The Fed was hit with withdrawals of $83.3 billion last Wednesday, the largest withdrawals from its deposit accounts that were not associated with quarterly tax payments since February of 2009. $7 billion of that was the net cash transferred to the US Treasury from its note and bond sales less outlays. The Fed still had to meet the other $76 billion. These transactions were revealed in the Fed’s weekly H.4.1 report.
The Fed was apparently forced to take extraordinary measures to fund these withdrawals. These included the outright sale of nearly $24 billion in its Treasury note and bond holdings from the System Open Market Account. As a result, the Fed’s System Open Market Account (SOMA) fell to $2.611 trillion, some $43 billion below the Fed’s stated target of $2.654 trillion. Prior to this week, it had not strayed from by more than $7 billion since June. The Fed’s action was not only a direct contradiction of its stated policy, but it was done without warning or explanation. It ran counter to Bernanke’s penchant for telegraphing every important move the Fed makes so that the banking/speculating organizations can front-run it.
The Fed took another unusual and virtually unprecedented action to fund these massive withdrawals. It borrowed $43 billion from foreign central banks (FCBs) through Reverse Repurchase Agreements (revese repos, or RRPs).
The Fed’s commitments of reverse repurchase agreements, where it pledges its securities holdings in return for cash loans, bulged by a record amount to a record level. The magnitude of this action is unprecedented....Adler concludes:
I don’t know whether this is some kind of technical adjustment, however big, or a sign that the wheels might be beginning to come off the world financial system. Given what’s going on with countries and brokerages going bankrupt and internet coupon companies setting the investing world on fire, it’s difficult not to suspect the latter.
We’ll have to see what hits the fan this week. If no reports show up in the mainstream media, rather than concluding that there’s nothing here, I would tend to suspect that there is, and that the reason there’s no reporting is that the Fed does not want us to know. I’d infer from that that Dr. Bernankenstein has lost control of his monster.
Read the whole post at The Wall Street Examiner, Hit With Big Withdrawals, Fed Sells Assets, Borrows Cash by Lee Adler
(h/t Zero Hedge)
Tom,
ReplyDeleteThis looks like 100% garbage.
The Fed is never "faced with withdrawals", the Fed buys and sells assets.
Buys assets with newly created reserves, and drains reserves by selling assets from it's balance sheet (H.4.1)..
so this guy Adler seems waaaaaaaay out of paradigm...
Resp,
Just left a comment there...
ReplyDeleteYou're confusing the thunder with the lightning. The sale of assets is what caused the drop in cash deposits, not vice versa. Think about it, if a bank (for itself or as an agent) buys an asset from the Fed, where do you think the purchase money comes from?
The currency swap with the ECB was clearly an effort to help out our friends across the sea, isn't the point of any Fed reverse repo draining dollar reserves and not "borrowing cash"?
The Fed has no more need to borrow dollars than Keebler elves have to borrow cookies; their power to make more is unconstrained and absolute. Speaking of which, I'm off to the store to engage in a dollars for cookies asset swap.
http://designdeliver.com/images/Keebler_2.jpg
Yeah, I thought this was interesting as a reverse of the hype about inflation that was supposed to result from QE. Now when the Fed sells some assets, it's hype about the Fed lossing control of its book. Damned if they do, and damned if they don't.
ReplyDeleteIt may be seeing faces in clouds, but perception is reality in magical thinking. We can probably expect a lot more of this if the Fed continues to unwind previous purchases.
As Beowulf points out, he gets the thing backwards. This seems to be an occupational disease in the profession.
"Fund these withdrawals???" What is this guy talking about???
ReplyDeleteMike, I was laughing about this kind of stuff over at ZH for a long while, but now I realize that we have to take it much more seriously, along with Ron Paul's "End the Fed" and the pervasive notion that the real culprit is the Fed. The misinformation about the Fed is incredible, and it is affecting the ability of MMT to penetrate the thick fog of not only ignorance but also falsity.
ReplyDeleteMMT proponents need to take these things very seriously and mount a strategy for counteracting the obstacles to acceptance of MMT that these ideas present.
I am coming to the conclusion that there is no satisfactory solution in tweaking the present system, but rather that the Federal Reserve Act needs to be revisited and the confusion resulting from an unclear public-private partnership removed.
The MMT solution would seem to be abolishing the Fed as an "independent agency" altogether — which is enormously popular albeit mostly for the wrong reasons —and combining the central bank and treasury functions formally under the US Department of the Treasury (in other countries the ministry of finance).
This would not only clear up the confusion of what is public and what is private by eliminating the private component of the central bank. It would also take the central banking function out of the hands of unelected and unaccountable technocrats and bring it under the umbrella of democratic control. All arguments to the contrary was simply assertions of distrust of democracy.
I reported in another comment how I was just interacting with some local #Occupy people and never got to MMT because the conversation got bogged down in the Fed. I don't think that this is an isolated instance. As far as I can see, it is endemic.
This is one of the chief issues that MMT has to confront head-on in mounting a clear and concise policy presentation for public consumption.
So while we can shake our heads at this stuff, we cannot ignore it. It is poisoning the well.
fascinating stuff guys. And great comment Beowulf.
ReplyDeleteSo when the Fed does forex swaps are they really just doing reverse repos with the ECB or whoever?
I agree with you Tom about the Fed. People are pissed and they have a right to be. And the Fed sucks at communicating with the public clearly about what they are doing and all the info out there on this stuff is so "poisoned" as you say that it makes perfect sense they feel this way.
One of you guys should do a powerpoint presentation on the Fed, how it works, and how we can effectively change it to make it better. I'd do it but frankly I am STILL hazy on some of the finer details of the Fed and really understanding it top notch.
so is all this guy saying that the amount of treasuries held at the Fed is alot lower than what it was a week ago or what have you? That banks have more cash on hand and the Fed has less treasuries in the open market account? Wouldn't that make sense though considering the whole MF Global and Italy and Greek yields and CDS and all that in Europe and the need for cash to handle any liquidity issues?
ReplyDeleteAs I say, even after all this time, I'm still fuzzy about some of this stuff so I just want to make sure! LOL
Basically the Fed was borrowing US dollars to avoid lowering the US dollar that much further which would strengthen the Euro that much more and that would be tough on Europe at this time. So instead the Fed did a reverse repo for dollars from foreign CB's and it's all much smoother that way and they can buy back those treasuries at a later date or unwind it some other way with those foreign CB's. yeah?
forex swaps seem to be a bit different I suppose since the foreign CB isn't putting anything up for collateral are they? The Fed just takes them at their word and gives them the cash. I guess in a sense the Fed is being quite generous with Europe and very accommodating to any sensitivities in their Euro currency. That's kind of "Christian" of them I guess. yeah?
So while we can shake our heads at this stuff, we cannot ignore it. It is poisoning the well.
ReplyDeleteTom, your thoughts on this little project I've been working on with TC would be appreciated.
http://traderscrucible.com/2011/11/07/4-ways-to-change-the-fed-a-users-manual/
Among other things, the Fed and Tsy could be kept administratively separate but with the Fed placed under "the supervision and control" of the Secretary of the Treasury. Sort of like the Marine Corps and Navy are separate services but both answer to the Secretary of the Navy. :o)
Beyond that, Tsy should issue US Notes to spend and the Fed should issue its own debt to control interest rates.