Ron Feldman's Fed Secret and Treasury Bond Behavior

This article was first published by me on Talkmarkets:

Fed Reveals Secret Bank Bond Protection

Before getting into sovereign Treasury Bond behavior, we learned that Minneapolis Fed Vice President Ron Feldman revealed another terrible Fed secret.

Of course, we know that his boss, Fed President Neel Kashkari has said the Fed prunes wages. Now we find out that the Fed refuses to let bank bond holders take losses. In an interview with David Beckworth at the Mercatus Center, Feldman uttered this must read quote:

The only active creditor in the US where we have a record that we do impose losses on them is equity holders. We do treat equity holders differently from fixed income holders, depositors, or bond holders...The thing that’s not credible is that in a crisis, a government is going to want to impose more losses on debt holders.
It is one thing for the Fed to act this way. But we now hear a Fed VP saying bank bonds are sacrosanct, untouchable! If you are in stocks and you lose your shirts, we at the Fed are prepared to let you die, financially. We bail out banks and bank stock holders lose everything.

But if you own bonds, TBTF bank bonds and maybe smaller bank bonds, sleep soundly. We the Fed will protect you and will do whatever it takes to make sure your bonds keep their value. And if you don't think that view is the view of the Fed, take a look at a Ben Bernanke quote in  his book The Courage to Act: 

Ron J Feldman First Vice President

“Another contentious issue concerned how to treat countries that, even after rigorous austerity, were unable to pay their debts. Should they be bailed out by other eurozone members and the International Monetary Fund? Or should private lenders, many of them European banks, bear some of the losses as well? The situation was analogous to the question of whether to impose losses on the senior creditors of Washington Mutual during the crisis. We (Tim, especially) had opposed that, because we feared that it would fan the panic and increase contagion. For similar reasons, we opposed forcing private creditors to bear losses if a eurozone country defaulted. Jean-Claude Trichet strongly agreed with us, though he opposed other U.S. positions. (In particular, he did not see much scope for monetary or fiscal policy to help the eurozone economy, preferring to focus on budget balancing and structural reforms.) On the issue of country default, though, Jean-Claude’s worry, like ours, was that, once the genie was out of the bottle, lenders’ confidence in other vulnerable European borrowers would evaporate.” 

Clearly bank bonds, especially TBTF bank bonds, held by senior creditors, are risk free and protected. Bernanke's decision along with Tim Geithner, was not a one off. The secret revealed by Feldman is that this Fed guarantee toward senior bank bondholders is permanent Fed policy! Bailouts, not bailins, are still backed by the world central banking system for systemically risky banks.

Protecting Sovereign Bonds

So, we have Kashkari saying the Fed prunes wages to stop inflation, especially wage inflation, to protect sovereign bonds. Now we have Feldman saying the Fed will let bank equity go to zero and yet protect bank bonds. There seems to be, from these two, a whole lot of protection of bonds going on.

In fact, I view the Fed as the big protector of bonds, including Treasury bonds, and that the Fed actively encourages the Greenspan conundrum, with low long rates.

The serious hoarding of bonds and yield decline began under Greenspan in the mid 80's. It is well charted and well documented.

Again, it isn't like we don't know that this Fed behavior is real and expected. After all, bonds are the new gold. I have argued that to people, even trained economists, who look at me with glazed stares. It just doesn't register. Edward Lambert is one of the few economists who takes this usage of bonds seriously. Bonds as gold are jealously protected by the Fed.

Wonder why physical gold is stuck in a rut? Maybe it is because bonds are a capitalist vehicle for safety and are protected and gold isn't so important anymore. The Fed has turned debt into gold.

Protecting Bonds Protects the Capitalist Class

Are bonds more protected than in the past? I am not a historian. But it could be that bonds are not only the preferred vehicle of safety of the capitalist class and have always been, but that in more current history, the bonds are used as collateral in derivatives deals. Therefore, then simply cannot be decimated (as they are marked to market constantly by the new clearinghouses), or the entire financial edifice will crumble!

While people appreciate that Kashkari and Feldman would reveal Fed secrets that actively create moral hazard, it isn't like they are upset about it. It is their job. Kashkari would like inflation to run a little hotter, to help wages and prosperity, but that is not really what the Fed is about.

Fixing Imbalances in the Financial System

Is it a diabolical system that we have? More and more, I think that it is. Certainly, it is a system that protects the elite, in ways that are clearly unfair. .

I think helicopter money would rectify imbalances in the system, the tendency of the system to funnel wealth to the very top. It would become less diabolical with helicopter money in the mix with rare usage.


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