Bernanke Bluff

All the fuss yesterday was because of this:

When these tools are used to drain reserves from the banking system, they do so by replacing bank reserves with other liabilities; the asset side and the overall size of the Federal Reserve’s balance sheet remain unchanged. If necessary, as a means of applying monetary restraint, the Federal Reserve also has the option of redeeming or selling securities. The redemption or sale of securities would have the effect of reducing the size of the Federal Reserve’s balance sheet as well as further reducing the quantity of reserves in the banking system. Restoring the size and composition of the balance sheet to a more normal configuration is a longer-term objective of our policies. In any case, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments and on our best judgments about how to meet the Federal Reserve’s dual mandate of maximum employment and price stability.

Every normal and sane person knows this is garbage. No way FED will sell a single security in next couple of years or even longer because by doing that it would push interest rates higher in all market segments. This would mean higher mortgage rates, higher treasury interest rates and all this combined could lead to the repeated collapse of  U.S. and global financial system and a collapse of U.S. public finances.



This entry was posted on Friday, March 26th, 2010 at 4:02 am and is filed under Markets. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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