Policy Alternatives at ZERO bound

If there's one piece of my diary (RANT) you might want to read till the end and think
about, PLEASE let it be this one :

March 18, 2008
2245 hrs

Acknowledging that I've no real economic training and exhibiting ignorance and
wonder, "No sarcasm here, you've got to hand it to Ben Bernanke. I'm floored by
all the novel things his Fed is trying to do to revive things. Uncle Ben's Fed is
truly creative in the way it uses tools.", I said. An economist friend retorted,
"Anon! You've to read this paper by Ben Bernanke - 'Monetary Policy Alternatives at the Zero Bound : An Empirical Investigation'". Wow! To learn more, I also found another paper by Gordon Sellon (also enclosed) and spent quite a bit of time reading both of them. Nice way to spend an afternoon while glancing at the tape....

The papers are a very very good read and gives you a nice blueprint of the various
tools and means the Federal Reserve could take in dealing with economic
issues when typical monetary policy measures don't work.

Okie! In typical situations banks can deposit collateral with certain qualities and
walk out with dollars. Now, banks can deposit crappy paper (getting worth less by
the day) and then walk out with dollars (fast dwindling) that are worth less by the day!

Under usual conditions, the FED only bought safe US government bonds and lent
money to banks. Now, they've created a Term Securities Auction Facility (TSAF)
which takes in all manner of crappy paper. With the backstopping of Bear
Stearns via JP Morgan, the US Federal Reserve has essentially averted what
could have potentially been a cluster f**k in global financial markets. They've
saved the financial system by becoming the pawn shop of last resort. The Fed has
essentially risked half (400 Billion) of its balance sheet on using RMBS
(Residential Mortgage Back Securities) as collateral ie., its a government agency
that now owns paper (bonds) backed by home prices for an initial rolling period of
28 days...and now onto 90 day rolling periods!!

This move is unprecedented. No central bank in economic history has ever
exposed itself to the vagaries of instruments backed by assets - in our case,
homes that are dwindling in value. The Fed is essentially bailing out banks and
in the end if the idiots in Washington have their way (they always do) its going
to be you and I that are going to pay for all this.

I trade for a living and I absolutely hate this move of convenience but at the
same time I do realize that this has to be done, else the system as we know it
might not exist in the years to come. Regardless, I don't think the machinations
here by the Fed alone will work. Washington will get involved, conveniently
forgetting that its their own policy of taxation combined with capital market
structure (another conversation!) that was the seed that created this mess ie.,
think of George Bush's rate cut during a time of war - that was definitely a new
one for the economic history books!!

"Anarchy" party - consistent in that we absolutely hate absolutely everything that is
political! Yes, self referential.