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"The guy is doing what Krugman is saying without openly acknowledging it. I am amazed that no one is talking about this!"

 
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07/11/2010 11:48 AM
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"The guy is doing what Krugman is saying without openly acknowledging it. I am amazed that no one is talking about this!"
[link to www.zerohedge.com]

What we see is that Bernanke has indeed stopped those programs for all intents and purposes. The net printing shown above has come through a decline in bank Excess Reserves. Whereas before such declines in Excess Reserves were met by Fed sterilization through a shrinkage of the Fed's own balance sheet (for example, see May - July 2009), nothing of the sort has happened this time. That money is just being allowed to enter the system, period.

The next logical question is where the bank lending that has replaced the Excess Reserves is heading. Well, we know it is not hitting the consumer debt market, given the latest Fed reports. Consumer credit has continued to shrink (ref), and the government is the only marginal lender (chart). And just ~20 days later, risk assets began falling hard. It seems doubtful that they are ramping up risky lending at a time like this.

My theory is that the money has floated into the Treasury market. A lot of people have wondered how the Treasury would be able to continue running record deficits without the Fed buying. Well, we now know that the banks are picking up a lot of slack in the lending markets, and they are doing so in the midst of very dicey market conditions. Is it that much of a stretch to posit that the Fed reached an agreement with them whereby the banks would take over where the Fed left off?

If this is true, Bernanke is talking a good game while continuing to dole out free booze. The guy is doing what Krugman is saying without openly acknowledging it. I am amazed that no one is talking about this!

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