In a speech B.S. Bernakke gave in 2004 he repeated how a Fed chair could stay 'potent in policy' even with naught dot naught funds rate:
(1) providing assurance to financial investors that short rates will be lower in the future than they currently expect, (2) changing the relative supplies of securities (such as Treasury notes and bonds) in the marketplace by shifting the composition of the central bank's balance sheet, and (3) increasing the size of the central bank's balance sheet beyond the level needed to set the short-term policy rate at zero ("quantitative easing").
He's taken all these steps, save declaring zero rates into perpetuity,adding to the log pile by dropping mortgage rates yesterday and effectively monetizing the long bond.
With meatballs stacking up to the sky please excuse us as we sidestep the conventional cognitive dissonance and consider how in the bejeezus will this all be mopped up?
A rolling loan gathers no loss and most of the BS squared (B.S. Bernakke's Balance Sheet) are financing facilities. Inevitably though unless this is actually a liquidity problem, the loans will only be as valuable as the collateral backing the collateral(Treasuries) backing those loans. Furthermore, our new monetary industrial policy i.e., synthetic Treausries where the RAV is the issuing company, is fraught with peril. Building a federally mandated sausage factory for the Masters of the Universe will end up making sovereign and private risk ubiquitious and to the detriment of the sovereign.
Ironically, a S&P 500 of 500 is good for the Federales administered hedge funds (FAHF) because that probably goes hand in hand with a 10 year of about 2.5% and a 30 year of 3.0%. Roll it all out to that rate and you can finance 10 trillion for a mere 250 to 300 billion a year.
Terminally depressed world equity markets and bubble debt will be a prosperity financing engine up and until the point ironically when prosperity 'is on the march'.
Assuming that there isn't enough private equity money to overpay for all FAHF assets (with the requisite taxpayer handout), one can only hope that by the time it becomes too expensive to roll over the facilities, that the assets owned and the assets supporting the assets(Treasuries) that are collateral for the facilities actually are worth more than a nickel.
Unless such a optimistic scenario materializes the only recourse will be devaluation of the U.S peso and selective default of the cornucopia of sovereign debt. This will probably be followed by converting 'distressed' debt into a foreign scrip.
If all else fails we could ring-fence Arizona, California,Nevada and Florida.
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