Apparently the national debt limit is capped, unless congress authorizes a higher limit, at $10 trillion. (National debt was $5.7 trillion in late 2000....)
The Federal Reserve has, in just a few weeks, lent banks and brokerages nearly half of it's total $850 billion portfolio value. It cannot sell the "collateral" that it accepted in exchange for loaning more than $300 billion to banks and brokerages, because they are not marketable...even when no one is seriously trying to sell the mortgage backed "paper" and other "crap", that the Fed lent against at face value amounts instead of at market value. The newest "paper" that the Fed is accepting are <a href="http://news.google.com/news/url?sa=t&ct=us/0-0&fp=47fef45f43afa7e8&ei=Ii3-R6GsJ4KyyQSv2938Aw&url=http%3A//www.bloomberg.com/apps/news%3Fpid%3D20601087%26sid%3DalBrRvnzgSaM%26refer%3Dhome&cid=1150006413&usg=AFrqEzdJsrMl0FVsSecZ8OrL7IRVBSGUuA">"CLOs"</a>, "Corporate Loan Obligations". In short, the Fed accepts and loans against at face value, the degraded "investment vehicles" the banks and brokerages refuse to sell at huge losses or to "mark to market". If they did that, instead of borrowing from the Fed in this "charade" that transforms these dramatically degraded assets into loans at the value that they were priced at before the credit crisis, most of the prominent banks and brokerages would be insolvent or their stock would be trading at much lower prices, crashing the stock market....
Quote:
http://online.wsj.com/article/SB1207...googlenews_wsj
Fed Weighs Its Options in Easing Crunch
By GREG IP
April 9, 2008; Page A3
WASHINGTON -- The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.
Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed's name rather than the Treasury's; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.
• The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
• The News: The Fed is considering several contingency plans for getting more lending capacity so that won't happen.
• The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.
No moves are imminent because the Fed still has plenty of balance sheet room for additional lending now. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the availability of such options largely eliminates the risk of exhausting its stockpile of Treasury bonds and thus losing its ability to backstop the financial system, as some on Wall Street fear.
British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.
The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.
The Fed is reluctant to heed calls from some Wall Street participants and foreign officials for the Fed to directly purchase mortgage-backed securities to help a market that still is not functioning normally.
Before the credit crunch began in August, the Fed had $790 billion in Treasury securities on its balance sheet, about 87% of its total assets. <h3>Since then, it has sold or lent about $300 billion. In their place, the Fed has made loans to banks and securities firms to assist them in financing holdings of mortgage-backed and other securities.</h3> Some on Wall Street say the potential for further declines in Fed treasury holdings could leave it out of ammunition.
[Chart]
The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasurys or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.
Since reserves earn no interest, banks lend cash that exceeds their required minimum. That puts downward pressure on the federal funds rate, currently targeted by the Fed at 2.25%. The Fed could purchase securities and make loans almost without limit, expanding its balance sheet. That would cause excess reserves to skyrocket and the federal funds rate to fall to zero. The Fed would contemplate such "quantitative easing" only in dire circumstances. The Bank of Japan took this step this decade after years of economic stagnation.
Weighing the Possibilities
So the Fed is seeking ways to expand its balance sheet without causing the federal funds rate to drop. The likeliest option, one the Fed and Treasury have discussed, <h3>is for the Treasury to issue more debt than it needs to fund government operations. The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasurys in the open market; for legal reasons, it generally cannot buy them directly from Treasury.
Treasury's principal constraint is the statutory limit debt. Treasury debt was $453 billion below the limit Monday.</h3> In the past, Congress always has responded to administration requests to raise the limit, sometimes only after political theatrics.
Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. It has never done so; the legality is unclear. Some foreign central banks, such as the Bank of Japan, do so.
Another possibility is seeking congressional approval to pay interest on banks' reserves immediately instead of waiting until a 2006 law permits that in 2011. If the Fed paid, say, 2% interest on reserves, banks would have no incentive to lend out excess reserves once the federal funds rate fell to that level.
Congress put off the effective date because paying interest on reserves reduces the Fed profits that are turned over to the Treasury each year, widening the budget deficit. Although preliminary explorations suggest Congress would be open to accelerating the date, the Fed is leery of depending on action by Congress.
The Fed is inclined to use any additional maneuvering room to lend through its existing and recently expanded avenues. Officials are reluctant to buy mortgage-backed securities directly. They worry that such purchases would hurt the market for MBS that the Fed is not permitted to buy: those backed by jumbo and subprime and alt-A mortgages, which are under the greatest strain.
<h3>Moreover, the Fed is not operationally equipped to hold MBS and would probably have to outsource their management.</h3> Such holdings wouldn't help avert foreclosures much, since the Fed would have little control over the mortgages that comprise MBS.
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Did I mention that, in addition to lending more than $300 billion to prop up this farce that was once the "vibrant" US economy, envied by the rest of the world, government borrowing, since the last fiscal year ended on 9/30/07, has borrowed $439 billion, and this just fiscal year is just half over...
http://www.treasurydirect.gov/NP/BPD...application=np
the $161 billion in tax rebate checks has not even been borrowed and distributed yet.
If only the Fed's entire $850 billion is lent out by 9/30/08, and no more, the US taxpayers will experience, along with the $700 billion in government borrowing by 9/30/08, a negative change of $1.55 trillion in just one year.
In year ended 9/30/00, the negative change was just $18 billion, or $1.542 trillion less than we may experience, this year.
At what point would you be curious and concerned about these details?
My prediction is that the Fed will exhaust it's portfolio, and instead of that event being perceived for what it actually is....the Fed participating in a deception to prop up the valuations of the stock, and the solvency of the banks and brokerages, to such an extent that the Fed itself has nothing remaining to lend to these criminals, congress will authorize borrowing....increasing the national debt to an amount higher than $10 trillion, permitting the Fed to lose even more than the $850 billion that was it's entire portfolio.
When that new borrowing, authorized by congress begins, this mess will actually have cost taxpayers the $850 billion that was the Fed's portfolio value....nearly half of which is probably already loaned out in this year's bailout, with very little likelihood that banks and brokerages will be able to pay it back, or the much larger borrowed amounts to come....