Ray Dalio of Bridgewater the question of what happens if we exhausted the gas in the QE tank ? After effectively drops interest rates to zero and then embarking on various QE programs ( the current program being 85 billion per month split between Treasuries and MBS ) , the Fed is caught in a vice of watching asset prices being pushed higher , while said wealth effect is not being distributed throughout the larger economy. Even thinking out loud by the Fed about tapering its QE causes " a disturbance in the force " , so to speak . The disturbance that occurs when a ponzi scheme sees flows decrease. So , what does the Fed do next , wonders Ray ? Despite decreasing ineffectiveness , the Fed ( even if it slows for awhile its QE ) , will resort back to QE ( perhaps more than at the present ) , once the taper has its inevitable impact on excessively stimulated and propped up asset prices...... Paradoxically , while risk assets are being pushed higher due to QE , liquidity in bond markets is drying up ! Why - one reason is unnaturally low yields ( QE ) make low risk ( Ha Ha Ha ) assets like Treasuries " risky " if government support might go away ( taper talk ) .... Thus , we see another distortion ( not just risk assets such as equities impacted , but should be low risk assets like government bonds . ) ........ ECB and BOJ also caught in their own interventional webs - ECB lowered its key rate to 25bps ( fighting deflation they said ) , but was the concern lack of liquidity in the secondary market - and is that market close to breaking down again ? While discussing deflation , what about hyper-inflationary forces from QE ? Lawrence Kotlikoff says higher prices will come ( and so will dumping of government bonds ) ...... since we won't see the huge tax increase needed to bridge the fiscal gap if QE was abruptly ended and does anyone expect Politicians to make huge spending cuts , can the US bridge the gap by borrowing even more and spiking our deficit ? What happens when excess reserves held by banks make it into the system ? BTW , when does any politician raise the question of why our Fed bailed out Europe's Banks with both QE 2 and 3 ?

http://www.zerohedge.com/news/2013-11-10/ray-dalios-bridgewater-feds-dilemma-were-worried-theres-no-gas-left-qe-tank

Ray Dalio's Bridgewater On The Fed's Dilemma: "We're Worried That There's No Gas Left In The QE Tank"

Submitted by Tyler Durden on 11/10/2013 18:21 -0500

• Bridgewater
 
• Central Banks
 
• Equity Markets
 
• headlines
• Monetary Policy
 
• Quantitative Easing
 
• Ray Dalio

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"The Fed's real dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing," Bridgewater notes as the relationship between US equity markets and the Fed's balance sheet (here and here for example) and "disconcerting disconnects" (here and here) indicate how the Fed is "trapped." However, as the incoming Yellen faces up to her 'tough' decisions to taper or not, Ray Dalio's team is concerned about something else - "we're not worried about whether the Fed is going to hit or release the gas pedal, we're worried about whether there's much gas left in the tank and what will happen if there isn't."

Via Bridgewater,

In the old days central banks moved interest rates to run monetary policy. By watching the flows, we could see how lowering interest rates stimulated the economy by 1) reducing debt service burdens which improved cash flows and spending, 2) making it easier to buy items marked on credit because the monthly payments declined, which raised demand (initially for interest rate sensitive items like durable goods and housing) and 3) producing a positive wealth effect because the lower interest rate would raise the present value of most investment assets (and we saw how raising interest rates has had the opposite effect).

All that changed when interest rates hit 0%; "printing money" (QE) replaced interest-rate changes. Because central banks can only buy financial assets, quantitative easing drove up the prices of financial assets and did not have as broad of an effect on the economy. The Fed's ability to stimulate the economy became increasingly reliant on those who experience the increased wealth trickling it down to spending and incomes, which happened in decreasing degrees (for logical reasons, given who owned the assets and their decreasing marginal propensities to consume).

As shown in the charts below, the marginal effects of wealth increases on economic activity have been declining significantly. The Fed's dilemma is that its policy is creating a financial market bubble that is large relative to the pickup in the economy that it is producing. If it were targeting asset prices, it would tighten monetary policy to curtail the emerging bubble, whereas if it were targeting economic conditions, it would have a slight easing bias. In other words, 1) the Fed is faced with a difficult choice, and 2) it is losing its effectiveness.

We expect this limit to worsen. As the Fed pushes asset prices higher and prospective asset returns lower, and cash yields can't decline, the spread between the prospective returns of risky assets and those of safe assets (i.e. risk premia) will shrink at the same time as the riskiness of risky assets will not decline, changing the reward-to-risk ratio in a way that will make it more difficult to push asset prices higher and create a wealth effect.

Said differently, at higher prices and lower expected returns the compensation for taking risk will be too small to get investors to bid prices up and drive prospective returns down further. If that were to happen, it would become difficult for the Fed to produce much more of a wealth effect. If that were the case at the same time as the trickling down of the wealth effect to spending continues to diminish, which seems likely, the Fed's power to affect the economy would be greatly reduced.

...

...we think that US monetary policy is nearing a new test that will require wisdom and creativity along the lines of that which was required to deal with those problems. 

The basic issue is that quantitative easing is a much less effective tool when asset prices are high and thus have low expected returns than it is for managing financial crises. That's because QE stimulates the economy by (1) offsetting a panic by providing cash to the financial system when there's a need for cash, and (2) by raising asset prices, and driving money from the assets they buy into demand and investment, creating a higher level of future economic activity.  So, the policy was particularly wise and most effective (in the sense of impact per dollar) at the height of the financial crisis when there was both a desperate need for cash and when extremely depressed asset prices were heavily weighing on demand and investment. 

Now, there is a flood of liquidity and asset prices are high relative to underlying fundamentals.  So the impact of additional asset price increases on demand is much less (as high asset prices and low future returns make assets more interchangeable with cash). 

Quantitative easing today is driving asset prices to unsustainable levels, without stimulating much additional activity.  That leaves a much clearer tradeoff between driving up asset prices today and lowering future returns (the price of which will be paid in the future).  During the crisis period, that was much less the case, because pulling forward returns from the future (i.e.,  raising prices) was then also creating future earnings growth (by helping to normalize the economy). 

The dilemma the Fed faces now is that the tools currently at its disposal are pretty much used up, in that interest rates are at zero and US asset prices have been driven up to levels that imply very low levels of returns relative to the risk, so there is very little ability to stimulate from here if needed.  So the Fed will either need to accept that outcome, or come up with new ideas to stimulate conditions.

We think the question around the effectiveness of continued QE (and not the tapering, which gets all the headlines) is the big deal.  Given the way the Fed has said it will act, any tapering will be in response to changes in US conditions, and any deterioration that occurs because of the Fed pulling back would just be met by a re-acceleration of that stimulation.  So the degree and pace of tapering will for the most part be a reflection and not a driver of conditions, and won't matter that much.  What will matter much more is the efficacy of Fed stimulation going forward. 

In other words, we're not worried about whether the Fed is going to hit or release the gas pedal, we're worried about whether there's much gas left in the tank and what will happen if there isn't.

http://www.zerohedge.com/news/2013-11-10/theres-liquidity-crunch-developing

There's A Liquidity Crunch Developing

Submitted by Tyler Durden on 11/10/2013 17:24 -0500

• Bond
 
• European Central Bank
 
• Gross Domestic Product
• Yield Curve

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Submitted by Alasdair Macleod ofGoldMoney.com,qe 

This week an article in Euromoney points out that liquidity in bond markets is drying up. The blame is laid at the door of regulations designed to increase banks' capital relative to their balance sheets. Furthermore, the article informs us, new regulations restricting the gearing on repo transactions are likely to make things worse, not only reducing bond market liquidity further, but also affecting credit markets. The reason this will be so is that in a repurchase agreement a bank supplies credit to non-banks for the period of the repo.

One could take another equally valid point of view: the reason for deteriorating liquidity in bond markets is due in part to yields being unnaturally low. If you price bonds too highly, which amounts to the same thing, few investors want to buy them without the unconditional support of the central bank as a ready buyer. This, after all, is why just the hint of tapering recently was enough to derail the markets. So here again we come up against the same choice: if the Fed insists on mispricing the market with its interventions and zero interest rate policy it must fully support the market with both QE and also twist applied to the yield curve to maintain market liquidity.

For the investment analysts and commentators that still expect tapering this must come as something of a surprise. The underlying point they have missed is that once a central bank embarks on a policy of printing money as a cure-all, it is impossible to stop, or even to just taper without risking a liquidity crisis. Increasingly illiquid markets are now telling us that QE should be increased.

The point was rammed home this week by the ECB's decision to lower interest rates.The move was sold to the financial press as designed to stimulate inflation and reduce the risk of deflation. However, central to the deflation argument is the need to stimulate liquidity in the secondary markets, which according to the Euromoney article "are now close to breakdown".

At least the ECB rate cut should defuse tapering expectations in US markets, making it easier for the Fed to back down from its failed experiment. The Fed now needs to plant the suggestion that QE will have to be increased, or a similar mechanism designed to boost liquidity introduced.

This will not be difficult in the prevailing economic conditions. Even though GDP remains a positive figure, concerns over deflation abound and are preoccupying more and more analysts. These are concerns which analysts can readily accept as an immediate and greater risk than inflation.

http://www.zerohedge.com/news/2013-11-09/larry-kotlikoff-asks-hyperinflation-around-corner

Larry Kotlikoff Asks "Is Hyperinflation Around The Corner?

Submitted by Tyler Durden on 11/09/2013 18:13 -0500

• Ben Bernanke
 
• Ben Bernanke
 
• Bill Gross
 
• Excess Reserves
• Federal Reserve
 
• Gross Domestic Product
 
• Hyperinflation
• M1
 
• Monetary Base
 
• Money Supply
 
• Nominal GDP
• Quantitative Easing
 
• Reality
 
• Recession
 
• Unemployment

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Authored by Lawrence Kotlikoff, via Yahoo Exchange blog,

In his parting act, Federal Reserve Chairman Ben Bernanke has decided to continue printing some $85 billion per month (6% of GDP per year) and spend those dollars on government bonds and, in the process, keep interest rates low, stimulate investment, and reduce unemployment. Trouble is, interest rates have generally been rising, investment remains very low, and unemployment remains very high. As Lawrence Kotlikoff points out, echoing our perhaps more vociferous discussions,Bernanke’s dangerous policy hasn’t worked and should be ended. Since 2007 the Fed has increased the economy's basic supply of money (the monetary base) by a factor of four! That's enough to sustain, over a relatively short period of time, a four-fold increase in prices. Having prices rise that much over even three years would spell hyperinflation.

The Treasury dance

And while Bernanke says this is all to keep down interest rates, there is a darker subtext here. When the Treasury prints bonds and sells them to the public for cash and the Fed prints cash and uses it to buy the newly printed bonds back from the public, the Treasury ends up with the extra cash, the public ends up with the same cash it had initially, and the Fed ends up with the new bonds.

Yes, the Treasury pays interest and principal to the Fed on the bonds, but the Fed hands that interest and principal back to the Treasury as profits earned by a government corporation, namely the Fed. So, the outcome of this shell game is no different from having the Treasury simply print money and spend it as it likes.

The fact that the Fed and Treasury dance this financial pas de deux shows how much they want to keep the public in the dark about what they are doing. And what they are doing, these days, is printing, out of thin air, 29 cents of every $1 being spent by the federal government.

QE an unsustainable practice

I have heard one financial guru after another discuss Quantitative Easing and its impact on interest rates and the stock market, but I’ve heard no one make clear that close to 30 percent of federal spending is now being financed via the printing press.

That’s an unsustainable practice. It will come to an end once Wall Street starts to understand exactly how much money is being printed and that it's not being printed simply to stimulate the economy, but rather to pay for the spending of a government that is completely broke -- with long-term expenditures obligations that exceed its long-term tax revenues by $205 trillion!

This present value fiscal gap is based on the Congressional Budget Office's just-released long-term Alternative Fiscal Scenario projection. Closing this fiscal gap would require a 57 percent immediate and permanent hike in all federal taxes -- starting today!

Prices will rise

When Wall Street wises up to our true fiscal condition (and some, like Bill Gross, already have), it will dump long-term bonds like hot potatoes. This will lead interest rates to jump and make people and banks very reluctant to hold money earning no return. In trying to swap their money for goods and services, the public will drive up prices.

As prices start to rise and fingers start pointing at the Fed for fueling the inflation, QE will be brought to an abrupt halt. At that point, Congress will have to come up with an extra 6 percent of GDP on a permanent basis either via huge tax hikes or huge spending cuts. Another option is simply to borrow the 6 percent. But this would raise the deficit, defined as the increase in Treasury bonds held by the public, from 4 to 10 percent of annual GDP if we take 2013 as the example. A 10 percent of GDP deficit would raise even more eyebrows on Wall Street and put further upward pressure on interest rates.

What are we waiting for?

But why haven't prices started rising already if there is so much money floating around? This year’s inflation rate is running at just 1.5 percent. There are three answers.

First, three quarters of the newly created money hasn’t made its way into the blood stream of the economy – into M1 – the money supply held by the public. Instead, the Fed is paying the banks interest not to lend out the money, but to hold it within the Fed in what are called excess reserves.

Since 2007, the Monetary Base – the amount of money the Fed’s printed – has risen by $2.7 trillion and excess reserves have risen by $2.1 trillion. Normally excess reserves would be close to zero. Hence, the banks are sitting on $2.1 trillion they can lend to the private sector at a moment’s notice. I.e., we’re looking at a gi-normous reservoir filling up with trillions of dollars whose dam can break at any time. Once interest rates rise, these excess reserves will be lent out.

The fed says they can keep the excess reserves from getting lose by paying higher interest on reserves. But this entails poring yet more money into the reservoir. And if interest rates go sufficiently high, the Fed will call this practice quits.

As excess reserves are released to the economic wild, we’ll see M1, which was $1.4 trillion in 2007, rise from its current value of $2.6 trillion to $5.7 trillion. Since prices, other things being equal, are supposed to be proportional to M1, having M1 rise by 219 percent means that prices will rise by 219 percent.

But, and this is point two, other things aren’t equal. As interest rates and prices take off, money will become a hot potato. I.e., its velocity will rise. Having money move more rapidly through the economy – having faster money – is like having more money. Today, money has the slows; its velocity – the ratio GDP to M1 -- is 6.6. Everybody’s happy to hold it because they aren’t losing much or any interest. But back in 2007, M1 was a warm potato with a velocity of 10.4.

If banks fully lend out their reserves and the velocity of money returns to 10.4, we’ll have enough M1, measured in effective units (adjusted for speed of circulation), to support a nominal GDP that’s 3.5 times larger than is now the case. I.e., we’ll have the wherewithal for almost a quadrupling of prices. But were prices to start moving rapidly higher, M1 would switch from being a warm to a hot potato. I.e., velocity would rise above 10.4, leading to yet faster money and higher inflation.

No easy exit

I hope you’re getting the point. Having addicted Congress and the Administration to the printing press, there is no easy exit strategy. Continuing on the current QE path spells even great risk of hyperinflation. But calling it quits requires much higher taxes, much lower spending, or much more net borrowing (with requisite future repayment) from the public. Yet weaning Uncle Sam from the printing press now is critical before his real need for a fix – paying for the Baby Boomers’ retirement benefits – kicks in.

The one caveat to this doom and gloom scenario is point three – increased domestic and global demand for dollars. The Great Recession put the fear of God into savers worldwide. And the fact that U.S. price level has risen since 2007 by only 15 percent whereas M1 has risen by 88 percent reflects a massive expansion of domestic and foreign demand for "safe" dollars. This is evidenced by the velocity of money falling from 10.4 to 6.6. People are now much more eager to hold and hold onto dollars than they were six years ago.

If this increased demand for dollars persists, let alone grows, inflation may remain low for quite a while. But our ability to get Americans and foreigners to hand over real goods and services in exchange for very few green pieces of paper is hardly guaranteed once everyone starts to understand the incredible rate at which Uncle Sam is printing and spending this paper. Once everyone gets it into their heads that prices are taking off, individual beliefs will become collective reality. This brings me to my bottom line: The more money the Fed prints, the more it risks everyone starting to expect and, consequently produce, hyperinflation.

http://www.zerohedge.com/news/2013-11-10/biggest-difference-between-qe3-and-qe2

The Biggest Difference Between QE3 And QE2

Submitted by Tyler Durden on 11/10/2013 19:21 -0500

• Ben Bernanke
 
• Carry Trade
 
• Eurozone
 
• Excess Reserves
• Federal Deposit Insurance Corporation

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Back in 2011, in an exclusive analysis, Zero Hedge showed how virtually all the reserves created as a result of QE2 ended up as cash on the balance sheets of foreign (mostly European) banks operating in the US. Some suggested that this was due to a change in FDIC rules which was being arbed by foreign banks which were able to engage in a mini carry trade affecting the Fed's excess reserves. We disagreed, and suggested that this was nothing short of yet another way in which foreign banks abused the Fed's "Bernanke Put" to bail themselves out at a time when the Eurozone and its currency seemed like they would implode any second.

QE2 came and went, and was replaced by QE3. And, having lasted nearly a year now, it has allowed us to observe the main way in which the Fed's open-ended QE3 has so far differed from the QE2 of 2011.

Recall that while the Fed's Quantiative Easing programs are largely determined by what securities the Fed monetizes: i.e. the sources of funds, what is always left unspoken is where the Fed's created reserves end up, or the "uses" of funds, or rather, reserves. Luckily, as the chart below shows and as tracked by the Fed's H.8 statement, there is a perfect correlation, and causation, between the Fed's newly created reserves parked at banks, and the corresponding change in cash held on the books of either domestic (large and small) and foreign commercial banks operating in the US.

What may not be quite visible in the chart above is that during QE 2, virtually all the newly created cash ended up at foreign banks. This is shown far more clearly in the chart below showing the change in cash balances at large domestic commercial banks and foreign banks between the start and end of QE 2.

So while the Fed was explicitly pumping the deposit base of foreign banks in 2011 - and thanks to JPM and the entire deposit collateral pathway we now know that this cash was used to satisfy collateral requirements needed when purchasing risk assets, even if the banks never explicitly used the Fed's cash to buy up risk - what has it been doing so far in 2013? The answer is shown below.

Surprisingly - if only to all those who claimed our assertion that the Fed was bailing out Europe's banks was bunk due to "regulatory arbitrage" - entirely unlike during QE 2, this time around, virtually every dollar newly created by the Fed has landed on an equal basis at both large domestic commercial banks, and foreign banks operating in the US. But... but... whatever happened to the regulatory arbitrage of QE2?

To those still confused, here is the best visualization of the cash change in domestic vs foreign banks under the two QE regimes:

Indeed - a pretty clear summary of what the Fed's deisgnated bailout audiences was under QE 2 (European banks) and QE 3 (everyone on an equal, pro rata basis).

The above, far more importantly than what the Fed is monetizing in order to build up its reserves, gives us a clear snapshot of the other part of the equation - where the Fed's reserves end up.

All of this should perhaps once again spark the debate over just why has the Fed parked a record $1.3 trillion in cash not with US-based banks, but foreign ones, and just for whose benefit - since by now it is quite clear that QE is solely for the benefit of the 0.1% of the population and, of course, the banks - was QE designed.

Because it is one thing to bail out the rich, at least they are America's rich. But when more than half of the proceeds of QE to date... 

...have ended up at foreign banks, perhaps at least a theatrical congressional hearing is in order?

Source: H.8

and not just Europe's banks  

SUNDAY, NOVEMBER 10, 2013

(OT) US Fed's Purchase of MBS (Part of QE) after the "Lehman Shock" Were For Foreign Governments, Foreign Central Banks, Foreign Investors, Says Nikkei

I just saw this article at Zero Hedge "The Biggest Difference Between QE3 And QE2", which wonders aloud at the end:

But when more than half of the proceeds of QE to date... have ended up at foreign banks, perhaps at least a theatrical congressional hearing is in order?

That has brought to mind an article that I read yesterday in Japan's Nikkei Shinbun, which said part of the quantitative easing by the US Federal Reserve after the so-called "Lehman Shock" in September 2008 was not so much about helping the US domestic banks or the US housing market but about responding to the demand for the US action from foreign governments for their financial institutions, particularly from China and Japan, two largest foreign holders of the US treasuries　AND mortgage-backed securities issued by Fannie Mae and Freddie Mac.

In the US, the purchase of mortgage-backed securities (MBS) issued by Fannie and Freddie by Federal Reserve has been explained as measures to support the housing market. It's that way even today.

From Nikkei Shinbun (11/10/2013; part):

リーマン・ショックから２カ月。米連邦準備理事会（ＦＲＢ）は緊急危機対応策として、米住宅公社が発行・保証する長期証券の買い入れに踏み切った。今なお続く異例の金融緩和の幕開け。ＦＲＢ議長、ベン・バーナンキの背中を押したのは、日本や中国など各国からの悲鳴と圧力だった。

Two months after the "Lehman Shock", the US Federal Reserve decided to purchase long-term bonds issued and guaranteed by the US government corporations [Fannie Mae adn Freddie Mac], as emergency response measures.It was the beginning of the extraordinary monetary easing that still continues today. What forced Chairman Ben Bernanke's hand was the cry for help and the pressure from foreign governments, including Japan and China.

2008年11月24日夜、米ワシントンのＦＲＢ本部。「あす発表する。追加対策のパッケージを大至急、仕上げてくれ。一枚紙の要旨で、すぐに」。事務方に指示したバーナンキの声はわずかに震えていた。

November 24, 2008 at night, Federal Reserve Board in Washington DC. "I will announce it tomorrow. Prepare the package for additional measures as soon as possible. One-page summary, and quick." Bernanke instructed the staff with a slight quiver in his voice.

　翌25日早朝、ＦＲＢは緊急理事会を招集。米連邦住宅抵当公社（ファニーメイ）などが発行・保証する長期証券の買い入れを柱とする危機対応策を決めた。

Early next morning on November 25, Federal Reserve Board called an emergency meeting and decided on the emergency response measures that centered on the purchase of long-term bonds issued and guaranteed by Fannie Mae [and Freddie Mac].

　米東部時間午前８時15分。ＦＲＢが発表した声明は紙一枚にわずか13行。だがＦＲＢが買い入れると表明した長期証券の総額は6000億ドル（約59兆円）にも上った。中央銀行であるＦＲＢが市場から直接、証券を買い入れる異例の措置の始まりだった。

8:15AM US Eastern time. The announcement by FRB was typed on one page, in 13 lines. The total amount of purchase by Federal Reserve would, however, be 600 billion dollars. It was the beginning of an extraordinary measures whereby Federal Reserve, central bank of the US, would buy bonds directly from the market.

「とにかく市場の安心感を最優先に考えた。金額の根拠は乏しかった」。当時の議長側近は振り返る。

"Our first priority was to assure the market. There was little basis for the amount," says an aide to the chairman at that time.

ＦＲＢが真っ先に住宅公社が発行・保証する長期証券の買い入れに動いたのはなぜか。「危機の震源である住宅市場の下支え」が表向きの理由。だが裏にはリーマン・ショック前夜、米国として示した「国際公約」があった。

Why did Federal Reserve choose to buy the long-term bonds issued by Fannie and Freddie? The official (ostensible) reason was "to support the housing market which was the cause of the financial crisis". However, there was an "international pledge" [as the real reason] that the US government had made right before the "Lehman Shock".

　08年９月７日夜。ファニーメイなど住宅公社２社の公的管理を発表した米財務長官、ヘンリー・ポールソンは電話に飛びついて説明した。「これで米国政府が完全に後ろ盾になった」。相手は中国の当局者。ポールソンは主要７カ国（Ｇ７）の当局者との緊急電話会議も開催。米政府として初めて、住宅公社などが発行する米政府機関債の保証を対外的に公約した。

On the night of September 7, 2008. Treasury Secretary Henry Paulson had just announced the effective takeover of Fannie and Freddie, and he was now on the phone. "The US government will now fully back these companies." The Treasury Secretary was talking to the Chinese counterpart. Paulson also conducted a teleconference of G7 finance ministers, and made a pledge that the US government, for the first time, would guarantee the bonds issued by Fannie and Freddie.

住宅バブル崩壊で住宅ローンの保証を主な業務とするファニーメイなどが巨額の債務超過に陥っているのは明らかだった。一方で住宅公社など米政府機関が発行した長期証券の残高は当時の推計で１兆5000億ドル弱。暗黙の米政府保証がついた優良債券として、欧州やアジアの130を超える国の政府や中央銀行、機関投資家が保有していた。

It was clear that the collapse of the housing bubble left Fannie and Freddie deeply insolvent. In the meantime, the long-term bonds issued by them were estimated at that time to be about 1.5 trillion dollars. These bonds were considered high grade with implicit guarantee of the US government, and held by more than 130 entities such as governments, central banks, and institutional investors in Europe and Asia.

　懸念を特に強めたのは保有残高が１、２位の中国と日本。中国の胡錦濤国家主席は、外貨準備で保有する大量の米政府機関債を損失覚悟で売却処分する可能性をちらつかせ、外交圧力を強めた。

The two most worried countries were China and Japan, whose holdings were No.1 and No.2. President Hu Jintao of China pressured the US by threatening to sell its large holding of the bonds even at a loss.

　日本政府が中国の保有する米政府機関債を一部肩代わりする――。中国が米政府機関債を放出すれば、国際金融市場の動揺は計り知れない。幻に終わったが、一時はこんな構想が浮上。「日本は米国と真剣に内容を検討した」（国際金融筋）ほどの綱渡りが続いた。

At one time, a plan was being discussed whereby the Japanese government would take over (buy) part of the Chinese holding. If China dumped the bonds from Fannie and Freddie the damage to the international financial markets would be immeasurable. It didn't come to pass, but "Japan and the US were seriously considering the plan" (according to the source in international finance). The situation was very tense.

(Full article in Japanese at the link)

Slight quiver in his voice. That's poetic of Nikkei, but I think Mr. Bernanke's speaking voice always sounds like that.

By the way, how much Fannie and Freddie papers did China and Japan have at that time?

China had over 500 billion dollar worth of mortgage-backed securities from Fannie and Freddie, and Japan had over 250 billion dollars worth. The third largest holder was Russia, at slightly over 50 billion dollars.

From Nikkei (English labels are by me):

China and Japan were worried, Nikkei says. China threatened to dump, Japan was willing to buy what China would dump. In 20-20 hindsight, if China had dumped and Japan had picked up those MBS at a significant discount, maybe Japan would have no problem paying for the nuclear accident cleanup. Oh well.

Nikkei doesn't say why Federal Reserve was worried enough to start purchasing the MBS from Fannie and Freddie at that time. I don't remember the reason myself. All I remember was that the stocks of investment banks like Goldman Sachs, Citi, JP Morgan Chase were on a free fall in November, and a extra large downward pressure was on the stocks on November 21, 2008 which was Friday. After the announcement by Federal Reserve on November 25 next Tuesday, the stock markets were lifted somewhat, but all it did was to not fall for the duration of

Sunday, November 10, 2013 9:29 AM

ECB Following Path of Japan, Including Similarly Ridiculous Statements

Rather than writeoff bad loans at European banks, the ECB has chosen the bury your head in the sand, extend-and-pretend path of Japan.

This is despite the fact the Japanese plan has taken multiple decades without producing meaningful results.

"More Room For Rate Cuts"

For example, ECB Executive Board member Benoit Coeure says "ECB Can Cut Rates Further, Offer Liquidity". 

 The European Central Bank can trim interest rates further and provide the banking system with liquidity, ECB Executive Board member Benoit Coeure said on Saturday after last week's rate cut to a record low.

"We can still cut interest rates if needed, and as we said clearly last Thursday we can provide liquidity to the euro zone financial system if needed to ensure they don't have problems refinancing," he said on France Inter radio.

"All that's possible, but what counts is that the banks transmit the decrease in the cost of refinancing to the economy," he said.

What Good Can Additional Rate Cuts Do?

Let's be realistic. The ECB's lending rate is .25%.

Although the ECB can cut rates 25 more times, 1 basis point at a time, the idea that such a move can produce anything meaningful is ridiculous.

Japan made similar moves multiple times, cutting rates a few basis points at a time. It served no purpose other than to let the Bank of Japan say "we are acting". The BOJ never once added the truth "but it's meaningless".

And now Benoit Coeure makes the same useless statement, also without adding "rate cuts cannot do a damn thing for Europe".

Mike "Mish" Shedlock