The Dow Jones, Gold and The Fed

New York (Apr 7)   QE-3 began in September 2012 with the Federal Reserve committing itself to the purchase of $85 billion dollars a month of US Treasury bonds and illiquid mortgages from its favorite financial institutions – the big NY banks. And why not? They own the Federal Reserve. In December the Fed announced they were going to reduce their QE by $10 billion in January, and then announced they would taper QE by $10 billion in February and another $10 billion in March. No doubt they will be “tapering” QE by another $10 billion in April as they have also said that they want to be out of the QE business by autumn of this year.


Being the curious sort, I made a chart showing the Federal Reserve’s monthly purchases of US Treasury debt going back to January 1997. Remember, these are just the Federal Reserve US T-Bond purchases. I don’t have any data on the non-performing mortgages (Fannie/Freddie bonds) purchased by the Fed.


From 1997 to 2006 we see Alan Greenspan’s bubble-blowing monetary program in the chart below, which typically increased the Federal Reserve’s balance sheet by less than $10 billion a month, even during the housing bubble. The housing bubble can be seen bursting as the plot declined by $10 billion in September 2007, when the Federal Reserve began swapping its T-bonds for Wall Street’s illiquid mortgages. By summer of 2008 the chairman of the House Committee on Financial Services; Barney Frank (D-Mass) in a televised interview expressed his concerns that the Fed was running out of US T-bonds and may need the assistance of the US Treasury in their effort to maintain “stability” in the banking system.


What happened? The NY Banks’ interest rate derivatives (insurance policies) were coming into the money as the mortgage market became illiquid, an event that Wall Street had neglected to make provisions for by maintaining adequate reserves. This was, and is a multi-hundred trillion dollar market, a market from which Wall Street had just collected income and then squandered the revenues on employee bonuses as government regulators looked on in silence. This is still the case, as nothing has changed since 2008. The grotesque monthly purchases since September 2008 have been the Federal Reserve’s response to Wall Street’s interest-rate derivative swindle.