Fed "Secrecy" Slowly Falls...
The Market Ticker ® - Commentary on The Capital Markets
Posted 2011-11-28 09:17
by Karl Denninger
in Federal Reserve
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Fed "Secrecy" Slowly Falls...
 

From Bloomberg....

The Federal Reserve and the big banks fought for more than two years to keep details of the largest bailout in U.S. history a secret. Now, the rest of the world can see what it was missing.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Why did they have to "fight", and what were they "fighting"?

The rest of this article makes it sound like the government was interested in the little guy on the street, and Bloomberg fought the good fight with the government against those e-vile bastards at The Fed.

Nothing could be further from the truth.

Oh, it's true that Bloomberg sued.  And it's true that they won. 

But it's false to assert that government and The Fed are on opposite sides of this issue.  They most-certainly are not.

“When you see the dollars the banks got, it’s hard to make the case these were successful institutions,” says Sherrod Brown, a Democratic Senator from Ohio who in 2010 introduced an unsuccessful bill to limit bank size. “This is an issue that can unite the Tea Party and Occupy Wall Street. There are lawmakers in both parties who would change their votes now.”

That's a lie.

The Fed and Congress are complicit.  They're both in what would be called a "deadly embrace" if it was adversarial in some fashion but it is not.  In point of fact The Fed is the sole enabler of Congressional and Executive overspending, which in turn allows pretending that our "economy" is somehow healthy or recovering and that the "programs" put forward by the Government have "helped" our economy.

The employment data says otherwise.  Housing says otherwise.  But The Fed continues to try to "protect" the bubble mentality it created along with Congress, to wit:

The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.

Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

Remember folks where this came from.  It's embedded in our psyche now, but it wasn't always this way.  Go look in rural America or older near-urban places and you will see "shotgun" construction -- original buildings that were made with three load-bearing walls and two or three rooms (a place to live, a place to cook, and somewhere to sleep along with a small bathroom) with the rear wall designed to be knocked out.

Why? 

Because those homes, inclusive of the land, were sold at 1x average incomes or less, and families added to the building as they grew -- often across generations.

Then came the 1920s.  Balloon notes were the "preferred" means of financing, damnably like "Option ARMs" of today less the fancy computers.  Home prices and real estate costs soared.  And then, of course, crashed.

What was done then?  FNMA happened -- in 1938.  Now known as "Fannie Mae", its purpose was to provide a means of financializing homes.  With it ended the practice of a young couple saving 10 or 20% of their incomes for five to ten years and purchasing their home outright for cash.

Suddenly it became "chic" to have more and better than you could afford right now, today.  You couldn't buy it but we'll lend you the money -- you just need to pay a little interest.

Uh huh.

There never was a future in this, because ultimately such a practice is nothing more than pulling forward into today that which you would have bought tomorrow, and the skimming that takes place through interest and fees means that your labor simply gets turned into a foil for slavery -- of you, to the banksters.

Has any of this changed since the crash?  Oh hell no. 

But while the Fed's wheel-spinning and desperation both within The Fed and Congress hasn't changed, it is changing among the population.  The latest is the screed coming from colleges:

Even as college prices and average student loan debt rise, educators in some sectors of higher education report they're also seeing plenty of students like Yeh. After watching debt cause widespread damage in their families and communities, they're determined to avoid loans no matter what.

What's surprising is this: Educators aren't sure that's always such a good thing.

Of course they're not "sure" it's a good thing.  Why their outsized salaries and pensions might be threatened, not to mention all the bond issues that were floated by colleges to build palaces that look more like a luxury hotel than an educational establishment and do exactly nothing to improve the quality of instruction in Calculus.

More to the point some of those "educators" might realize that education, like everything else, responds to supply and demand.  If students are waking up to the idiocy of taking out $70,000 in debt to pursue a 4-year degree that earns $30,000/year then the price of that degree must come down -- a lot, by like more than half -- in order to meet the available supply of money!

But back to the central point: Congress enables The Fed's lawless behavior on purpose despite the absolute ability to stop it any time it wants.  It does so because this is how Congress is able to promise you, dear reader, programs that they cannot pay for with current tax revenues. 

The error is that Congress seems to think that this can go on basically forever.  It cannot.

That's the lesson coming from Europe -- validation of my central thesis, that the math always wins and the longer you keep screwing around the worse the damage will be that you must absorb.

The only question is whether Congress will stop acting like a two-year old that wants another piece of candy before or after the entire economy and financial system melts into radioactive slag.

I'll take the under on that.

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User Info Fed "Secrecy" Slowly Falls... in forum [Market-Ticker]
Stanowen
Posts: 160
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a real newbert question here, but where does The FED get the hundreds of billions of dollars that it lends (both in loans and in "stimulus")?
Madashel
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Green A True American Patriot!
Gone
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Serious question here: How do they come up with the money for all of this (secret bailouts and massive rallies on very bad news)? I know you say they are NOT printing outright but how and where is it coming from? Is it as simple as getting on a computer and moving the decimal point on their account over a step or two? Whether either is true or not the money still has to come from somewhere right?

I would also guess it would only work if the whole world is doing it at the same time...collusion if you will. Please tell me if I'm wrong on this because I just don't see how it is being done any other way.

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Jwm_in_sb
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You may want to sit down before you read.the answer.
C130gunship
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Corinth, TX
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“Governments are deemed to succeed or fail by how well they make money go round, regardless of whether it serves any useful purpose. They regard it as a sacred duty to encourage the country’s most revolting spectacle: the annual feeding frenzy in which shoppers queue all night, then stampede into the shops, elbow, trample and sometimes fight to be the first to carry off some designer junk which will go into landfill before the sales next year. The madder the orgy, the greater the triumph of economic management.” George Monbiot

“Look at the orators in our republics; as long as they are poor, both state and people can only praise their uprightness; but once they are fattened on the public funds, they conceive a hatred for justice, plan intrigues against the people and attack the democracy.” – Aristophanes, Plutus
Degaston
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Karl, I apologize if I'm throwing a tangent to a topic you've covered in another ticker. But I'm wondering if you are aware that the interest rate swaps market increased 21.2% in size during the first half of this year from 364.377 trillion to 441.615 trillion according to http://www.bis.org/statistics/otcder/dt1.... You've mentioned many times that you think this monster needs to be caged in an exchange where margin rules apply. Well it looks like this monster is blowing up into a huge bubbilicious floating mass in the sky. IMO this particular monster of interest rate swaps is the key vehicle for hiding the risks associated with the artificially low interest rates that are keeping the leverage/bubble game going.

Maybe we could start a fundraiser here on Ticker Forum to pay off the interest rate swaps derivatives bubble so this problem will go away. Anyone got any good ideas on how we can quickly raise 441.6 trillion dollars ;)

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3/17/2013: Bullish on nothing - 100 percent in cash.

Reason: Fundraiser idea ;)
Genesis
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Deg: Yes. And it's going to detonate.

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Steelhead23
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Quote:
The only question is whether Congress will stop acting like a two-year old that wants another piece of candy before or after the entire economy and financial system melts into radioactive slag.


If profit is the sine qua non for capitalism, being re-elected is the sine qua non for politics. The math they understand is "how many votes?" Until there are more votes for honest hard work than partying, it will be "party on." You'll win that bet.

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Bluebird
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I really don't think Congress will ever stop acting like a two year old. They got theirs, everyone else is on their own. This also seems to be the thinking of many people nowadays. So there won't be anybody stopping what's coming...the global Ponzi will implode affecting all of us, in a manner not of our choosing. Sad.

Snowmizuh
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Profit and loss are the sine qua non of capitalism. As Friedman would say, the loss part is arguably the most imporant part. We don't have a capitalistic system anymore and apparently haven't for some time.

Pika-steph
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Karl wrote..
The error is that Congress seems to think that this can go on basically forever. It cannot.
Whose error? Congress, and indeed ALL governments, have no reason to believe otherwise. They've been able to do it since 1659. Sort of a long enough time frame to become comfortable, I'd think.

When you've made theft legal....well...


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Anti
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Stanowen and Madashel have the same question it looks like and sit down is right.

They add an asset to their balance sheet, say a Treasury note or nowadays a crappy MBS, and an offsetting liability at the same time - a FRN or nowadays a demand deposit for the entity from which they bought the asset. The balance sheet still balances but is now larger by the price they paid for the asset.

Try this book:
http://mises.org/Books/mysteryofbanking.....

Chapter VI Loan Banking and Chapter VII Deposit Banking show the basic process, but there are chapters on central banking too.

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Blurtman
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Gen,
When I read this story last night, I was outraged, but also put off by the tone. It seems like propaganda to now begin claiming that Congress was misled and somehow opposed to the Fed's actions. What a load!

And the reason why folks seem a bit apathetic - in an overwhelming majority, we told Congress to not bail out the banks and they told us to***** off.
Inline

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Shanearthur
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na
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Karl, What leverage is The Fed up to after 7.7 trillion in loans? What would THEIR credit rating be I wonder.
Aztrader
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Nothing like a little truth coming out and the rats start jumping ship:

http://thehill.com/blogs/ballot-box/hous....
Plaman
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NE Ohio
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Does anyone know where I can donate money online to help pay down our nation's deficit?
Stanowen
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Quote:
Does anyone know where I can donate money online to help pay down our nation's deficit?


Mr. Buffet, is that you?
Mo
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People are going to die in large numbers.

There are simply too many people to support given our state of technological development. Germany faced this in 1914 and again in the 1930's. Japan faced this in the 1930's. Now, it involves the entire western world and most of Asia.

This time, we won't see masses of men in armies going at eachother, at least in the west. People will die when the money goes away that supports their healthcare. People will get desperate when they no longer get their government checks.

In Asia, we might see the armies or worse, nukes flying around.

Unfortunately, mass death is the only thing that rebalances all the imbalances created after a period of rapid technological change. We saw it in 1914 and again in 1940. It simply can't be fixed otherwise.

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Andyc
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So I guess we are back to defcon 1 and get another temporary reprieve


I imagine they will take the proceeds and throw it at PIIGS debt


Its all so circular and stupid


Andyc
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"Does anyone know where I can donate money online to help pay down our nation's deficit?"

Here is a link to that particular rat hole/money toilet and you can throw as much money as you want into the toilet because it will never back up or become clogged

http://www.treasurydirect.gov/govt/repor....


: )
Pika-steph
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Stop the Looting; Start Prosecuting - http://www.FedUpUSA.org/
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"The only regulation that really works is failure."--Rick Santelli
Stockmonger
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Here's a question for you:

What was the point of TARP when they were able to hand 10x more money under the table without the political circus and strings attached?

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Tesla
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I've wondered that too, Stock - distraction, sideshow, the only way to bailout AIG/GE/GM, or ... ?

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Stanowen
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Stockmonger: I think it was about restoring confidence in the market and getting investors to believe that the Federal government could somehow stem the bleeding without having to reveal the real figures/depth of the crisis.

Consider $700 billion for TARP vs. 14.4 trillion and counting.
Hilandstrata
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Confuse the sheeple? It was only 700 BILLION, not 7 TRILLION or whatever the hell that hellish number is!
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