Fed to start talks with dealers on repos

The Daily Bell

Issue 420 • Thursday, September 24, 2009

Fed to start talks with dealers on using reverse repos

Getty Images

The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions. Central bank officials are discussing plans to use so-called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That's where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system. - Bloomberg

Dominant Social Theme: Complex measures, complex minds.

Free-Market Analysis: Wow, no wonder only a few people understand monetary policy! Ask most people how they go about buying and selling and they will tell you that they either extend or receive currency - money of some sort. Ask them if they utilize repos and they are likely to look at you as if you are losing your marbles. But that is how central banking works. The arcane nature of the nomenclature and the complexity of the transactions would seem to ensure that average folks stay as far away from the subject as possible.

In fact, the Federal Reserve is wrestling with a fairly simple problem. It has printed too much money to refloat improvident banks and now must reduce the money supply without raising rates. This is not just problematic. It is likely as impossible - as we have pointed out - as winning a major lottery day after day for, say, a year. There are simply no diagnostic tools that the Fed's wise men can use to figure out how much money is too much money - and the reverse.

When the market was allowed to moderate the money supply, prices determined whether the supply of money (gold and silver) went up or down. Too much money in the system and mines shut down and hoarders ceased to sell their stockpiles of money metals. Too little money in the system and mines opened back up and hoarders began to sell. Thus it was that the market itself determined the money supply.

But now we have the wise men. They will sit around a polished table in an extremely elaborate setting and "argue" about whether or not the money supply is too big or too small. Eventually they will reach a "consensus" - either because the time allotted for the meeting is running out or because they have grown tired of bickering. This consensus is then what will determine how much money remains in the banking system, and eventually in the larger economy. But since the wise men have no tools to determine the correctness of their diagnosis (except hindsight) the consensus is likely as flawed as any other part of the process.

Conclusion: There is a big backlash building against the Fed and against the entire central banking process as it is practiced in the West. The backlash has been fueled by the Internet which has allowed the process of central banking to be explained in detail. This was impossible to do in the past and those who promoted and utilized the levers of central banking relied on the secret and complex nature surrounding what is essentially price fixing to defend again uncomfortable questions. Unfortunately for those who believe in the Platonic approach to statecraft, the wise man model is steadily being undone by the drumbeat of technology. Too many seem to understand what has taken place.