Fed and the Reverse Repo

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The crisis is over, say the feds. Now, they can begin turning off the taps.

“Fed takes first step in exit strategy,” is the headline in The Financial Times. A more accurate headline would have been…

“Fed dodges and weaves…fakes exit.”

The only way to exit is by the door the Fed came in. It barged into the market buying up toxic assets and Treasury notes and bonds. In order to get back out the door, it has to get rid of all the debt it gobbled up. How? It has to sell them back to the people it bought them from – or to someone else.

Instead, the Fed has come up with a subterfuge: the reverse repo.

“In a reverse repo,” The Financial Times explains, “the Fed sells assets, such as Treasury securities, to dealers for cash, with an agreement to buy them back later at a slightly higher price…”

No kidding. That’s what it says. Now, let us put the question to you, dear reader. Having thus reverse repo-ed a boatload of debt, has the Fed:

a) unloaded its unwanted debt and drained liquidity from the system,
b) not unloaded any debt at all…but merely lent out the credits at negative interest rates
c) postponed the problem until later?

If you answered “all of the above” you are not paying attention to the choices we’ve given you. It’s not on the list. Still, it’s probably the right answer…

The Fed says it’s going to try out this reverse repo trick and see how it works. We can tell them now. Save them some trouble. Either the Fed is the bagman of bad US debt, or it is not. It is either in or out. Long or short. Either Fannie Mae, AIG, GM are backed by the government or they’re not. If they’re not, the market will sort them out in its own good time. If they are the bagmen…well, then, the feds will squirm and dissemble…get themselves in deeper and deeper…until, finally, the bags drag them beneath the surface.

This reverse repo is just a scam to disguise the situation…so the Fed can pretend to exit without actually going out the door.

*********************

We talked about the origins of US government scofflaw-ism a couple of days ago and promised a follow up. What sparked the idea was the recent newspaper report that President Obama has called for an extension of George Bush’s post-9/11 emergency measures – such as eavesdropping and the suspension of the Bill of Rights in terrorist cases. Today, we see that he has announced another troop surge in Afghanistan, with no declaration of war from the US Congress (whom would they declare war against?) We pin this lawlessness on Napoleon Bonaparte’s nephew, Charles Joseph Bonaparte.

This story comes to us from one of our favorite raconteurs of Baltimore history – H.L. Mencken. It answers a question we posed ourselves for many years: what happened to them? The Bonapartes of Baltimore…that is.

Jerome Bonaparte, Napoleon’s younger brother, came to Baltimore in the early 19th century. There, he met the beautiful Betsy Patterson, from a prosperous Scotch-Irish family that gave its name to a leafy park that later became a center for drug use and homicides. But back in the 19th century, Baltimore was still a civilized place. And when Napoleon’s bro’ came, he was apparently attracted both by the energy of the place as well as the seductive charm of Ms. Patterson.

Jerome stayed in Baltimore long enough to leave his name on the founders’ brass plaque in the Maryland Club, of which your editor is a member, and to leave Ms. Patterson with child. Later, under Napoleon’s heavy thumb, he rejected his Baltimore connections in order to aim for something grander, leaving the aforementioned Ms. Patterson abandoned in Paris…later to return, enfant en main, to Baltimore. This issue – Jerome Bonaparte-Patterson — had two sons of his own, one of whom, Charles Joseph, devoted himself to public service….which is to say, he became a dangerous and meddlesome hack. Somehow, he caught the eye of Theodore Roosevelt, who had just enough knowledge of history to be flattered at the thought of a Bonaparte under his command, so he put him in as his Secretary of the Navy.

“He was the worst Secretary of the Navy ever heard of,” writes Mencken. He did not move to Washington, which was seen as a step in the wrong direction in those days. Instead, he kept his house in Baltimore and took the train down to the Navy Department in Washington. By the time he got down to work it was time for lunch. After dinning, he turned around and went home.

This proved that he had the talent for even greater responsibility in Washington, so Roosevelt elevated him to Attorney General. Normally, a semi-comatose Attorney General is the best kind. He is not chasing terrorists or Dadaists or climatologists. Bonaparte was one of the best. For three years, he did nothing. Then, something stirred him to action. Roosevelt had his eye on a group of Italian immigrants in Paterson, New Jersey. He was sure they were undermining the republic with seditious literature. They were anarchists, with a small circulation newspaper, written in Italian, who were no danger to anyone, except perhaps themselves. Nevertheless, Roosevelt thought he heard the walls crack. He was determined to stop them before the roof fell in. So he put his Attorney General on the case.

The trouble was that Mr. Bonaparte had sworn to uphold the law of the land. And the law of the land clearly gave the anarchists freedom of the press. It was then that the Roosevelt/Bonaparte team came up with a model for all the scalawags and scoundrels who have ever since smudged high office in the United States of America. They simply ignored the law and banned the Italians’ rag from the US mail. Thus was established the hallowed principle of American jurisprudence — it is perfectly all right to turn your back on the highest and most sacred laws of the land, as long as you can get away with.

Until next time,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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