Fed Chairman Bernake published a letter in the WSJ today stating:
"The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy."
This is what we have been complaining about for months, since October of last year and it was the basis of our most recent White Paper. He continues:
"The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed."
Again this is exactly what we have been arguing. It is the control of M2 growth as the Fed balance sheet implodes. This still means drastic inflation. Bernake knows the problem and this may be a plea to Congress to keep him there to manage it. Not to put Summers in his place. We feel the replacement of Bernake with Summers would potentially destroy the US economy. Bernake is always looking over his shoulder, reconsidering and re-planning, he is highly adaptive. In our opinion Summers totally believes in his current plan at least until he comes up with another. Just look at the stimulus plan, it frankly is not working. Bernake is an adaptive self checking individual, so keep him there.
Just look at his options for an exit strategy:
"First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.
Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline....
Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers....
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.
Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy..."
Yes, increasing short term rates will occur and we believe there will be an inversion of the yield curve and a modest recession resulting from that rebound. It is necessary. Yet the snake in the wood pile of this plan is the tax and deficit explosions created by the current President. We are already seeing the destruction of many small venture capital companies and thus the elimination of long term value. If the policies continue we could become worse than France, Germany perhaps...
"The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed.
But as the economy recovers, banks should find more opportunities to lend out their reserves. That would produce faster growth in broad money (for example, M1 or M2) and easier credit conditions, which could ultimately result in inflationary pressures—unless we adopt countervailing policy measures. When the time comes to tighten monetary policy, we must either eliminate these large reserve balances or, if they remain, neutralize any potential undesired effects on the economy."
This is what we have been complaining about for months, since October of last year and it was the basis of our most recent White Paper. He continues:
"The exit strategy is closely tied to the management of the Federal Reserve balance sheet. When the Fed makes loans or acquires securities, the funds enter the banking system and ultimately appear in the reserve accounts held at the Fed by banks and other depository institutions. These reserve balances now total about $800 billion, much more than normal. And given the current economic conditions, banks have generally held their reserves as balances at the Fed."
Again this is exactly what we have been arguing. It is the control of M2 growth as the Fed balance sheet implodes. This still means drastic inflation. Bernake knows the problem and this may be a plea to Congress to keep him there to manage it. Not to put Summers in his place. We feel the replacement of Bernake with Summers would potentially destroy the US economy. Bernake is always looking over his shoulder, reconsidering and re-planning, he is highly adaptive. In our opinion Summers totally believes in his current plan at least until he comes up with another. Just look at the stimulus plan, it frankly is not working. Bernake is an adaptive self checking individual, so keep him there.
Just look at his options for an exit strategy:
"First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements with financial market participants, including banks, government-sponsored enterprises and other institutions. Reverse repurchase agreements involve the sale by the Fed of securities from its portfolio with an agreement to buy the securities back at a slightly higher price at a later date.
Second, the Treasury could sell bills and deposit the proceeds with the Federal Reserve. When purchasers pay for the securities, the Treasury’s account at the Federal Reserve rises and reserve balances decline....
Third, using the authority Congress gave us to pay interest on banks’ balances at the Fed, we can offer term deposits to banks—analogous to the certificates of deposit that banks offer their customers....
Fourth, if necessary, the Fed could reduce reserves by selling a portion of its holdings of long-term securities into the open market.
Each of these policies would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy..."
Yes, increasing short term rates will occur and we believe there will be an inversion of the yield curve and a modest recession resulting from that rebound. It is necessary. Yet the snake in the wood pile of this plan is the tax and deficit explosions created by the current President. We are already seeing the destruction of many small venture capital companies and thus the elimination of long term value. If the policies continue we could become worse than France, Germany perhaps...
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