“Sterilized” Bond Buying – New Federal Reserve Scam

This story is interesting. The Federal Reserve has a new name for the usual scam, “print new money and give it to the banksters”. It’s called “sterilized bond buying”.

Here’s how it works. The Federal Reserve buys long-term junky bonds (probably mortgage bonds) from banks. At the same, those banks are required to buy short-term Treasuries (or other short-term loans), lending that money back to the Federal Reserve.

The lie is “Banks are required to buy short-term Treasuries. Therefore, this is not inflationary.”

That is false. First, banks can sell those Treasuries/loans and buy other things. Second, the bank is swapping junky assets for Treasury debt. Third, the bank can use that Treasury debt as collateral for other leverage. Fourth, the banks profit from the interest rate spread. Finally, the Federal Reserve probably is overpaying for the bonds.

Suppose that the Federal Reserve sells the bank short-term Treasuries at 0.25%. Later the Fed Funds is lowered to 0.1%. The bank gets a profit of 0.15%. 0.15% seems like nothing, but when you multiply by billions of dollars and add 100x leverage, it’s very valuable.

Suppose that the mortgage bond really is worth $0.5B but the Federal Reserve pays the bank $1B. That’s a gift of $0.5B to the bank. Even if it’s a repurchase agreement where the bank must buy it back later, the bank gets rid of a junky asset and gets $1B liquid. In the meantime, the bank profits. By the time the repurchase agreement unwinds, inflation might make the bond worth more than $0.5B.

There’s no such thing as “sterilized bond buying”. The Federal Reserve creates new money and buys bonds/junk from banks. That’s inflationary. The details are obfuscated, to make it harder to understand what’s going on. The details of the scam are slightly changed each time. That’s a distraction. By changing the details slightly, it seems like a clever new idea, rather than the usual “Print new money and give it to banksters.”

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