As Long As The Fed Can Help It Rates Are Not Going Up - Of Course They Cannot Help It For Ever

As long as the Fed can help it rates are not going anywhere. You have only one thing to look at: The Banks' Debt Maturities. You have to dig deeper than just their plain debt in the balance sheet as the banks have other structured debt instruments that are coming due in the next couple years. If the rates on these debt that the banks have to roll into future dates (a giant Ponzi scheme), happen at slightly higher rates, the banks would run out of cash needed to mask their insolvencies. The Fed cannot let that happen considering it is owned and ruled by the same banks. The Fed is there for the banks, not for the people. Do not ever forget that when you make decisions. Therefore, rates will be kept at low rates as long as the Fed can help it. I say "help it" because it is very possible that even after trying very hard the Fed cannot help it. Countries such as China that are selling their treasury holdings as well as local and international investors if they become less complacent can easily turn the tables and ask for higher rates and there is nothing the Fed can do at that point besides just printing money and giving it to the banks, which is what they are already doing.
The biggest travesty right now is the zero rate that banks can borrow from the Fed, buy treasury securities with that money and make the spread. This serves two purposes. First is that the banks make "free" money at the taxpayers' expense. The second is that the monetization of the debt of the US is masked slightly and the fact that the treasury auctions are failing is less apparent.

The below is an article from the Daily Telegraph:

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US bank lending falls at fastest rate in history

Bank lending in the US has contracted so far this year at the fastest rate in recorded history, raising concerns that the Federal Reserve may have jumped the gun by withdrawing emergency stimulus.

 

By Ambrose Evans-Pritchard, International Business Editor
Published: 8:43PM GMT 17 Feb 2010

US Federal Reserve - US bank lending falls at fastest rate in history

David Rosenberg from Gluskin Sheff said lending has fallen by over $100bn (£63.8bn) since January, plummeting at an annual rate of 16pc. "Since the credit crisis began, $740bn of bank credit has evaporated. This is a record 10pc decline," he said.

Mr Rosenberg said it is tempting fate for the Fed to turn off the monetary spigot in such circumstances. "The shrinking in banking sector balance sheets renders any talk of an exit strategy premature," he said.

Tim Congdon from International Monetary Research said demands for higher capital ratios and continued losses from the credit crisis are both causing banks to cut lending. The risk of a double-dip recession – or worse – is growing by the day.The M3 broad money supply – watched by monetarists as a leading indicator of trouble a year ahead – has been contracting at a rate of 5.6pc over the last three months. This signals future deflation. The Fed's "Monetary Multplier" has dropped to a record low of 0.81, evidence that the banking system is still broken.

"It is absurdly premature to think of withdrawing stimulus while bank credit is still sliding. To have allowed this monetary collapse to occur a full 18 months after the financial cataclysm is extreme incompetence. They seem to have forgotten that the lesson of the 1930s was the falling quantity of money," he said.

Paul Ashworth, US economist for Capital Economics, said that certain Fed officials are clearly worried about lending since they slipped in a warning that bank credit "continues to contract" in their latest statement.

However, regional Fed "hawks" appear to have gained the upper hand. This has echoes of mid-2008 when the Fed talked of tightening, arguably setting off the chain of events that led to the collapse of Lehman Brothers later that year. China has also been calling for a halt to QE, accusing Washington of "monetizing" its deficit in a stealth default on Treasury bonds.

The bank has already wound up its main liquidity operations. Concerns that the Fed may soon reverse quantitative easing altogether have caused a sharp rise in credit spreads in recent weeks.

Fed chair Ben Bernanke first made his name as an expert on the "credit channel" causes of slumps. It is unclear why he has been so relaxed about declining bank loans this time.

"The reason the Great Depression became 'great' was the contraction of credit. You would have thought that a student of the Depression like Bernanke would be alarmed by this," said Mr Ashworth.

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