The Fed's Loans

This week was a very telling week, literally.  Bernanke gave two press conferences where he discussed the Federal Reserve's ability to make loans.  The first time he mentioned it he cited a rule in the Fed Charter, 13-3 I think I heard, that allows the Fed to make loans to sovereign states without Congressional approval, even considering the new regulations of the Dodd-Frank Act and the Volker Rule.  The other speech he made various points that if there is any more systemic risk, the Fed can make loans to mitigate the problems.  This is telling because we know they Fed makes loans to States such as Libya and corporations such as Caterpillar, but from what he said this week we should expect more of it.

What does the Fed loan?  They make currencie swaps, and this loan gives them a 1:1 loan with interest.  This cash is loaned from their reserves, but cash is not the only reserves the Fed has.  In congressional testimony a month ago Bernanke was asked if he owns gold.  After acting like he did not know we remarked that he did have gold, on reserve, in the form of "gold certificates", on loan from the Treasurie.  This gold is loaned, and will be loaned.  When it is loaned the currencie that comes from the loan can be fractionally reserved, and the loan is magnified.  This and gold not only maintains value, its price apreciates compared to fiat (which is depreciating ad infenum due to inflation).  This is why gold is still the crux of the financial system:  it is the loan of first recourse, it is the proprietray trade for banks, central and private, because it has a maximum leverage.

Demand is high for these loans, too, as other Central Banks want to and are trying to  hedge and diversify from dollars.  The loan makes sense for the PBoC and other CBs because they buy the loan at $1650 (if the loan was made today) and the hope is that when the loan comes due the price is higher, and the PBoC will get paid that amount.  This interestingly makes gold manipulation very profitable of the Fed's side.

If the Fed has a large amount of gold loans coming due, they can orchestrate bearish news on the economy, and have their proxie banking houses (JPM et al) flush the precious metal complex at the same time, making the Fed have to pay the loanee a lower amount than the loan was made for.  Add on a premium and interest, and the Fed's gold loans can turn a hefty profit.