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On February 7, 2009 Bernanke Admitted What It Was All About

Back on February 7, 2009, one month before the Fed unveiled its massive (for its time) first episode of Quantitative Easing, the Federal Reserve was flailing. And, as revealed today by the latest annual batch of Fed transcript releases, precisely one month before the Fed commenced monetizing tens of billions in government debt and MBS, Bernanke held perhaps the longest conference call in the Fed's history (the transcript alone is 65 pages) in which he revealed that he was working on something entirely different: an "aggregator bank" concept, which would have been essentially a quasi-nationalization of  the US banks whereby Fed funds is commingled with the bank's capital in order to avert public attention from the trillions of bad assets on the bank books.

It is during the discussion of this plan, which mysteriously disappeared from the Fed's plan of action between February 7 and a month later, when America set off on its path from which 7 years later it is still unable to ween itself (and in fact now everyone else is also pursuing QE), that we learn for a fact precisely what most have suspect if not known for a fact, namely that the resulting "bailout" of the US economy by way of QE was nothing more than a way to keep bank shareholders "thrilled."

From the February 7 transcript:

The purpose of the meeting today is for me to discuss with you the Treasury’s proposed financial stabilization plan and, in particular, the Fed’s proposed role in that overall structure. This is a “close hold.” There have been a number of leaks, as often happens, which is very counterproductive; but I think the Fed has done well, and I would not like those leaks to come from the Fed. So I appreciate your keeping your confidence close.


We have been discussing, and by “we” I mean primarily the Treasury, the Federal Reserve, the FDIC, and the OCC, the last week or so—with a lot of staff work before that—a plan that Secretary Geithner will propose on Monday at 12:30 in a speech at the Treasury. They have been very wide-ranging discussions, and, frankly, there was little in the way of resolution or focus until very recently—only in the last 24 hours or so have we begun to see where Secretary Geithner wants to take the plan; in fact, we got a very substantial revision of the document this morning at 9:15, so you can see this is very much a work in progress.


But given the schedule for Secretary Geithner to announce the plan on Monday, I thought this was an opportune point for us to review the plan and the Fed’s potential role. As you’ll see when I go through the plan with you, the details are fairly lacking. There is an overall structure. That, in part, is on purpose. The political strategy is to provide an overall structure with some detail, but not a great deal of detail, with the idea that the public discussion and the congressional discussion will create some buy-in on the political side. It’s like selling a car: Only when the customer is sold on the leather seats do you actually reveal the price. So the  strategy, again, is to provide the framework to get the Congress involved within certain parameters, and then, only when there is some consensus on how the plan will work and what the key elements will be, to negotiate whether additional funding beyond $350 billion is necessary.


But I think there are some advantages to that from a political point of view. I will say that both I and the staff—Bill Dudley and others—are somewhat concerned, at least given the way things stand now, about the market reaction. First, the lack of details will create some uncertainty and concern, particularly because there’s not a great deal said about the “problem children,” the BAC and Citi. Secondly, I think the markets will be disappointed in the following sense: As I will describe, this is a real truth-telling kind of plan. It’s fundamentalist. It’s not about giving the banks a break. It’s not about using accounting principles  to give them backdoor capital. It’s very much market-oriented and “tough love.” And I think we all will like that. I like that. But the banks’ shareholders aren’t going to be thrilled about it.


For one brief , fleeting instant, the Fed was willing to do what is right, and no only not halt Mark to Market (the Fed itself admits accounting gimmicks boost banks), but force banks to recognize their losses without "giving them backdoor capital" - something else the Fed now admits to doing. But the reason why the Fed's plan would have been applauded is that as Bernanke says it is "market-oriented" and "tough love."

But most importantly, the Fed revealed what the overarching motive behind the entire economic "bailout" has been- in other words what it was all about: the banks’ shareholders.

And.... he was right, even if he "liked it." Because someone else apparently did not.

Precisely one month later, unclear why, the Fed changed course 180 degrees, and instead of dispensing "tough love" and going with a market-oriented means to fixing the economy, one which however would have wiped out all bank shareholders, Bernanke unleashed central-planning unlike anything even seen in the USSR. Not only that, but we also know what QE is by what it isn't:

  • It isn't a "real truth-telling kind of plan
  • It isn't "fundamentalist"
  • It is "about "giving the banks a break"
  • It is about "using accounting principles to give the banks backdoor capital"
  • It is about "non-market oriented and unquestioned love"...  by the Fed.

In short, it is why 7 years later bank shareholders couldn't be more thrilled with QE.

As for why it hasn't worked for everyone else, well, one can only imagine the kind of "meticulous attention" to detail the Fed uses if, on its official transcript, it made the most epic, glaring error possible. Because it would appear that in the eye of the Fed, QE is now even distorting the days of the week...

Source: Fed