The Start of Something Bad

Reading James Hamilton can sometimes be as mystifying as studying the Fed itself. It has something to do with the nature of the of the discussion; describing a federal bureaucracy being akin to outlining an alien life form. The Fed originally started out holding short-term Treasuries, releasing excess funds in the economy; they holding two Properties of short duration, and lack of horizontal integration with Private holdings. The Fed began an integration with Private holdings beginning in September of 2007 by a Shift to a policy affective influence through manipulation purchase of desired Investment, which could not find sustainable subscription elsewhere at a desired Interest rate. The Fed became a Hedge Fund in itself with an agenda; one which attempted to create artificial value–like unto a high quality Junk bond issuance. Here is where the trouble may have started.

It was at that Point where the Fed stopped being a Regulator, and became a Participant in the economy. The ramifications of this action may not be seen until disaster hits, which is often the Case in economic events. The reality is that the Bank Reserves demanded by the Fed no longer consisted of actual Reserves, but had altered to mortgage collateral which itself was subject to the hazards of over-extension of viable Value. The End-Result was and will be that the Fed loses its authority, and serves as no repository of Value when subordinate institutions fail. Further action has cut the wings of the FDIC, so that the entire Reserve System has been uncovered by the previous Insurance against Risk.

The above discussion is hotly contested by Some, who cannot perceive any change in lifestyle until many years of living within a new house. They do not grasp that the Fed lowered itself to the same level as its subordinates by the surrender of the Concept of Reserves in reality, rather than the actual only nominal designation. The Fed places itself under the same pressures as the rest of the Banking system, with no avenue to a superior fund under crisis. The current Raiding of the FDIC for funding which neither Congress and Treasury desires to underwrite, completes the destitution of the Insurance program initiated by the federal government after the last Depression to forestall Banking system collapse under adverse conditions. Treasury and Federal Reserve actions has brought Us back to systemic Risk from which only real Reserves are an actual salvation. lgl