Jan. 29: More Alarms in the Fed over Hyperinflation Policy
February 22, 2013 • 11:00AM

Feb. 22, 2012 (LPAC)—The just-released minutes of the Federal Open Market Committee's (FOMC) Jan. 29 meeting show the Fed now "Split on how long to keep cash spigot open," as the Wall Street Journal's headline put it. Chairman "Helicopter Ben" Bernanke's money-printing policy, heading for a $4 trillion-plus total by the end of 2013, is causing alarm within the Fed itself; and this time, the minutes say, not among "several" FOMC members as in December's meeting, but among "many" of them. America's top economic forecaster, Lyndon LaRouche, has long warned of such a hyperinflationary explosion, and pointed to Glass-Steagall as the "firewall" Congress must immediately pass to stop it.

For the first time, according to the minutes, the potential was openly discussed in the FOMC that if the Fed continues the hyperinflationary printing policy much longer, it may, when it then attempts to "exit" that policy, wipe out a big chunk of its own capital as a bank. This would result directly from the large and sharp rise in interest rates these FOMC members now foresee, when and if the Fed starts selling its immense asset book, soon to equal 25% of U.S. GDP. The longer the Fed keeps buying up $85 billion/month in MBS and Treasury securities, the more certain this "exit" interest-rate spike becomes. If Fed asset losses were to wipe out part of its capital in such an "exit" situation, either the Treasury would have to step in with tens of billions more taxpayers' funds as additional capital — bailing out the Fed! — or the Fed itself would have to lurch back in the direction of even more rapid money-printing — or both. In a word, the Fed may soon become unable to exit from the hyperinflationary policy, as "many" fearful FOMC members are suspecting.

As the Journal reported Feb. 20, FOMC members were also alarmed that the money-printing policy is causing "excessive risk-taking and instability in financial markets." Bubbles in "junk" corporate bonds and in mortgage-backed securities have zoomed back up again as in 2005-07. In fact, fed by the hyperinflationary, zero-interest policy of the central bank, these bubbles are blowing up much more rapidly — though not yet to the same size — than they did in that lunatic period preceding the global financial crash. The quality of these bonds is deteriorating at the same time; all this is shown in the Journal's coverage with ominous charts.

"Don't sit on the same hot stove twice," is the way Dallas Fed President Richard Fisher put it. He wants to stop the policy, as does Fed governor Jeremy Stein, giving the same reasons.

Another chart on U.S.-based banking, published on the well-known "Motley Fool" investors' site on Feb. 21, shows the biggest banks' asset books having gone to 30-40% securities; 15-20% cash, effectively frozen to protect those banks against securities losses in a crash; and just 30-40% loans. These banks (JPM Chase, Bank of America, Citigroup, Wells Fargo) are not lending — also noted in the Fed's Jan. 29 minutes — but moreover, all these securities speculations and cash assets are being funded by their customers' deposits — they're supposed to be commercial banks!

In trenchant comments Feb. 20, FDIC vice-chairman Thomas Hoenig pointed out that if these banks' financial derivatives were counted among their "assets", as they should be, then a.) they would be revealed as the world's largest banks, led by JPM Chase; and b.) they would be revealed as leveraged at 25 to 1, 2007-style.

Hoenig is advocating enactment of a new Glass-Steagall Act, the only antidote to the hyperinflationary explosive changes ready to blow the banking system away.

Additionally, Dallas Fed President Richard Fisher told Reuters news agency on Thursday, "I'm not alone anymore" in thinking that the Federal Reserve's quantitative easing policy is not helping to create jobs. Fisher's comments reinforced the dissent shown in the Federal Open Market Committee's minutes of its Jan. 29 meeting, which for the first time reported disagreements about QE3 by "many" of the voting Governors of the Fed. Fisher is now on rotation as a non-voting member of the Fed.

Fisher also hit the Fed's purchase of $40 billion of mortgage-backed securities each month, along with $45 billion of Treasury bonds (totalling $85 billion/month), ostensibly to push down interest rates: "I just don't personally feel the need for further mortgage-backed activity, but the majority rules, and I've been in the minority on that front... The housing market is even becoming speculative in some places." Fisher said the Fed's actions to lower interest rates have "artificially" boosted markets, but "done little for the real economy," Reuters reports.

Fisher says the "wealth effect" of QE3 has not led to the robust employment growth that everyone wants. "The cost, however, is maybe higher than we think, because the more we do, the further into uncharted territory we sail, and how do we get out of it?"