Bernanke's Snow Tiger - A Short Comment

Bloomberg.com had an interesting story today concerning the US Federal Reserve.  It would appear, rumors claim, the Fed is in negotiations with "private investors" < meaning large banks >, about doing a reverse repurchase agreement of Treasury obligations. The amount being discussed is suppose to be $1 trillion.

Basically, repurchase agreements are loans, where the Central Bank takes Treasury bonds from commercial banks, in exchange for money from the Central Bank. At a specified time later, the commercial bank takes back these Treas obligations from the Federal Reserve, in exchange for the money the Fed gave the commercial banks . In other words, I give a deposit to rent your car, and then when you get the car back, I get my deposit back.

A reverse repurchase agreement < reverse repo > is just the opposite.This time the banks give the Fed money in exchange for Treasuries, and at a given date later, return these Treasuries to the Central Bank, in exchange for the money originally given the Federal Reserve.

Both the repo and reverse repo have been relatively small transactions in the past. Basically the Fed is temporarily lending the banking system money or vice versa, in order to smooth / stabilize temporary liquidity imbalances. Guido can't recall the amounts being over $50 billion before 2008.

Evidently this time the Fed needs to borrow $1 trillion from the banks. Bloomberg claims this is an attempt to drain money from the financial system in order to forestall high inflation. However, Guido has a different opinion.

Simply stated, this time it is asking those big, taxpayer subsidized commercial banks to bail out the Federal Reserve. In other words, the Fed may be on the verge of insolvency and needs a lot of cash, pronto, to meet it's obligations.

Central Banks are suppose to be like private commercial banks, balancing their assets and liabilities. Guido always found this hard to believe,  when a Central Bank had the ability to create a fiat currency in the country of it's residence. And with the large potential assets that exist at  the Federal Reserve, one would expect the Central Bank's liquidity to approach infinity.

Well evidently Ben Bernanke and his fellow stooge governors have accomplished the impossible. They have breached the infinite.

Seriously, I never thought I'd see this day.

With $80 trillion of unhedged Collateralized Debt Obligations in the world financial system < No one knows how much. Maybe it's $150 trill >, I can't imagine what gives the Fed the idea that private banks have even a few hundred billion to spare.

This may be why the Fed is reluctant to be "audited". This may be why the successful fund manager, John Paulson, has so much gold. And this may also be the reason why there has been so much propaganda  hype, in trying to get the entire world to start spending like crazy again.

If so, it's going to all unravel very quickly. Guido may buy more gold Wednesday.

"An avalanche doesn't come like a gentle lamb. It happens in the blink of an eyelash. It's a snow tiger." - Anonymous

< This article is strictly for information purposes only. It is not investment advice or otherwise a recommendation. It is specifically not to be construed in any way as advice to buy or sell gold, US dollars, or any other foreign currencies. Mate, it's every person for themselves. >