a. in the context of the real-world constraints on the Fed’s inherent ability,
b. taking into account the action already taken by the Fed in our current crisis as a predictor of its future action.
In other words, even though the Fed can solve the following problem,
Brace for $1 Trillion Writedown of `Yertle the Turtle' Debt
it can’t solve the problem, for the following reasons:
1. The cataclysmic effects on the dollar: if the Fed has to take truly unprecedented, epic monetization/debtization action, then I assume the endogenous credit/debtization system will have seized up in a truly unprecedented, epic manner. Such an act would reek of Fed desperation, as it would be obvious the Fed can’t solve the credit problems within the economy. After all, if it could have solved them, then why would it have let the unprecedented, epic “seize up” occur in the first place?? If the Fed were to debtize/monetize under such epic “seize up” conditions, it would be mega-inflationary, dollar destructive, and likely cause a U.S. demand crash.
2. If the Fed is to, at a minimum, obtain the following new powers:
“In addition, the Federal Reserve should have the ability to undertake market stability discount window lending. Such lending would expand the Federal Reserve's lender of last resort function to include non-FIDIs. A sufficiently high threshold for invoking market stability discount window lending (i.e., overall threat to financial system stability) should be established. Market stability discount window lending should be focused wherever possible on broad types of institutions as opposed to individual institutions. In addition, market stability discount window lending would have to be supported by Federal Reserve authority to collect information from and conduct examinations of borrowing firms in order to protect the Federal Reserve (and thereby the taxpayer).”
It can’t risk its current “stellar” reputation by engaging in uber-extreme monetary sports; therefore,
(a quick and very necessary rant: only in a world of gargantuan power asymmetries among economically powerful groups could one class—the financier/speculator class—propose something as outrageous as an expanded lender of last resort function for the Fed. Let me get this right: financiers/speculators cause the current crisis, yet obtain more power and more taxpayer insurance, yet no additional regulation, from the Fed?? The audacity and behavior of the financiers who inhabit and own the U.S. credit/debtization system has become intolerable; the entire system needs to be democratized or destroyed, for there can be no true free market when one group stealthily and covertly exerts totalitarian control over the allocation of a country’s economic resources.)
in my opinion, the Fed will continue to:
a. (temp repo) rollover, then exchange (treasuries [and/or] cash for garbage securities in order to bail out the bankers), and finally sterilize (if necessary).
b. Lower the Federal Funds rate, which I view as a commercial bank currency-drain backstop, and nothing more.
Neither of these actions is flooding the financial system with liquidity, contrary to what the media is portraying. The actions are, however, temporarily preventing either a partial or total implosion of the endogenous debtization system, while allowing it to extend more credit, albeit in a much more limited and prudent manner.
I don’t expect the Fed’s current or future actions to save the real economy from depression, since, again, due to real world economic constraints and its future (de)regulatory desires, the Fed can’t monetize/debtize in a manner consistent with halting and reversing the deflationary/inflationary aspects of our current crisis, and neither can the endogenous credit/debtization system. But I do expect its actions to save the bankers and their debtization system from categorical destruction.
I also expect the Fed to continue to transfer the responsibility for any necessary inflation from itself to Fannie and Freddie, the FHLBs, or any other government agency that may have to support illiquid markets or perform some sort of “price support” in the near future, as such transfer action allows the inflationary/deflationary aspects of said support to remain somewhat hidden, in addition to allowing for a more controlled descent into depression, as government agency involvement and/or guarantees can create enough confidence among market participants to allow for their somewhat controlled exit from the American economy (Unprecedented Fed monetary action would not support a controlled exit from the American economy by market participants).
Moreover, when the support actions of the government fail to stop the real economy’s descent into depression, it makes a strong case for radical reform of any support-involved government institutions, which is an obvious desire of the financier class.