If not Fed chief Ben Bernanke, then who will provide the more than $1 trillion liquidity the global financial markets need to continue making record highs?
The Fed giveth, but given last week’s testimony and minutes from the central bank and its leader, it could taketh it away.
And as with the charge levied against JPMorgan CEO Jamie Dimon about lacking a successor, the Fed has tapped no one to step up and provide the liquidity.
Bernanke and his Federal Open Market “Loan” Committee now purchase $85 billion a month of Treasuries and government-sponsored mortgages, and the US economy is still feeble.
The market understands this economy is unsustainable without massive liquidity injections.
Like water to humans, bond-market liquidity is a necessity for an economy to exist; we are deficit-dependent on it.
However, the paper taper wouldn’t be such a caper if the Fed had a stable of able participants to gradually take over for it, the way banking has traditionally been done, but when you’re the only bank left in town with the flexibility to buy and a yen for US bonds, the question arises: taper to whom?
Historically, we have always had the Fed tightening or loosening only interest rates and not easing quantitatively, because the banks and brokerage houses would step in and buy.
In the past, they had been permitted to buy bonds for their own accounts with their own capital. This is the major structural change in the economy: When rates were considered appealing, the banks and brokerage houses would buy them for their own accounts, and the economy would benefit.
But today, they are only permitted to use up to a total of 3 percent to 5 percent of their overall capital when buying securities for their own accounts. as the Volcker Rule within Dodd-Frank has essentially dammed non-governmental liquidity, aka bond buying.
Money markets and mutual funds are other natural buyers of US debt — but not at these levels, with yield rates at lows not seen for decades.
In the land of unintended consequences — Washington, DC — it’s all on Ben and the Fed now, because the need for their presence is no longer temporary.
The Fed used to be the “buyer of last resort”; today it buys 70 percent of bonds issued each month by its neighbor the Treasury Department and most of the mortgages underwritten by Fannie Mae.
The Fed can talk “taper” all it wants; it sounds great in theory. But taper the paper to whom, Sir?