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Rep. Rothfus: “Is That Printing Money”, Chmn. Bernanke: “Not Literally”

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Fed Chairman Ben Bernanke presented his Semiannual Monetary Policy Report to the House Committee on Financial Services. On Thursday, he’ll present the report to the Senate Committee on Banking, Housing, and Urban Affairs. You can read his prepared remarks at this Federal Reserve page. After reading his prepared remarks, Chairman Bernanke answered House committee members’ questions. I watched the 3-hour testimony on C-SPAN 3 patiently waiting for some questions and answers relevant to savers. I had to wait until after 1:00pm before I heard some interesting exchanges. The first one started with a question by Rep. Keith Rothfus (R-PA 12th District) which asked Chairman Bernanke if the Fed was printing money and if that was going to lead to rampant inflation five years down the road. Below is a transcript of this exchange:

Rep. Rothfus: Simple question that I have is when I have someone in my district that is going out to buy a Treasury bill, an individual is looking to make an investment, they go to their bank, they go to their broker, they have $1,000 or $5,000, and they get a bill. Where does the Fed get its money to buy its Treasury bills?

Chmn. Bernanke: When we buy securities from a private citizen, we create a deposit in their bank, and it shows up as reserves. So if you look up our balance sheet, our balance sheet balances. We have Treasury securities on the asset side. On the liability side we have either cash or reserves at banks, and on the margin that’s what has been building up as excess reserves at banks.

Rep. Rothfus: You create the reserves?

Chmn. Bernanke: Yes

Rep. Rothfus: Is that printing money?

Chmn. Bernanke: Not literally.

Rep. Rothfus: It’s troubling to me when I look at the balance sheet that the Fed has and you look four years ago it was $800 billion and now we’re up to $3.5 trillion. I know you say you’re confident that you have the tools available to do a draw down when necessary without risking hyper-inflation, but by your own admission this has been unprecedented what you’re doing. What assurance can you give to the American people that we’re not going to have a round of rampant inflation five years down the road?

Rep. Bernanke: It’s not unprecedented because many other central banks use similar tools to the ones we plan to use.

Rep. Rothfus: Currently? Or can you look back in history and see a country that has blown up its balance sheet by 311% in four years without any kind negative consequences?

Chmn. Bernanke: Absolutely. Japan, Europe, U.K. All have done similar kinds of things with very large balance sheets.

Rep. Rothfus: I appreciate your feedback on that, and we may reach out to get that information. Thank you.

Just a few minutes after this exchange, Rep. Steve Pearce (R-NM 2nd District) stood up for seniors by describing how seniors are getting punished by the low interest rates. Rep. Pearce described this as taking from seniors and giving it to Wall Street. Chairman Bernanke’s answer was similar to his past answers when asked about this.

Rep. Pearce: You continue to take advantage of seniors because they don’t have access to sophisticated instruments. So a lot of them have their money in cash or near cash equivalents. Now Mr. [?] noted that the home financing has increased from 3.3 to 4.5. We got a whole sheet of Wall Street profit reports. Those are going extraordinarily high. Did the seniors even get an honorable mention in the question about who’s going to pay the bill for this? When are you going start to go up on the interest rate just a little bit? Because right now you are taking from seniors and you’re giving it to Wall Street basically. In my district we’re like 43rd per capita income, $14,000 to $18,000 per year. Seniors live their lives right. They paid off their bills and they’re being punished for this economy.

Chmn. Bernanke: I don’t think the Fed can get interest rates up very much because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank. Interest rates would be low.



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Comments
21 Comments.
Comment #1 by KenKounter (anonymous) posted on
KenKounter
OKAY, INTEREST RATES ARE HINGED TO INFLATION. BUT SO FAR AS I KNOW, NO ONE HAS DONE A DETAIL  EXAMINATION OF THE METHODOLOGY USED BY BLS TO CALCULATE THE CPI TO SEE IF IT IS CURRENT AND ACCURATE. ANY TAKERS?

7
Comment #2 by paoli2 posted on
paoli2
Thanks Ken for sharing this information with us.  I am so grateful that at least Senator Pearce spoke up for seniors.  I was very disappointed in Ben Bernanke's answer as it gives us little hope for better rates.  So where do we go from here??   The future does not seem too much better for those depending on interest rates for income. 

17
Comment #3 by Anonymous posted on
Anonymous
Hehe, following the example of the UK, Europe, and Japan: what could possibly go wrong?

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Comment #4 by Anonymous posted on
Anonymous
This is all because Mr. B and his buddies are all invested on Wall Street, But not to worry because when all the seniors find out that interest rates are going to be held down for a much longer period of time , thay to will be forced to also put money into Wall Street.....Then and only Then will He AND His Buddies ....PULL THE PLUG.....

Talk about your irrational exuberance...........

15
Comment #5 by Shorebreak posted on
Shorebreak
I got the impression that Chairman Bernanke was mocking Rep. Pearce for even suggesting that seniors were thrown under the bus with this current easy money policy. This man, Bernanke, has absolutely no concern for the plight of elderly retirees who can't afford to put their funds at risk. Oh well, we have gone over this dilemna so many times that it's getting like a player piano. Personally I don't care if Bernanke, or his succesor, keep rates this low for another two decades. I still won't knuckle under to their wish to place all my funds into the equity markets so they can pull the plug on seniors who will have nothing left while Bernanke and his friends enjoy the beach in the Cayman Islands..

14
Comment #6 by mustsavemore posted on
mustsavemore
The obvious solution is to spend money (investments) to make money. That's what I decided I'm gonna do. Works for the government, should just as well work for me.

3
Comment #7 by outtempster posted on
outtempster
"Japan, Europe, U.K. All have done similar kinds of things with very large balance sheets." And Japan's economy is down for the past 20 years...

7
Comment #8 by Anonymous posted on
Anonymous
Bernanke has absolutely no concern for the savers, the retired savers in particular. This is something we already knew but he continues to remind us of it every chance he gets. It's really hard to understand how he could be so matter of fact about it without even a hint of concern or sympathy of our situation. In his ego based world, we obviously don't count. And the really sad part of it all is that we are essentially helpless to do anything about it.

11
Comment #9 by Anonymous posted on
Anonymous
It has turned out to be a win win situation for me.  The lower cd rates has reduced my income level low enough that I will be in the required federal poverty level to qualify for the government subsidies to pay for most of my health insurance in 2014.

12
Comment #10 by Jim Davis (anonymous) posted on
Jim Davis
Zero Hedge does a whole story on how we've been raked over the coals

 

http://www.zerohedge.com/news/2013-07-17/savers-and-real-108-trillion-cost-zirp#comment-3763807

5
Comment #11 by Bancxman (anonymous) posted on
Bancxman
It’s nice to see the fastidious side of Steve Pearce. If he were really interested in the plight of seniors, he wouldn't have voted for H Con Res 25 on March 20, 2013. His vote was in favor of adopting a chained cpi thereby reducing the benefits of social security recipients.  This resolution was presented as part of the Republican Study Committee's alternative budget.  Rothfus voted against it.

11
Comment #12 by Anonymous posted on
Anonymous
Bernanke, much like Greenspan, was seduced by the press with their talk of "soft landings", seduced by Wall Street showering praise upon him (for giving them riskless profit via the "carry trade"), seduced by politicians who never met a "free lunch" that offended them, and seduced by their concern over their legacy and how they will be remembered.

At this point the only way to reimburse those seniors who have bore the burden of the false interest rates of the last decdade, would be to formulate some type of tax credit of 3% of savings, retroactive to 2004, which is  at a minimum, the penalty savers have paid in interest lost.

The next Chairman is guaranteed to follow the same regimen, given that PresidentObama will be doing the appointment.  I say bring back Paul Volcker, the last chairman that did not have his spine removed.

 

11
Comment #13 by Anonymous posted on
Anonymous
It was Congress who gave the fed his dual mandate. Why are we upset with the fed chairman? Get upset with Congress. If higher interest rates is what we want than get on Congress to change the mandate of the fed. 

11
Comment #14 by Henry (anonymous) posted on
Henry
It's supply and demand. Too much demand right now for "safe" assets, therefore 0% rates.

Better lately to buy what's not in demand, like anything with risk - stocks/bonds balanced portfolio. Even if those investments take a tumble, you'll still be ahead of being in 0% for the last 5 years.

2
Comment #15 by lou posted on
lou
Henry, it is not really relevant what happened in the last 5 years. Can you say that you would be ahead in the next 5 years if stock/bonds take a tumble? The honest answer is that you don't know.

7
Comment #17 by Anonymous posted on
Anonymous
Q: Why does the Federal Reserve Bank rob seniors?

A: Because THAT'S where the money is!

2
Comment #18 by Wanderer (anonymous) posted on
Wanderer
While it is true that the Fed has little concern for seniors or "savers", it does have a lot of concern about the banking system. If it didn't do the permanent open market transactions, known in the industry as "POMOs", and to the general public as "QE", all the money center banks and investment banks in America and Europe would have failed. Indeed, if the Fed really "tapers" its money printing program, they will still fail. Most of the casino banks in NYC are still potentially insolvent. They've got hundreds of trillions worth interest rate swap derivatives which rely on the Fed controlling the rise in interest rates. If rates precipitously rise, a net of from $500 billion to $1 trillion US dollars will be lost, almost overnight, by the likes of JPM, GS, MS, Merrill/BAC, and CITI.

The Fed is NOT worried about unemployment or inflation. It is worried about the biggest banks in NYC and London, ONLY. Accordingly, it will not taper or end the money printing, but merely change the style by which it does the process. From year 2001 until 2009, the Fed was incredibly busy printing money. Not as busy as after March, 2009, when it began its POMO program, but it was busy nonetheless. That is why gold rose from $255 per ounce to $850 per ounce between 2001 and 2008.

From 2001 to 2008, the Fed extensively engaged in another method of money printing known in high finance as the temporary open market transaction or "TOMO" for short. Theoretically, TOMOs can be issued by any of the Fed's branches. But, like POMOs (QE) today, TOMOs were almost exclusively available at the TOMO "window" at 33 Liberty Street, in lower Manhattan, and only to the big trading banks of NYC. TOMOs are technically "loans", but they were being infinitely renewed, from 2001-2009.

The process is simple. The banks ask for dollars. The NY Fed, in turn, asks for "collateral". The banks hand over whatever they have. In the beginning, they would usually post federal government bonds, but, after 2008, the Fed started to accept all kinds of toxic stuff, including MBS and stocks. The Fed usually values this 'collateral" at par, though, at various times, the collateral posted was actually worthless in the open market (as was the case with mortgage backed securities in 2009). For example, Lehman Brothers stayed in business for months, toward the end, by living almost exclusively upon the money supplied through repeated TOMOs. Simply put, the Fed electronically creates "reserves", in exchange for the collateral, and credits the reserves to the bank's account at the Fed.

The TOMO process increases the amount of money in circulation, just like a POMO (QE). The difference is only that, theoretically a TOMO is a temporary increase, whereas a POMO is a permanent increase. But, in practical terms, it makes little difference. The money created does not enter the official money supply numbers, like M1, as readily as POMO money does. That's because, theoretically, a TOMO is a repo loan. But, the money supplied has the same net effect as printing money by outright buying the securities. The banks can use the cash to manipulate markets, or pay off debts, or do whatever else they want to do with it.

The key to TOMOs is that, even though they are loans, in practical terms, they have always been endlessly renewed, making them, esssentially gifts. The official term of the "loan" may be 1 day, 1 week or up to 3 months, but the Fed never actually called these loans in for repayment. Thus, from 2001 to 2008, about $300 billion worth of TOMOs were floating around continuously. This money was only paid back in 2009/10, when the POMOs began.

The Fed will suppress interest rates, after the supposed "tapering" or "end" of QE, by slowing down POMOs and replacing them with TOMOs. QE (POMOs) has a bad name, and is equated to money printing. Thus, the sale of US Treasuries to foreign sovereigns is down by 77% since 2010. The Fed wants to change tactics, while insuring that the NYC/London bankers don't suffer any big losses. The Fed doesn't want a precipitous fall in nominal stock values, and it certainly doesn't want the bond market to collapse. Now that people understand that QE amounts to money printing, they will turn to TOMOs to print money, because TOMOs are less well understand.

The TOMO is called a "tender" in Europe, and it is the method by which the ECB has printed over $1.2 trillion in new money, while claiming that it is a conservative institution that "never" prints money. The mandarins of the Federal Reserve, meanwhile, have seen the success of the tender program in Europe, and are well aware of the relative success of their own TOMO program from 2001 to 2007. The Fed was able to pump a huge and profitable bubble, in those years, in both real estate and stocks. They managed to fool both the American financial community and foreign nations for 8 years with TOMOs. That's why they are now testing and retesting their revamped TOMO system, with the obvious intent to reinstate the process. Just as with POMOs (QE), they can print as much money as they want, with TOMOs.

Because of the aforementioned facts, I choose to save my money in gold now, and keep only enough ready cash to fund my expenses for a year. I don't buy gold when it goes on one of its parabolic rises. I buy it only when it gets subjected to one of the periodic price attacks by the US government. I buy on the big dips. For example, I accumulated earnings for quite a while, and bought a lot of gold, at favorable prices, during the recent price attacks that were mounted against the precious metals. If I had any excess money now, I would buy more, but I have to wait until I build up more income.

I believe that buying gold is the only choice to defend oneself again Mr. Bernanke's policies, and those of his probable successor, Janet Yellen, who is going to be much worse. I wish this were not the case, but, unfortunately, I must deal with the reality of the situation. Meanwhile, a year's worth of my cash (for emergency use) is invested in the highest yielding money market accounts that I can find on this excellent website. I also use the highest yielding MM account to build up cash, during the accumulation process, which I will use to buy more gold, silver or platinum on the next big dip.

3
Comment #19 by paoli2 posted on
paoli2
#18:  And what are you going to do with all your "gold" if this same government which has allowed our dollars to be trashed, decides to confiscate your gold?  Do you have enough hiding places for it?  Who will allow you to use it to even buy food if it gets deemed by the Holies of Holies as illegal to use?  Crazy thinking??  Right.  And years ago it would have been crazy to think I would look at a bank like Chase offering 0.50% for a Five year CD!  Don't be too sure about anything being able to protect you unless the citizens can find a way to get the FED to undo this downward spiral we are on.  Truth be known, they have NO idea how to undo it so they are experiencing with our money and our lives!

1
Comment #20 by Wanderer (anonymous) posted on
Wanderer
So long as we don't return to the gold standard, and I don't think we will, the government will not confiscate gold. They did it in 1933 only because they intended to raise the official price of gold from $20.67 to $35.00 per ounce and didn't want the political backlash of having the biggest gold holders, which, at that time, were the banks, benefitting from that.

Gold confiscation, back then, was a depression era's version of "quantitative easing". The higher gold price allowed them to print more dollars. If we do go back to the gold standard, since the price is no longer under the direct control of the government, even if they do a price attack immediately beforehand, it will be selling for a much higher price than now. Remember, the USA will not be able to return to the gold standard without extensive debate and, probably, an Act of Congress. During the debate, the price will probably skyrocket in anticipation.

Bottom line... the Feds will to pay me a pretty penny for every ounce of gold they take from me... if they ever confiscate my gold.  I'd also use many of the dollars to immediately buy silver and/or platinum and, therefore, will benefit from the cross-link in world trading, between those metals. So, if the government sets the price of gold in relation to the money supply of dollars, which would mean $15,000 gold, my silver and platinum will also rise.

Since you asked, I've now told you about my emergency backup plan. However, I doubt they will ever confiscate gold again.

1
Comment #21 by Wanderer (anonymous) posted on
Wanderer
One more thing, Paoli2... I completely agree with you about the Federal Reserve.

It would be great to get the Fed under control. However, honest folks, like you, me, Ken Tumin, and most others who read his website, don't have any real ability to do that. Even if we vote for a Tea Party President in 2016, that is too late to stop them from trashing the dollar.

This President is going to continue nominating printers-in-chief, instead of serious Fed Chairmen,

1
Comment #22 by Anonymous posted on
Anonymous
I'd be leery of taking big bets on gold right now.  The most likely scenario I see is that stocks will continue to do well, and money will eventually come out of bonds into stocks, pushing equities even higher.  Right now people are using dividend paying stocks as proxies for bonds.  They're scrambling for income.  Gold, of course, doesn't give you income.  You only make money if the price of the metal goes up.  As an investment, gold seems to have already made its big move, and it has occured over a very long time frame.  So stocks seem to be the only game in town at the moment. 

1