My Congressman, Mark Kirk (R-Illinois, 10th district), who is now running for the Senate seat once held by Barack Obama, has pointed out a time bomb on the Federal Reserve balance sheet that could wreak great damage in the days ahead:
At least one rising congressman, Rep. Mark Kirk of Illinois, is raising an alarm about the Federal Reserve's ability to protect the dollar and maintain the Fed's own inflation-fighting capacity. At the root of his concern, he says, is the Fed's new role as "one of the largest bondholders in the world."
Fed Chairman Ben Bernanke has been piling up purchases of "mortgage-backed" securities to keep money flowing into the housing market. Though the Fed recently said it would slow its buying, the central bank now sits on a giant portfolio worth $650 billion. Here's the problem: If the Fed decides to raise interest rates to combat inflation, even a small hike would likely knock billions of dollars off the value of the Fed's holdings.
Mr. Kirk estimates that if rates go up two percentage points -- a plausible scenario given short-term rates are near zero now -- the Fed could lose $100 billion from its own balance sheet. The danger is that the mere existence of such a concern could become a self-fulfilling prophecy if the markets doubt the Fed would endanger its own financial welfare to fight inflation.
The Federal Reserve has been on a bender-buying hundreds of billions of bonds to help prop up the economy. A better path for our nation would have been to not let a wasteful stimulus bill expand our deficit and for our Congress and President to have not enacted or promised to enact anti-business measures galore that merely restrain businesses from investing for growth.
Bond prices move inversely to the movement in interest rates. The Federal Reserve has telegraphed that it will likely hold rates low but at some point the plummeting dollar and risks of a bubble (and inflation) will prompt the Fed to rates. As the Fed does so, the value of the huge position they have in bonds of all stripes will fall -perhaps dramatically. Mark Kirk is known locally as not just being very smart (and well versed in economics-after having served at the World Bank) but having a very a keen sense of emerging risks and dangers (he serves in the military reserves and has his eyes over the horizon when it comes to military threats).
He once again seems ahead of the curve when it comes to the dangerous consequences of our nation's current economic policies.
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