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I know, the headline stunned me when I read it the first time too. First via James Turk, I had to stop and look at that for a second. Don’t they make it? How could they possibly need it?
Initially, the Fed called this proposed deposit facility a component of its “exit strategy” (the existence of which, much like Sasquatch, is still up for debate), insisting that by creating an interest-bearing drain for banks’ funds held at the Fed, it could clear out some of the money sloshing around in the system.
Although they also believe asset sales to be an option, I’m still not sure who the hell they are expecting to buy these bonds (unless they’re willing to take a loss, and knowing the Fed that’s not too likely) so stay tuned.
I believed this whole interest-bearing deposit facility nonsense was really just a Bad Bank for Dirty Fed money but it’s actually the Fed begging for deposits, so I guess I was wrong. But why, then, would they paint this as an exit strategy?
From the Turk piece:
The US government needs ‘deposit currency’ – or ‘electronic’ currency, to put it into Mr. Bernanke’s terms – so that it can pay its bills by check or wire transfer. Payment for goods and services by deposit currency are made through the banking system, and nearly all commerce in the United States is conducted in this way. So where will the Federal Reserve get enough deposit currency to enable it to continue purchasing US government debt?
In 2008, “public debt” was considered to be $9.9 trillion dollars or 70.2% of GDP. By 2009, that number had ballooned to over $12.9 trillion dollars, nearly 91% of GDP. Even more disconcerting? This is using governmental accounting rules which — as any of you who have ever worked in government can attest to — don’t necessarily coincide with GAAP logic.
Let’s not forget that a large chunk of this debt is owed to the Fed itself (for some reason) perhaps because inflation isn’t bad enough and we somehow should pay them more for the convenience of having printed money and payment systems.
I’m not 100% on what’s going on here but it’s beginning to look awfully suspicious.
