Monday, December 1, 2008
The crisis/panic/mahem, I don't know what to call it these days, has moved to its next phase. In an effort to slap some funding into the hands of the Treasury and to reduce the cost of corporate borrowing, Bernanke said that he may purchase Treasury debt (or agency debt) on the open market in "substantial quantities".
It is official - again - that the Fed plans to monetize government debt. But why wouldn't it? This is the next phase of the Fed's dropping each and every liquidity trick into the economic bucket.
The 10-year Treasury is trading at 2.72%, which certainly a record low. If the Fed succesully drives the 10-yr down another whopping 1.5% let's say, then where does that leave the cost of corporate borrowing? On November 28, the Moody's Baa investment grade corporate credit yield was 9.03%, and if the Fed's measures tighten investment credit by the same 1.5%, then the final cost is 7.5%, or just a 16% discount. I certainly wouldn't run to that sale.
Ben Bernanke should be using his power as a closely-followed public figure to pressure Congress to pass their $500 billion stimulus bill quickly. Bernanke & Co. cannot do this on their own!
The U.S. economy “will probably remain weak for a time,” even if the credit crisis eases, Bernanke said today in a speech in Austin, Texas. While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity -- remains effective,” he said.
Bernanke has created more than $2 trillion of emergency lending programs in the past year, using the Fed’s balance sheet and money-creation authority to cushion the economy from the worst financial crisis in seven decades. The central bank may lower its benchmark interest rate to zero and pump even more funds into the banking system, economists said.
“Although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest-rate policies to support the economy is obviously limited,” Bernanke said in prepared remarks to the Austin Chamber of Commerce.
One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.”
Treasury prices rose on Bernanke’s remarks, with yields on 10-year Treasuries tumbling about 10 basis points to 2.74 percent and two-year notes dropping to 0.85 percent. One basis point is equal to 0.01 percentage point. RW: If this works, then Ben Bernanke would have pulled the biggest rabbit ever out of his hat. All I see is policy makers running around with their tales between their legs. It's the real economy that matters - we need Congress.