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Wednesday, March 25, 2009

US Fed and Treasury enter into incestuous fiscal policy

In the last week the Federal Government has entered into outright manipulation and incestuous fiscal policy with two far reaching actions.

1 - Federal Reserve transferring debt to Treasury (spending taxpayer money) without congressional spending approval.
First, the Federal Reserve Bank under the cover of providing market stability purchased "assets" from private industry as collateral for companies to use against federal loans. This isn't new. What is new is the Treasury was under a court order to reveal information about certain "assets" that the Treasury money was used by the Federal Reserve Bank under Freedom of information act. (In an attempt to avoid disclosure) The FRB has "asked" the US Treasury to take ownership of these "assets". This will nullify the court order, since the Treasury will take the assets onto it's own books, and not involve a (quasi) private interest, FRB. This also has the added benefit of the Federal Reserve Bank's balance sheet being cleansed by off-loading assets (that no one wants at their price) for US Treasuries (basically cash).

Short Take
Fed takes "assets" from banks, gives T bills to banks and/or counts "assets" as reserves to meet margin requirements. Fed gives "assets" to Treasury, in return for T bills. Repeat cycle. Treasury now responsible for eventual profit/loss for the assets.

Assuming a loss, this translates into the US Treasury "spending" money, without authorization of the US Congress. This is in direct violation of the US Constitution. (See Karl's blog entry)

But here is the secret. NO ONE CARES! And once this action completes unchallenged, only the most naive would think this is the last time this will occur. The Federal Reserve can pave the way to continue to take on "assets" then "stick" them to the treasury, and therefore the taxpayer. I for one applaud these actions, the Fed should (and will) continue to do illegal actions unless the citizens care enough to pressure the government to stop acting illegally. After all, its not illegal if no one enforces the constitution. At some point bloggers can be dragged into the streets and executed for inflammatory writings. And they should if no one enforces the law.

2 - Federal Reserve buying US 2/10/30 Treasury Bonds with "Assets (see 1) / extra cash".
The Federal Reserve in purchasing "long term T-Bills" is willing to accept lower interest rate on 30 year T-bills than the public.
Let me boil this down. Would YOU buy 30 year T-bill with under 5% return? I wouldn't and so wouldn't most since no one wants to lock in a low interest rate with all the financial games going on. So the 30 year T-Bill interest rate is going higher compared to the short term T-bills. I, and others will take 1% for 30 day T-Bills. (Previous post)

Solution? Have the "private" institution, the Federal Reserve Board, buy T-Bills at a lower interest rate. After all, we are all friends here, why would FRB ask for higher interest rates?
And in return, the Treasury will accept alternate forms of "money" (see number one above)
Once T-bills are purchased, the Treasury can "print" more money. (See Mish blog)

Why this is bad

The Federal Reserve board is a QUASI private entity acting on the "behalf" of the government. Lets get real, The FRB IS A GOVERNMENT ENTITY. These are all semantics.

If you accept FRB is basically the US Government, then what we have here is one branch of the government taking on debt/(spending) and buying from itself long term T-bills to artificially hold down rates, so the other branch can use the new cash to buy more assets. Further, the FED buys T-Bills from the Treasury, which allows the Treasury to print money.

If none of this sounds suspiciously like banana republic finance, then buy 30 year T-bills and don't worry about it, everything is going to be all right. For those more skeptical, buy natural resources to get off of US currency based valuations while you can.

These recent actions combined enter into my own classification of "Financial Ground Zero" moments.

Hurray for watching history in the making.

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