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The Two Trillion Dollar Meltdown, Charles Morris

Posted in Uncategorized by minniebakker on March 24, 2009

The first edition of this book was titled The Trillion Dollar Meltdown. One trillion was his early-2008 estimate of the losses to the banking and other investment sectors, assuming orderly deleveraging. With disorderly deleveraging going on in late 2008, the estimate was raised to two trillion. But never mind that.

The new edition has a foreward and a postscript (p105) about the Federal Reserve. The “Greenspan Put” is an assumption that “no matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles.” In the first edition, Morris had said, “The days of a universal put to the Federal Reserve are finally over.” Now he says, “I couldn’t have been more wrong. Ben Bernanke, in close cooperation with [Paulson] embarked on round after round of creative intervention unmatched in the entire history of the Fed.”

Starting in late 2007 Bernacke started to lend against (purchase?) shaky assets like sub-prime mortgage backed CDOs. The Fed’s 10/07 balance sheet  showed total Fed assets were $890 billion, mostly traditional. The Oct-08 number was $2 trillion, mostly “a melange of god-knows-what instruments vacuumed up from banks and investment banks.”

What’s wrong with this? “If the Fed balance sheet starts to look like those of the banks it’s bailing out, it could readily shake confidence in America’s economic soundness.” And the Fed balance sheet is the foundation stone for the American money supply.” … “A radical expansion of the Fed balance sheet raises fears that America may be attempting to simply inflate its way out of its problems, as it tried to do, so disastrously, in the 1970s.” The postscript ends, “Puring out ever more dollars in the hope of recovering the zing of the old bubble days is exactly the wrong prescription, and risks making eventual outcomes far worse than they need be.”

See the 6-page postscript at Google books.
See Econbrowser Dec-08  on the Federal Reserve Balance Sheet and
Econbrowser Jan-09 for Bernacke’s comments on it.


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