patrick.net

Compare his speech to this part of his Helicopter speech in 2002
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates.

A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.

He is going from NOT talking about the Fed's purchase of the T, to substantial purchase of the T (where did the money come from), and he will go to unlimited purchase of T which is the final step of raw printing.

We are still in the middle, if deflation doesn't go away, we will go to unlimited purchase of T.

"The terrorists would like nothing better than have India and Pakistan at each others throat. In fact, it is very likely to be their main motivation."

I think you are right. If India can be provoked into attacking Pakistan, then the Pakistani military will be diverted away from their anti-terrorist efforts (such as they are), and both governments will be under stress. This could create an opportunity for a takeover by the religious radicals in Pakistan.

Zephyr Says:
the Pakistani military will be diverted away from their anti-terrorist efforts

The Pakis have used this bluff all the time. As it stands, they are doing the bare minimum required to prevent the US army from taking over the operation in their Northwest province.

I think we should call their bluff - if they are going to be diverted, then sure, go ahead. Get out of the way - we will take over the NW province and finish the job ourselves.

I agree with OO - it is pretty much a signal that Bernanke is itching to bring his monetary doomsday machine out of the closet. This is his "yeee-haa!" moment from Dr. Strangelove.

Not that it will solve the crisis, but I don't think he cares. This is his last shot at trying to defend his Ph.D. thesis - most of which has turned out to be full of crap so far.

Bernanke probably is very interested in a real world test of his ideas. And I expect that Bernanke very much does care whether it works. His credibility and legacy will be hugely affected by his success or failure with this crisis.

Which specific elements of his thesis do you consider to be full of crap?

On another note, Bernanke apparently is saying that the Banks are NOT getting face value for the bad paper that they pledge as collateral at the various FedR funding facilities:
I've posted the Fed "haircut" worksheet (PDF) several times. Definitely worth a look to see how comfortable you are with the Fed margins.

Anybody want to hazard a guess if Black Friday came a week early for the stock market (was that the low or will we retest)? The banks I picked up were at a 30+% discount (certainly better than GoLDs performance over that last week).

EbGuy, thanks for the worksheet. I missed that earlier.

The gubment does not want the direct lending you talk of comrade.

http://tinyurl.com/6b3gmd

They are crushing prosperDOTcom

Zephyr,

while I am pro bailout in general because I am comfortable with where I am, and do not want anything to topple the current matrix order, I am very much against the BB bailout so far, not because of moral reasons, but because it just won't damn work.

The whole issue of the housing bubble is because there are fewer and fewer people in the US with enough $$$. So when everyone falls below the least eligibility line to buy a house (which is a symptom of something much larger), you just need to find ways to scrape the bottom of the barrel, that's why we have rampant fraud in mortgage business, because we need marginal breathing bodies to keep the game going.

Now we have hit the wall. The game stops. Don't get me wrong, I like the game, because I have been beneficiary of the game, but their way of playing it is NOT sustainable, and that's why I think they are so full of crap. If they are smart, they may want to share a bit more with rest of the income and wealth pyramid, but not to grab more when the bottom levels are already at a destitute situation and the middle level are falling off the cliff! Who is going to support the top level if your bottom levels hollowed out?? What they are doing is inviting REVOLUTION, violent revolution, and I don't like revolution one single bit.

So the quantitative easing has to start from the bottom. Give everyone a rebate check of $1K, 10K, whatever. Build roads and bridges to keep the poor employed so that they don't go loot the stores. I am even fine with loan modification with under-water properties so as to keep them in their homes forever.

The game plan is not to recapitalize the banks, it should be recapitalizing the American people, if you recapitalize the American people, the banks will be recapitalized automatically. If you throw $30K at every single American (that's how much these bailouts have cost so far!!!), we have long reflated. We probably are already running at 20% inflation by now.

"We probably are already running at 20% inflation by now"

Lol. Gold isn't going anywhere for a long long time. Deal with it.

I think gold fell from around $200 to around $100 before it went up again. That was in 1974.

In present times gold isn't down by that ratio in USD. Not yet.

How does the Fed get its money? It doesn't need to borrow it; it merely creates an entry into its balance sheet. All the Fed requires to "print" money is a keyboard connected to a computer. The difference between the Fed and the Treasury issuing money is that the Treasury needs to get permission from Congress before selling bonds. In this context, it shall be mentioned that physical cash (coins, bank notes) are entered as liabilities on the Fed's balance sheets; they are rather unique liabilities, however, as you can never redeem your cash: if you went to a bank, the best you can hope for in return for your dollar bill is a piece of paper that states that the bank owes you one dollar. While it is possible for central banks to remove cash in circulation, they are not obliged to do so.

Until recently, the Fed would only temporarily park non-government securities on its balance sheet: a bank would typically receive a temporary, often overnight, loan for depositing top rated securities with the Fed; these "swap agreements" were traditionally intended for very short-term loans, but the crisis has led the Fed and other central banks around the world to engage in 60, 90 day or even longer agreements. Since late September, the idea of swap agreements has been supplemented by outright purchases.

When the Fed issues cash for debt securities it acquires, we talk about "monetizing the debt".

frank,

I am not concerned about gold. If we do not resolve deflation within 12 months, gold is going through the sky, because USD will collapse, simple as that. US government has to default. Those who have gold will be the only wealth holders, and if they hold guns to defend their gold, even better.

But this is not the scenario that I would like to see, because that means system reset. I would rather run an inflation, gold wins a little, the system can go on, so that we can still live happily ever after in our American dream.

Sybrib,

you forgot the event that triggered the gold to go down that much - because US government allowed citizens to own gold again. There was so much pent-up supply to sell gold to American citizens from all over the world because everybody was anticipating that moment.

I didn't forget.

But I thought it was the other way around. A small surge in demand for a short while in the US. Whatever. More volatile in USD price than we've seen in the present.

"because USD will collapse, simple as that."

Just be thankful that you won't lose your shirt with gold, because given your lack of knowledge in economics, you could do a lot worse.

Just look at poor Peter Schiff. 50% down and counting.

I'm not trying to insult. You're in good company like Warren Buffett who has been betting against the USD for the past 3 years (at least).

You are just using the wrong economic theory. Suggest you take a look at mises.org.

Though I gotta say, at times you must be making up stuff because it doesn't make sense in any model of economics.

There is a book called the Power of Gold by economist Peter Bernstein. He sorta makes the reader feel like gold is coveted by a hoarding mentality, a greedy hoarding instinct that'll always getcha in the end.

But I heard Bernstein interviewed on Money Talk last year, he actually recommended having a position in gold.

Headset, thanks for that MISH link.

Some good stuff there, though I'm not convinced when it comes to trend analysis or Elliot wave theory.

"I think gold fell from around $200 to around $100 before it went up again. That was in 1974."

I think that was '75 / '76 but no matter. I was always perplexed by that part of the chart from the 70's gold bull. What I think was related to that move back then was when they introduced futures contracts on gold in the USA on the COMEX. At best it was the wild west (as it is now again).

Probably nobody will care, but the reason I became interested in markets (any and all) goes back to this time frame (around 1980). My father said "take this $200 USD and get Canadian as we are about to go north on vacation". I as a youngster, went to multiple banks for quotes and found huge discrepancies in bid/ask. Even to the point that I was able to arbitrage between banks (walking between them buying from one selling to another) as a preteen, for a quick profit.

Almost everyone recognizes that the US dollar (like all fiat currencies) will lose purchasing power over time. Because of this, many people wrongly assume that the US dollar must decline relative to other currencies. But the exchange rate with other currencies can move in either direction depending on what is going on in those currencies/markets.

In 2007 I thought the bottom would come in 2008 for the USD, and so this summer I bet long the dollar against the Euro, Canadian, Pound, and Swissy. So far so good.

I think the dollar will continue to gain against other currencies in the next two years.

In fact, for more than a year I have felt that cash was the best investment. I think it is still a little early to bet on anything else. And the best cash is the US dollar. Most of the world agrees with this view, which is why we have seen a flight to the safety of US treasury bonds.

This type of currency volatility as witnessed now and described above can not be a good thing for international commerce. I have only heard it mentioned as a problem once or twice in the mainstream media in all of this chaos.

@ Zephry,

2 more years a dollar bull - WOW? How high you think?

Any chance someone (like China) blinks?

or Japan

or the British?

or Brazil?

etc...

I think the current bailout is mostly a terrible waste of money. It is far too expensive for the benefit we will get. And much of it will be counterproductive.

I do think that the Fed needed to take action to stabilize the financial system and the counterparty credit risk for normal commerce. But, that could have been accomplished by guaranteeing deposits, without guaranteeing the survival of the banks (and other entities). Let them fail, but cover the depositors and counterparties for normal commercial balances. As for credit default swaps let them sink – they were mostly speculator positions anyway.

Unfortunately, the fools in congress want this path, so we will have these expensive bailouts. And the spending on weak banks and other weak entities will divert resources away from the healthier parts of the economy. These programs will waste resources and stifle the normal recovery of the economy. We are starting down the policy path that Japan followed in the 1990s, and that the US followed in the 1930s. It failed both times.

The Fed caused the great depression by bad policy. And they have caused this crisis in the same manner. In both cases the policy was far too loose leading into the bubble, and then they tightened quickly precipitating a credit crunch and a financial panic.

Once the panic starts you cannot cure it with low interest rates. You have to let the speculators lose money.

I do not expect the dollar to have a dramatic rise. But the rest of the world is going into the toilet much worse than we will. And they are on a lag behind us. By 2010 we will be rising while they are still falling.

China cannot afford to blink. As I have posted for years, China is addicted to our trade. They need us - but we don't really need them. They sell stuff to us for dirt cheap prices and they even lend us the money to buy it with. So they give us real stuff now, and in exchange we give them a promise to pay them later with our paper that is declining in value.

But they are desperate and must sell their goods at any price (even at a loss) to maintain employment. Otherwise they will have civil unrest, rebellion. The economic tide is going out now and they are headed for severe trouble. Watch for increased turmoil and serious rioting in China soon.

Zephyr,

"China addicted to our trade":

In one sense, because the trade is the primary mechanism for creating the hierarchical capitalist social structure that the leadership appears to be so very much yearning for. ("I need oh-so-badly someone to be on top of").

In a practical sense, they could just as well sell their consumables domestically.
And the US consumer is quite addicted to the cheap stuff, if you ask me. They are the ones that really need to go to the dollar store and buy a tool for $1 that used to cost $10.I do think that WE are addicted.

So there is your contrarian view. Tell me where I'm wrong.

Justme, The communist structure gives them more dominance over the people. The leaders of China have been supremely on top of the people. That dominance is eroding.

Economic reforms give power to more people - diluting the concentrated power of the party elite. It is also creating a small but growing middle class.

Clearly China could consume more of their own output, but not enough to keep their factories running at their current rate. If the export market declines for them their unemployment will skyrocket. The lack of freedom in China has unrest already boiling under the surface. A rise in unemployment would be a disaster for the rulers.

We have become accustomed to cheap goods from China. But removal of that source would mean we pay more to buy those goods elsewhere. Our quantity of unnecessary stuff would decline somewhat. Americans would be annoyed by the reduced purchasing power.

However, the impact on China would be soaring unemployment, rising poverty, civil unrest and violence in the streets in protest against the government. There are already thousands of such protests each year. The Chinese rulers cannot afford to inspire greater dissatisfaction. They are sitting on a powder keg.

Paul,

My two year currency forecasts:
Euro $1.00 (if the Euro survives at all)
Pound $1.30
Canadian $0.70

Clearly China could consume more of their own output...

I think they know better than to eat their own dog food...

Patrick, that kind of loan actually pays 12% or more. There are hard money brokers I have told you about who do these loans. Yes, it is risky, you have to be very careful about the appraisal and working with a broker you trust. That is not meant to be a joke, you have to find someone reputable to work with. Also, realize that someone's residence is different than say a commercial project. I have seen people get very protective of their home and threatened to sue for such things as usury. Even if the claim is bogus it still scares people. If you have money burning a hole in your pocket and want to lend or invest in real estate get in touch with me and I'll show you how. I am working on some things on foreclosures back east that you will find interesting. You could get in with less than $15,000.