Bernanke May Need ‘Massive’ Asset Buying to Counter Contraction

Bloomberg reports that Bernanke may need 'massive' asset buying to counter contraction.

(emphasis mine) [my comment]

Bernanke May Need 'Massive' Asset Buying to Counter Contraction

By Craig Torres

March 17 (Bloomberg) -- Chairman Ben S. Bernanke and Federal Reserve policy makers may have to ramp up their purchases of mortgage securities and other assets after the economy and job market deteriorated further since they last met.

The Federal Open Market Committee, gathering today and tomorrow in Washington, needs to redouble its efforts after the central bank's balance sheet shrank 17 percent from a $2.3 trillion December peak, Fed watchers said. The retreat came even as Bernanke acknowledged the chance that the unemployment rate will exceed 10 percent for the first time in a quarter century.

"It takes massive balance-sheet expansion [asset buying with printed money] to generate significant easing in financial conditions," said Andrew Tilton, an economist at Goldman Sachs Group Inc. in New York who used to work at the Treasury. "More needs to be done."

This week's FOMC meeting could mark a shift toward more aggressive monetary expansion to fight deflation after demand waned for many of the Fed's existing programs. One top consideration is an increase in the pace and size of a $600 billion program to buy bonds issued and backed by U.S. housing agencies such as Fannie Mae, analysts said.

Other measures could include everything from purchases of Treasuries to corporate bonds, Tilton said. The Fed has already agreed to work with the Treasury on implementing a program to revive consumer and business loans, which the Obama administration has said could reach $1 trillion.
...
Consumers Reluctant

Analysts are skeptical. "The concern about the TALF is not so much the investor interest in it, but the availability of eligible" securities to buy, given lack of consumer demand for new debt, said Tilton of Goldman Sachs.

Consumers will borrow if they see solid job prospects and rising wealth, economists said. Right now, neither condition is in place. The unemployment rate in February was 8.1 percent, up almost 2 percentage points in the past six months. Household wealth fell by a record $5.1 trillion last quarter. Personal savings as a percent of disposable income has risen every month since August.

A less effective TALF would lead the Fed to use its authority to purchase assets and expand the supply of money, some Fed watchers said.

"I would be surprised if they didn't continue buying another $500 billion of mortgage-backed securities in the second half given the downside risks to the economy and the fact that the mortgage market is still in a shambles," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York.

Rebel Traders reports that Bernanke's nightmare.

Bernanke's Nightmare
March 16, 2009
By Chuck ·9:48 a.m. today

The following chart is of the 10 year Treasury Note Yield..

Ben 'wants' to keep the yields low if he wants to keep mortgage rates low. A continued rise in the 10 year yield would make it much harder to keep interest rates low for homeowners.

If the 10 year yield breaks above 3.25% it would probably be the time when the FEDS will step in and buy their own notes to control prices/yields, as they have threatened to do for the past six months.

This should be what keeps Bernanke 'up at night'.


10 Year T Note Yield TNX

My reaction: There are only two real points to take away from these two articles:

1) The fed is expected to buy $500 billion of mortgage-backed securities this year.

2) If treasury yields continue to rise (and they will), the fed will start buying treasuries too.

The way the fed buys assets is by printing money and expanding the money supply. When the fed does start expanding its balance sheet again, it will put downward pressure on the dollar and upward pressure on gold.


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13 Responses to Bernanke May Need ‘Massive’ Asset Buying to Counter Contraction

  1. Anonymous says:

    Eric, I know that gold is a good investment right now, but what is your take on silver as it is more affordable for the average citizen?

  2. Martijn says:

    Both silver and gold are difficult investments, so be careful.
    It is true that gold is considered a safe haven, and it can offer some safety in case of a possible collapse of paper money (e.g. the dollar). However, the gold price has already risen significantly and a drop in price is not unthinkable. Hence, one could actually loose money owning gold.
    Besides, people advocating gold are somewhat idealistic and tend to use almost any economic development to state that "this will make gold rise for sure".
    Do not get me wrong: I believe that there is a strong case for gold these days, but one should also note this case having been picked up by quite some investors already.
    As for silver it is more a commodity than gold, so it can vary with industrial developments. However, silver can also have a monetary component (which in my opinion has not yet been priced in fully), so there is quite some upward potential. Silver is however somewhat more volatile than gold, and on top of that both the silver and gold market are said to be manipulated.
    Personally I would prefer owning some gold for safety and some silver for speculation.

  3. doug says:

    Eric,
    Whats you guess as to how much longer until the Fed begins to buy other loan-backed securities? (car, student, credit-card)

    This seems like a nightmare that will never end!

  4. Anonymous said...
    Eric, I know that gold is a good investment right now, but what is your take on silver as it is more affordable for the average citizen?

    As an investment, Silver is as good as gold.

  5. Martijn says:

    Not entirely true I believe. In the worst case people will want to be able to physically take their capital with them. As the same weight in gold is about 70 times worth as much as silver, gold would clearly be more practical to people with capital. Therefore gold might rise harder, although this theory might be a bit far fetched.
    On the other hand I expect silver to better hold its ground in stock market rally due to it's commodity function.

  6. The Russian lesson from late 90s.
    After collapse of USSR and criminal privatization, the industrial output fell through the floor, unemployment rising etc.,
    the government (Eltzin) faced potential civil unrest,
    so they decided to contain inflation (CPI) and keep the value of ruble for essential imports,
    by swapping government bonds, essentially building gov bonds pyramid.
    This killed the industry, as bonds EUR/RUBLE suck the rest of money which can be put into the economy revival.
    In few months time the Ruble fell 5+ times, all peoples savings lost, government defaulted and failed.
    So came Putin.

  7. Robert says:

    Question - how did the FED's balance sheet go down since Dec? Are they starting to write down the worthless 'assets' they just bought?

  8. Anonymous says:

    Has the Fed actually said (or leaked) that they will dedicate another $500 bil of newly-printed money toward buying agency mortgage-backed securities? Sure hope not.

  9. As for the Fed physical gold reserves in NY, Fort Knox (and other mythological places - Osama hiding cave ;) there maybe some gold there.
    If it is, does it belong to the Fed?
    If not and the Fed take it, means return of this gold is US public. Expect some dusty assays along with it with interesting historical information from the past centuries - do you think the gov will be happy the public reading it?

  10. Q: what is stimulus package and boosting stimulus?
    A: you figure it yourself, you are a big girl!

    Q: what is quantitative easing?
    A: it is when I payed you and now is taking your pants off.

  11. Anonymous says:

    to Hakuna Matata,

    Stepan, is it you?

  12. Yui And Drop Off says:

    Dacha!
    Ru lost 1/4 of its fgn funds
    reserves 'defending the rubble.'
    Costly mistake to roll
    into Northers Up-sett-ya aug
    08? IN old daze, RUskie
    role all way to Prague CZ!!

  13. Anonymous says:

    $165 Million out of 173 Billion is by my math less than 1/10 of a percent!! If $58 bilion went to over seas sources this would seem like a Much bigger story

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