Tuesday, January 23, 2018
Our National High-Wire Act: Dealing With Fed’s Balance Sheet in The Age of Trump

WASHINGTON, D.C. Aug. 24 (DPI) – Sometime next month, America’s central bank will begin selling government bonds – $50 billion, it says, every month for a few years to come. It’s all to “wind down” a $3.5 trillion economic-stimulus program by The Federal Reserve that began in the depths of the 2008 financial crisis – a program that, so far at least, has worked out pretty well if you agree that another Great Depression was worth avoiding.

But the decade-long policies of cash stimulus and near-zero interest rates have to end at some point, and they are – slowly.  The Fed  has indeed curtailed its bond-buying program, the so-called “Quantitative Easing” intended to quietly inject cash into the economy.  And as for interest rates, the Fed has engaged in quarter-point hikes over the last year. But they are such small increases that short-term rates remain at levels that economists say remain “artificially” and “unrealistically” low.

Thus the Fed’s financial high-wire act is far from over.

In fact, the Fed’s plan to sell the $3.5 trillion in bonds it accumulated over the last decade looks more and more perilous – especially with the unpredictable and reckless Donald Trump as president. He certainly hasn’t helped the global receptiveness for US bonds.

Yes, there are the familiar hazards – the usual political impasse over a US budget, and the potential for another government shutdown.  But the presence of Trump has hurt the prospects for America’s central bank to sell all that debt.

Why? For starters, non-US buyers of the debt are critical to absorbing any amount of it, and the nation’s recent political upheavals have dented our longstanding image of prestige, responsibility and creditworthiness.  The financial high wire has only gotten higher.

Why did the Fed buy all those bonds in the first place? The short answer: Because it could, and because Congress wanted the political cover that such a program provided.

In the midst of the financial crisis almost a decade ago, the government needed and wanted action to stabilize the fast-cratering markets – Congress authorized an initiative called Troubled Asset Relief Program to stabilize the banking system, and then allowed the Fed to engage in its bond buying scheme. Those bonds were issued by Wall Street firms only too happy to go along with the Washington charade that Quantitative Easing wasn’t a government scheme to lend to itself.

Of course, such a long-term program, lardered in officialese and double-talk, sounded much more acceptable than simply the old-fashioned printing of money – but that is in effect what the Fed has been doing for 10 years.  See the Fed’s balance sheet today.

Sure, the Fed can do nothing, and hope that no one will notice its $4.5 trillion balance sheet, which is about 25% of the nation’s GDP.

So now we turn to bond-selling. There’s a chance that this latest twist in the scheme, scheduled to begin next month, will go smoothly.  The Fed is counting on the Wall Street firms to help with the orderly distribution of all those bonds.

But right now no one – not even anyone at the Fed – really knows how it will play out.  But most experts agree on this: Once the bond-selling gains momentum, look for long-term interest rates to rise, whether anyone wants them to or not. And higher interest rates will likely trigger a slow-onset recession.

No central bank in modern history has engaged in a scheme this audacious – and enormous.  And the deeply divided political climate, only worsened by poor leadership, isn’t helping.



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