"On the monetary side, the Treasury and the Federal Reserve System must stop creating artificially cheap money — i.e., they must stop arbitrarily holding down interest rates. The Federal Reserve must not return to the former policy of buying at par the government's own bonds. When interest rates are held artificially low, they encourage an increase in borrowing. This leads to an increase in the money and credit supply. The process works both ways — for it is necessary to increase the money and credit supply in order to keep interest rates artificially low. That is why a "cheap money" policy and a government-bond-support policy are simply two ways of describing the same thing. When the Federal Reserve Banks bought the government's 2½% bonds, say, at par, they held down the basic long-term interest rate to 2 percent. And they paid for these bonds, in effect, by printing more money. This is what is known as "monetizing" the public debt. Inflation goes on as long as this goes on."
Henry Hazlitt, "What You Should Know About Inflation" - 1964
Following Federal Reserve Chairman Bernanke’s February 24, 2010 testimony to Congress, Congressman Alan Grayson--perhaps best known to those outside his home city of Orlando for his periodic comedic and dramatic YouTube moments--submitted 17 questions to the Chairman. Bernanke's response raises more questions than it answers, as ZeroHedge notes. A cursory review confirms our worst fears, revealing a man at the helm of the world's most powerful central bank that is either (1) so clueless he cannot grasp the most basic of economic tenets and/or (2) willing to respond dishonestly to Congress in writing. Anyone with a hint of understanding of economics will want to put down their coffee before learning the beguiled Chairman “[doesn’t] believe that monetary policy during the early and mid-2000s was responsible for the boom and subsequent bust in the U.S. housing market.” The material deserves a thorough point by point refutation, which will be the subject of a later post. For now, however, we turn to the patently dishonest response to question 1 regarding the Fed’s intervention in the stock market.
Questions for The Honorable Ben Bernanke, Chairman, Board of Governors of the Federal Reserve System, from Congressman Grayson:
1. The Federal Reserve has taken extraordinary measures to prevent losses by large financial institutions. This has led to widespread speculation that such measures might include intervention in the stock market. Has the Federal Reserve--alone or in concert with the Treasury Department or any part of the government--ever taken any action with the purpose or effect of supporting the stock market or an individual stock? The means to do so included in this inquiry include, but are not limited to, the futures market, the Exchange Stabilization Fund, foreign custody accounts, the System Open Market Account, and any other account, mechanism or financial instrument. Has the Federal Reserve, Treasury, or any part of the government ever directed, acted in conjunction with or otherwise engaged a proxy or intermediary--including but not limited to a private sector entity or foreign central bank--with such a purpose or effect? Please respond to both parts of this question. Please note that we are asking you to enumerate each such action, with a description on each occasion of who, what, when, where and why.
[Answer:] The Federal Reserve has not intervened to support the stock market or an individual stock.
At fifteen words, this is by far the shortest response—revealing perhaps that the Fed has more to hide here than anywhere else. The question clearly asked if the Fed had taken any action with either the purpose or effect of supporting the stock market. Yet, Gentle Ben replies only to the former when he writes the Fed has not intervened to support the stock market. The evasion is not surprising because documents obtained through Lehman bankruptcy proceedings reveal that during the maelstrom of the post-Lehman crash in September, 2008, the Fed at one point held as collateral some $4.4 billion in equities on its books, including among other things 5,136 shares of bankrupt retailer Shaper Image. ZeroHedge provided a full analysis as well as the following proof:
While it can be argued that the intent was not to support the stock market or any individual stock, the effect was certainly to do so, as it provided a fleeting floor for equities during that turbulent time. As we lack granular data on the numerous other interventions that preceded and followed, we can only speculate as to the Fed’s complete role in supporting the equities markets. However, as we demonstrated in August, 2009, there was an incredible correlation between days on which the Fed would pay primary dealers billions for their Treasury securities (as part of the Fed's quantitative easing program) and paint-the-tape closes in the stock market.
Then, there is the curious statement by Nouriel Roubini in December, 2008 suggesting the Fed might intervene to buy stocks indirectly. Regular EPJ readers are apprised that the highly connected Roubini does not simply shoot his mouth off, but echoes his conversations with the power elite. Washington’s Blog covered it here:
As I pointed out in December 2008, Nouriel Roubini wrote the month before that the government might buy U.S. stocks:
The Fed (or Treasury) could even go as far as directly intervening in the stock market via direct purchases of equities as a way to boost falling equity prices. Some of such policy actions seem extreme but they were in the playbook that Governor Bernanke described in his 2002 speech on how to avoid deflation.
Given that Roubini was previously a senior adviser to Tim Geithner, he probably knows what he's talking about
Finally, we turn to the Maiden Lane LLC portfolio—the $30 billion cesspool of Bear Stearns Assets actively managed by BlackRock Securities to this day (though sold to the public as a wind down portfolio), originally taken on by the NY Fed after Bear Stearns was gifted to JP Morgan in early 2008. As we count down the days to Maiden’s two year anniversary--and we greatly anticipate the 4:00 pm Friday June 25 press release stating JP Morgan will be reimbursed ahead of the taxpayers to the tune of $1.xxx billion--it’s worth pointing out that BlackRock, on behalf of the NY Fed, has actively bought and sold interest rate futures, putatively for hedging purposes:
Excerpt from Maiden Lane LLC Holdings as of January 29, 2010
Source: Federal Reserve Bank of New York
And therein lies the rub: if BlackRock can buy interest rate futures for hedging purposes, why couldn’t the Fed buy massive amounts of equity index futures and options, also for hedging purposes? Hedging does not imply intent to support prices, but to mitigate loss in an extant portfolio. With the NY Fed's System Open Market Account bloated to beyond $2 trillion in assets, any number of hedging strategies could be concocted that would provide direct support of the equities markets and possibly individual stocks. So when Chairman Bernanke only answers half of a question and in the negative, it implies a positive response in the other half. Namely: the Fed has intervened in the stock market with the effect of supporting it.
While a redirect to Bernanke for clarification would be appropriate, it’s time to stop playing footsie with those that are squandering what’s left of our future for their personal gain. What the people need is a line by line accounting of every transaction executed by or on behalf of the Federal Reserve Banks of the US. What is needed is a full audit of the Fed.
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