Bernanke is undoubtedly snickering when people talk about the impact of rates going up on Treasury, such as was raised (again) this morning in a WSJ editorial:

Meantime, the Fed's near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn't keep bailing them out with easier money.

He gets the first half right but the second in large part wrong.

The Fed isn't concerned about the latter and neither is Geithner.  The reason is simple: Every dollar of interest paid by the Government to The Fed is remitted back to Treasury, ex actual operating expenses of The Fed, by law.

That is, if rates start to back up and The Government continues to "sell" bonds to The Fed, which prints the money to buy them, that increased coupon doesn't actually cost Treasury anything.

But the snicker that comes from people like Geithner and Bernanke on this is in fact misplaced, although on first blush it sounds good.

The reason it's misplaced is that both profits and losses belong to Treasury.

Consider what happens if the squeeze on middle-class and below people continues as it has for the last four years, and the spiral of deficit spending that the government is engaged in to try to keep people from recognizing that we've been in (and are in!) a Depression continues to accelerate.  At some point the calls for The Fed to "tighten" will become thunderous as the people are no longer able to afford basic necessities.  The Government may not call this "inflation" in the CPI or whatever they choose, but a starving man doesn't give a damn what you call it.  He will simply demand it stop and he will have a pitchfork and torch in his two hands.  In short, the people will mean it and the people do have the means to enforce it.

Here's the problem -- if The Fed starts selling the assets on its balance sheet and takes losses doing so, then those losses also belong to Treasury!  This in turn makes the deficit worse.

The irony is that by designing into the system a feedback mechanism that appears to provide solace to Treasury and "protection" it contains an equal-sized bomb on the other side of the ledger under opposite economic conditions.

In other words thermodynamics win again -- there is no such thing as a free lunch, and if you think you found one you simply overlooked the cost, which greatly increases the risk that you will get buggered by it at an extremely inconvenient time.

The market has this one right.  Bernanke's speech yesterday and decision are simply doubling down on a bad bet that thus far has yielded nothing.  At the same time the fiscal situation is the "real deal" in that the government is destroying economic surplus at a rate of more than 6% annually in concert with The Fed's policies, and as a result there is no improvement in employment.

Monetary policy has a lagtime of several months before the full effects are felt, but what you're seeing here is the initial reaction.  The bad part of this is that due to the lagtime once the full effects of this idiotic move are recognized, somewhere around June of next year, reversing it will also take six more months to be recognized -- more than enough time for "risk markets" to blow up into all manner of itty bitty pieces.

Be prepared; the law of unintended consequences has not been repealed and neither have the laws of arithmetic.