Federal Reserve Undermines Credit Markets

Another Sign That Ben Bernanke

Ought To Step Down ASAP

I have in other, previous blog posts argued that Ben Bernanke is perhaps the worst Fed Chairman in its now 100 year history (here, here, here, here, here). Maybe I am already a bit obsessive with this guy in my blog posts, but he and his predecessor are perhaps the foremost culprits for massive government failure that caused and prolonged the Great Recession.

However, this man does not take responsibility for the worst recession and recovery in decades!

The Fed Squeezed The Repo Market

Thanks to a Wall Street Journal opinion page piece by Andy Kessler titled “The Fed Squeezes the Shadow-Banking System” (subscription required) published on 5/23/2013 I became aware of this issue.

The article uses the term “rehypothecation”, while for the purposes of this blog I chose the term “repurchase agreement”. I may be ignorant about the differences, but I am not a financial economist and I am pressed for time.

To summarize the article, due to the aggressive buying of large amounts of Treasuries (the Fed holds about $1.8 trillion of US Treasury bonds) and mortgage backed securities, the market for repurchase agreements is partially dried up. According to the article such repurchase agreements are similar in effect as the fractional reserve banking multiplier on credit and money availability in the economy. In particular, highly liquid and fungible Treasury securities serve as collateral in repurchase agreements.

Thus, it is very likely that the Fed has acted counterproductive rather than stimulating the economy it throttled it. There are so many things that this preeminent economist, i.e. Ben Bernanke, does not understand about economics.