Friday, April 3, 2009

Bernanke’s Decision On Buying Treasury Securities The Recipe for Disaster

Bernanke’s green shoots! Federal Reserve Chairman Ben Bernanke in an interview on 60 Minutes said that he does “see green shoots of economic revival,”

Fed might want to use quantitative easing to force banks to lend by buying treasury securities . You may ask what does buying the US treasury got to do to force the banks to lend again?

Here how Bernanke wishes it would work:
Banks received billions of dollars on ~0% rate and all they did they paid their bonuses, dividends, buoght securities that explains the recent rally in market, banks who supposed lend to consumers & businesses used the cheap money from thier dearest friend Bernake and injected it into the stock market.
When Federal bank of reserve buy huge amount of treasury bonds, it causes a big drop in treasury yield and theoretically should makes treasury unattractive to banks. You may say; why do I think this is a bad idea and it would not work?
Here is the other side the coin: We know China is the biggest buyer of the US treasury; what would happen if Chinese get scared and reduces buying our debt?

This is an actual photo from the 1934 Chicago Tribune.
“Will history repeat itself”?

The only thing Bernanke knows very well is how to press the print button, his policies will cause dollar to lose its value and high inflation in years to come.
Buying a treasury by Fed causes the US treasury becomes unattractive to foreign investors and in the long run could cause irreversible damages to the US economy and ultimately collapse of dollars. Note that dollar already start to show weakness in the last couple days. On the other hand banks are dealing with lack of liquidity therefore Bernanke’s pressure would not cause the easing lending as he hopes for. His quantitative easing will be a failure. Do you remember how did the Bearn Stearns collapse? It went belly up just in a week due to lack of liquidity; obviously others try not to fall in the same hole. If my economic analogy would be correct we are heading the same road the Japan did back in 90’s. It means that contrary to average investors belief, this rescession is not going to end anytime soon.