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Chris Whalen - Fed Halting Bond Purchases Equals Big Problems
With the Fed signalling that it will keep interest rates low causing gold and silver to take off to the upside, today King World News interviewed the man Jim Rickards calls the best bank analyst in America, Chris Whalen of Insititutional Risk Analytics to get his comments on the Fed’s policies. When asked about Fed policy Whalen stated, “The bottom line is that they seem to be I think lost in a policy sense. They are going to continue to muddle along and keep rates where they are, so there doesn’t look to be any change in price guidance coming from the Fed. But I don’t know how they can ignore what’s going on with the financials. If we don’t let the rates start to rise we are going to have a very serious problem with the banks because the are not making any money.”
April 27, 2011
Whalen continues:
“Well what should they be doing? There is no easy answer here, you know they achieved a certain stability in financial assets by keeping rates low and also through quantitative easing. But that’s not helping households and it’s certainly not helping the housing sector because we haven’t seen the kind of trickle down in terms of liquidity in this cycle that we have seen in the past.
The problem is that there aren’t many ways for the Fed to help the economy if they can’t re-liquify households with cheaper credit. So if you don’t have households getting a little bit of a lift in terms of disposable income we are not going to see a rebound in the economy.
You had that piece in the Times today criticizing the Fed, talking about how they are not doing enough to create jobs. Well the Fed doesn’t create jobs. They just provide the lubrication if you will for the real economy. But if there is a block, and if the Fed’s low rates aren’t getting down to the household level the way they have with the banks, then you are not going to have the kind of rebound that everybody hopes for and I think in a sense expects. So when those expectations are dashed...then people are going to react negatively.”
When asked about how Fed’s policies will influence the dollar Whalen remarked, “Well it’s baked into the pie. Ask yourself a question Eric, where would the dollar be if the US currency wasn’t the global default as a means of exchange? It would be much lower. So in a sense, the adjustment of the dollar is long overdue. I don’t like it, it doesn’t make me happy to see the dollar going down, but given the debt load we have and the absolute refusal of Americans to face reality...I think the real problem we face is not so much Fed policy, but the fact that there is no fiscal policy.”
When asked about the Fed signalling that the bond buying would end in June Whalen replied, “Well we’ve got some deep, deep problems then Eric. See if the you think about what they’ve been doing they have been monetizing all of the Treasury’s debt issuance. And what that means is that they are taking the paper and the duration that paper represents which is the time value of money out of the market. So the dealer market hasn’t had to support those inventories.
They took it very briefly when the Treasury issues the bonds and then the Fed buys the bonds from them and puts them on their books and they pay cash for them. So their is no leverage, the street doesn’t have to support any of that paper with leverage. And so the Fed has been saying to them go and put your money in other things...and the Fed is hoping that eventually this cash is going to go into something productive.”
The KWN interview with Chris Whalen will be released shortly and you can listen to it by CLICKING HERE.
Eric King
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