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Thursday, June 24, 2010

Some interesting notes on the #FED

As I like to say the government and the FED are 'all in' on this... All we can do is pray it works out... Though, personally, I give it no hope at all... They are NOT addressing any of the REAL problems we have in the financial system, in the society and in the culture... IMO

You can't fix a debt deflation problem by pretending it doesn't exist and forever adding more debt...

The following is just a snippet from an article on The Financial Times you may click here for the full article

by Sam Jones

At its core, the Bernanke Twist is a direct effort to try and support prices; to stop destructive debt deflation. We are in uncharted territory though. The Fed is not just trying to game the market in US government debt. It’s trying to support the entire asset-backed debt market.

Which is particularly risky when the the Fed is effectively supporting those prices by positioning itself as a risk sump.

No wonder, as Krugman says, Fed officials are “nervous”. This is an all-out gamble.

It isn’t clear just how much the Fed will need to throw into that system to actually prop it: so far, the Fed’s balance sheet alone has not been enough. The TARP doesn’t look like it has enough either. Consider the fact that total capital raised by the banking system is actually less than total writedowns taken to date.

There’s a big danger here for the Fed: that it is trying to catch a falling knife. The Fed is risking things it’s never risked before. That’s not to say we’re in apocalyptic territory at all; consider the firepower the Fed has behind it. It is though, to use a hackneyed, but apt phrase, paradigm shifting.

In Japan, where quantitative easing failed, the central bank’s balance sheet swelled to a size equivalent to 30 per cent of GDP. The Fed’s balance sheet is currently equivalent to 12 per cent of GDP.

Where we go from here then very much depends on how severe you see this crisis relative to Japan.

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