As part of the Federal Reserve's ongoing QE2 program, nearly each day, the NY Fed purchases US Treasury securities from a select group of primary dealers in what is called a permanent open market operation (POMO). Ordinarily, the auction begins at 10:16 am and ends at 11:00 am Eastern. While the exact mechanics of the operations are not public, the NY Times published an article about the team that manages them here, divulging a few details, which we subsequently analyzed here.Unbelievable. Who needs capitalism and monetary loss for bad decisions when those ever-clever central bankers can literally alter the rules in your favor? Privatizing gains and socializing losses? Hmmm I believe Mussolini had a term for that....
Only minutes before today's auction was scheduled to complete (while most, if not all, offers from the primarily dealers were presumably in), the European Union’s energy commissioner warned of ‘further catastrophic events’ at Japan’s stricken nuclear power plant. Shortly thereafter, the NY Fed cancelled the POMO--to our knowledge, an unprecedented act. According to Tyler Durden of Zero Hedge, Reuters reported the cancellation at 10:57 or 10:58 am.
In the minutes that followed, equities and other risk markets tumbled, while the very 5 and 7 Year Treasury Notes the Fed would end up buying surged in price over 50 bps (0.50%). At 11:24 am, after prices had settled a bit (though were still materially higher than before), the NY Fed restarted the POMO, which finally closed at 12:04 pm. It would end up purchasing a total of $6.580 billion in Treasury securities (reported at par), with a heavy concentration in the 5 Year tenor at $5.089 billion (of which $3.209 billion had been issued by the Treasury in the last two months).
Using 5 Year Note futures as a proxy, we have calculated the difference in average price between what the NY Fed would have paid had it not cancelled the first auction versus what it actually ended up paying: $15.7 million ($12.1 million for the 5's and $3.6 million for the 7's). This amount was simply pocketed by the primary dealers and is now a liability of the Federal Reserve, and putatively the US taxpayer.
And yet the mainstream financial media barely notices. Things may be changing though. Check out CNNMoney's slide show on Fed blunders. While stating many of the Fed personnel's obvious mistakes (Geithner lying on taxes, Greenspan creating the housing and dot.com bubble) CNN makes the same mistake Friedman did in thinking that the Fed's raising of interest rates at the onset of the Depression made it worse while not addressing the fact that its easy credit policies created the stock bubble that caused the market crash to begin with.
And now check out the latest Producer Price Index:
The index for finished consumer foods surged 3.9 percent in February, the largest increase since a 4.2-percent climb in November 1974. And the best part is up next:
Zerohedge: stagflation, bitchez!! Hello Japan.
In regards to the Keynesian idiots out there who think the destruction in Japan will force the government to engage in a huge fiscal stimulus that will re-energize the economy (cause twenty years of stimulus to avoid deflation wasn't enough), John Tamny and Caroline Baum absolutely destroy this ridiculous notion in their respective columns today.
To buy into the silly reasoning popular among journalists and allegedly intelligent economists such as Larry Summers is to believe that each time the U.S. experiences an economic downturn, the path to recovery would consist of dynamiting various cities in order to put Americans to work. A more absurd bit of economic thinking would be hard to conceive, but sure enough, newspapers have been filled with just that kind of commentary since the tragedy in Japan struck.Baum:
As Adam Smith long ago observed, stationary economies are failed ones, so for a region or country to rely on disasters as a form of stimulus would be for both to see investment and the jobs it creates eventually depart. Destroying wealth in order to recreate it is the picture definition of a stationary economy, so only the truly dim would suggest that there's a silver lining tucked into Japan's monumental struggles.
I’m glad to see that Bastiat is enjoying something of a revival, judging from the numerous post-earthquake commentaries that reference his parable of the broken window. Bastiat used the analogy of the broken window, and the spending that flows from it (that which is seen) to point out that which is unseen: How the money used to repair the window -- government spending on fiscal stimulus -- could have been spent more efficiently if the window hadn’t been broken.I will end with a great passage from Ron Paul on the absurd notion that we should establish a no-fly zone over Libya:
Japan won’t be better off -- richer, as a nation -- as a result of the rebuilding effort. Housing starts will increase, but the housing stock won’t. The same goes for factories and office buildings.
A nation isn’t richer when it has to allocate scarce resources to rebuilding. Just think how the money could have been used, in ways only entrepreneurs can envision, rather than rebuild what was destroyed.
Whatever we may think about the Gaddafi regime, we must recognize that the current turmoil in Libya represents an attempted coup d’état in a foreign country. Neither the coup leaders nor the regime pose an imminent threat to the United States and therefore, as much as we abhor violence and loss of life, this is simply none of our business.Before I go, I gotta mention this crazy article from the Financial Times Alphaville Simply amazing commodity collateral shenanigans in China:
The banks call it “inventory financing”. And of course, we should stress, it is completely legal. The practice mainly involves pledging an asset in return for an exchange warrant or cash.Read the article for the full explanation. This leads me to believe that the Bank of China isn't completely behind the real estate bubble over there. It is actually trying to contain the bubble:
According to our source, traders can deposit copper in an exchange warehouse in order to receive a warrant which can then be used to gain financing, usually via a broker, and less a 15 or 20 per cent haircut needed to cover futures margin deposits (sometimes called margin or warrant financing).
It’s a very useful facility, says our source, for any trader that needs to short-hedge but who does not want to face massive margin calls in the event that prices increase. The funds released by the exchange go directly to a broker account, and so cannot be misappropriated.
So that’s all fine and dandy.
It’s the use of the funds, however, that might be more of a concern.
For example, our source says it’s bad enough that it could be skewing analysts’ estimates of the global economic landscape and leading to a buildup of excess stocks in China.
But the open secret is that a lot of the money used from this strategy has gone into other assets like real estate, commodity futures and stocks.
It’s not that the government itself is engaged in this behavior (they are trying to limit it as above) but that the stimulus and massive bank lending in general went in part to private companies that engaged in this trade. Precise numbers are again, alas, difficult to quantify.Then again, I could be wrong. Massive bank lending and government spending? Sound familiar?