can see house prices falling ... commercial real estate values starting to decline ... the economy slumping into recession ... and the multi-year credit binge we've been on coming to an end. So they're not buying crummy, complicated debt securities anymore. Maybe, just maybe, the Fed shouldn't be standing in the way of the crunching of all those debts.

Legendary former Chairman of the Fed Paul Volcker warned in a speech earlier this week that the Federal Reserve is at the very edge of its lawful powers.
Legendary former Chairman of the Fed Paul Volcker warned in a speech earlier this week that the Federal Reserve is at the very edge of its lawful powers.

I'm not the only one that's concerned about what is going on here, either. The legendary former Chairman of the Fed itself — Paul Volcker — gave a speech this week warning about what the Fed is doing, as well as its consequences. A key quote:

"The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded central banking principles and practices."

And he took no prisoners when critiquing the Bear Stearns bailout, saying:

"What appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return."

Moreover, it's not like what the Fed is doing is consequence-free ...

Dangerous Precedents Are Being Set ...

Look at what has happened to the dollar ... to oil prices ... to food prices and so on. There are fundamental economic reasons for the moves we're seeing in commodities. But those moves are being turbocharged by the easy-money policies of the Fed.

Indeed, one measure of U.S. money supply — M2 — surged at a 17.9% annualized rate in February. I have a Bloomberg chart that goes all the way back to 1959 on this indicator. It has only risen this quickly a handful of times in U.S. history.

The Fed is clearly playing a perilous game by slashing rates and shifting the presses into overdrive at a time when inflation pressures are high, the dollar is weak, and commodities are through the roof.

So Wall Street may appreciate what the Fed is doing. They may like the fact that they're on the receiving end of all this Fed largesse. But the rest of us are taking a real hit to our standard of living as a result ... and we're setting some dangerous precedents for the future.

Until next time,

By Mike Larson

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit .

Money and Markets Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in