Monday, October 18, 2010

The Fed's SWAT Team in Operation Today

One of Fed Chairman Ben Bernanke's new tools has spiraled so out of control, the payment of interest on excess reserves, that Bernanke has created even more new tools to counteract his first tool creations.

From basically zero, there is now sitting as excess reserves a trillion dollars. No one knows when, or in what volume, these funds will come flying into the system. Bernanke is so concerned about this trillion that he has created a new tool to defend against the excess reserves flying out. The Fed tests this new counter-tool under the name,  tri-party reverse repo as part of operational readiness program.

They "tested" the readiness program today. Here their post on it:

It should be noted that, despite these successful tests, if any huge amount of funds come flying out of excess reserves, this program will collapse of its own weight or collapse the markets.

Essentially, the program would require money market funds to buy Treasury securities from the Fed to drain reserves from the system.

The first thing that should be noted, and is stated above, is that there are now a trillion plus in excess reserves. The mutual fund money markets that the Fed has approved to participate in this counter-tool have only $900 billion in total in their funds. Further, most of that is in other securities, far below 10% is in cash. But assume 10%. How the hell is this program going to absorb even a fraction of a trillion dollars, if ready cash is less than $90 billion, i.e., less than 1% of the trillion in excess reserves?

Any demand by the Fed for these funds to buy anymore than this 1% would require them to do wholesale dumping of securities on the open market. It will never work--even as a joint program with other "tools".

I repeat: The Fed shouldn't be in the money manipulation business at all. But if they are, the basics that everyone learned in Macro 101 as to how to control the money supply worked well for all other prior Fed chairmen. That is you can control the money supply by the discount rate, the reserve requirement and open market operations(Which controls the Fed funds rate). That Bernanke is creating a bunch of new tools that don't seem to work the way he expects is positively bizarre. The man is a mad scientist.
New York Fed purchases $1.290 billion in tri-party reverse repo as part of operational readiness program:

1 comment:

  1. Could you please consider posting a reference for "money market funds", as I used the links and found only primary dearlers referred to.