Not Buying What Ben's Selling

Posted: Dec 23, 2011 12:01 AM

Let me get this straight. 

Ben Bernanke said on 60 Minutes “we do not monetize our debt.” 

That effectively means the Fed absolutely does not buy treasuries printed by the U.S. Treasury directly from Tim Geithner and the U.S Treasury. 

However, if Bernanke uses an intermediary, like primary dealers who buy at the auction and then sell immediately afterward to the Fed, that of course, doesn’t count. 

In Bernanke’s world, that’s perfectly acceptable. 

Somehow I get the feeling I’m back in the era where it depends on what “is” “is.” 

Now we have Mario Draghi, the newly anointed head of the ECB, vehemently stating that neither he nor the Central Bank will buy sovereign bonds. 

He really should have made an appearance on 60 Minutes, thereby completing the Bernanke playbook. 

So, if he’s true to his word, and I absolutely believe him, here’s the question: How does Draghi obtain sovereign bonds on the ECB balance sheet without directly buying them. 


The key word once again, directly

Pulling the old Ben Bernanke shift, Draghi authorized the long-term refinancing operation (LTRO). 

Simply put, banks borrow money from the ECB’s LTRO at virtually no cost, and then use the proceeds to buy sovereign debt at each and every sovereign auction. 

In turn, the banks then use the sovereign debt as collateral with the ECB balance sheet so they can receive more loans. 

In other words, there is more buying of debt, more collateral, more buying of debt, more collateral, and on, and on, and on. 

The assumption is two-fold.  First, the banks will receive the spread between the low borrowing cost from the ECB and the yield on the crap (sorry, I mean sovereign debt.) 

Think of this as a nice little profit for the banks, or a carrying cost freebie. 

The second assumption is that they will, in fact, use the loans in order to add to their overwhelming existing positions in crap (excuse me again, I mean sovereign debt.) 

That could be a huge question mark. 

Draghi stays true to his word and does not directly buy sovereign debt, although by using intermediaries he accomplishes his goal. 

As in the Ben Bernanke strategy, a little time will be bought until the ultimate collapse. 

Nothing has changed, the debts keep mounting, the unemployment keeps climbing, and the world is one step closer to the realities of the situation.  However, both Ben and Mario can sleep well tonight knowing they stayed true to their word. 

No monetization and no sovereign debt purchases, respectively.  I believe we are getting closer to truly knowing what the meaning of “is” “is.”