Diary of a Financier

Bernanke, Scripted

In Economics on Sat 9 Jun 2012 at 06:20

I’ll to play speechwriter tonight. Going to email this bit down to the Federal Reserve. Consider it a pro bono effort to script Ben Bernanke’s next press conference after the FOMC Meeting June 19-20 (if we get that far with Greek elections June 17). Politics, economics, and pragmatics aside, this is what the market wants to hear:

The Federal Reserve is prepared to provide $600b in additional Quantitative Easing (QE) in the form of Large Scale Asset Purchases (LSAP). These operations will focus on Agency Mortgage Backed Securities (MBS) with the flexibility to purchase other government/government sponsored assets–all on the long-end of the curve. This operation does not have a term limit. Its end-date is indefinite. Hence, the Federal Reserve will only deploy on an “as needed” basis.

In addition, the Federal Reserve is working closely as a consultant with the Congressional Finance Committee and the Congressional Budget Office, who are drafting a bill for a $400b fiscal package. If Congress is unable to approve this legislation by year-end, the Fed is prepared to provide that capital itself, transmitted through LSAP in the 1-5 year front of the curve.

Through these mechanisms, our design is to not only promote continued liquidity and normal functioning of capital markets–even were unforseen, exogenous shocks to beset us–but also to provide stability in a more certain outlook for the business environment.

I’m not saying that’s what I want to hear, but since we’ve made our bed, that’s apparently how we lay in it. It’s the lock on a 30+ year sentence to the Keynesian liquidity trap. From my StockTwits:

  • What will #QE3 do, push rates lower? Already at historic lows! We must forgo ST pain for LT gain… $$ flq.us/1XK
    1 Jun 12 – 2:32pm
  • …announce more QE on long end (only deploy if necessary), and fiscal intervention (to aid structural issues/innovation). $TYX $TLT 1 Jun 12 – 2:36pm

While our situations differ somewhat, my original advice to America much resembles my recent advice to Europe. That is, accept the immediate retribution in order to evade a decade(s) of stagnation:

[Europe’s] Fiscal Consolidation will prompt a short-term rally, followed by long-term retracement. Currency Dissolution will trigger a short-term capitulation, followed by long-term repair.

It’s not so much the federal debt load as it’s the private, zombie institutions that concern me. Bankruptcy is a necessary–albeit painful–purge. “Not during my term,” says the politician. Shame.

–Romeo

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