Why the Federal Reserve has to Tapper.

Why the Federal Reserve has to Tapper

I have been hesitant to post a piece on this subject because I find it difficult to imagine a world with no common sense. Yet I keep hearing relatively reputable economist arguing the case for why the Fed can’t keep tapering the quantitative easing. I've always subscribed to the idea that simpler is better because I personally can’t understand complicated things. The idea that a butterfly flapping its wings in one part of the world will cause a hurricane in another part of the world is plainly beyond my comprehension. The idea that the Fed can continue quantitative easing when it produces no desired results for 4 years would be another of those incomprehensible things. The Federal Reserve is a private business, yes it is owned by the big banks and yes it is up to its eyeballs in politics but it is not part of the Federal Government. There is a profit mandate that governs every business, if you don’t turn a profit or at least break even you go out of business sooner or later. The Fed has no exemption from this business principle although they can’t be audited without an act of congress but you can’t escape the reality of going broke by not reporting the facts or under reporting.

Essentially the Fed is the governments’ bank, they buy Treasury Bonds from the government – loans that have to be paid back with interest – bonds are the collateral.  They are stewards of the dollar, controlling the physical amount and value of dollars in circulation by regulating deposit requirements and interest rates on “participating banks” in the private banking system. In the last few years the Fed has been buying a whole bunch of government low yield bonds and a whole bunch of debt (sub-prime mortgages) from the very banks that own them the “participating banks”   $4,000,000,000,000.00 worth.  These sub primes the Fed has bought will be a very big loss and as the Treasury Bonds mature they will be replaced with an even lower yield bonds as the government can’t survive without borrowing money and no one else will buy the bonds. This is not a balance sheet or income statement I would want to try to defend and somebody is going to have to try to do exactly that to the Federal Reserve Board of Governors. To add insult to injury the Fed has been doing some “off balance sheet” swaps with the ECB to bail out the Euro but because the transactions are unreported the amounts are unknown. Best guess – since 2009, 10 trillion dollars swapped for Euros, SDRs and other foreign currencies.

The Fed has to make an effort to cut their losses and tapering is the very least they can do.