Tuesday, March 3, 2009

More New Fed "Tools" Coming

Ben "The Toolmaker" Bernanke wants even more new "tools" than the ones he as already created.

Snuck into the bottom of the press release on the launching of Term Asset-Backed Securities Loan Facility was this interesting paragraph:

Increased TALF lending and other actions to stabilize the financial system have the potential to greatly expand the Federal Reserve's balance sheet. In order for the Federal Reserve to conduct monetary policy over time in a way consistent with maximum sustainable employment and price stability, it must be able to manage its balance sheet, and in particular, to control the amount of reserves that the Federal Reserve provides to the banking system. The amount of reserves is the key determinant of the interest rate that the Federal Reserve uses to pursue its monetary policy objectives. Treasury and the Federal Reserve will seek legislation to give the Federal Reserve the additional tools it will need to enable it to manage the level of reserves while providing the funding necessary for the TALF and for other key credit-easing programs.
The release does not discuss exactly what type of new "tools" the Fed is seeking legislative approval for. Could this be the Fed's attempt, that it has mentioned before, to gain the right to issue debt, as a way to drain reserves from the system?

Bernanke better watch out with all these new tools, it is simply impossible to think in advance of all the ramifications from the creation of these tools. So far the Fed has had to only make minor adjustments to some of the tools it has added, as a result of unforeseen consequences of the tools, but it is a very real possibility that at some point a major unforeseen consequence could arise that could threaten the entire financial system.

I hasten to add that Jeffrey Rogers Hummel, with strong justification, already considers the Fed's decision to pay interest on its reserves a major blunder.


  1. Maybe Bernanke realized that there is a potential problem with getting those "excess reserves" out of system without messing up prices on all those assets they have stockpiled in the Federal Reserve these days...or what does the professional economists say?

  2. @hpx83

    I think that is it. But,outside of my own posts on it a couple of times, I haven't seen anyone else comment on it.

  3. Fed debt was my first thought too as it is the only major "tool" left that I can think of that would require legislative action. Not only would this drain excess reserves, but could be the first step to internal debt repudiation and/or Dollar devaluation (forget the IMF). Would Fed debt be subordinated to Treasury debt? Could it issue a new currency class? Effectively transfer a substantial portion of U.S. debt to the Fed, devalue it, and leave the official Treasuries in tact.

  4. Another Fed PR released 3-23-09 states: "In addition, the Treasury and the Federal Reserve are seeking legislative action to provide additional tools the Federal Reserve can use to sterilize the effects of its lending or securities purchases on the supply of bank reserves".