- We're making this way, too complicated. It's simple really.
- The Fed has only one tool at its disposal; to create
more money. Typically, the way the Fed adds to the money supply is by lowering
interest rates. When the Fed lowers rates below the rate of inflation;
they're basically selling dollars for under a buck. That's a good deal,
so, naturally, speculators jump on it and trigger a credit expansion. What
follows is a frenzy of market activity that ends in a housing, credit,
tech or equity bubble. Eventually, the bubble bursts and the economy goes
into a tailspin. Then, after a period of digging-out, the process resumes
again. Wash, rinse, repeat. It's always the same.
- The moral is: Cheap money creates bubbles; and bubbles
move wealth from workers to rich motherf**kers. It's as simple as that.
That's why the wealth gap is wider now than anytime since the Gilded Age.
The rich own everything.
- The Federal Reserve is the policy arm of the big banks
and brokerage houses. Period. Ostensibly, its mandate is to maintain "price
stability and full employment". Right. Anyone notice how many jobs
the Fed has created lately? How about the dollar? Is it really supposed
to zig-zag like it has been for the last decade? The central task of the
Fed is to shift wealth from one class to another. And it succeeds at that
- The Fed's "mandate" is public relations claptrap.
Bernanke hasn't lifted a finger for homeowners, consumers or ordinary working
stiffs. "Yer on yer own. Just don't expect a handout. That's socialism!"
All the doe is flowing upwards...according to plan. The Fed is a social
engineering agency designed to serve as the de facto government behind
the smokescreen of democratic institutions. Did you really think a black,
two year senator with no background in foreign policy or economics was
calling the shots?
- Puh-leeese! Obama is a public relations invention who's
used to cut ribbons, console the unemployed, and convince Americans they
live in a "post racial" society. Right. (Just take a look at
the footage from Katrina again)
- The Fed has complete control over monetary policy and,
thus, the country's economic future. Bernanke doesn't even pretend to defer
to Congress anymore. Why bother? After Lehman caved in, Bernanke invoked
the "unusual and exigent" clause in the Fed's charter and declared
himself czar. Now he has absolute power over the nation's purse-strings.
- The $13 trillion the Fed has committed to the financial
system since the beginning of the crisis --via loans and outright purchases
of mortgage-backed garbage and US sovereign debt--was never authorized
by Congress. In fact, the Fed stubbornly refuses to even identify which
institutions got the "loans", how much the loans were worth,
what kind of collateral was accepted for the loans, or when the loans have
to be repaid.
- In truth, the loans are not loans at all, but gifts to
the industry to keep asset prices artificially high so that the entire
financial system does not come crashing down. Check this out:
- "In an analysis written by economist Gary Gorton
for the Federal Reserve Bank of Atlanta's 2009 Financial Markets Conference
titled, "Slapped in the Face by the Invisible Hand; Banking and the
Panic of 2007", the author shows that mortgage-related securities
ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset
backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1
in 2006. All told, more than $20 trillion in securitized debt was sold
between 1997 to 2007. "
- $20 trillion! How much of that feces paper--which is
worth just pennies on the dollar-- is sitting on the balance sheets of
banks and other financial institutions just waiting to blow up as soon
as the Fed asks for its money back? And the Fed will never get its money
back because the prices of complex securities and derivatives will never
regain their pre-crisis values. Why? Because these derivatives are linked
to underlying collateral (mortgages) which have already declined 33% from
their peak and are headed lower still. Also, these toxic assets were sold
as risk-free (many of them were rated triple A) and have now been exposed
as extremely risky or fraudulent. Because these assets were heaped together
in bundles to strip out their interest rates, they cannot be easily separated
which means that they are worth considerably less than the 33% that has
been lost on the underlying collateral (mortgages) The securitization markets
are not expected to rebound for a decade or more, which means that the
Fed will have to find other more-creative way to goose the credit system
to avoid a downward spiral.
- But how?
- Zero percent interest rates haven't worked because qualified
borrowers are cutting spending and saving their disposable income, while
people who need to borrow, no longer meet the banks' tougher lending standards.
Bank credit is shrinking even though excess bank reserves are nearly $900
billion. When banks stop lending, the economy contracts, business activity
slows, unemployment soars and growth sputters.
- Presently, the economy is still contracting, but at a
slower pace than before. "Less bad" is the new "good".
All the recession indicators are still blinking red--income, employment,
sales, and production--all down big! But it doesn't matter because it's
a "Green Shoots" rally; plenty of cheap liquidity for the markets
and a freeway off-ramp (for sleeping) for the unemployed.
- The Fed's lending facilities are designed to pump liquidity
into the system and inflate another bubble by generating more debt. Unfortunately,
most people accept Bernanke's feeble defense of these corporate-welfare
programs and fail to see their real purpose. An example may help to explain
how they really work:
- Say you bought a house at the peak of the bubble in 2005
and paid $500,000. Then prices dropped 40% (as they have in Calif) and
your house is now worth $300,000. If you only put 5% down, ($25,000) then
you are underwater by $175,000. Which means that you own more on the mortgage
than your house is currently worth. (This is essentially what has happened
to the entire financial system. The equity has vaporized, so institutions
are using dodgy accounting tricks instead of reporting their real losses.)
So Bernanke comes along and gives you $175,000 no interest, rotating loan
to you so that no one knows that you are really busted and you can continue
spending just as you had before. Not bad, eh? This is what the lending
facilities are all about. It is a charade to conceal the fact that a large
portion of the nation's financial institutions are insolvent and propped
up by state largess.
- But there's more, too.
- Now that Bernanke has given you $175,000 no interest,
rotating loan; you expect that eventually he will ask for his money back.
Right? So your only hope of saving your home, in the long run, is to engage
in risky behavior, like dabbling the stock market. It's like playing roulette,
except you have nothing to lose since you are underwater anyway.
- This is exactly what the financial institutions are doing
with the Fed's loans. They're betting on equities and hoping they can avoid
the Grim Reaper.
- Here's how former hedge fund manager Andy Kessler summed
it up last week in the Wall Street Journal: "By buying U.S. Treasuries
and mortgages to increase the monetary base by $1 trillion, Fed Chairman
Ben Bernanke didn't put money directly into the stock market but he didn't
have to. With nowhere else to go, except maybe commodities, inflows into
the stock market have been on a tear. Stock and bond funds saw net inflows
of close to $150 billion since January. The dollars he cranked out didn't
go into the hard economy, but instead into tradable assets. In other words,
Ben Bernanke has been the market." (Andy Kessler, "The Bernanke
Market" Wall Street Journal)
- Only a small portion of the money that has gone into
the stock market in the last 6 months (since the March lows) has come from
money markets. The fed's loans are being laundered into stocks via financial
institutions that are rolling the dice for their own survival. The uptick
in the markets has helped insolvent banks raise equity in the capital markets
so they don't have to grovel to Congress for another TARP bailout.
- Everybody's elated with Bernanke's latest bubble except
working people who have seen their wages slashed by 4.5%, their credit
lines cut, the home values plunge, and their living standards sink to third
- And the Fed's spending-spree is not over yet; not by
a long shot. The next wave of home foreclosures (already 1.9 million in
the first half of 2009) is just around the corner--the Alt-As, option arms,
prime loans. The $3.5 trillion commercial real estate market is capsizing.
The under-capitalized banking system will need assistance. And there will
have to be another round of fiscal stimulus for ailing consumers. Otherwise,
foreign holders of US Treasurys will see that the US can no longer provide
25% of global demand and head for the exits.
- Bernanke's back is against the wall. The only thing he
can do is print more money, shove it though the back door of the stock
exchange and keep his fingers crossed. The rest is up to CNBC and the small
army of media cheerleaders.
- There is some truth to the theory that Bernanke saved
the financial system from a Chernobyl-type meltdown. But that doesn't change
the facts. Accounts must be balanced; debts must be paid.
- The Fed chief has committed $13 trillion to maintain
the appearance of solvency. But the system is bankrupt. The commercial
paper market, money markets, trillions of dollars of toxic debt instruments,
and myriad shyster investment banks and insurance companies are now backed
by the "full faith and credit" of the US Treasury. The financial
system is now a ward of the state. The "free market" has deteriorated
into state capitalism; a centralized system where all the levers of power
are controlled by the Central Bank. If Bernanke's Politburo withdraws its
loans--or even if he raises interest rates too soon-- the whole system
- The economy is now balanced on the rickety scaffolding
of the dollar. As the Obama stimulus wears off, the rot in the economy
will become more apparent. Household red ink is at record highs, so personal
consumption will not rebound. That means US assets and US sovereign debt
will become less attractive. Foreign capital will flee. The dollar will
- The world needs a breather from the US. And they'll get
it sooner than many think.