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Friday, September 9, 2011

Federal Reserve "Twist"

This story was funny. The Federal Reserve plans to "Twist" its balance sheet.

Translating into English, the Federal Reserve plans to sell some short term Treasury debt and buy longer term Treasury debt. They will still keep the Fed Funds Rate at 0%-0.25%.

What's the point? Who benefits? Duh! I'm not even going to bother with spoiler space.

The point is that the Federal Reserve is giving more free money to the banks. The Federal Reserve can't do the exact same thing as before, because that would be too obvious. They change the details a little.

The yield curve is normally upward-sloping, with short-term yields less than longer-term yields. This isn't due to the "free market", but rather due to Federal Reserve policy. By selling short and buying long, the Federal Reserve is flattening the yield curve. In the process, they're giving free money to banks, who usually borrow short and lend long.

Changing the bailout details helps the "economists" think they're doing a good thing. Instead of realizing "The banksters are drinking a firehose of free money.", the Federal Reserve economists make up fancy excuses for why they're doing the right thing.

If the Federal Reserve sells 3 month Treasury debt for 0.5% while the Fed Funds Rate is 0.25%, that's a sure profit of 0.25% for the banksters. Multiply that by 100x+ leverage, and it's a lucrative scam.

Anybody who knew about the details could profit, by trading ahead of the Federal Reserve. For example suppose that the Federal Reserve decides to sell 2 year bonds and buy 10 year bonds. If a bankster makes that trade before the Federal Reserve, he'll make a nice profit.

Alternatively, the Federal Reserve might decide to sell 3 year bonds and buy 9 year bonds. If you know ahead of time exactly what the Federal Reserve will do, you can make a nice profit.

The knowledge of "Twist" isn't enough. If you know which specific bonds the Federal Reserve is buying, then you can make a nice profit. Goldman Sachs probably gets better inside information than the other Primary Dealers, giving them an extra edge.

The Federal Reserve keeps coming up with new names for the same evil idea. There was "Term Auction Facility", "Quantitative Easing", "QE2", and now "Twist".

Each time, the name of the plan and the details are slightly changed. This keeps the slaves distracted and confused. The Federal Reserve is printing new money and giving it to their bankster buddies. The "Twist" is a variation of the usual theme.

The Federal Reserve uses its money printing power to buy and sell Treasury debt. The Federal Reserve buys high and sells low, while the banksters buy low and sell high. It's pure illicit interest arbitrage for the banksters.

Speculating in Treasury debt, the Federal Reserve makes a guaranteed riskless profit. The Federal Reserve has an unlimited budget. It doesn't matter if the Federal Reserve loses money by making stupid trades with banks. Ben Bernanke isn't spending his own personal money. He's spending the people's money. The Federal Reserve finances its operations by creating new money, by inflation.

That's how the banksters earn huge profits, without doing any real work. That's how the big banks show a profit from trading every day. They're trading with the Federal Reserve! Everyone else pays the cost via inflation. The Federal Reserve eagerly makes stupid trades. Some of the Federal Reserve economists think they're "stimulating the economy". In reality, they're just giving the banksters free money.

Via "Twist", the banksters get another stealth bailout. Everyone else pays higher prices when they buy things.

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