Executive Intelligence Review
Subscribe to EIR


Fed Governor Says 'Keep Printing' After Fed Loses $155 Billion in May

June 13, 2013 (EIRNS)—This release was issued today by the Lyndon LaRouche Political Action Committee.

St. Louis Federal Reserve Governor James Bullard surprised "market experts" by recommending indefinite continuation of the Fed's "quantitative easing" at $85 billion/month, in a speech in Montreal today—and demanding that the European Central Bank (ECB) pursue "aggressive quantitative easing," something it is not allowed to do by treaty.

Unexpectedly, Bullard said he did not favor "tapering off" the Fed's bond purchase later this year—because of what he called the anomaly of simultaneously falling official inflation and rising long-term interest rates. "Maybe this is noise in the data [!], maybe this will turn around, but I'd like to see some reassurance that this is going to turn around before we start to taper our asset purchase program," Bullard said. "Surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame."

The Federal Reserve now holds 15% of all U.S. Treasury debt, as well as a huge portfolio of mortgage-backed securities, and when interest rates suddenly began to rise in May—without any sign of a Fed "exit"—the central bank lost $155 billion in one month, according to estimates by Forbes. This is three times its total equity capital. Since Jan. 1, 2011 the fiction has been created that the Fed never need recognize such losses (sound familiar?) but can simply book them as offsets to the interest payments which the Treasury will make to it on those securities. For one thing, this means Fed payments of its profits to the Treasury will stop, creating more U.S. government debt.

But more important, the much-denied "exit problem" from Quantitative Easing has now appeared, and will intensify; thus the real reason for Bullard's call to "keep printing."

Another reason for the demand for "aggressive money-printing" from the ECB, is that the majority of the Federal Reserve's money-printing continues to go to support the liquidity, and cover the losses, of European banks. This had been shown three weeks ago for the fourth quarter of 2012 by the website ZeroHedge.com; today ZeroHedge updated it through the first quarter of 2013 based on newly released Fed flow-of-funds reports.

The site demonstrates with four charts that more than all net bank lending in the United States in the first quarter was done by a single bank—the Federal Reserve! Its $303 billion increase in assets dwarfed the $158 billion increase in assets of the whole banking system; in other words, all the other banks had a net decline in lending by $145 billion. And again in the first quarter, more than half of all of this "reserve creation" by the Fed went to the U.S.-based branches of British and Eurozone banks.