Market Observations with Rob Kirby

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Un-Graceful Exits

by Rob Kirby, Kirby Analytics. April 5, 2010

On March 25th, 2010 Federal Reserve Chairman Ben Bernanke gave testimony before the House Committee on Financial Services regarding the Fed’s “Exit Strategy”. Here is a brief summary of Mr. Bernanke’s testimony in his own words:

“Broadly speaking, the Federal Reserve’s response to the crisis and the recession can be divided into two parts. First, our financial system during the past 2-1/2 years experienced periods of intense panic and dysfunction, during which private short-term funding became difficult or impossible to obtain for many borrowers. The pulling back of private liquidity at times threatened the stability of financial institutions and markets and severely disrupted normal channels of credit. In its role as liquidity provider of last resort, the Federal Reserve developed a number of programs to provide well-secured, mostly short-term credit to the financial system. These programs, which imposed no cost on taxpayers, were a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit to American families and businesses. Besides ensuring that a range of financial institutions--including depository institutions, primary dealers, and money market mutual funds--had access to adequate liquidity in an extremely stressed environment, the Federal Reserve’s lending helped to restore normal functioning and support credit extension in a number of key financial markets, including the interbank lending market, the commercial paper market, and the market for asset-backed securities.”

The money that the Fed “created” acting as lender of last resort can be clearly seen in the Fed’s accounting of the Monetary Base here:


Mr. Bernanke’s assertion that the money created [above] imposed “no cost” on taxpayers is patently false. What we can say about this newly created money is that every nickel of it that was conjured into existence – out of thin air – to bail out the banks is now an obligation of future generations of Americans to repay * plus interest. The repayment of this debt cannot ever be settled by “sleight-of-hand” and will be settled with the sweat equity or confiscation through taxation of future incomes of Americans.

Mr. Bernanke should be ashamed of himself for uttering such hubris.

When Mr. Bernanke states that the money creation was a critical part of the government’s efforts to stabilize the financial system and restart the flow of credit to American families and businesses, he is once again way off base. When credit “flows” to American families and businesses, this is captured in M3 reporting. Here’s what has happened to M3:

Chart compliments of:

What the money creation was really all about was a rescue of the banks whose balance sheets were and probably still are worse than those of ‘ordinary’ Americans.

Mr. Bernanke claims that financial conditions have improved:

“As financial conditions have improved, the Federal Reserve has substantially phased out these lending programs. Some facilities were closed over the course of 2009, and most others expired on February 1.1 The Term Auction Facility, under which fixed amounts of discount window credit were auctioned to depository institutions, was discontinued in the past few weeks. As of today, the only facility still in operation that offers credit to multiple institutions, other than the regular discount window, is the Term Asset-Backed Securities Loan Facility (TALF), which has supported the market for asset-backed securities, such as those backed by auto loans, credit card loans, small business loans, and student loans. Reflecting notably better conditions in many markets for asset-backed securities, the TALF is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.2…”

But reality suggests that something is happening that is more akin to a shell game:

IMF Executive Board Backs US$250 Billion SDR Allocation to Boost Global Liquidity

Press Release No. 09/264
July 20, 2009

The Executive Board of the International Monetary Fund (IMF) has backed an allocation of Special Drawing Rights (SDRs) <> equivalent to US$250 billion to provide liquidity to the global economic system by supplementing the Fund’s 186 member countries’ foreign exchange reserves. The equivalent of nearly US$100 billion of the new allocation will go to emerging markets and developing countries, of which low-income countries will receive over US$18 billion. The proposal <> will now be submitted to the IMF’s Board of Governors for final approval…

...SDRs allocated to members will count toward their reserve assets, acting as a low cost liquidity buffer for low-income countries and emerging markets and reducing the need for excessive self-insurance. Some members may choose to sell part or all of their allocation to other members in exchange for hard currency--for example, to meet balance of payments needs--while other members may choose to buy more SDRs as a means of reallocating their reserves. In supporting the allocation proposal, the Executive Board stressed that it should not weaken the pursuit of prudent macroeconomic policies, and should not substitute for a Fund-supported program or postpone needed policy adjustments.

Bait and Switch

The I.M.F. liquidity injection outlined above was designed to replace the maturing Central Bank Swap Lines – which coincidentally had brought a great deal of scorn on the U.S. Federal Reserve. Do you all remember how the maturity of the Central Bank Swap lines without renewal was sold [as in a bill of goods] in the mainstream financial press as a sign of a global financial recovery?

The reality is that temporary liquidity measures were made permanent – thanks to the benevolence of the I.M.F.

Announced Date Expired Date Participating Foreign Central Banks Maximum Authorized Amount
04/06/2009 10/30/2009 Eurozone, Japan, England, Switzerland $286 billion
10/29/2008 04/30/2009 Brazil, Mexico, Korea, Singapore $120 billion
10/28/2008 04/30/2009 New Zealand $15 billion
09/24/2008 01/30/2009 Australia, Sweden, Norway, Denmark $30 billion
09/18/2008 01/30/2009 Canada, England, Eurozone, Japan, Switzerland $180 billion

Yes Mr. Bernanke, while you speak of graceful exits, the reality is that banks have been thrown life preservers and the ordinary Americans / Businesses have been thrown ‘wet bags of fiat cement’. Your fiat rescue ensures that in future, ordinary Americans will have to paddle much harder to remain where they are.

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 53 points to 11,339. North American markets also improved with the DOW ahead 46.50 points to 10,973.50, the NASDAQ up 26.95 to 2,429.53 and the S & P adding 9.35 to 1,187.45. NYMEX crude oil futures gained 1.89 to end the day at 86.76 per barrel.

Benchmark interest rates – the 5 year government bond ended the day at 2.73% while the 10 year bond finished at 3.99%.

On foreign exchange markets the US Dollar Index fell .05 to 81.12.

The precious metals complex was broadly higher with COMEX gold futures adding 5.00 to 1,142.40 per ounce while COMEX silver futures gained .17 to finish at 18.11 per ounce. The XAU Index gained 1.79 to 173.07 while the HUI Index added 4.26 to 432.30.

On tap for tomorrow, at 2:00 p.m. we anticipate the release of the minutes of the last FOMC meeting.

Wishing you all a pleasant evening!

Rob Kirby

© 2010 Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail

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