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Fed's Portfolio Similar To Ah-Long's

The Fed's portfolio now looks a lot like an Ah-Long's (unlicensed loan sharks). The spate of lendings by the Fed means it has to borrow from someplace to lend to the distressed parties. In exchange for the loans to these "privileged children of the corn", the Fed now has car loans, credit card loan, auto loans and housing loans on their books. This literally means that there could come a time when Bernanke may be knocking on doors and asking why you have not kept up with your credit card minimum payments.

The Fed's portfolio is not a bottomless thing. As you can see, in exchange for lending to the distressed parties, the Fed now have the distressing loans in their books, what a wonderful exchange rate. Its like exchanging one ringgit for one Euro, why not?!

The debt is issued under the Fed's name rather than the Treasury's, hence they have to ask Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.
The Fed holds assets to manage the nation's money supply and influence the federal-funds rate, which banks charge each other on overnight loans. When the Fed buys Treasuries or makes loans directly to banks, it supplies financial institutions with cash; in effect, it prints money. The cash ends up as currency in circulation or in banks' reserve accounts at the Fed.

Fed officials also are investigating the feasibility of the Fed issuing its own debt and using the proceeds to purchase other assets or make loans. The Fed has never done such a thing but may consider to do so. There is a precedent here in that the Bank of Japan also did something similar. More writedowns on commercial real estate, auto loans, credit card debt, Alt-A mortgages, and pay option arms are coming. Does that mean we will see the Fed end up holding these papers??? The Fed now has to buy risky paper from the banks or lend the banks the Fed's own assets against risky assets. What if the banks fold, does that mean the Fed take up the loans and start calling up the car loan, housing loan and credit card defaulters in order to get Fed's money back?


Comments

bantersy said…
Hi Dali,

Ever since the bailout of BS and 200 bil injection into the system, the market has recover a lot with some going up as much as 20 over percent in exchanges such as Singapore. The market has since become very resilient to negative news and downside is very narrow compare to upside. Markets around the world seems to be pushing up, like cha cha, three steps forward, one step back. The confidence crisis is over? Yes, people have more confident now than few months back. Of course, nothing much has really changed since a few weeks ago. Any comment from you on the current trend? Tq
yj said…
this is what happen when u print money like there's no tmorrow...the role of the fed is to control inflation and to ensure that the economy does not suffer from shocks...and not to enrolled itself to bailout cos which are poorly managed and not to involve with the stock mkt...if the fed kept on printing money...the bubble will obviously appear somewhere in different forms...without knowing it...the US is now the biggest exporter of inflation to the whole world!!..and what r they doing now??...cutting int rates!!!OMG!
Mike Dirnt said…
i thought the market has somewhat consolidated after the bear sterns news and subprime issues began appearing somewhere last year. but seems like more hell gonna break loose if the 2nd quarter reporting is terrible. Look at GE after their recent report.

anyway you got a nice blog and nice analysis dali. care to do a link exchange on our blog? :)

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