Plan B: Bernanke sets sail on QE2, leaves US drowning in debt

Today, at 2:15pm, the Federal Reserve officially reversed course from "exit" to "full steam ahead."

If you heard a loud fog horn today at about 2:15pm Eastern, you were not hallucinating. No, in fact, I and other Bankster Report witnesses are quite sure that at this exact moment today, while diligently tuned into Bloomberg radio to hear Vinny Del Giudice hit us with latest FOMC statement at the instant it was unembargoed, the faint sound of an ocean liner horn could be distinctly detected in the background. Indeed, as Mr Del Giudice read the following statement, we are quite sure that it sounded again!

Reports described it something like this, "Baaaaaaa...!," right when Mr Del Giudice starts the following paragraph from today's short FOMC Statement:

"To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature."

"Baaaa.....Baaaaaaaa.......!"

Indeed, Bankster Report observers were right: that loud horn at 2:15pm today was the mighty QE2 arriving in the US!

QE2, or Quantitative Easing Round 2, officially docked today, having acquired the permission of Mr Bernanke and his co-conspirators at the Federal Reserve to enter US waters. What you see above is from the short FOMC statement. If you don't quite understand what it says, here is the translation--with some added parts in italics:

"To help support the economic recovery in a context of price stability, the dictatorial monetary-policy manipulating Federal Open Market Committee will keep constant the Federal Reserve's holdings of securities, which we purchased, of course, with money made out of thin air and for which we are, of course, currently charging the US taxpayer 6%, at their current excessively and ridiculously large $1,277,010,000,000 level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities, or in other words, by buying more debt with the "interest" we earn on the debt we originally bought with made-up money, including "interest" that we are, effectively, paying ourselves, and of course, paying the shareholder banks which own this Federal Reserve system. The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature, thus ensuring that our dictatorial body will remain in utter control of the monetary policy of the United States, because, baby, if we stop your buying government debt, you're toast. No, no, no--you don't understand, sweetheart--we said TOAST. So shut up with your "End the Fed" crap and get back in your place, because you do NOT want us to get mad, and you do NOT want us to stop buying US debt."

And then it sounded again, "Baaaaaa.....!"

So there you have it, Bankster Report style: the Fed will henceforth commence sailing on the QE2, and loading it up with yet more Treasuries. According to the FOMC, the Fed will "reinvest" returns earned from their original agency and MBS paper "investments" back into the purchase of more Treasuries. The exact amount of "reinvestment," of course, is unknown, as the Fed will not disclose the returns of their investments, as not all of their "investments" are performing. At any rate and by whatever means, today's statement means that the Fed's balance sheet will get bigger, and stealth quasi-monetization will begin.

Currently, the Federal Reserve's balance sheet (also, for your convenience, permanently linked on the left, under "Charts and Data"), sits at an utterly amazing, super incredibly immense $2,368,781,000,000, with some $1,277,010,000,000 of this jaw-dropping total in agency paper (GSE, Fannie, Freddie paper) and other asset-backed debt, including, of course, defunct AIG CDO's, auto loans, student loans, and buckets of AIA, ALICO, and Bear Sterns ever-toxic paper. Remember that the previous Fed purchases of Treasuries have been, de facto, monetization ever since the Fed adopted the practice in 2008. However, in analysis of this latest announcement, the Fed will surely declare that these new purchases are different:

"After all," will say Mr Bernanke, "we're buying these Treasuries with money we earned from that other money we created up out of thin air and charged the US Treasury for! That's totally different!"

This will be, admittedly, true. However, only by degrees, as, again, the original money used to purchase the "performing" assets was magic glitter unicorn money, and, of course, a big hunk of that magic glitter unicorn money was used to purchase "assets" which are not performing and hence not returning any new magic glitter unicorn money to "reinvest." The Fed's announcement to embark upon QE2 and continue further down this path of artificially supporting these insanely low interest rates is, in a nutshell, not exactly good news for the economic outlook. But it feels good now: it is another dose of morphine, and as our disease worsens, only our opiate tolerance is strengthening.

As mentioned above, the Fed will not state what the sum of this reinvestment will be, though theoretically it may soon be extrapolated from balance sheet changes. Economists questioned by Bloomberg estimate the Fed to be earning between $15 Billion and $20 Billion a month on performing agency debt, and this will now be reinvested in Treasuries. Therefore, assuming a continued performance of the underlying interest-bearing assets, this new tactic stands to introduce $180 Billion to $240 Billion in support intended to hold down Treasury rates.

By the way, if the Fed's income of $15 Billion to $20 Billion per month seems startling, imagine what the shareholder bank-owned Federal Reserve System is collecting in interest rates from the US Treasuries it "owns"--the over $820 Billion in Treasuries and other direct government liabilities upon which the US taxpayer is paying interest. You'd better get another nine zero's.

But back to today's announcement, there was a predictable afternoon rally in gold as the 2:15pm statement and the blaring sound of QE2's horn reached the pits in New York, prompting about a $15 spike post-announcement. I would guess that much of this was short covering, but the gold market is very fickle and, if you haven't noticed, quite easily spooked, not to mention highly manipulated. Also, as Mr Bernanke prepares for QE2, many new cries erupted for Stimulus 2, including suggestions from Morgan Stanley and many in Congress that we might have a possible August Surprise. Clearly on the table is that special Treasury spending tool which Mr Geithner inherited from former Treasury head Mr Paulson, who himself was given the device by the 2008 Congress and Mr Bush (Demopublicans and Republocrats). If you can't remember the shape of this apparatus, it looks something (read: exactly) like a blank check. That's correct: the Treasury, in Mr Geithner's bankster-molded hands, has effectively been given a blank check to remedy the GSE issue and its behemoth closet monsters, Fannie Mae and Freddie Mac. Some estimates for the August Surprise are casually throwing around a number of $800 Billion. What's tragic is that not even $800 Billion will fix the problem.

The Fed is obviously rather desperately trying to keep interest rates on Treasuries down, and there is strong pressure from Congress to do so. The reason for this obsession is simple: the Fed knows that an increase in rates, either by the FOMC through the means of a Fed funds rate increase, or by the market through the means of domestic and international Treasury dumping, will directly impact the mortgage market. Mortgage rates are set by interest rates, particularly the 10-yr and 30-yr Treasury rate (see the post on yield curve for more about this). Even at these currently all-time low rates, due to decreases in home value, more than 1 in 5 (21.5%) of all mortgages in the US are underwater. Higher rates only add to this situation. In some areas, such as Phoenix, the statistic is a staggering 2 of every 3 mortgages underwater. For those with adjustable rate mortgages (ARMs), a rate increase means a mortgage payment increase: if the house is already underwater, the water just gets deeper; if you're already fighting to make your payment, your fight just got harder. ARMs are disproportionately more common for low-income borrowers, as even the FHA admits that ARMs are designed for and targeted to low-income loan owners. When rates adjust, people will--literally--be out of their loans and out of "their" homes.

The Fed has maintained a near-zero Fed funds rate for 21 months, and has purchased at least $300 Billion in Treasury debt to hold down rates (that's the official number, but many suspect the real number is much higher). This latest announcement is another attempt at $180 Billion to $240 Billion worth of bricks to hold down rates. Meanwhile, savers and those on fixed income are getting killed by these low rates, Congress is continuing to spend, and the Fed's balance sheet is ever-expanding.

Welcome abroad the QE2: this ship has no lifeboats. Enjoy the ride.