Hmm - I know I'm probably going to sound a little crazy now......

Hmm - I know I'm probably going to sound a little crazy now... But I'm calling BS on this whole exercise.

Here the question I want answered

1) Why is the media treating the fed's purchase of treasuries like it is something that hardly ever happens...? In fact, why is Bernanke treating it like this? Here are some articles from past times to support my point:

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Finance
THE MARKETS: Rates Dip as Fed Buys Treasuries Series: 10
Bart Fraust
268 words
15 April 1993
American Banker
22
Vol. 158, No. 71
English
(Copyright American Banker Inc. - Bond Buyer 1993)
Interest rates fell on Wednesday as Federal Reserve buying of Treasury securities boosted bond prices.

Blue-chip stocks rose, with the Dow Jones industrial average up 11.61 points, to 3,455.64. But the Standard & Poor's 500 index dipped by 0.56 point, to 448.66.

The dollar rose to 1.5925 German marks from 1.5820 and to 113.8 yen from 113.4.

In late trading, the government's benchmark 30-year bond was up about 1/4 in price. This lowered its yield to 6.76%, from 6.78% on Tuesday.

Ten-year notes were up 1/8, to yield 5.89%. Two-year notes were up 1/32, to yield 3.77%.

The Federal Reserve executed a "coupon pass," buying Treasury securities to add reserves to the banking system. Such moves are common at this time of year to offset drains in reserves caused by tax payments.

The Fed did not disclose how much it bought, saying only that it acquired issues maturing this November and beyond.

John Lonski, senior economist at Moody's Investors Service Inc., said Wednesday's coupon pass at least equaled the record $5.5 billion in Fed purchases in November 1992.

"Coupon passes reduce the supply of government securities," he said. "All else staying the same, a coupon pass gives prices a lift."

Also bolstering bonds was sentiment that the economy had slowed in the first quarter. That impression was fed by this week's report that retail sales fell 1% in March.

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Note - that a coupon pass was an instrument used previously that was in effect a permanent sale of the security to the fed. This was replaced later on by a new instrument, a repo operation, which ensured that the security would be handed back and the cash withdrawn from the system. This development can be seen in the following article:

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Fed opting for flexibility in open market operations.
By Ross Finley
635 words
11 December 1999
01:55
Reuters News
English
(c) 1999 Reuters Limited
NEW YORK, Dec 10 (Reuters) - With Y2K concerns adding to the usual year-end pressures on the money market, the Federal Reserve has not only been providing ample liquidity to keep interest rates from rising, it appears also to be subtly changing the way it makes sure there is enough cash available.

Market observers say the Fed is buying fewer U.S. Treasury securities on the open market through outright purchases called "coupon passes" - trades that add permanent reserves to the banking system.

Instead, analysts say, the Fed is making frequent use of its new longer-term repurchase agreements to add funds.

These operations - where the Fed buys Treasuries from the market under fixed agreements to sell them back on a set date - offer the Fed greater flexibility than outright purchases because they are only temporary additions of reserves.

The longer-term "repo" operations - set up initially to address liquidity concerns at year-end - are also being used to address "typical seasonal needs," Peter Fisher, manager of the System Open Market Account for the Federal Open Market Committee (FOMC), said earlier this month.

Since early October, the Fed has conducted nine long-term repurchase operations totalling over $48 billion - far greater than the total amount of reserves added via coupon passes during all of 1999.

The Fed has added just over $40 billion in reserves through coupon passes this year, most in the first half.

"They did an awful lot (of coupon passes) this year in the early part of the year and actually in September, October and November they've done less and less," said James Blumenthal, economist at MCM Moneywatch.

Coupon passes used to be the main way the Fed ensured consumers had enough cash on hand during busy holiday periods such as Easter, July 4, Labour Day, Thanksgiving and Christmas, but the change has led some market watchers to wonder whether the coupon pass is becoming passe.

In the past, routine repurchase operations were confined to overnight, over-the-weekend or short-term durations. But early this year the Fed extended the span to 60 days from 15.

The FOMC then decided at its August 24 meeting it would permanently lengthen the span of those repos to 90 days, effective in October.

"Long-term repo agreements are really a 'quasi-pass' because most of the money that's been injected into the financial system is going to be there for two to three months," said Kevin Flanagan, economist at Morgan Stanley Dean Witter.

On Thursday the Fed conducted its largest-ever fixed-system repo since the maturity period was extended in October, a 40-day operation totalling $6.205 billion.

In addition to extending maturity dates, in October the FOMC also decided to allow the New York Fed to expand the types of collateral it accepts for repos, which has made it easier for the Fed to exercise them.

"One of the main reasons they're doing more repos is they have also moved to add more variety to the repo collateral," said Carol Stone, senior economist at Nomura Securities International.

Analysts and traders also say the Fed has preferred repos because it is reluctant to reduce the already lower supply of Treasuries on the market by buying securities outright.

"There are fewer Treasuries outstanding, and they are trying to find different ways to avoid pulling Treasuries out of the market," Stone said.

With the Federal government now showing a budget surplus of over $120 billion, the Treasury does not need to issue as much debt as it did in the past.

"There's no question about it," Flanagan said, "the reduction of Treasury debt outstanding has played a role."

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Note that in this article - from 1999 - it mentions 48 billion worth of repo purchases (the temporary kind) but still 40 billion worth of coupon passes (the permanent kind).

What seems to have happened historically is that the fed moved from purchasing treasuries outright to the repo agreements in order to add liquidity to the market (and keeping rates low) without putting to much stress on the supply of treasuries. Note that in terms of flexibility - it doesn't so much add flexibility because the fed can pull the money back in after 90 days. The flexibility is that it allows banks and other institutions to keep treasuries on their books. Chances are that the banks will just roll it over to a new repo agreement - their standard habit of financing long term loans with short term money and constantly rolling over that short term money. They then get to keep their treasuries on their books as assets. A game we all know with the gold leasing. The point being - even the repo money stays out there.

But this was only 10 years ago! All they are doing is going back to buying treasuries now that supply is about to considerably loosen. 300 billion worth of purchases isn't actually that much considering that they bought 40 billion worth in 1999 on top of the repo agreements. It's certainly not that much considering the scale of the crisis, nor is it much in comparison to the trillion or so spent on corporate bonds. This is all money going into the system.

So to repeat my question - why the big deal? The fact is that it is not a big deal. They've done this before and there wasn't the great outcry then.

My view? Everyone is getting played. They are trying to stoke inflation without actually doing anything they haven't already been doing for a long time. They are trying to effect sentiment without actually effecting any significant change in the fundamentals.

Note that this is consistent with the world view being displayed by the Obama administration. The view is that the values of those toxic assets are being underpriced by the market and that the real price will be something much fairer. They are trying to fake the market into accepting those fairer prices by underwriting the risk that the market sees in them - the risk that the Government DOES NOT see in them.

The Fed and the administration are in bed together in the belief that there are no problems in fundamentals - that this is a problem entirely of perception... and their efforts are solely designed to manipulate that perception.

I don't know what this means going forward - it depends if they are right or not and if so, if they can indeed manage that perception. For gold, it depends if one believes that the the historical actions of the fed are already highly inflationary - in which case you should remain bullish because it's business as usual.