Re: FW: Dangerous Fed policy supports America's Consumer Debt Bubble

["Gary Santos" <evs@xxxxxxxxxxxx>]

A description of 14% to 18% of income for debt service at current interest
rates (from what can be gleaned from the internet) might be more useful to
judge what is uncharted Fed and economic territory.

When Henry sent his thoughts on Greenspan's speech, I had just finished
reading Bernanke's paper which I found more a interesting subject. (I mean
this, of course, in reference to Greenspan's speech and not Henry's
commentary whose contrarian thinking I have always found good reading.) I
attach Bernanke's speech for reference.

As I read it, I wondered just how much of it was an attempt at empty
boasting or mere bluffing. If a sizable part of the market chose to bet
against Fed policy, even the Fed will not be able to prevent a crash. At
least this is my understanding of conventional wisdom.

Going further than his speech late 2002, Bernanke, in the usual Fed hedging
language, now says ("suggests") that even if interest rates are low and will
be kept low, monetary policy will be conducted via (quoting):

(1) ". . .providing assurance to financial investors that short rates will
be lower in the future than they currently expect,

(2) ". . .changing the relative supplies of securities (such as Treasury
notes and bonds) in the marketplace by shifting the composition of the
central bank's balance sheet, and

(3) ". . .increasing the size of the central bank's balance sheet beyond the
level needed to set the short-term policy rate at zero ("quantitative
easing").

While all three are unprecedented, I find (2) and (3) a teensy bit
incredulous. Would he actually do these? Or, is he bluffing? Some quotes
from the speech:

a) . . . the Federal Reserve might be able to influence term premiums, and
thus overall yields, by shifting the composition of its holdings, say from
shorter- to longer-dated securities. . . .The same logic might lead the
central bank to consider purchasing assets other than Treasury securities,
such as corporate bonds or stocks or foreign government bonds. . . [This was
also what he said late 2002.]. . . .Perhaps the most extreme example of a
policy keyed to the composition of the central bank's balance sheet is an
announced ceiling on some longer-term yield below the prevailing rate. This
policy entails (in principle) an unlimited commitment to purchase the
targeted security at the announced price.

b) . . .However, nothing prevents a central bank from switching its focus
from the price of reserves to the quantity or growth of reserves. When
stated in terms of quantities, it becomes apparent that even if the price of
reserves (the federal funds rate) becomes pinned at zero, the central bank
can still expand the quantity of reserves. That is, reserves can be
increased *beyond* the level required to hold the overnight rate at zero . .
.

Even with the speech's language hedged in Fed fashion, one is left wondering
whether the Fed really willing to buy up long bonds from all sellers by, in
his words, expanding the current liabilities side of the Fed's balance sheet
without limit. Again, is Bernanke bluffing or is this a crack in the dike?

There is one thing that gives me both caution and awe. In all Fed speeches
I've read, two key words are "transparency" and "credibility". For the Fed
to be effective, it's policy pronouncements must be credible. Bernanke,
while blandly saying it in Fed speak, ends his speech with "I will do it" (.
. . policymakers are well advised to act *preemptively* and *aggressively*.
. .").

As if in a game of baccarat, while we don't know exactly what the Banker
holds, I think we have seen the last cards just dealt, all stakes are on the
table and someone is asking, "Side bets, anyone?"




----- Original Message -----
From: "David Chiang" <chiang.d@xxxxxxxxxxxxxxxx>
Sent: Tuesday, January 06, 2004 8:13 PM
Subject: Re: FW: Dangerous Fed policy supports America's Consumer Debt
Bubble


> Despite the free fall in the US dollar, the Fed is afraid of the serious
> consequences of raising interest rates to defend the dollar. In reality,
the
> Greenspan Fed is now fully immersed in desperate measures to perpetuate a
> (John Law-style) financial scheme / bubble. The Mortgage Finance bubble is
> running completely out of control in America. Rumors noted by the London
> Financial Times have circulated that the European Central Bank has
> recommended that central banks cut their holding of US government backed
> mortgage securities. Just wait until the US government is faced with the
> specter of inevitable post-bubble credit losses on the $8 trillion in
> mortgage backed securities at Fannie Mae and Freddie Mac, which are fully
> guaranteed by the federal government. - Dave C.
>
> ----- Original Message -----
> From: <rainesco@xxxxxxxxxxxxx>
> To: "David Chiang" <chiang.d@xxxxxxxxxxxxxxxx>
> Sent: Monday, January 05, 2004 10:28 PM
> Subject: Re: FW: Dangerous Fed policy supports America's Consumer Debt
> Bubble
>
>
> > Several news programs have also stressed that low mortgage rates have
> positively affected housing prices.  I.e., extremely low rates have
propped
> up prices which otherwise would have stagnated or gone down.
> >
> > Raise the interest rates again, and poof goes the bubble.  The
refinancing
> and equity loans are a loaded nuclear cannon.
> >
> >
> > -----Original Message-----
> > From: David  Chiang <chiang.d@xxxxxxxxxxxxxxxx>
> > Sent: Jan 5, 2004 6:05 PM
> > To: rainesco@xxxxxxxxxxxxx, Gary Santos <evs@xxxxxxxxxxxx>,
> > Qasim KZ <qasim@xxxxxxxxxxxxxxxxx>,
> > william engdahl <engdahl@xxxxxxxxxxx>,
> > Abe Killian <destro@xxxxxxxxxxxxxx>,
> > Peter Kirsch <pjk1298@xxxxxxxxx>,
> > "Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>,
> > Peter Myers <myers@xxxxxxxxxxxxxxx>,
> > Gavin Oughton <amband@xxxxxxxxxxx>,
> > Peter Wakefield Sault <xxxx@xxxxxxxxxxxxxxx>,
> > Israel Shamir <shamir@xxxxxxx>, Philev@xxxxxxxxxx,
> > "Wolfram Graetz, Architect" <Wolfram@xxxxxxxxxxx>,
> > cpds@xxxxxxxxxxxxxxxxxxxxx, arno@xxxxxxxxxxx
> > Subject: FW: Dangerous Fed policy supports America's Consumer Debt
Bubble
> >
> > Americans build mountain of debt, savings rate slides
> >
> > Monday January 5, 2:05 pm ET
> > By Eileen Alt Powell, AP Business Writer
> > http://biz.yahoo.com/ap/040105/na_fin_us_debt_in_america_2.html
> >
> > NEW YORK (AP) -- As the bills from holiday spending sprees arrive,
> Americans
> > are finding that the mountain of debt they've built has gotten even
> higher.
> > Consumer debt has more than doubled in the past 10 years to record
levels,
> > making it hard for many families to cope.
> > For Bruce and Lorraine Esbensen, a couple living in Pennsylvania,
trouble
> > started when they spent lavishly on their wedding six years ago. They
soon
> > found themselves falling behind on their bills.
> >
> > (snip)
> >
> >
>
>

Attachment: Conducting Monetary Policy at Very Low Short-Term Interest Rates.doc
Description: MS-Word document