Friday, April 18, 2014
PLACERVILLE, CALIFORNIA
99 CENTS

‘Mouse trap’

By
From page A4 | August 05, 2013 | 7 Comments

What CNBC’s Rick Santelli referred to as a “mouse trap” Friday morning is a growing concern for banks. The “mouse trap” is the Federal Reserve’s quantitative easing, which means it is buying $85 billion of long-term bonds each month. How the Fed will taper off those long-term bond purchases without tanking both the stock market and the banks is the “mouse trap” it will have to try to escape from.

When the Fed slows and then stops buying long-term bonds, bond prices will fall and banks will face capitalization losses.

Stanford University Professor Ronald I. McKinnon also used the trap metaphor in a July 30 column in the Wall Street Journal:  ”The problem here is that as banks and other financial institutions get used to near-zero interest rates and accumulate low-interest bonds for some years, they end up in a trap from which escape is difficult, and this trap has negative implications even for corporations that seek direct, long-term financing.

“The trap was revealed for all to see after Fed Chairman Ben Bernanke’s suggestion, in congressional testimony on May 22, that the central bank might slow down its huge purchases of long-term treasury bonds and other long-term securities — purchases designed to keep long-term interest rates low.”

Bernanke’s tapering talk led long-term bond rates to spike 1.5-2.5 percentage points in four days and stock markets crashed around the world. It took a whole lot of jawboning from Bernanke and various other Federal Reserve Board members to calm stock markets.

The yield on 10-year U.S. bonds Friday morning was 2.62 — down from about 2.75 at the start of the day — and the 30-year mortgage was 4.59. The weekly chart for the 10-year bond shows significant variability.

“Now, after a low-interest rate ‘equilibrium’ for some years, the potential for exiting its quantitative-easing means high volatility in bond markets — a volatility that inhibits new bond offerings for domestic investment,” wrote McKinnon, later adding, “The misnamed monetary stimuli are actually holding the economy back.”

McKinnon’s prescription is for all central banks to increase short-term interest rates in a coordinated way and phase out long-term bond purchases.

Coordination seems like the best course, but slowly and discreetly. A top official at the Bank of England talking about that bank’s policy noted it has created “the biggest bond bubble in history.”

It’s time to change, but it’s going to be a challenge to avoid the mouse trap.

Mountain Democrat

LEAVE A COMMENT

Discussion | 7 comments

  • Phil VeerkampAugust 03, 2013 - 6:03 am

    Eustace Mullins, calling Eustace Mullins . . . NOT!

    Reply | Report abusive comment
  • EvelynAugust 03, 2013 - 11:48 am

    “[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank, in the hands of men like … Benjamin Strong of the New York Federal Reserve Bank … sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world.” ~ Carrol Quigley, 1966, Tragedy & Hope, pgs. 277-278

    Reply | Report abusive comment
  • cookie65August 05, 2013 - 8:11 am

    Wow!! Do you mean to say that the market, which has become the lefts only evidence of anything that resembles a recovery, is being propped up with $85billion a month in printed money? whodathunkit. And the chasm between the haves and the have-nots continues to grow because those evil rich are gambling with other peoples money with the guarantee that other peoples money will bail them out when it all goes south. Welcome to hope and change. A never discussed purpose to keeping the market injected with monopoly money is an attempt to keep the public sector and their pensions from experiencing what everyone in the world of reality is dealing with.

    Reply | Report abusive comment
  • cookie65August 05, 2013 - 8:14 am

    The "bond bubble" is another term for "public sector bubble". The rich DID NOT steal your money, the government did.

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  • cookie65August 05, 2013 - 8:39 am

    This is where the trillion dollar stimulus went, which is why it created no jobs. It was never meant to create jobs. When a trillion dollars merely postpones what is coming you know you are in deep sh*t. Pandemic of pensions. http://www.cnbc.com/id/100929269

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  • James E.August 05, 2013 - 9:03 am

    Cookie, it wasn't a trillion dollar stimulus. Rather a $787B stimulus, with approximately a third of that going to tax cuts for individuals and businesses.

    Reply | Report abusive comment
  • cookie65August 05, 2013 - 2:15 pm

    James, as you know I am more than aware of what you will hear if you tune into the alphabet channels as a means of being informed. The cost of obama's spending spree known as stimulus was well north of $1 trillion. I am always suspicious of anyone who counts people keeping more of what they earn as government spending though. Even the CBO revised the spending to 831 billion, which is not the cost James. If you know where to borrow 831 billion -interest free- let the government know. My favorite part of the whole sham is the summer of recovery only cost us roughly 700 grand per job.

    Reply | Report abusive comment
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