The Market Ticker - Federal Reserve

Jackassery Patrol (Greenspan)

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 14:53:00 -0400

“The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”

Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said.

Really Alan?

Does the capital have to be real? That's the question, you know. Lehman allegedly had plenty of capital and plenty of cash too - $50 billion worth, in fact, that was allegedly "cash" on their balance sheet.

Oh wait - it wasn't real, was it? Well ok, it was real - for a day. Then it went right back to its lender and the garbage can full of used dogfood that they "tendered" to get the $50 billion came back to them!

This is the general problem with Greenspan's "solution" - all solutions for sound lending require regulators that are not corrupt, so when someone tries to pull a scam like that they get arrested and the scammer is outed so the investing public knows what's going on!

This means that FRBNY (and counterparties!) that become aware of such frauds must have a duty to report them. In this case we know for a fact that counterparties were aware of the problem and we have reason to believe from the narrative that FRBNY was. Yet nothing was done.

But we can't have that! Why if we had that happen then we'd be stuck with firms that couldn't hide risks off their balance sheets, we wouldn't have firms that claimed fictitious levels of cash, and we wouldn't have firms that claim HELOCs are all "money good" when behind underwater and defaulted first mortgages!

All of those sins are still occurring.

I agree that "more capital" solves most problems with banks. But the simplest way to do this is to set reasonable standards for excess capital (e.g. 6% Tier 1) and then enforce one dollar of capital (beyond that "last chance" reserve) for each dollar of unsecured lending.

The "last chance" reserve is thus present to cover the liquidation costs and insure that the FDIC doesn't have to cover anything. Bondholders and shareholders are fully exposed to being wiped out, of course.

If you take this approach then the problem disappears. A HELOC behind an underwater first is an unsecured loan, as the collateral is insufficient to cover the paper. Therefore, if a bank wants to hold a HELOC on a home where the first is underwater they must hold one dollar of capital for each dollar out in that HELOC. If the HELOC is then not paid for any reason, the bank is still secure and cannot go bust.

The question we have to ask is this: Do we really want a secure and sound banking system, or do we want a system that has to be bailed out every few years because at the end of the day too many people are crooked and we haven't busted enough of them for the crooks to be concerned about being arrested.

Fed Didn't Know Lehman Was Book-Cooking? Yeah Right.

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 11:00:00 -0400

I suppose they expect me to believe this:

During congressional testimony, House Financial Services Committee Ranking Member Spencer Bachus asked if the Fed was aware of Lehman's "accounting gimmicks."

"We did not have that information," Bernanke replied. The Fed "had only a couple people in the company to make sure" Lehman repaid money it borrowed from the central bank's primary lender credit facility, he said.

That's funny - the report says that FRBNY had all the information. Now they may not have acted on it, but that's not the same thing as not knowing about it.

Oh wait - he did say that:

"We were not charged with supervising the company, clearly it was a very troubled company," Bernanke said on Wednesday. "We had no authority to require them to do anything."

So if you know someone's going to rob a bank, and you sit back and let them do so because you have "no authority to regulate them", and in fact you trade with them, are you complicit in whatever they pull?

Now there's a good question.

An even better one is whether we should hand regulatory authority to someone who refused to blow the whistle on whatever irregularities it may have observed (like, for instance, gaming the PDCF, being told by Citi they had no good collateral - which I presume means they turned immediately to The Fed with the same garbage, and in fact announcing false "test transactions" that were in fact real transactions)?

After all, if you're the "uber-regulator" and the primary institution charged with overall banking system stability and clearing, you don't have any sort of responsibility to blow the whistle when those who are dealing with you are lying, do you?

I'm Gonna Throw Up (Bernanke)

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 08:00:00 -0400

Does anyone remember me ranting at the time of the TARP's passage about an obscure little sentence that allowed Bernanke to set the reserve ratio on the banks to zero?

Well, Bernanke's Congressional testimony yesterday garnered a footnote on the issue, specifically:

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Right. The cost is that you have to actually have something called "capital" behind your loan book, and you had a velocity limiter as well.

This is simply unbelievable. To call such a thing a "distortion" is the worst sort of outrage to come from a central banker.

Reserve requirements have largely become a quaint subject since Greenspan effectively eliminated them by allowing almost-unlimited marketing and use of "sweep accounts." But nonetheless they remain one of the checks and balances on potential bank runs destroying a firm's cash position without warning.

The sheer lack of recognition and understanding that we're in this mess almost exclusively due to excessive leverage in all parts of our financial system is beyond ridiculous - especially for an agency that now wants to be granted even more power of oversight and "regulation."

"I'm sorry" isn't good enough when you operate from a perspective that someone else (in this case the taxpayer) gets to clean up your messes, and this sort of philosophical idiocy will do nothing but guarantee that we'll have much bigger banking messes in our future.

Repeal Of Law Needed NOW

nospam@example.com (Karl Denninger) — Wed, 24 Feb 2010 21:03:06 -0500

Watch this clip, right near the end. 4:30 into the clip onward.

Yes, Ron Paul went off on quite the rant.

But that last minute......

The Federal Reserve has the authority to buy the debt of any foreign government, essentially obligating The US Taxpayer to bail them out!

Bernanke says he has no plans, but notice that he did not say they have never done such a thing.

Hmmm.... two-line bill to revoke that BS anyone?

Anyone?

FedSpeak - Humphrey-Hawkins

nospam@example.com (Karl Denninger) — Wed, 24 Feb 2010 10:31:00 -0500

I know, it's not called Humprey-Hawkins any more. Call me old-fashioned.

Here's my view on Bernanke's comments - Bernanke's comments are in italics and indented, mine are plain text:

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. I will begin today with some comments on the outlook for the economy and for monetary policy, then touch briefly on several other important issues.
The Economic Outlook
Although the recession officially began more than two years ago, U.S. economic activity contracted particularly sharply following the intensification of the global financial crisis in the fall of 2008.

We created a mess with more than 20 years of intentional pumping of risk assets and an ever-present lowering of the Federal Funds Rate on an average basis. We held that rate intentionally low through the provision of excess liquidity so as to cause credit growth beyond the growth rate of the economy. This is, as I have said before, a direct violation of The Fed's primary mandate, which is not to "manage interest rates" but rather to match long-term credit aggregates to growth so that growth potential is maximized without creating dangerous inflationary pressures.

Instead, we allowed those pressures to run rampant, but in active conspiracy with Congress and the BLS, we hid the effects. Specifically, CPI-U does not include actual home prices but rather "Owner's Equivalent Rent" which is cleverly constructed so that lower interest coverage costs result in a false deflationary contribution. This, along with other intentional distortions, allowed us to hide the hyperinflation in home prices that we intentionally caused.

Concerted efforts by the Federal Reserve, the Treasury Department, and other U.S. authorities to stabilize the financial system, together with highly stimulative monetary and fiscal policies, helped arrest the decline and are supporting a nascent economic recovery. Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year.

The US economy didn't expand at all. Instead, the government borrowed and spent money. Of course in the real world when you borrow you are poorer, not richer, but we don't keep our books the same way everyone else does. After all, we're the government.

A significant portion of that growth, however, can be attributed to the progress firms made in working down unwanted inventories of unsold goods, which left them more willing to increase production. As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services.

There is no private-sector final demand. Proof is found in the fact that the government has blown $2 trillion beyond tax confiscations, er, receipts, or roughly 14% of annual GDP, in the last 18 months to falsely inflate said final demand.

Private final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market. Business investment in equipment and software has risen significantly. And international trade--supported by a recovery in the economies of many of our trading partners--is rebounding from its deep contraction of a year ago. However, starts of single-family homes, which rose noticeably this past spring, have recently been roughly flat, and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing.

We count "transfer payments" (that is, government borrow-and-spend) in those final demand figures, even though doing so is fraudulent. Didn't you catch my "it's great to the be the government" up above?

The job market has been hit especially hard by the recession, as employers reacted to sharp sales declines and concerns about credit availability by deeply cutting their workforces in late 2008 and in 2009. Some recent indicators suggest the deterioration in the labor market is abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing rose modestly in January. Initial claims for unemployment insurance have continued to trend lower, and the temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October. Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce. Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago.

It's impossible to find a job - except as a Census worker.

Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers' unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable.

When we pump liquidity, people speculate. They have speculated in energy markets. We like this and are heartened by the fact that not too many old people froze to death in their homes over the winter. Oh wait - winter isn't over yet, right? Uhhh....

The improvement in financial markets that began last spring continues. Conditions in short-term funding markets have returned to near pre-crisis levels. Many (mostly larger) firms have been able to issue corporate bonds or new equity and do not seem to be hampered by a lack of credit. In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects.

Free money and carry trades make a lot of money for Wall Street. Unfortunately they asset-strip the rest of the economy, but we never talk about that. Kiss a bankster - including me please. Left and right cheeks only (and I'll choose which cheeks - bawhaha.)

In conjunction with the January meeting of the Federal Open Market Committee (FOMC), Board members and Reserve Bank presidents prepared projections for economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. The contours of these forecasts are broadly similar to those I reported to the Congress last July. FOMC participants continue to anticipate a moderate pace of economic recovery, with economic growth of roughly 3 to 3-1/2 percent in 2010 and 3-1/2 to 4-1/2 percent in 2011. Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 6-1/2 to 7-1/2 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent. Inflation is expected to remain subdued, with consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. In the longer term, inflation is expected to be between 1-3/4 and 2 percent, the range that most FOMC participants judge to be consistent with the Federal Reserve's dual mandate of price stability and maximum employment.

The Federal Reserve's mandate is always falsely stated in front of you guys. You never call us on it. You're stupid and I'm laughing at you. In public. Isn't it grand? (PS: The actual mandate is US Code Title 12, Chp 3, Sub1, Section 225a, if you care to look)

Monetary Policy
Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained at a historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Gotta keep that bubble going - if we can. Unfortunately, we can't. Oops.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

It didn't work. Math is such a bitch.

In response to the substantial improvements in the functioning of most financial markets, the Federal Reserve is winding down the special liquidity facilities it created during the crisis. On February 1, a number of these facilities, including credit facilities for primary dealers, lending programs intended to help stabilize money market mutual funds and the commercial paper market, and temporary liquidity swap lines with foreign central banks, were allowed to expire.¹ The only remaining lending program for multiple borrowers created under the Federal Reserve's emergency authorities, the Term Asset-Backed Securities Loan Facility, is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.

Again, it didn't work. We tried to get the real estate bubble going again, but it's popped. Do you have better duct tape laying around somewhere we can use - this crap we bought at Home Depot doesn't hold up to us trying to pump it again - we keep getting results like this:

In addition to closing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window. The final auction of discount-window funds to depositories through the Term Auction Facility, which was created in the early stages of the crisis to improve the liquidity of the banking system, will occur on March 8. Last week we announced that the maximum term of discount window loans, which was increased to as much as 90 days during the crisis, would be returned to overnight for most banks, as it was before the crisis erupted in August 2007. To discourage banks from relying on the discount window rather than private funding markets for short-term credit, last week we also increased the discount rate by 25 basis points, raising the spread between the discount rate and the top of the target range for the federal funds rate to 50 basis points. These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve. These adjustments are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC.

See above.

Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures. Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time.²

We're lying. But that's ok, because as noted, you're too damn gullible to figure it out.

Most importantly, in October 2008 the Congress gave statutory authority to the Federal Reserve to pay interest on banks' holdings of reserve balances at Federal Reserve Banks. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

Watch my gums move!

PS: The real 900lb Gorilla in the EESA/TARP bill was the little one-sentence change that allowed me to set the reserve ratio at the banks to zero. That jackass Denninger caught it, but few others have and you don't listen to him. Don't worry, banks holding nothing in reserve to back their depositors is not a problem. Just ask Bernie Madoff.

The Federal Reserve has also been developing a number of additional tools to reduce the large quantity of reserves held by the banking system, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and other short-term interest rates. Notably, our operational capacity for conducting reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb reserves from the banking system, is being expanded so that such transactions can be used to absorb large quantities of reserves.³ The Federal Reserve is also currently refining plans for a term deposit facility that could convert a portion of depository institutions' holdings of reserve balances into deposits that are less liquid and could not be used to meet reserve requirements.⁴ In addition, the FOMC has the option of redeeming or selling securities as a means of reducing outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. I provided more discussion of these options and possible sequencing in a recent testimony.⁵

We can't sell jack. The MBS we bought (unlawfully, I might add) are severely impaired and if we sell them the market for mortgages will collapse. Therefore, we will do what we always do - can you help me pick up the corner of the rug over here so I can sweep?

Federal Reserve Transparency
The Federal Reserve is committed to ensuring that the Congress and the public have all the information needed to understand our decisions and to be assured of the integrity of our operations. Indeed, on matters related to the conduct of monetary policy, the Federal Reserve is already one of the most transparent central banks in the world, providing detailed records and explanations of its decisions. Over the past year, the Federal Reserve also took a number of steps to enhance the transparency of its special credit and liquidity facilities, including the provision of regular, extensive reports to the Congress and the public; and we have worked closely with the Government Accountability Office (GAO), the Office of the Special Inspector General for the Troubled Asset Relief Program, the Congress, and private-sector auditors on a range of matters relating to these facilities.

Ron Paul is a dangerous asshole and his bill would expose our tampering in the markets. It might even expose criminal malfeasance. We can't have that.

While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve's management of all facilities created under emergency authorities.⁶ In particular, we would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities. The Federal Reserve will, of course, cooperate fully and actively in all reviews. We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay. It is important that the release occur after a lag that is sufficiently long that investors will not view an institution's use of one of the facilities as a possible indication of ongoing financial problems, thereby undermining market confidence in the institution or discouraging use of any future facility that might become necessary to protect the U.S. economy. An appropriate delay would also allow firms adequate time to inform investors through annual reports and other public documents of their use of Federal Reserve facilities.

Of course our commitment to openness is fully-consistent with our obstructionism both toward Bloomberg in their FOIA lawsuit and with Mr. Townes and Mr. Issa's subpoenas. We simply need enough time to smash all our hard disks with hammers and shred the paper before you audit us, along with preparing our second set of books.

Looking ahead, we will continue to work with the Congress in identifying approaches for enhancing the Federal Reserve's transparency that are consistent with our statutory objectives of fostering maximum employment and price stability. In particular, it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people. Moreover, the confidentiality of discount window lending to individual depository institutions must be maintained so that the Federal Reserve continues to have effective ways to provide liquidity to depository institutions under circumstances where other sources of funding are not available. The Federal Reserve's ability to inject liquidity into the financial system is critical for preserving financial stability and for supporting depositories' key role in meeting the ongoing credit needs of firms and households.

Again, we never mention the actual statute (see above) or what it actually requires (ditto.)

Regulatory Reform
Strengthening our financial regulatory system is essential for the long-term economic stability of the nation. Among the lessons of the crisis are the crucial importance of macroprudential regulation--that is, regulation and supervision aimed at addressing risks to the financial system as a whole--and the need for effective consolidated supervision of every financial institution that is so large or interconnected that its failure could threaten the functioning of the entire financial system.

We willfully ignored the CDS and similar games being played by the big banks, and still are. If anything goes wrong we'll simply print money!

The Federal Reserve strongly supports the Congress's ongoing efforts to achieve comprehensive financial reform. In the meantime, to strengthen the Federal Reserve's oversight of banking organizations, we have been conducting an intensive self-examination of our regulatory and supervisory responsibilities and have been actively implementing improvements. For example, the Federal Reserve has been playing a key role in international efforts to toughen capital and liquidity requirements for financial institutions, particularly systemically critical firms, and we have been taking the lead in ensuring that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking.⁷

You must not take our blinders away and give them to anyone else.

The Federal Reserve is also making fundamental changes in its supervision of large, complex bank holding companies, both to improve the effectiveness of consolidated supervision and to incorporate a macroprudential perspective that goes beyond the traditional focus on safety and soundness of individual institutions. We are overhauling our supervisory framework and procedures to improve coordination within our own supervisory staff and with other supervisory agencies and to facilitate more-integrated assessments of risks within each holding company and across groups of companies.

We are handing out new, better, larger and blacker sets of blinders to our staff. It is most-important that no light get in - or out.

Last spring the Federal Reserve led the successful Supervisory Capital Assessment Program, popularly known as the bank stress tests. An important lesson of that program was that combining on-site bank examinations with a suite of quantitative and analytical tools can greatly improve comparability of the results and better identify potential risks. In that spirit, the Federal Reserve is also in the process of developing an enhanced quantitative surveillance program for large bank holding companies. Supervisory information will be combined with firm-level, market-based indicators and aggregate economic data to provide a more complete picture of the risks facing these institutions and the broader financial system. Making use of the Federal Reserve's unparalleled breadth of expertise, this program will apply a multidisciplinary approach that involves economists, specialists in particular financial markets, payments systems experts, and other professionals, as well as bank supervisors.

We lied about bank stability. We'll do it again as necessary.

The recent crisis has also underscored the extent to which direct involvement in the oversight of banks and bank holding companies contributes to the Federal Reserve's effectiveness in carrying out its responsibilities as a central bank, including the making of monetary policy and the management of the discount window. Most important, as the crisis has once again demonstrated, the Federal Reserve's ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has by virtue of being both a bank supervisor and a central bank.

The blind are great at elucidating on the finer points of classical architecture - don't you think?

The Federal Reserve continues to demonstrate its commitment to strengthening consumer protections in the financial services arena. Since the time of the previous Monetary Policy Report in July, the Federal Reserve has proposed a comprehensive overhaul of the regulations governing consumer mortgage transactions, and we are collaborating with the Department of Housing and Urban Development to assess how we might further increase transparency in the mortgage process.⁸ We have issued rules implementing enhanced consumer protections for credit card accounts and private student loans as well as new rules to ensure that consumers have meaningful opportunities to avoid overdraft fees.⁹ In addition, the Federal Reserve has implemented an expanded consumer compliance supervision program for nonbank subsidiaries of bank holding companies and foreign banking organizations.¹⁰

Consumers were violated by a gorilla over the last 20 years. Our new tool for this job is over there - he's an Arabian, and rather feisty.

More generally, the Federal Reserve is committed to doing all that can be done to ensure that our economy is never again devastated by a financial collapse. We look forward to working with the Congress to develop effective and comprehensive reform of the financial regulatory framework.

After our cronies are done looting the financial system and are in their G-IVs headed for Paraguay, you can bet it will never happen again.

That which no longer exists cannot collapse.

Fed Changes Terms In Front of OpEx Again

nospam@example.com (Karl Denninger) — Thu, 18 Feb 2010 16:52:00 -0500

This is a load of crap folks:

For release at 4:30 p.m. EDT

We just made sure that anyone who was long into Options Expiration - which is tomorrow - especially on index options which cannot be hedged or traded now, is screwed. Just like in August of 2007 when we did the opposite.

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Of course we couldn't wait until Friday after the close when it wouldn't hose people - instead, we timed this for maximum pain.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We gave no warning either. Ha ha. You did wear your titanium plate in your pants, right?

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

That's "right now", in case you didn't figure it out yet.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

This is something we did warn about, and in addition we're giving notice. See? Hope you don't get a margin call in the morning - BOOYA!

Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

See above.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

This is something we said we'd do, but heh, you gotta love our timing. We make a practice of burning people - a few years ago it was the shorts (who were right), this time it's the longs (who were also right - well up until this evening!

BTW, I shorted the close on the technicals in the futures (which if this reverses I can hedge and of course can't lose on now) - the market was heavy and it looked overbought, so you'd think I'd be happy.

I'm not - this sort of action, whether I personally make money or lose money, is not the point. The point is that this release was intentionally timed to hurt people, just as was the August 2007 one.

Bernanke and his pals ought to be run out of town on a rail for this sort of repeated abuse. They seem to think that the markets are their plaything, and all they're doing is destroying confidence with each and every move of this sort.

It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited. The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded.

Betcha you can't find a cop.

The Fed Has A "Goal" Of Lawful Behavior?

nospam@example.com (Karl Denninger) — Thu, 18 Feb 2010 08:32:00 -0500

Amusing....

Feb. 18 (Bloomberg) -- Federal Reserve officials set a long-term goal to keep only U.S. government securities in their portfolio as they debated how and when to pull back on the most aggressive monetary policy in U.S. history.

Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries.

Taylor may have accused them of straying beyond monetary policy but stopped short of saying what I have - that The Fed's mandate and lawful authority stops at monetary policy.

Yes, I know all about 13(3). That section of the Federal Reserve Act allows them to make loans to anyone (including individuals!) in "unusual and exigent circumstances." They've done a lot of that too, and whether distasteful or not, it is clearly within the (current) confines of Fed authority.

But asset purchases are another matter. I know all about the debate over the so-called CFRs but a CFR does not override a statute, and the statutes are clear - you need a full faith and credit guarantee for an asset to be able to be owned by The Fed.

The purpose behind this is clear on it's face as well - only such an irrevocable guarantee prevents the possibility of The Fed being used as a vehicle to subsidize losses taken on credit instruments by The American People without the consent of Congress.

Since all revenue bills must (by The Constitution) originate in The House, such a position and clause is necessary for The Federal Reserve Act to be Constitutional on its face. Absent that requirement (in fact and practice, not in principle) The Fed is a blatantly unconstitutional body in that it has usurped the constitutional requirements for imposition of a tax or impost on the American People.

Plosser claims:

Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech. “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.”

These "blurring of the lines" are not a risk to Fed independence they are blatantly unlawful as a violation of the Constitutional prohibition on the imposition of revenue and spending except through a bill originating in the House of Representatives.

What Plosser and others in The Fed (and beyond it) refuse to recognize and admit is that these "threats" to Fed independence have and are coming about as a direct consequence of The Fed's wanton violation of the highest law of the land - The US Constitution.

By effectively appropriating funds, beginning with Maiden Lane I (Bear Stearns) which, by the way, is now showing a huge mark-to-market loss (despite claims by Bernanke that such a loss would not happen) and continuing through what I argue is an artifice of a structure with the Maiden Lane vehicles related to AIG, along with the Fannie and Freddie MBS subsidies The Fed has stepped beyond the bright white line that delineates its power and has decided to arrogate to itself the power of the purse - a power that under the Constitution is restricted to The House of Representatives.

That our Congress and Executive is too spineless to stand up to these clowns and throw the lot out on their ear, revoking The Federal Reserve Act due to the willful and wanton violation of the boundaries thereupon along with willful disregard for The Constitution, is where the real problem lies.

Plosser's bleating is amusing, but The Fed finds itself with this pressure as a direct and proximate consequence of its own actions, much like someone who complains about their thumb being in pain - after they hit it with their own hammer.

Wake up Chuck; you're well beyond requests that you smell the coffee - you spilled it down your shirt!

Are You Skeered Hoenig?

nospam@example.com (Karl Denninger) — Tue, 16 Feb 2010 14:02:00 -0500

KC Fed's Hoenig said:

Feb. 16 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the U.S. must take “difficult” steps to reduce spending and increase revenue so the central bank isn’t pressured to fund the “unsustainable” federal debt.

“It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington.

Uh huh.

Have you ever had a drunk friend or family member?

Did they ever pester you for a $20 because they were broke - and you knew they were headed straight for the liquor store with it?

Did you give it to them?

Did you call their boss the next morning and make an excuse about them being sick - when they were really passed out with their head hanging over the toilet bowl?

This, by the way, is called enabling, and it makes you just as responsible for the bad act as the person doing it, because but for your help they couldn't have gotten drunk.

Well Hoenig, who's been buying up both Treasury and MBS debt for the last year, enabling The Federal Government to run a deficit of more than $1.5 trillion - oh, and they're doing it this year too.

That would be The Fed.

So before you start talking about how "The Government" must get control, stop enabling the very irresponsible behavior that you're complaining about!

There ends our lesson in political BS for today.

Wow, Look At My Jaws Move: Bernanke

nospam@example.com (Karl Denninger) — Wed, 10 Feb 2010 10:43:00 -0500

You have to love the hubris:

Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities.....

Yeah, as if you have control of this Bernanke.....

That's up 500% in the last few weeks. Yes, it's very low (0.1%) but remember the target is 0 - 0.25%, and the discount rate is supposed to be above that.

So in reality there's some pressure building here, and when the IRX gets to, oh, 3 or so (which at this rate of change it will rather soon) The Fed will be forced to either crank up more QE or raise the rates to follow!

The Fed sets rates eh? What's this chart say?

The red line is the 13-week T-Bill rate, and the blue line is the Fed Funds rate (now discontinued since they went to the "range rule", but it shows the point.)

Which leads which Bernanke?

In virtually every case the market rate moves first, and The Fed FOLLOWS the market, not the other way around.

This, by the way, is rather obvious. If The Fed was to try to move the market when it did not want to move, it would have to expend an infinite amount of funds to do so - either printing an infinite amount of money (destroying the dollar) or soaking up an infinite amount of dollars (destroying itself.)

Those who pray at the alter of Fed Omnipotence are rabid idiots; The Fed's own data, which is produced above, proves it.

Moving onward...

These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework. To preclude any future need for the Federal Reserve to lend in similar circumstances, we strongly support the establishment of a statutory regime for the safe resolution of failing, systemically important nonbank financial institutions.

As opposed to willful and intentional blindness when it came to the creation of fully synthetic CDOs written by primary dealers, over which The Fed has regulatory jurisdiction, which were then "swapped off" to an alleged "insurance company subsidiary" which had no money to pay?

While it is true that The Fed had no regulatory power over AIG it is absolutely false that The Fed had no ability to stop this abuse, since the abuses originated in and were promulgated through firms over which The Fed did and does have regulatory power.

Of course admitting that you missed this would be equivalent to admitting that you really are either stupid or bought (whether monetarily or simply by ideological bias) and that won't do, will it? You'd prefer to simply ignore this like you ignore your plethora of false and outrageously-blind pronouncements on the economy in general, including your claim that there was no housing bubble, that we would not slip into recession and that "subprime is contained."

Keep flapping your jaws Ben - it's what you're best at.

FOMC Statement 1/27 In English

nospam@example.com (Karl Denninger) — Wed, 27 Jan 2010 14:28:00 -0500

Tickerguy's translation of the FOMC statement:

Release Date: January 27, 2010

For immediate release

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.

We used the crooked durable goods numbers which were later admitted to be a "statistical error", and what's better, we think that nearly a million people leaving the labor force last month was a good thing - not bad.

Don't worry, you don't need jobs - government handouts work just fine.

Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.

Households are spending the handed-out money. However, credit is and continues to contract as households are rejecting the continual bending over they're taking by the banks, especially on their credit cards.

Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls.

Businesses are buying boxes to give to their employees so they can box up their stuff as they're fired and shown the door. We count this as both "equipment" and "software".

Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth.

We buy futures in the overnight every time the market threatens to go down. Oh wait, we're not supposed to talk about that, right?

Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

You're going to take it in both holes and like it.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Deflation is winning. Rates are still zero which denotes an emergency. But after two years, saying that really pisses people off, especially when we just got skewered by Paulson in sworn testimony (that bastard!) who said we printed money.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The emergency is not over.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

We bought $1.25 trillion of securities in a box but when we opened it we found that it was in fact dead and decomposing fish. The old saying about "throwing good money after bad" comes to mind.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

We're shutting all the crap down - it didn't work.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Tom Hoenig is the only one with a brain. The rest of us like lying to the public - "its all getting better but we still have an emergency!"

Yeah.

AIG and NY Fed: Who's Involved?

nospam@example.com (Karl Denninger) — Wed, 27 Jan 2010 08:47:00 -0500

Here's a CNBC video on the matter...

Jim DeMint may not be ready to call this a "cover up" but DeMint also is bringing to the forefront a number of points that I have repeatedly made, specifically:

It was securitized debt that was rife with fraud that led to the blowup. But what's not being said - still - is that without this fraud-laced securitization party there would have been no bubble either!
DeMint asserts that Ben Bernanke and the FOMC was involved in the bailout and secrecy play with regard to AIG. No, really? The NY Fed doesn't pass gas without the approval of the FOMC! So yes, the FOMC was involved - and it is only reasonable to assume so was Bernanke.
While DeMint didn't say it, I will: The essence of all asset bubbles is fraudulent credit creation. While the form of these fraudulent securities vary from one bubble to another the essence of the scam never does, because in order to screw people in the sale of securities you must lie in some fashion (whether by omission or commission) about their value.
These bubbles happen because we refuse, as citizens, to demand that the law be enforced. In this specific case (the housing bubble) the warnings were clear as early as 2004 and included the FBI, HUD and private credit analytic firms all issuing loud and strident warnings that the non-conforming mortgage market was rife with fraud and that in one classification of this paper (ALT-A mortgages) nine in ten mortgages were not properly underwritten - that is, the income and assets claimed did not match reality.
In the 1990s the essence of the scam was the claim that The Internet is doubling in size every three months. It was: for about six months in the late summer of 1995 and through the early spring of 1996. I know because I was running the Chicagoland area's largest ISP at the time, had access to the core Internet routing tables and was forced into buying hardware to keep up with the expansion of processing power and memory required to keep track of it. The driver of this crazy expansion was the release of Windows 95, which for the first time made connecting to the Internet a "non-technical" accomplishment. But by the end of 1996 the expansion rate was slowing substantially and into 1997 and 1998 the rate of growth, while still substantial, was more akin to a "growing nicely" industry - simply because virtually every PC out there was already online.
Fraud in all of its forms is - or at least is supposed to be - against the law. If I represent to you a growth rate that is not supported by the facts and a projection that has no realistic possibility of being fulfilled (as was in the case in the 1990s) or if I make claims such as Bernanke did in 2005 - "U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households" I have intentionally deceived you and when you rely on that expert opinion and are harmed as a result I have committed fraud - whether I can be sued or prosecuted for it or not. 25% in two years? During the same two years per-capita income grew seven and a half percent. Strong growth in incomes supported this advance eh? That wasn't a mistake, it was a lie. In this regard Bernanke had good company, including virtually everyone in the housing industry. Anyone remember the books written by the NAR's "chief economist"?
Let's not forget folks - The FBI warned in 2004, before these books were published, and a year before Bernanke's famous pronouncement in the health of the housing market - just prior to his nomination as Fed Chair - that there was a fraud problem in the mortgage market.
It appears that The Fed was neck-deep in all of this - Zerohedge published an article which appears to document that Soc Gen had pledged reference securities at the Fed Discount Window that had a value of 49 cents on the dollar, probably without a material haircut! In other words this French firm was funding itself with money from our Federal Reserve with securities pledged at "par" that were in fact worth less than half and for which the taxpayer was on the hook for.

I recognize that Congress doesn't like the idea of cracking open the fraud-laced securitization "industry" nor examining exactly who was responsible for all of the fraud in mortgage securitization and peddling through the economy. The Fed has even less incentive to do so, given that it has now bought more than $1 trillion of potentially-contaminated securities from Fannie and Freddie!

Nonetheless we will not and cannot have a sustainable economic recovery until we drive the fraud out of our financial markets and set an example for the future by investigating and prosecuting those involved in it this time around, as a means of sending a strong message that these sorts of shenanigans will not be tolerated.

The simple fact of the matter is that the bad debt generated by this fraud extravaganza still is in the system. Unlike in the 2000-2003 Nasdaq market collapse when the vast majority of the fraud-laced securities (stocks and such peddled during the Internet boom) were flushed from the marketplace as the firms collapsed this time we have instead transferred much of this bad debt to the government's balance sheet and otherwise backstopped those who were involved in the scams rather than forcing them to eat their own cooking. No small part of that decision is almost certainly traceable to the fact that virtually everyone involved in either falsely representing the "value" of these securities and their creation or in the willfully-blind pronouncements of economic health are in the government or their "pet" industry - the big banks - in some form or fashion.

As a consequence the drain on the economy caused by this panoply of scams and rip-offs remains as all this bad debt continues to demand service in the form of interest payments lest the destruction of underlying asset value bubble to the surface. We have banks claiming to have "money good" 2nd liens on their books which are behind deeply-underwater first mortgages that aren't being paid (and which in fact are legally worthless in the inevitable foreclosure that must eventually follow), Fannie and Freddie bought an unknown amount of impaired paper, both securitized and in raw loan form, thus compromising their balance sheets to the point that both effectively collapsed, and we have "backstopped" the issuance of so-called "insurance" on these securities (by AIG which was writing this paper with no money to pay) and yet we claim that "the economy and banking system has been stabilized and is recovering."

In a word: Baloney.

Far more ominous for the economy and political system going forward the people have figured it out. It may have taken two years but we are finally seeing evidence that the common man realizes he was had during the bubble years and that this was no accident or "irrational exuberance" - it was a deliberate scam and asset-stripping scheme that enriched a few thousand people on Wall Street and in Washington DC.

Continued refusal to deal with the facts will lead to severe political consequences come November. Massachusetts makes clear that while you can fool the American People for a long time, once they wake up it's too late - your political life timer has expired.

The Fed Is Politicizing The Fed

nospam@example.com (Karl Denninger) — Tue, 26 Jan 2010 13:47:00 -0500

Richard Fisher (President of The Federal Reserve Bank of Dallas) bleats that:

There are many roadblocks we must overcome to get our economy running again. Businesses must develop sufficient confidence in the future to begin expanding their order books and payrolls. Banks must be willing and able to lend again. And consumers must regain the wherewithal to open their pocketbooks.

Notice what's missing: Households and businesses must have the earnings capacity to be able to borrow based on production, not based on speculative frenzy.

The burden of making the tough decisions needed to make our country's economy sound again falls on the sole body responsible for taxing and spending our money: Congress.

Really Dick?

Then why did The Fed take the consequence of that decision out of Congressional hands when it started buying Fannie and Freddie paper?

The impulse to use Mr. Bernanke as a political punching bag raises the specter that, instead of doing the right thing, Congress may seek to pressure the Fed to print its way out of this crisis. We know from history that when fiscal authorities attempt to monetize their debts, the result is inevitably inflation.

Again Dick, who is it that "printed" their way out of the financial mess that you allege was entirely Congress' doing when it comes to the GSEs? Who forced Bernanke to buy over $1 trillion in mortgages and GSE debt - acts that I have and continue to argue are outside of The Fed's lawful authority?

We are not accountable to any Washington politicians, Democrat or Republican. We are politically agnostic and are guided solely by what we believe is the best way to encourage sustainable economic growth anchored by price stability.

This is only true until and unless you take a political action by your own hand. Once you do this you have no room to complain that the consequence is that The Fed becomes embroiled in political controversy.

Congress didn't "tamper" with the independence of The Federal Reserve. The Fed destroyed its own independence by inserting itself into markets where it had absolutely no business participating, including but not limited to Fannie and Freddie.

Monetary policy does not include bailing out failed or failing institutions by propping them up with printed money and advocacy of accounting changes that legalize acts that were formerly flat-out fraudulent.

Nor does it include having a Fed Chairman who is up for re-nomination having a conversation with the Senate Majority Leader where he appears to promise an "easier lending" environment in return for a "yes" vote.

Yet The Fed has done all of the above, and now, having made a bed of its own doing and feathered by protecting its cronies on Wall Street while tramping all over Main Street and the Citizens, it's upset that the consequence of inserting itself into the political process is a groundswell of demands for full transparency, audits and investigations - as with any other political organ that has access to the citizen's support via taxation.

We the people have every right to make these demands Mr. Fisher - it's our money, not yours.

If you don't like it then stop meddling in the political sphere, stop buying agency securities, stop bailing out failed and failing firms, do your damn job when it comes to regulation and disgorge the crap you are currently holding on your balance sheet.

If you instead insist on acting like a political animal then shut the hell up and accept that with your insertion into the political process you have invited the scrutiny that comes along with the acts of your own hand.

We'll start with a full audit and I suspect will shortly need to empanel a Grand Jury as well.

Oh, So The Fed DID Hide Documents?

nospam@example.com (Karl Denninger) — Tue, 26 Jan 2010 08:15:00 -0500

From the wire:

WASHINGTON -(Dow Jones)- The special inspector general for the government's $ 700 billion Wall Street rescue plan is opening a pair of probes into the government's rescue of American International Group Inc. (AIG), including efforts to slow public disclosure of all of the terms of the deal.

....

Additionally, Barofsky said he is reviewing the cooperation of the Federal Reserve with his staff's attempt to conduct an audit of the AIG transactions. Some of the documents recently turned over to the Oversight panel "were not provided to the SIGTARP audit team during the course of the audit."

This is all anyone should need to call for The Fed to be fully audited now and on an ongoing, permanent, annual basis, along with seeing if there is a criminal charge we can locate that fits this (obstruction perhaps?)

Darrell Issa seems to have this one right:

The report, prepared by staff for Rep. Darrell Issa (R., Calif.), calls the central bank a "quasi-governmental agency, unaccountable to the American people." The Fed's actions during the AIG rescue, including the effort to withhold the names of the insurer's counterparties, "demonstrates the threat that the Federal Reserve poses to basic principles of American democracy," the report concludes.

Let's not forget who was running the NY Fed at the time, and what job he holds now.

Oh Timmy? TURBOTAX TIMMY!

Yeah you.

I look forward to seeing you in the dock and while you're in there let's toss Bernanke in with you - I don't believe for a second that he wasn't both aware of and signed off on what you were up to there in New York.

FEDGATE!

A Message To Our Senate: Defeat Bernanke

nospam@example.com (Karl Denninger) — Sun, 24 Jan 2010 13:44:00 -0500

The reaction from Wall Street and The White House should not have surprising when it comes to Bernanke's nomination. We heard people like Robert Gibbs say:

Asked about the potential financial repercussions of the U.S. Senate voting against Bernanke, Gibbs said, "The best way to not have to deal with those repercussions is to support Ben Bernanke for a second term."

Gibbs said senators could support stability in the financial system by backing Bernanke's renomination.

This is a blatant and outrageous lie.

The historical record is clear and incontrovertible. Ben Bernanke caused, both directly and indirectly, the housing bubble and as a consequence the inevitable crash.

He has refused to take actions that would prevent it from happening again. Indeed, he has promoted even more concentration of risk through intentional acts of aggregation of banking interests, taking "too big to fail" to a new level of "outrageously too big to fail."

And finally, he has argued for and fostered a ridiculously unsustainable spending binge by Congress which has destroyed The Federal Government's ability to effectively intervene when, not if, the next market crisis comes.

The facts are simple:

Bernanke intentionally allowed the growth of credit aggregates at rates of 50% to 100% faster than GDP over the last decade, a direct violation of the law governing The Federal Reserve and the underlying and necessary predicate for the bubble to occur. Bernanke was, in fact, the loudest Federal Reserve advocate of Greenspan's "easy money" policies after the 2000 Nasdaq market collapse.

Bernanke has willfully and intentionally ignored basic mathematical facts related to the growth in credit aggregates - specifically, that permitting credit aggregates to grow faster than GDP always must eventually, if maintained, lead to a massive credit bust. This is a function of basic mathematics - specifically, exponents. All the fancy "econometric models" in the world cannot violate the basic laws of mathematics.

Bernanke refused to regulate lending and securitization by the banks during the housing bubble despite the fact that the FBI issued a formal warning of massive fraud in 2004 and both HUD and Corelogic issued studies in 2005 and 2006 showing nine of ten borrowers in "ALT-A" loans had lied about their incomes. Without suckers to buy these worthless securities this irresponsible lending could not have taken place.

Bernanke's willful refusal to both conform with the law and regulate the banks fostered the environment in which they have and continue to asset-strip the citizens of this nation. Bluntly put the big banks are paying out 1% of GDP to a few thousand people not due to hard work, industry and innovation but rather due to rank exploitation and deliberate mispricing of risk with the costs of these outrageous and intentional acts shifted to the citizens of this nation.

Bernanke has intentionally concealed the terms and beneficiaries of bailouts and handouts despite multiple requests from Congress and The Press, has fought FOIA requests, has ignored Congress outright and just recently failed to fully comply, in the opinion of Representative Darrell Issa, with the Congressional subpoena issued by the committee on which he sits.

Bernanke has in fact been dead wrong on virtually every pronouncement he has made over the last ten years on economic matters, including claims that there was no housing bubble as late as 2006, that subprime was contained, that we would not experience a recession, that his policy prescriptions would stabilize the economy and job market and that if EESA/TARP was passed the stock market would not collapse. Each and every one of those claims was in fact wrong. A weatherman would be fired for a predictive record far better than Bernanke's.

Bernanke claimed, in sworn testimony, that he would not monetize the debt. While he was speaking - almost literally to the hour - The Federal Reserve was in fact monetizing $300 billion in Treasury debt and $1.2 trillion in Fannie and Freddie Securities - securities we now know are stuffed full of fraudulent mortgages that Fannie and Freddie bought during the bubble years.

Bernanke has refused to accept responsibility for his policies. He gave a major speech in January in which he defended not only his record but also the willful and intentional misapplication of his favored policy "pointer", known as The Taylor Rule. The author of that rule, a highly-respected academic professor, responded with a scathing (in academic terms) reply pointing out that "as written" Bernanke and Greenspan had held interest rates far too low for too long and thus fueled the speculative frenzy that led to this collapse.

Bernanke claims to have a plan to exit his "extraordinary measures" but has refused to explain that plan. This is likely because he has not supported the mortgage-backed security market, he is, in fact, the market, having now bought literally more than the entire net issuance in 2009! The reason Bernanke has not explained his exit strategy is simple: he doesn't have one.

Bernanke has willfully and intentionally ignored obvious and clear indications of front-running in the bond market while he has been running his "quantitative easing." There have been inexplicable pricing moves in the Treasury Market in the very specific issues that were then bought by The Fed just hours or days later. While there is no "smoking gun" proving that The Fed has communicated to certain market participants what would be bought, and then intentionally overpaid for those very same securities, it is impossible to look at this market's performance in an objective, statistical fashion over the last year and not reach the inescapable conclusion that someone, or a handful of someones, have been cheating.

The people have had it with Bernanke, the banks and The Federal Reserve's complicity and willful blindness in the looting of our nation.

We the people are tired of being told that we not only must sit still for being looted on the way up but then must bail out those who get caught holding the bag when the inevitable bust follows the fraud-laced boom - a pattern of conduct that has been intentionally played out at the expense of Americans twice in the last ten years.

As a matter of public policy these actions are irresponsible, unacceptable and outrageous. They constitute outright theft from the citizens of this nation both on the way up and on the way back down.

There are many who say that "there is no other reasonable alternative." This is outrageously false as well. Paul Volcker is one obvious choice, assuming he wants the job. Another obvious choice would be John Taylor - author of The Taylor Rule and a highly-respected academic. There are others, of course but these two are clear alternatives that make sense, with Mr. Volcker being arguably the best-respected central banker of the last 100 years and the man who singularly put a stop to what could have easily been a disastrous descent into monetary hell in the 1980s.

The Senate has 1/3rd of their ranks up for election. Every Senator standing for election this year that votes for Bernanke is at risk of losing his or her seat, as Massachusetts shows.

Remember Senators that Massachusetts saw a more than thirty point swing from Democrat to Republican - and to a near-literal unknown candidate - in less than thirty days time.

There is not one Senate seat that can survive such a swing at the polls.

NOT ONE OF YOU HAS A SAFE SEAT.

Massachusetts was about much more than health care. It was about the Democrat Majority the people put into power claiming that they would bring change to Washington DC - that "captains of industry" would no longer be free to loot and steal from the common man in all of its forms, whether it be in health care, offshoring jobs, passing 2,000 page bills in secret or predatory lending. Instead of keeping that promise The Democrats instead increased the looting of the people, with big banks now paying out 1% of GDP in bonuses - $145 billion - to a few thousand people with each of those dollars literally stolen from the rest of us.

We the people have had enough and you are on notice: What happened in Massachusetts can and will happen across this land come November. We, not you, are the ones with the power and we WILL dispossess you of your jobs just as you have allowed the banksters to dispossess us of our homes, our wealth and our jobs.

Remember well as you vote Senators, because we the people are damn tired of being looted, financially raped and robbed, and Ben Bernanke both put in place the conditions leading to and has in fact refused to put a stop to these acts!

IF YOU DON'T PUT A STOP TO IT HERE AND NOW WE WILL FIRE YOU AND REPLACE YOU WITH SENATORS THAT WILL.

That's a promise.

BEWARE Senators: The Public Says VOTE NO!

nospam@example.com (Karl Denninger) — Fri, 22 Jan 2010 18:32:00 -0500

To add on to the Ticker from Friday, here's a poll by Fox News:

Let's put this in simple terms - How do you spell "You're Fired!" when the people's opinion is running 85% to 10%, with 5% undecided?

The opinion is fairly-evenly split among CNBC web viewers - an astounding view considering that investors have been touted literally all day on CNBS as being "strongly in support." Uh, no.

Now of course this is not a scientific poll. But let's cut the crap - after the election in Massachusetts nobody can possibly believe they have a "safe seat" in Congress when they go against an eighty-five percent majority.

I'd like to see polls by CNN and MSNBC, but I couldn't find them. CNBC's poll had a paltry 6,000 or so responses, and so means less. And let's be straight - Fox leans pretty hard to the right.

But still, with 60,000 unique votes......

Go ahead Senators, ignore the people (again.)

You saw what happened in Massachusetts.

There's an election coming, and it can happen again - 33 more times, to be precise.

The people have had enough of the crap and Congress no longer has a pass. Act as an actual representative in a republic - that is, do as the people demand - or lose your job.

Gee, More Duplicity (Is Someone's Nomination In Trouble?)

nospam@example.com (Karl Denninger) — Tue, 19 Jan 2010 13:59:00 -0500

Bernanke has apparently changed his tune on AIG and The Fed:

Jan. 19 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said the central bank would welcome a “full review” of its aid to American International Group Inc. by congressional auditors and make all necessary records and personnel available to them.

“To afford the public the most complete possible understanding of our decisions and actions in this matter, and to provide a comprehensive response to questions that have been raised by members of Congress, the Federal Reserve would welcome a full review by GAO of all aspects of our involvement in the extension of credit to AIG,” Bernanke said today in a letter to Gene Dodaro, acting head of the Government Accountability Office. The Fed released the letter.

So what's the difference between this and a full audit of The Fed?

Nothing, right? After all, to afford the public the most complete possible understanding of our decisions and actions in this matter Bernanke now asserts that it is "ok" for the GAO to audit The Fed.

Oh wait - isn't that what Ron Paul's bill has been seeking since this entire thing began and in fact prior to that time?

Better go talk to Lacker about this - remember, he's been issuing threats...

Lacker criticized legislation before Congress that would rescind an exemption on government audits of monetary policy and give politicians a greater say over the appointment of Fed bank directors and presidents.

“Such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability,” Lacker said in a speech today to the Risk Management Association in Richmond, Virginia.

So let's see, we can't have the public find out what sort of mistakes we made, but it's ok if the GAO performs an audit after, and only after, Congress issues SUBPOENAS for all of the information anyway.

What a load of crap.

IF Bernanke truly had no problem with Congress (and the people) knowing what they had done when AIG was rescued they would not have waited until there were SUBPOENAS already on their desk that COMPEL them to release the information!

This sort of two-faced forked-tongue BS is outrageous.

Instead of saying "oh ok" the proper response is for Congress to turn around and issue a subpoena for ALL DOCUMENTS in any form whatsoever related to any and all bailout, handout, and policy decisions from 2000 onward when this mess began so that, as Bernanke has now said, WE THE PEOPLE can have the most complete possible understanding of The Fed's decisions.

After all, Bernanke now says that we the people have the right to know.

The Fed's Lacker: More Threats

nospam@example.com (Karl Denninger) — Sun, 17 Jan 2010 13:57:00 -0500

If you've done nothing wrong, why are you threatening people Mr. Lacker?

Lacker criticized legislation before Congress that would rescind an exemption on government audits of monetary policy and give politicians a greater say over the appointment of Fed bank directors and presidents.

“Such moves would present very serious risks to the effectiveness of monetary policy and ultimately to economic growth and stability,” Lacker said in a speech today to the Risk Management Association in Richmond, Virginia.

In a word: Why?

If The Fed has made "policy mistakes", which Lacker acknowledges, why doesn't he want exposed to public view why those mistakes were made, who wanted them to be made and what happened as a consequence?

While the Fed has made “policy mistakes” leading up to the financial crisis, its structure has “given us a good record over the better part of three decades.”

I challenge Mr. Lacker to prove that.

To expose the entire structure of monetary policy decisions.

To "bare all."

See, I think he's lying.

I believe that an honest examination of The Fed's monetary policy will show that The Fed has willfully and intentionally blown asset bubbles for the last 30 years. That it has willfully and intentionally ignored risks to the economy posed by those bubbles. That despite more than 30 years of knowledge of the below graphs and facts (all drawn from The Fed's own data!) the institution has chosen a path of knowing monetary ruin, and wishes to conceal not only the "who" but also the "why."

It is my belief that the displayed willful and intentional ignorance of the above chart, along with an intentionally-blind eye toward the reality of compound growth in credit beyond that of GDP, will, if examined and audited, prove that The Fed has intentionally and willfully violated its lawful mandate:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates. (12 USC Ch 3, Sub 1, Sec. 225a)

It is a direct violation of the law to permit credit and monetary aggregates to grow faster than output over the long run. Such growth will always lead to a runaway condition and subsequent crash as a consequence of fundamental mathematical principles, as the following graph proves:

This condition, which is predicated by the laws of mathematics, has led to the following result exactly as the laws of mathematics demand that it will:

The growth in credit per-unit of GDP is what has led to this bust and prevention of that credit bubble is not a mere suggestion, it is legal mandate upon which The Federal Reserve's authority rests.

When you screw up and violate your lawful mandate, and the above charts prove beyond a shadow of a doubt that The Fed has, the correct policy response is to perform a full forensic-level audit to figure out who, what, when, where and why, so the parties responsible are identified, their motivations discovered and to the extent possible the damage they caused can be and is reversed.

In short I believe it is trivially easy to not only prove that The Fed has willfully and intentionally violated the law but an audit will extend responsibility to the actual persons who did or did not take notice of the above facts and yet voted for policies that would cause expansion to continue anyway. That is, an audit might lead to personal responsibility for certain former and current Federal Reserve Board members for both these actions and their consequences.

I allege and believe that The Federal Reserve has willfully, wantonly and intentionally violated its lawful mandate and continues to do so, as that mandate directs that credit and GDP levels must be brought back into balance. To do so today would require a contraction of credit aggregates outstanding by close to fifty percent.

I further allege and believe that the purpose of these threats is to attempt to prevent the discovery of the identity of those current and former members of the FOMC who were and are responsible for this willful and wanton violation.

Mr. Lacker's protests must not only be ignored but must serve as further impetus to pass and execute a full audit on all activities of The Federal Reserve.

AIG: More NY Fed Concealment?

nospam@example.com (Karl Denninger) — Sun, 17 Jan 2010 13:21:00 -0500

It just keeps coming, doesn't it?

WASHINGTON (Reuters) - The New York Federal Reserve Bank actively worked with bailed out insurer AIG to build a case against disclosing details of AIG's payments to banks just days after the insurer considered making them public, documents released late on Saturday showed.

Nice. The argument?

"If market participants acquired information as to the composition of ML III's securities portfolio or if the prices paid by ML III were known to market participants, BlackRock's efforts to effectively manage ML III's portfolio of securities would be seriously undermined," AIG said in the confidentiality request.

Now this is a problem.

See, markets only work when, well, there's a market. For there to be a market you need buyers, sellers, and disclosure of prices and volume.

That is, bids, offers, and where trades take place.

What The Fed apparently argued for is the destruction of the market. The intentional concealment of bid, offer, last and volume. Further, The Fed apparently argued that should this information come to light market participants would be unhappy with what they discovered.

Why?

One wonders. Perhaps market participants would have discovered that The Fed intentionally overpayed. That The Taxpayers were screwed. That The Fed was lying about valuations - at the time of acquisition and, perhaps, now.

See, The Fed has claimed that it has not lost money on these "investments." Indeed, it has claimed mark-ups on them.

Is this the truth?

The Fed doesn't want you to be able to judge for yourself. They want to be able to make such a pronouncement without any review by anyone else.

The New York Fed has said its focus in AIG disclosures has been "ensuring accuracy and protecting taxpayers interests during a time of severe economic distress."

Accuracy only occurs with scrutiny and disclosure. With the public generally and market participants specifically, being able to view the transactions that took place, including their terms.

Without that there is no "accuracy" - only corruption, secrecy and deceit. With secrecy comes mischief and and cover to permit lies.

The NY Fed argues it has the right to do this, as does the FOMC.

I disagree.

The NY Fed may be a bank with commercial interests but when it acts at the direction of, directly or indirectly, the FOMC and The Fed generally it acts as a fiduciary of the Taxpayer and Congress.

The people have a right to know, and if The Fed should continue to refuse, The People have a right to demand replacement of The Fed with a body that is accountable to the taxpayer's interests.

Darrell Issa is from a part of California that has been particularly hard-hit by the housing bubble and its subsequent collapse. His district and constituents have been particularly impacted by the fraud, lies, deceit and complicity that led to the inflation of this credit bubble and ultimately doomed it to bust.

We will solve nothing until we get all of the facts into the open, until full forensic audits are done of every institution involved including The Fed and all of the regional Federal Reserve banks, and until each and every indication of wrong-doing, no matter who the bad actor may be, is referred to a Grand Jury for consideration of indictment.

WE THE PEOPLE must make this not a request, but a demand.

WE THE PEOPLE are the ones who are in charge, not private institutions, The Fed, or regional Fed banks.

WE THE PEOPLE are the ones who have had our wealth, futures, and means of production stolen by these banksters who have wantonly, intentionally and recklessly acted without regard for the truth.

We are well beyond the point where WE THE PEOPLE must stand up.

Where we no longer ask for truth and justice, but rather DEMAND it.

It is not their money.

It is ours.

Fed's Bullard Admits To Bubble Blowing...

nospam@example.com (Karl Denninger) — Mon, 11 Jan 2010 09:10:00 -0500

... and what's worse, makes clear they won't stop - and why.

Indeed, what James Bullard has done with this speech is both destroy the claims of Bernanke that low interest rates didn't cause the bubble (remember, Mr. Bullard is a Fed President) but at the same time he pulls down the curtain on exactly why The Fed ignores bubbles!

Specifically, Bullard said:

He noted that monetary policy necessarily affects asset prices and interest rates.

“Historically this did not appear to create prolonged run-ups in asset prices, but changes in the recovery of employment in the past two recessions led the Fed to keep interest rates low for a long time,” he said. “Both periods featured prolonged increases in certain asset prices: for technology in the 1990s and housing in the 2000s. During this time, unemployment hit lows of 3.8 percent in 2000 and 4.4 percent in 2007, and inflation was low and stable.”

If the fed funds rate target was kept too low for too long in the 1990s and 2000s, “Why didn’t we see more inflation?” he asked. “Yet, without an increase in inflation, asset price misalignments seem to have caused significant problems for the macroeconomy.”

You did see an increase in inflation - a big one. The Fed simply defined it out of existence by refusing to count it!

In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.^[1] When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.^[2]^[3]

Note that nowhere does it say "the price of houses does not count in the definition of inflation."

A house is a "good." It is occupied and consumed (yes, I know people call it a capital asset, but a car is a capital asset too and nobody says THAT isn't consumed!)

Just try not applying inputs in the form of repairs and maintenance (new roofs, new water heaters, a new furnace, appliances, etc) from time to time and see what that "house" looks - and functions - like in a few decades.

There was plenty of inflation Mr. Bullard. Indeed, there is a solid argument that not only was there inflation in the 2000-2007 decade there was a metric ton of it that you and the rest of The Fed intentionally ignored in the form of home price acceleration!

Oh, and as for why The Fed hasn't (and won't) suppress asset bubbles?

He added, “If the asset prices contain reliable information about future inflation and output, then the Fed might respond to the bubble using monetary policy, but the focus would not be on responding to the bubble per se. Another alternative would be to use regulatory, supervisory and lender of last resort powers for financial stability, but financial institutions would need to be capable of withstanding large shocks to asset prices, as well as other shocks.”

Got it? Financial institutions are incapable of surviving asset price deflation. But wait - if asset price increases aren't inflation, then asset price deceases can't be counted as deflation, right?

Isn't that double-standard nasty?

Bullard has inadvertently pulled back the curtain and exposed the reason that we will suffer another crash in the markets, this one worse than the last.

Why worse?

Since the Fed Policy of "easy money, blow asset bubbles" became the mantra (post 1987) each crash that occurred has been worse than the last and has involved greater and greater portions of the economy. This is an inherent mathematical reality when one tries to paper over the insolvencies exposed by an asset price crash through blowing a bigger bubble - to be "successful" you must place more of the economy at risk!

If The Fed's policies are not modified we WILL suffer another crash and it WILL be larger than the previous ones - perhaps large enough to destroy our economy and government entirely.

No folks, we did not "avoid a Depression" - we are in fact directly on the path to guarantee one - a Depression worse than the 1930s, and perhaps serious enough to imperil our government's stability.

The idiocy I have spoken of at The Fed since The Ticker began, and which Fed President James Bullard has just inadvertently admitted to, must be eradicated from The Federal Reserve through Congressional action (or executive order) while there is still time to do so.

Where The Sun Never Shines

nospam@example.com (Karl Denninger) — Thu, 07 Jan 2010 08:18:00 -0500

I'm sure you can figure out where that might be.

Of course we must include the NY Fed and The Federal Reserve generally, which apparently believes it is either above the law or has a "special exemption", as evidenced here:

Jan. 7 (Bloomberg) -- The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

Remember, this was when Geithner was the head of the NY Fed. Remember too that President Obama promised us that his administration would operate entirely "above board" and "in the sunshine."

This, of course, is why he later nominated (and The Senate approved) a man who intentionally concealed what AIG had done - and what The Fed had covered up.

I suppose this is the sort of thing we should have expected to discover, given that our President-elect (at the time) did indeed nominate an admitted tax cheat to be the nation's chief tax collector!

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.” President Barack Obama selected Geithner as Treasury secretary, a post he took last year.

It is not just Taxpayers who deserve disclosure.

Stockholders not only deserve disclosure, they have a LEGAL RIGHT to it!

AIG’s Dec. 24, 2008, filing was challenged privately by the U.S. Securities and Exchange Commission, which polices the adequacy of disclosures by publicly traded firms. The agency said in a letter to then-CEO Edward Liddy six days later that AIG should provide a Schedule A, which lists collateral postings for the swaps and names the bank counterparties that purchased them from the company. The Schedule A was disclosed about five months later in a filing.

Five months later. By which time the damage to those who were harmed was "all done." And what did the NY Fed say in its own defense?

“Our position has always been that if AIG’s securities lawyers determine that AIG is legally obligated to make a particular filing or disclosure, then that is what AIG must do,” said Jack Gutt, a spokesman for the New York Fed, in an e- mailed statement. Gutt said it was appropriate for the New York Fed, as party to deals outlined in the filings, “to provide comments on a number of issues, including disclosures, with the understanding that the final decision rested with AIG’s securities counsel.”

Uh huh.

Here's my position Mr. Gutt.

The entirety of the Federal Reserve structure must be gutted and replaced with a monetary authority that acts, in each and every case, in the sunshine, not hiding in the shadows and scurrying with the roaches.

It is not THE FED'S money that they're playing with (in which case it would be entitled to do whatever the devil it wanted), it is OUR money. The sovereign credit of The United States, for which WE THE PEOPLE are ultimately responsible in the form of levied taxes upon our labor and investments.

Those who argue otherwise should be run out of town on a rail by the people of this nation - the people who have the ultimate right to veto, by any means desired (and necessary) THE ACTIONS OTHERS TAKE THAT IN TURN OBLIGATE THEM.

The NY Fed (and indeed Bernanke's Federal Reserve) has clearly forgotten where their authority to act actually comes from. It does not come from God, it does not come from The Rothchilds and it does not come from Ben Bernanke, Congress, or even President Bush (or Obama.)

IT COMES FROM THE PEOPLE and it is time for those very same people to tell you, Mr. Gutt, along with the rest of The Fed "structure", that your authority is being revoked.

Fed Bubble Blowing: A Study Of Denial

nospam@example.com (Karl Denninger) — Sun, 03 Jan 2010 20:02:00 -0500

Ben Bernanke once again steps into the realm of (intentional?) misdirection with the following missive:

The financial crisis that began in August 2007 has been the most severe of the post-World War II era and, very possibly--once one takes into account the global scope of the crisis, its broad effects on a range of markets and institutions, and the number of systemically critical financial institutions that failed or came close to failure--the worst in modern history. Although forceful responses by policymakers around the world avoided an utter collapse of the global financial system in the fall of 2008, the crisis was nevertheless sufficiently intense to spark a deep global recession from which we are only now beginning to recover.

"Although the firefighters showed up and threw tens of thousands of gallons of water on the fire, thus preventing the ultimate collapse of the structure, the fire was nonetheless intense enough to destroy the contents of the building."

Even as we continue working to stabilize our financial system and reinvigorate our economy, it is essential that we learn the lessons of the crisis so that we can prevent it from happening again. Because the crisis was so complex, its lessons are many, and they are not always straightforward

"Fire, especially in a structure, is a very complex process. The usual process of fire beings with the heating of one or more items until they begin to combine with oxygen in the air, releasing energy and producing a self-sustaining series of chemical reactions that we call 'fire'. This in turn causes the heating of other items that contain chemical compounds that can both burn and melt. These chemical processes are extremely complex and so the lessons are not always straightforward in explaining the chemical reactions that take place."

What Bernanke doesn't mention is that The Fed ran around playing "Backdraft" setting the damn fires for twenty years and now wants credit as a "hero" for "putting out" their own acts of financial arson!

Surely, both the private sector and financial regulators must improve their ability to monitor and control risk-taking. The crisis revealed not only weaknesses in regulators' oversight of financial institutions, but also, more fundamentally, important gaps in the architecture of financial regulation around the world. For our part, the Federal Reserve has been working hard to identify problems and to improve and strengthen our supervisory policies and practices, and we have advocated substantial legislative and regulatory reforms to address problems exposed by the crisis.

This sort of nonsense is amazing. Bernanke then goes on to continue with an "analysis" of the 2000-2005 monetary policy conditions, including his favorite "tool", the "Taylor Rule."

The problem with the entire remainder of this "analysis" is that it simply refuses to acknowledge the truth found in the following graphs. Let's start with my favorite:

"Something" happened around 1985, didn't it Ben? What was "it"?

Simple: The leverage ratio - that is, the amount of debt outstanding in the economy for each dollar of GDP, began to rise precipitously. This happens to be roughly correlated with the so-called "modern era" of Central Banking by The Fed, just a few short years before Alan Greenspan took office and continuing to this day.

But what caused this expansion?

Simple: A long line of "deregulatory" actions taken beginning with The Depository Institutions Deregulation and Monetary Control Act of 1980, and then the Garn-St. Germain Depository Institutions Act of 1982. This, along with the ever-present thing called "human greed", led to rampant real-estate speculation in the 1970s and early 1980s. It was this unsound real-estate lending that ultimately led to the S&L bust, along with the expansion of brokered deposits and linked financing.

The expansion of leverage led directly to the bust and the "answer" to it in the mid 1980s was even more expansion of leverage!

We then had, in succession, even more booms and busts. LTCM, Latin America's debt explosion, the "Asian Tiger" explosion, The Tech Bubble and of course The Housing Bubble.

All of these were caused by one thing - the rapid expansion of leverage - that is, debt - compared to GDP.

It took more than twenty years to go from 150% of GDP to 175% of GDP in total systemic debt outstanding, an increase of about 17%.

Since then - less than thirty more years - we have more than doubled the debt-to-GDP ratio.

This has generated the following distortions in alleged "GDP":

That is, during the decade of the 1960s, about 10% of the alleged GDP didn't actually occur (not growth, aggregate output) through growth - it happened due to additions in borrowing beyond that which was paid off. In the 1970s, 16%. In the 1980s, 20%, in the 1990s, 16.3% and in the 2000, 21.6%.

Borrowing that produces something - that is, productive investment through the use of financing - will produce a negative percentage contribution. Simply put, if I borrow $100,000 to buy a CNC machine and it's aggregate output (ex-costs such as material, employees and the like) over the financed period is $300,000 then it produces a negative aggregate impact on debt-to-GDP ratios, because GDP grows faster than the debt does.

Monetary and regulatory policy is primarily responsible for the above table. When people are in effect paid to borrow they will do so with wild abandon and use those funds not for productive investment but rather to speculate with. Further, when those who commit fraud through various schemes are not forced to eat their own cooking, either financially or criminally then they will use leverage as a means to skim off "rents" from various parts of the economy for themselves by making an effective claim that 2 + 2 = 6.

The problem with using things like the so-called "Taylor Rule" is that one must make sure you include in "inflation" the actual price signals of all goods and services. This, of course, is not done. The average household spends 30-50% of it's post-tax income on housing-related items, including the home itself, utilities (which are mostly energy or energy-derived in some form or fashion), food, and of course taxes imposed by governments and insurance costs mandated by the use of leverage to purchase same. Another 16% of GDP is consumed by health care, making these two general categories of expenses account for the majority of all personal spending.

Yet "CPI", or what we call "inflation", does not count actual home price changes - it instead uses what's called "owner's equivalent rent". The BLS considers purchased housing investment, not shelter - that is, not consumption. Yet the BLS also considers improvements and repairs to housing part of investment even though those items are clearly consumed! In other words, they attempt to impute the rental cost of owned property.

This is, however, invalid. Research has shown that most homeowners retain their house for about seven years on average. Further it is clear that a home is in fact shelter as it's prime purpose, not "investment", and further the expenditure of funds to reverse the inevitable effect of entropy is claimed as investment rather than expense as well!

Health care expenditures are similarly (and deliberately) understated. Most persons gain the bulk of their health care as part of their compensation - that is, they do not directly spend that money. This in turn causes the BLS to dramatically understate price inflation in health care expense because most of it does not show up in the consumer price index. Specifically:

The weights in the CPI do not include employer-paid health insurance premiums or tax-funded health care such as Medicare Part A and Medicaid.

These distortions are critically important because they in turn drive public policy and public perception, and that, in turn, is how we wind up with a series of asset bubbles.

From a mathematical perspective the problem is relatively simple:

As soon as you start refinancing to avoid paying off debt, or writing loans that are not contemplated as amortizing, you have entered The Ponzi Zone.

Identifying these sorts of financing is trivial. Among them:

Balloon, "Option ARM" and other exotic, non-amortizing mortgages.
Commercial Real Estate and other forms of corporate loans that are "interest only" and have to be rolled at maturity.
Debt issues that include "PIK" sorts of features (so-called "Toggle" bonds, etc.)
Credit card "rollover" offers that provide a zero-interest period with no balance transfer cost, effectively permitting the "parking" of debt at a zero rate (for a period of time.)

All of these features tell you that the economic cycle has entered a "Ponzi" phase that will soon inevitably result in a bust.

But when one looks to the "why" rather than the "what" the cause is clear: Negative real interest rates - that is, rates anywhere on the curve that are below the rate of actual price inflation, inevitably lead to excessive speculative borrowing and asset bubbles.

It is here that Bernanke and his predecessor have completely and utterly blown it, and they appear to either not realize it or are desperately hoping they can keep you from figuring it out.

The Federal Government uses things like "owners equivalent rent" and other similar distortions in CPI to prevent having to pay out cost-of-living increases in entitlement programs. But The Fed is not compelled to use the BLS and BEA numbers in conducting economic policy. Indeed, The Fed employs a literal army of economists who are quite capable of developing their own independent price measurements - if they wanted to.

Bernanke also alleges that:

What policy implications should we draw? I noted earlier that the most important source of lower initial monthly payments, which allowed more people to enter the housing market and bid for properties, was not the general level of short-term interest rates, but the increasing use of more exotic types of mortgages and the associated decline of underwriting standards. That conclusion suggests that the best response to the housing bubble would have been regulatory, not monetary. Stronger regulation and supervision aimed at problems with underwriting practices and lenders' risk management would have been a more effective and surgical approach to constraining the housing bubble than a general increase in interest rates. Moreover, regulators, supervisors, and the private sector could have more effectively addressed building risk concentrations and inadequate risk-management practices without necessarily having had to make a judgment about the sustainability of house price increases.

What was your first clue Ben?

There was clear evidence of demonstrably unsound financial underwriting by banks you have primary regulatory authority over as early as 2004. You did nothing.

You claim to have issued "guidance" in 2005 on non-traditional mortgages, yet they were offered by banks such as Wachovia right into the maw of the bust, with them attempting to personally solicit me for one in the spring of 2008, more than three years later! Instead of taking them up on it I shorted their stock, as that offer was a clear display of idiocy that I was certain would lead to their demise.

I was right, but you still claim you didn't "see the problem."

Clearly you did not regulate - you stood back and watched the bubble inflate. You even said (just a few months before the bottom fell out of housing) that you believed house prices were supported by "strong fundamentals."

This claim was either a bald lie or a product of profound blindness. Either way it does not speak well of your capacity for discernment, say much less judgment.

In addition the peddling of paper with radically inflated claims of "quality" was also evident early in the bubble. This too is under your domain - fraud is always punishable and the law is supposed to be enforced. There is no need for more regulation - just enforcement of existing law. When one takes a package of loans that has a true risk-adjusted return of 300 basis points over Treasuries of the same duration it is impossible to produce a set of securities with a blended return higher than 300 basis points, and it is also impossible for anyone to sell a credit default swap against that package (that they can actually perform on) for less than the true risk-adjusted spread. Since nobody works for free the true return on a CDS + Debt, where "Debt" has some risk-adjusted return over Treasuries of equivalent duration, must always be less than simply buying the Treasuries!

As a consequence there is never a market for such a "synthetic" bond+protection that is "as safe as government debt" UNLESS someone is intentionally mis-pricing risk BECAUSE AT AN HONEST ASSESSMENT OF RISK AND THUS PRICE THE COMBINATION MUST ALWAYS RETURN LESS THAN AN ACTUAL RISK-FREE GOVERNMENT BOND!

Nobody in their right mind would select such a combination at a blended yield of 3%, for example, if the equivalent-duration US Treasury was yielding 3.5%.

These products were able to be marketed only because they were laced through and through with fraudulent misrepresentations. That someone was cheating was obvious to anyone who pulled their head out of their ass and looked at what was being packaged and at what yield it was being sold. Again, directly or indirectly The Fed had the supervisory authority to put a stop to these practices and refused to do so.

The bottom line is that asset bubbles do not just magically appear - they happen because of negative real interest rates and intentional and pernicious fraud, both of which occur as a consequence of intentional obscurity and outright lies.

Our economy and people deserve better. It is a fact, whether we like it or not, that we cannot have and sustain the sort of "economic growth" we have been sold over the last 30 years on an indefinite forward basis, as you cannot continually take on debt at a rate that exceeds productive output - eventually you will default. Instead of facing the truth - a long-term growth rate roughly approximating the growth in population, or about half of what we have allegedly "enjoyed", we have used debt pyramiding - that is, serial Ponzi schemes, to produce the illusion of dramatically higher economic growth.

There is no evidence that you, or anyone in Congress, has yet had their "Come to Jesus" moment with the blunt mathematical facts. Attempting to blow another bubble - which is the inherent path you are attempting to take - risks destruction of our nation's political system and economic future.

There are hard choices to make and economic adjustment to the realities of our debt load and what this portends for economic growth on a forward basis will not be easy. It is, however, both inevitable and necessary. The longer we continue to try to deny the math the worse the ultimate outcome.

It was time for the adults to be allowed in the room and the children restrained in August of 2007, as I have previously said. More than two years of continued banter and bovine excrement from you and others has not changed a thing. We have solved nothing and you have learned nothing.

In short, it is time for you to step down.

Where Did The More Than $500 Billion Come From?

nospam@example.com (Karl Denninger) — Fri, 25 Dec 2009 13:49:00 -0500

Sprott Asset Management has "pulled forward" something I intended to cover in my "year end review" Ticker but since he's put it out there I think I need to cover it now:

As a thought experiment, we separated all the various US Treasury owners and asked our readers whether each group could afford to increase their 2009 treasury purchases by 200%. In the end, we surmised that most groups couldn’t, and prepared our readers for the worst.

Almost seven months later, however, nothing particularly bad has happened on the US debt front. There have been no failed auctions, no sovereign defaults, no downgrades of debt and no significant increase in rates…not so much as a hiccup in the treasury market. Knowing what we discussed this past June, we have to ask how it all went so smoothly. After all – it was pretty obvious there wasn’t enough buying power to satisfy the auctions under ‘normal’ circumstances.

In the latest Treasury Bulletin published in December 2009, ownership data reveals that the United States increased the public debt by $1.885 trillion dollars in fiscal 2009.

....

To our surprise, the only group to actually substantially increase their purchases in 2009 is defined in the Federal Reserve Flow of Funds Report as the "Household Sector". This category of buyers bought $15 billion worth of treasuries in 2008, but by Q3 2009 had purchased a whopping $528.7 billion worth. At the end of Q3 this Household Sector category now owns more treasuries than the Federal Reserve itself.⁸

If you believe that you're more gullible than I.

Here's why.

The 2009/3Q Z1 shows an alleged annualized inbound (purchase) flow rate for "households" of $742.9 billion. This was exceeded only by the 1Q 2009 number of 1066.5, which in the context of the stock market meltdown makes perfect sense. Likewise, in 2008 Q2/Q3 when the market was falling apart flow rates into Treasuries by households were very heavy as well.

Before you write this off and say "oh but people still are scared and thus not willing to invest in the stock market" you better look below at the Money Market Mutual Fund holdings! In Q1, Q3 and Q4 of last year this segment saw massive buying of Treasuries. Not so this year - Money Market funds have been NET SELLERS all year long, and in Q4 the rate of selling has dramatically increased, mostly as a consequence of broker/dealer sales.

This, of course, is perfectly consistent with the stock market rising - money flows out of Money Market funds and into equities, thus causing Money Markets to be net sellers.

So how is it that "Households" allegedly are (individually, via Treasury Direct?) buying Treasuries at a $700+ billion annualized rate when the other categories under which "households" transact in the markets - via money market accounts, mutual funds and similar instruments - are showing either small increases or significant net sales?

There are other oddities in the Z1 as well related to net borrowing and lending - one of the more important being the fact that GSEs suddenly became negative net borrowers to the tune of more than a half-trillion dollars in the second and third quarter! Wait - they're paying down outstanding lending commitments? I thought The Fed was absorbing all their net new issue and Treasury was backstopping their operating costs? Hmmmm...... is someone trying to de-lever due to knowledge of "fun times" to come in 2010? Perhaps Timmy knows too, eh?

The two companies, the largest sources of mortgage financing in the U.S., are currently under government conservatorship and have caps of $200 billion each on backstop capital from the Treasury. Under the new agreement announced today, these limits can rise as needed to cover net worth losses through 2012.

Hint: Treasury believes those losses are going to be massive, and so do the GSEs, judging not by statements but by their behavior.

Commercial banks are neither lending OR borrowing, and after what looked to be a let-up in their divestment in the 2nd Quarter it has picked up bigtime once again in their third. Again: What do they know that we're not being told about their losses?

I have previously opined (in October) that it is more than a bit unlikely that "Caribbean Banking Centers" have the GDP (or sovereign wealth) to support more than $200 billion in Treasury Security acquisitions:

Who is the real holder of all the Treasuries in "Caribbean Banking Centers"? You don't actually expect me to believe that little islands like Antigua and Grand Cayman have the sovereign wealth to support holding nearly two hundred billion dollars of Treasuries, do you? Is that a vehicle by which back-door monetization can (and has) taken place? Germany, with a real economy and government, by contrast holds a mere $55 billion dollars, and even Russia (and Hong Kong!) have only $121 billion.

Yeah.

Now we have more than $500 billion in further discrepancies that make absolutely no sense, especially when one looks at the rest of the patterns in the Fed's most-recent Z1 release.

This, of course, begs the obvious question:

Who really "bought" that Treasury debt - and did it really "subscribe"?

Or is the truth that there were in fact no buyers for upwards of half of the total Treasury issue in the last year and it was instead monetized - one third openly via Federal Reserve "open market" purchase, and the other two-thirds via "covert" or "stealth" means, complete with bucketing the alleged "buyers" into categories in The Fed's and Treasury's data releases?

FOMC In English 12/16

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 14:29:00 -0500

Release Date: December 16, 2009

For immediate release

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating.

Those of you without jobs are now rolling off the unemployment rolls, so you don't count any more. We in Washington DC and on Wall Street have our huge bonuses back, and thus the labor market - what we see of it anyway, is doing better.

The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.

Credit continues to contract as shown by our most-recent Z.1 (below), but we're not going to tell you that:

This, of course, means that people are spending a higher percentage of their incomes. That in turn means that the squeeze - especially on the middle class - is getting acute.

Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales.

Walmart and others are laying off seasonal help ahead of Christmas because, surprise-surprise, sales suck!

Financial market conditions have become more supportive of economic growth.

We continue to pump the markets with every opportunity but unfortunately the effects are failing. We are thus forced to lie lest you discern that the curtains are on fire and bolt for the door.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Our stated purpose was to restart private credit expansion. We failed. See the above chart. We are thus forced to lie (didn't you read it the first time?)

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

Gasoline is up 38% y/o/y, but this doesn't count as "inflation." In point of fact, we do have deflation - and lots of it - since credit is the monetary base. Oops. (There's that damn chart up above again!)

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

I hear there is exceptionally strong support at zero. For everything.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.

We will keep illegally buying Fannie and Freddie paper. We will also keep calling them "agencies" even though they are clearly not, as defined by The United States government itself. Remember, we lie.

In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

We're preparing to do this:

(That, by the way, is why there's an ammunition shortage!)

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

All this crap failed to work - again, as I said before, the goal was to restart private credit expansion. It didn't - it's still contracting. Indeed, the really bad news is that even with all the government games total credit outstanding is contracting EVEN WITH government "borrow and spend" - an unprecedented problem.

At some point you have to give up. That point is now.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Go long gasoline and matches for this feature presentation in The New Year:

Calling The Time "Person Of The Year": Jackass

nospam@example.com (Karl Denninger) — Wed, 16 Dec 2009 10:46:00 -0500

Now we got a problem.

Bernanke was named Time's "Person Of The Year"; in doing so Time has added him to their illustrious list of persons....

Whether Bernanke wants to be in the company of these individuals is another matter. Here's the list of those who I believe have as their legacy that which most-closely approximates what Bernanke will be known for 10 or 20 years hence:

Why? Because Bernanke's actions have singularly done more damage to the American economy - and America - than anyone in the history of this nation. He clearly eclipses Nixon in his dissembling, while making a mockery of the free market.

Just like those other infamous persons pictured above he has acted in the belief that he can do so without consequence on the world stage.

This notion is not easily disabused, but in the end it always proves false.

Today's lesson in falsity is the announcement, long rumored, by the Gulf States that they will be forming a common currency, breaking the formal and informal dollar pegs that have controlled the price of oil and kept the petro-dollar recycling mill operating, allowing The United States to force our inflationary policies down the Arabs' throats.

“The Gulf monetary union pact has come into effect,” said Kuwait’s finance minister, Mustafa al-Shamali, speaking at a Gulf Co-operation Council (GCC) summit in Kuwait.

The move will give the hyper-rich club of oil exporters a petro-currency of their own, greatly increasing their influence in the global exchange and capital markets and potentially displacing the US dollar as the pricing currency for oil contracts. Between them they amount to regional superpower with a GDP of $1.2 trillion (£739bn), some 40pc of the world’s proven oil reserves, and financial clout equal to that of China.

Potentially displacing my tailfeathers. That displacement is now assured.

Oh, and it doesn't stop with just money either:

The GCC also agreed to create a joint military strike force – akin to the EU’s rapid reaction force – to tackle threats such as the incursion of Yemeni Shiite rebels into Saudi territory earlier this year.

They nevertheless repeated on Tuesday that “any military action against Iran” by Western powers would be unacceptable.

Well there you have it.

China will be next with a Pan-Asian common currency and exchange system. The rumblings have been coming from there too, and they'll be followed by action - if for no other reason than that with the unpegging of oil from the dollar there is no longer any reason for China to continue to maintain a dollar hegemony of its own, and in fact doing so could be extremely damaging to China's economy.

Bernanke is entirely responsible for this. By encouraging the bubble economy during Greenspan's time in The Fed (Bernanke was the chief agitator for 1% interest rates - and holding them too low during the early part of the 2000s) and trying to restart the bubble economy this time around through both ZIRP and intentional distortions through the credit markets, shielding those who made bad decisions while cramming the inflationary pressures down the throat of trading partners, Bernanke has guaranteed the loss of global reserve currency status for The Dollar.

Our Senate is too stupid to recognize this and stop his re-nomination.

You can take that to the (insolvent) bank.

Yet a failure to do so - a failure to reject Bernanke for a second term - will result in the acceleration of action by China and The Gulf States. Before Bernanke's next term expires you will see the dollar decoupled and left in the sand as the former anchor of global trade. You will see import prices in dollar terms - especially oil and similar commodities - skyrocket. You will see the destruction of America's way of life.

None of this was unforeseeable. Defending the currency isn't just Treasury's problem - it is yours as well when you act as Treasury's handmaiden by giving them free license to issue Treasuries into a zero-interest-rate environment for deficit spending purposes.

Stand and take a bow Ben - your true legacy will be recognized in the fullness of time.

Mark my Ticker.

Aha: Bunning And Bernanke (Fan/Fred)

nospam@example.com (Karl Denninger) — Tue, 15 Dec 2009 18:34:00 -0500

Senator Bunning sent in a written request to Bernanke following his re-confirmation hearing - and Bernanke has responded. You can read the entirety of both; I am going to focus this Ticker on one section that I have repeatedly opined upon, as there is apparent clarity here:

Bunning: 28. In response to a question posed by Senator Corker, you stated “On the mortgagebacked securities, we have a longstanding authorization to do that. I do not think there is any legal issue.” Please provide the Fed’s legal analysis on the authority to purchase such securities, particularly those issued by Fannie Mae and Freddie Mac, which are not full faith-and-credit obligations of the United States.

Bernanke: Section 14(b)(2) of the Federal Reserve Act (12 U.S.C. 355) authorizes the Federal Reserve Banks, under the direction of the FOMC, to “buy and sell in the open market any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.” The Board’s Regulation A (12 CFR 201) has long defined the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) as agencies of the United States for purposes of this paragraph. All mortgage-backed securities (MBS) acquired by the Federal Reserve in its open market operations are fully guaranteed as to principal and interest by Fannie Mae, Freddie Mac, and Ginnie Mae.

Sorry, that's not sufficient.

Here's the relevant link to the CFR section cited:

§ 201.108 Obligations eligible as collateral for advances.

An ADVANCE is a loan - you don't take collateral against a purchase, you take it against a loan. Note that this is the TITLE of the section in question.

(a) Section 3(a) of Pub. L. 90–505, approved September 21, 1968, amended the eighth paragraph of section 13 of the Federal Reserve Act (12 U.S.C. 347) to authorize advances thereunder to member banks “secured by such obligations as are eligible for purchase under section 14(b) of this Act.” The relevant part of such paragraph had previously referred only to “notes * * eligible * * for purchase”, which the Board had construed as not including obligations generally regarded as securities. (See 1962 Federal Reserve Bulletin 690, §201.103(d).)

(b) Under section 14(b) direct obligations of, AND obligations fully guaranteed as to principal and interest by, the United States are eligible for purchase by Reserve Banks. Such obligations include certificates issued by the trustees of Penn Central Transportation Co. that are fully guaranteed by the Secretary of Transportation. Under section 14(b) direct obligations of, and obligations fully guaranteed as to principal and interest by, any agency of the United States are also eligible for purchase by Reserve Banks.

That's correct - The Fed can purchase securities that hold a full-faith-and-credit guarantee on The Credit of The United States. The operative clause here in the lead sentence, which controls (since there is no clause negating or making the second subservient) is AND.

Following are the principal agency obligations eligible as collateral for advances:

The Fed can LOAN against any of the below instruments - note that it did not say "elegible as collateral for advances or for purchase":

(1) Federal Intermediate Credit Bank debentures;

(2) Federal Home Loan Bank notes and bonds;

(3) Federal Land Bank bonds;

(4) Bank for Cooperative debentures;

(5) Federal National Mortgage Association notes, debentures and guaranteed certificates of participation;

Fannie

(6) Obligations of or fully guaranteed by the Government National Mortgage Association;

Ginnie

(7) Merchant Marine bonds;

(8) Export-Import Bank notes and guaranteed participation certificates;

(9) Farmers Home Administration insured notes;

(10) Notes fully guaranteed as to principal and interest by the Small Business Administration;

(11) Federal Housing Administration debentures;

FHA direct debt.

(12) District of Columbia Armory Board bonds;

(13) Tennessee Valley Authority bonds and notes;

(14) Bonds and notes of local urban renewal or public housing agencies fully supported as to principal and interest by the full faith and credit of the United States pursuant to section 302 of the Housing Act of 1961 (42 U.S.C. 1421a(c), 1452(c)).

(15) Commodity Credit Corporation certificates of interest in a price-support loan pool.

(16) Federal Home Loan Mortgage Corporation notes, debentures, and guaranteed certificates of participation.

Freddie Mac

(17) U.S. Postal Service obligations.

(18) Participation certificates evidencing undivided interests in purchase contracts entered into by the General Services Administration.

(19) Obligations entered into by the Secretary of Health, Education, and Welfare under the Public Health Service Act, as amended by the Medical Facilities Construction and Modernization Amendments of 1970.

(20) Obligations guaranteed by the Overseas Private Investment Corp., pursuant to the provisions of the Foreign Assistance Act of 1961, as amended.

I remain steadfast in my assertion: An advance is a LOAN, not a purchase.

The above says that any of the above paper is eligible for advances, not purchases (without recourse to the "emergency" authority of 13(3)). For the paper to also be eligible for purchase it must carry a full faith and credit guarantee binding on the credit of The United States. The word between the clauses is AND, not OR. Therefore the section you cited as justification does not apply.

While Bernanke can (and it appears has) twisted this language into allowing unlimited purchases for paper that in fact is exposed to credit risk - an act that is clearly contrary to the intent of both The Federal Reserve Act and the CFR section cited - both the intent and letter is, from my read, rather clear - and directly contrary to what is asserted.

The following section, sub(c) also makes quite clear the intent - that a full faith and credit guarantee by the government of the United States is the intended requirement:

(c) Nothing less than a full guarantee of principal and interest by a Federal agency will make an obligation eligible. For example, mortgage loans insured by the Federal Housing Administration are not eligible since the insurance contract is not equivalent to an unconditional guarantee and does not fully cover interest payable on the loan. Obligations of international institutions, such as the Inter-American Development Bank and the International Bank for Reconstruction and Development, are also not eligible, since such institutions are not agencies of the United States.

Again, you can try to weasel here, but the intent of the CFR is clear - the guarantee required is that of the full faith and credit of The United States. That is, recourse must be to the sovereign credit and be unconditional.

This distinction is not "ministerial" and while the language may be tortured, the intent certainly appears clear: instruments purchased by The Federal Reserve must carry the full faith and credit of the United States Government.

The section Bernanke cited provides an exception for the purpose of advances (loans), not purchases.

For purchases the question is simple:

Is the entity that issues the obligation a Federal Agency as defined at law, and do their various credit instruments carry an irrevocable guarantee as to full payment of both principal and interest?

The fact of the matter is this: The United States "official web site" does not list either Freddie or Fannie as **government agencies**. Ginnie Mae, however, is listed as an agency. Indeed, the 1968 Charter Act split Fannie Mae into two parts: Ginnie Mae AS A FEDERAL AGENCY and Fannie Mae as a government-sponsored private corporation. Freddie was never a federal agency.

The most recent Fannie 10Q and every prospectus makes clear that Fannie and Freddie paper is not carrying a full-faith and credit of The United States as a government agency. Specifically:

Fannie Mae is a government-sponsored enterprise (“GSE”) that was chartered by Congress in 1938. Fannie Mae has a public mission to support liquidity and stability in the secondary mortgage market, where existing mortgage loans are purchased and sold. We securitize mortgage loans originated by lenders in the primary mortgage market into mortgage-backed securities that we refer to as Fannie Mae MBS, which can then be bought and sold in the secondary mortgage market. We also participate in the secondary mortgage market by purchasing mortgage loans (often referred to as “whole loans”) and mortgage-related securities, including our own Fannie Mae MBS, for our mortgage portfolio. In addition, we make other investments that increase the supply of affordable housing. Under our charter, we may not lend money directly to consumers in the primary mortgage market. Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

An agency relationship - complete with the credit of The United States - only exists if it really exists. You can't define it into existence by bald claim where isn't there, especially when Congress has explicitly declined to do so.

Fannie Mae is a corporation - NOT AN AGENCY!

The government could have (and still can) cure this deficiency any time it would like. Indeed, such an action was debated when Fannie and Freddie were taken into conservatorship but that action was specifically rejected as the CBO insisted that such an act would force the government to take these entities onto its balance sheet since the United States Government would then be legally responsible - full faith and credit - for Fannie and Freddie's obligations.

Treasury desired to be able to limit the government's exposure to the amount allocated in the "rescue", that of $200 billion each, or approximately 8% of the total MBS and debt outstanding. This was judged an acceptable risk, but this explicit limitation on risk once again speaks to the lack of the required backing of the credit of The United States.

The reason for this restriction in Sections 13 and 14 of The Federal Reserve Act is clear - The Fed is forbidden to take credit risk, as it acts without specific appropriation of Congress. It is therefore required to loan against good collateral and purchase only that which contains a full-faith-and-credit protection traceable back to the United States Federal Government.

Let us contrast this with the guarantee provided by Ginnie Mae on their prospectuses:

GINNIE MAE GUARANTY

The Government National Mortgage Association (“Ginnie Mae”), a wholly-owned corporate instrumentality of the United States of America within HUD, guarantees the timely payment of principal and interest on the Securities. The General Counsel of HUD has provided an opinion to the effect that Ginnie Mae has the authority to guarantee multiclass securities and that Ginnie Mae guaranties will constitute general obligations of the United States, for which the full faith and credit of the United States is pledged.

Ginnie Mae paper clearly complies with the strictures of Section 14 of The Federal Reserve Act.

Fannie and Freddie paper does not.

The Fed has the clear statutory authority to purchase obligations of Ginnie Mae, because Ginnie is a Federal Agency and issues paper with the full faith and credit of The United States.

Fannie and Freddie ARE NOT Federal Agencies and DO NOT issue paper with the required full faith and credit guarantee. The limited exception cited by Bernanke applies only to the MAKING OF LOANS, not to the outright purchase of securities.

If Congress wishes to authorize The Fed to purchase (not loan against - that The Fed is permitted) Fannie and Freddie paper it must formally designate these entities as having a full-faith-and-credit guarantee with recourse to The United States as general obligations.

Congress, despite multiple opportunities to do so both prior and subsequent to these entities being taken into conservatorship, and prior to The Fed's purchase of these MBS, has explicitly declined to provide that guarantee.

It was declined for the specific reason that doing so would obligate The Government to back the entirety of their $5 trillion balance sheet (between the two) with full recourse to the general fund.

I happen to believe, given the near-generation-long record of poor internal controls, accounting restatements and other evidence of both malfeasance and misfeasance Congress was exactly correct to refuse to provide that guarantee.

Absent that guarantee it remains my contention that The Federal Reserve has no authority to buy their paper, irrespective of the form it is in or the torture The Fed applies to the written word.

The Fed's Dudley: Who Are You Trying To Fool?

nospam@example.com (Karl Denninger) — Tue, 08 Dec 2009 07:58:00 -0500

The legion of misdirection and lies from The Fed continued yesterday, with this ditty from NY Fed President William Dudley:

The actions undertaken by the Federal Reserve over the past two and a half years have been critical to stabilizing the financial system and preventing the extraordinary distress in markets from causing a deeper and more protracted economic downturn.

The actions taken by The Federal Reserve were necessitated by the previous actions taken by The Federal Reserve.

Yes, that's circular. It is also true.

That said, there is also no question that the Federal Reserve and other regulators could have done more to prevent this crisis.

Following the law would have been a good start. You know, basic laws that say that you can't misrepresent the credit quality of things you sell (securities laws) and you can't claim to have a "hedge" against something when the counterparty to the trade has no capital (AIG anyone?), for openers.

Turning to the first issue, identifying asset bubbles in real time is difficult.

Not really. A stock index selling at a P/E of 80 is clearly overvalued. Likewise one that is selling with a dividend payout ratio less than half the historical average. Both suggest valuations are so stretched as to be driven not by fundamental value, but rather by debt pyramiding.

To take one recent example, there was a tremendous increase in financial leverage in the U.S. financial system over the period from 2003 to 2007, particularly in the nonbank financial sector. This sharp rise in leverage was observable.

Let's be clear Mr. Dudley: The sharp rise in financial leverage occurred because the at-the-time head of Goldman Sachs, one Henry Paulson, went to Washington DC and lobbied the SEC to remove the leverage limits from investment banks.

He in fact went twice - in 2000 when he was rebuffed, an again in 2004 when his request was granted. The Fed sat back and did nothing in either instance.

This suggests that limiting the overall increase in leverage throughout the system could have reduced the risk of a bubble and the consequences if the bubble were to burst.

There was a limit. It was removed by the efforts of the aforementioned Henry Paulson. The Fed has not demanded that the former limit for investment banks be restored.

Nor does it stop there. Alan Greenspan allowed gross and outrageous increases in financial leverage through his bastardization of reserve requirements via sweep accounts, and Ben Bernanke asked for and got the ability to set reserve requirements to zero - that is, to allow infinite leverage - in the EESA/TARP legislation.

On the other hand, however, there is evidence that monetary policy does have an impact on desired leverage through its impact on the shape of the yield curve. A tighter monetary policy, by flattening the yield curve, may limit the buildup in leverage.

This, of course, is why we have a zero interest rate right now as a new bubble has been blown, correct? It is why the zero interest rate has not been increased?

For example, the Federal Reserve has been singled out for criticism about the failures of supervision even though it did not have any regulatory responsibility for many of the largest U.S. financial firms that collapsed during the crisis

That's true in the case of AIG, for example. But The Fed did have supervisory responsibility for the banks that traded in CDS positions with AIG, and as such could have prevented the establishment of positions for which AIG lacked the capital to perform.

Bluntly, The Fed failed in discharge of its duties.

In a perfect world we would be able to prevent those individuals and institutions from benefitting; we would have a better way to penalize those who acted recklessly. But once the crisis was underway, one goal took precedence: keeping the financial system from collapsing in order to protect the nation from an even deeper and more protracted downturn that would have been more damaging to everyone.

That would be nice except that The Fed caused the bubble and subsequent collapse.

This argument is similar to the fireman who is also an arsonist. After setting the fire he claims he must be allowed to put it out, lest other structures burn as well.

That may be true but does not excuse his use of the gas can and matches just minutes before.

Going forward, the Federal Reserve and other regulators need to move aggressively to change the system so we don’t ever find ourselves in this position again.

You could start by taking responsibility for your blatant, outrageous and reckless disregard for risk, your mathematically-bankrupt credit support policies that are impossible to sustain and in fact illegal under the black letter of The Fed's mandate, and demand that all alleged "credit instruments" be backed with actual capital and nightly supervision - in particularly in the OTC derivative market.

Instead The Fed has made excuses for all of the above. Profit before safety, just as with the arsonist-cum-firefighter - the firefighting salary is sufficient to make the rent but when you can also collect $10,000 per pop for setting the fires, why that's good money!

2010 is also likely to be a more moderate growth period because we still face quite a few headwinds generated by the hangover of the financial crisis. The banks are still under pressure in terms of credit losses. The shadow banking system is still impaired and securitization activity is recovering very slowly. For example, last month we saw the first commercial mortgage-backed securities (CMBS) deal in a year and a half. This means that the constraints on credit availability will take considerably more time to fully abate.

Those constraints cannot "abate" until debt levels to GDP come back into balance. The Fed has done a horrifyingly bad job of this for the last 20 years and shows no sign of improvement:

If growth is subdued, this implies that the unemployment rate will stay high and inflation will stay low. If this outlook is broadly correct, this suggests that it will be appropriate to keep the federal funds rate target exceptionally low for an extended period. One risk in the outlook is that inflation expectations could become less well-anchored. This could conceivably occur for several reasons. First, people may worry that the expansion of the Federal Reserve’s balance sheet and the increase in the Federal debt will prove inflationary over time. Second, some may worry that the Congress could take actions that would call into question the Fed’s independence with respect to monetary policy and that this could cause the Fed to be less willing to tighten monetary policy in a timely way in the future.

In a word: Bah.

The real risk is in the above graph. Real rates of interest - that is, the rate charged by a willing lender of private capital - is largely determined by both inflation expectations and credit risk.

Credit risk is, to a large degree, determined by the debt-to-income ratio of the borrower. Taken as a nation we currently have 350% of our gross income (GDP) out in debt.

Were you a certified financial planner you would likely counsel an individual coming to you with such a profile that such a debt-to-income ratio is dangerously close to the wall where a death-spiral leading to insolvency could occur. Further, you would likely note that their continued ability to make the payments was dependent on extraordinarily low interest rates - rates that have fallen while their credit quality has deteriorated, which is an inherently unstable - and dangerous - situation.

You would counsel them to reduce their debt load immediately to something more reasonable.

But you're not doing that are you William?

Why not?

On the issue of the size of the Fed’s balance sheet, the worry among some is that the rapid growth of the Fed’s balance sheet will ultimately lead to an inflation problem. This anxiety stems from the fact that periods of rapid growth of the monetary base (that is, currency plus bank reserves) in the past have typically been followed by rapid credit growth and inflation.

That's backwards. Credit growth leads. But it's immaterial.

No, the real problem is that your balance sheet is stuffed full of used toilet paper. By becoming the market for MBS you have distorted the market price to a never-before seen degree, allowing banks to hold similar paper at marks that are entirely unrealistic. Given the leverage in the system this has prevented them from detonating - after all, even a 5% markdown from par, when multiplied by 20:1 leverage is enough to destroy a 10% "Tier 1" ratio, leaving a smoking hole where a bank once stood.

This sort of accounting gimmickry is how ENRON blew up - literal make believe on market prices. When the truth came it arrived fast, cold, dry and hard. Perhaps you'd like to explain how it will be different this time?

We should think about how market participants will react to the potential politicization of the monetary policy process. Knowing that a decision to raise interest rates today might be criticized by the GAO six months later, market participants could begin to worry about the Fed’s willingness to make tough choices in terms of tightening monetary policy.

The Fed has utterly failed to hold credit aggregate growth in line with GDP for more than two decades as is clearly shown by the above chart.

There is absolutely no reason to believe that you will begin to perform in line with your lawful mandate any time soon, and until there is, such a concern as you raise above is utterly without merit.

Fedspeak Translation 12/7/2009

nospam@example.com (Karl Denninger) — Mon, 07 Dec 2009 13:32:00 -0500

Ben Bernanke spewed forth:

It is a pleasure to speak once again before the Economic Club of Washington. Having faced the most serious financial crisis and the worst recession since the Great Depression, our economy has made important progress during the past year. Although the economic stress faced by many families and businesses remains intense, with job openings scarce and credit still hard to come by, the financial system and the economy have moved back from the brink of collapse, economic growth has returned, and the signs of recovery have become more widespread.

We printed up $12 trillion in "freebie" credit, manipulated the MBS market (and in doing so have fomented and created an accounting fraud for all of those entities that hold said paper) and have purchased alleged "assets" at vastly over their actual value on purpose. This has allowed financial institutions to claim to be solvent when in fact they are bankrupt several times over.

Understandably, in a situation as complicated as this one, people have many questions about the current situation and the path forward. Accordingly, taking inspiration from the ubiquitous frequently-asked-questions lists, or FAQs, on Internet websites, in my remarks today I'd like to address four important FAQs about the economy and the Federal Reserve. They are:

Where is the economy headed?

What has the Federal Reserve been doing to support the economy and the financial system?

Will the Federal Reserve's actions lead to higher inflation down the road?

How can we avoid a similar crisis in the future?

Where Is the Economy Headed?
First, to understand where the economy might be headed, we should take a look at where it has been recently.¹ A year ago, our economy--indeed, all of the world's major economies--were reeling from the effects of a devastating financial crisis.

We created this mess through malfeasance and misfeasance. In combination with other central banks around the world we pumped into the economy tremendous amounts of liquidity that should not have existed. This in turn created tremendous instability and asset bubbles throughout the economy, most particularly in housing.

Policymakers here and abroad had undertaken an extraordinary series of actions aimed at stabilizing the financial system and cushioning the economic impact of the crisis.

We cut off our Pinocchio nose. Repeatedly. The damn thing keeps wedging in the door when I try to go take a leak!

Critically, these policy interventions succeeded in averting a global financial meltdown that could have plunged the world into a second Great Depression. But although a global economic cataclysm was avoided, the crisis nevertheless had widespread and severe economic consequences, including deep recessions in most of the world's major economies. In the United States, the unemployment rate, which was as low as 4.4 percent in March 2007, currently stands at 10 percent.

We created it on purpose and through willful neglect, you ate it. Aren't we special?

Recently we have seen some pickup in economic activity, reflecting, in part, the waning of some forces that had been restraining the economy during the preceding several quarters. The collapse of final demand that accelerated in the latter part of 2008 left many firms with excessive inventories of unsold goods, which in turn led them to cut production and employment aggressively. This phenomenon was especially evident in the motor vehicle industry, where automakers, a number of whom were facing severe financial pressures, temporarily suspended production at many plants. By the middle of this year, however, inventories had been sufficiently reduced to encourage firms in a wide range of industries to begin increasing output again, contributing to the recent upturn in the nation's gross domestic product (GDP).²

That which you can't buy the government will simply sell more Treasuries to fund the purchase of, handing out money to special favored groups - especially labor unions. We won't talk about them billing you for the cost (snicker)

Although the working down of inventories has encouraged production, a sustainable recovery requires renewed growth in final sales. It is encouraging that we have begun to see some evidence of stronger demand for homes and consumer goods and services. In the housing sector, sales of new and existing homes have moved up appreciably over the course of this year, and prices have firmed a bit. Meanwhile, the inventory of unsold new homes has been shrinking. Reflecting these developments, homebuilders have somewhat increased the rate of new construction--a marked change from the steep declines that have characterized the past few years.

Again, the government is borrowing 'cause you're broke and can't. Heh, $8,000 per house, where many first-time buyers are in fact cats, dogs, and 3 year old children, we believe this could be tremendously stimulative.

(To your prostate, when you see how much this is all going to cost your children and grandchildren.)

Consumer spending also has been rising since midyear. Part of this increase reflected a temporary surge in auto purchases that resulted from the "cash for clunkers" program, but spending in categories other than motor vehicles has increased as well. In the business sector, outlays for new equipment and software are showing tentative signs of stabilizing, and improving economic conditions abroad have buoyed the demand for U.S. exports.

This is why port traffic and rail traffic, especially intermodal (that which moves things you buy) is down annualized of course. Oh, and so are sales tax receipts.

Though we have begun to see some improvement in economic activity, we still have some way to go before we can be assured that the recovery will be self-sustaining. Also at issue is whether the recovery will be strong enough to create the large number of jobs that will be needed to materially bring down the unemployment rate. Economic forecasts are subject to great uncertainty, but my best guess at this point is that we will continue to see modest economic growth next year--sufficient to bring down the unemployment rate, but at a pace slower than we would like.

The jobs all went over to China. Say "hi" to $2/day wages. We'll get to that one in a minute.

A number of factors support the view that the recovery will continue next year. Importantly, financial conditions continue to improve: Corporations are having relatively little difficulty raising funds in the bond and stock markets, stock prices and other asset values have recovered significantly from their lows, and a variety of indicators suggest that fears of systemic collapse have receded substantially. Monetary and fiscal policies are supportive. And I have already mentioned what appear to be improving conditions in housing, consumer expenditure, business investment, and global economic activity.

Banks can borrow at 0%, but you borrow at 29.9%. When I said "businesses" in regard to credit, I was speaking specifically of Government Sachs. Everyone else: Bend over.

On the other hand, the economy confronts some formidable headwinds that seem likely to keep the pace of expansion moderate. Despite the general improvement in financial conditions, credit remains tight for many borrowers, particularly bank-dependent borrowers such as households and small businesses. And the job market, though no longer contracting at the pace we saw in 2008 and earlier this year, remains weak. Household spending is unlikely to grow rapidly when people remain worried about job security and have limited access to credit.

No loan for you!

Inflation is affected by a number of crosscurrents. High rates of resource slack are contributing to a slowing in underlying wage and price trends, and longer-run inflation expectations are stable. Commodities prices have risen lately, likely reflecting the pickup in global economic activity and the depreciation of the dollar. Although we will continue to monitor inflation closely, on net it appears likely to remain subdued for some time.

You know that $2/day salary? Yes, well, the good news is that your salary will remain at $20/hour.

The bad news is that we're going to depreciate the dollar by 100:1 just as they did in North Korea.

And no, we won't tell you in advance before we do it.

What Has the Federal Reserve Been Doing to Support the Economy and the Financial System?

The discussion of where the economy is headed brings us to our second question: What has the Federal Reserve been doing to support the economy and the financial system?

I have this sock in my office.....

The Federal Reserve has been, and still is, doing a great deal to foster financial stability and to spur recovery in jobs and economic activity.³ Notably, we began the process of easing monetary policy in September 2007, shortly after the crisis began. By mid-December 2008, our target rate was effectively as low as it could go--within a range of 0 to 1/4 percent, compared with 5-1/4 percent before the crisis--and we have maintained that very low rate for the past year.

It is very important to make sure that the big banks can run carry trades and other non-productive means of siphoning off what little money remains for themselves.

Our efforts to support the economy have gone well beyond conventional monetary policy, however. I have already alluded to the Federal Reserve's close cooperation with the Treasury, the Federal Deposit Insurance Corporation (FDIC), and other domestic and foreign authorities in a concerted and ultimately successful effort to stabilize the global banking system, which verged on collapse following the extraordinary events of September and October 2008. We subsequently took strong measures, independently or in conjunction with other agencies, to help normalize key financial institutions and credit markets disrupted by the crisis. Among these were the money market mutual fund industry, in which large numbers of American households, businesses, and municipalities make short-term investments; and the commercial paper market, which many firms tap to finance their day-to-day operations. We also established and subsequently expanded special arrangements with other central banks to provide dollars to global funding markets, as we found that disruptions in dollar-based markets abroad were spilling over to our own markets.

Distorting markets and enabling fantasy accounting is very important to market confidence. Never mind that pesky thing called "the law"; we've been ignoring it for so long we don't even bother pretending any more.

More recently, we have played an important part in helping to re-start the markets for asset-backed securities that finance auto loans, credit card loans, small business loans, student loans, loans to finance commercial real estate, and other types of credit. By working to revive these markets, which allow banks to tap the broader securities markets to finance their lending, we have helped banks make room on their balance sheets for new credit to households and businesses. In addition, we have supported the overall functioning of private credit markets and helped to lower interest rates on bonds, mortgages, and other loans by purchasing unprecedented volumes of mortgage-related securities and Treasury debt.

Again: accounting fictions (that is, accounting fraud and lies) are great tools. We use them liberally. Their impact on you as a consumer is also applied "liberally" - dry, raw and hard.

In all of these efforts, our objective has not been to support specific financial institutions or markets for their own sake. Rather, recognizing that a healthy economy requires well-functioning financial markets, we have moved always with the single aim of promoting economic recovery and economic opportunity. In that respect, our means and goals have been fully consistent with the traditional functions of a central bank and with the mandate given to the Federal Reserve by the Congress to promote price stability and maximum employment.

Yes, we have done a great job over the last 20 years, as evidenced by this chart showing that we have held credit growth to that which can be funded by GDP expansion.

Oh wait - it doesn't show that? Got a black sharpie marker somewhere? Let me go diddle our Z1 and fix that - hang on a second....

In addition to easing monetary policy and acting to stabilize financial markets, we have worked in our role as a bank supervisor to encourage bank lending. In November 2008 we joined with other banking regulators to urge banks to continue lending to creditworthy borrowers--to the benefit of both the economy and the banks--and we have recently provided guidelines to banks for working constructively with troubled commercial real estate loans.⁴ This spring, we led a coordinated, comprehensive examination of 19 of the country's largest banks, an exercise formally known as the Supervisory Capital Assessment Program, or SCAP, but more informally as the "stress test." This assessment was designed to ensure that these banks, which collectively hold about two-thirds of the assets of the banking system, would remain well capitalized and able to lend to creditworthy borrowers even if economic conditions turned out to be even worse than expected. The release of the assessment results in May provided sorely needed clarity about the banks' condition and marked a turning point in the restoration of confidence in our banking system.⁵ In the months since then, and with the strong encouragement of the federal banking supervisors, many of these largest institutions have raised billions of dollars in new capital, improving their ability to withstand possible future losses and to extend loans as demand for credit recovers. Meanwhile, we have also continued our efforts to ensure fair treatment for the customers of financial firms. During the past year and a half, we have comprehensively overhauled the regulations protecting mortgage borrowers, credit card holders, and users of overdraft protection plans, among others.

29.9% is a great interest rate. Really. So are layered bounce charges when your bank claims you have money in your account that hasn't cleared yet, thereby encouraging you to overdraw two, three, four, or ten times in an afternoon buying a Starbucks coffee and a pair of pants.

Paying $41.25 for a cup of coffee is tremendously stimulative to the economy, don't you think?

In navigating through the crisis, the Federal Reserve has been greatly aided by the regional structure established by the Congress when it created the Federal Reserve in 1913. The more than 270 business people, bankers, nonprofit executives, academics, and community, agricultural, and labor leaders who serve on the boards of the 12 Reserve Banks and their 24 Branches provide valuable insights into current economic and financial conditions that statistics alone cannot. Thus, the structure of the Federal Reserve ensures that our policymaking is informed not just by a Washington perspective, or a Wall Street perspective, but also a Main Street perspective. Indeed, our Reserve Banks and Branches have deep roots in the nation's communities and do much good work there. They have, to give just a couple of examples, assisted organizations specializing in foreclosure mitigation and worked with nonprofit groups to help stabilize neighborhoods hit by high rates of foreclosure. They (as well as the Board) are also much involved in financial and economic education, helping people to make better financial decisions and to better understand how the economy works.

The Creature from Jekyll Island is alive and well - and like a vampire squid it's damn hungry.

For blood.

Yours.

All told, the Federal Reserve's actions--in combination with those of other policymakers here and abroad--have helped restore financial stability and pull the economy back from the brink. Because of our programs, auto buyers have obtained loans they would not have otherwise obtained, college students are financing their educations through credit they otherwise likely would not have received, and home buyers have secured mortgages on more affordable and sustainable terms than they would have otherwise. These improvements in credit conditions in turn are supporting a broader economic recovery.

We encouraged people to trade in perfectly good cars with no loan for one with lots of debt. These will all be repo'd next year, but heh, that doesn't count, right?

The bankruptcy line forms right over there - bring your first-born, that's the current charge for having your debt discharged. I love leg meat!

Will the Federal Reserve's Actions Lead to Higher Inflation Down the Road?
The scope and scale of our actions, however, while necessary and helpful in my view, have left some uneasy. In all, our asset purchases and lending have caused the Federal Reserve's balance sheet to more than double, from less than $900 billion before the crisis began to about $2.2 trillion today. Unprecedented balance sheet expansion and near-zero overnight interest rates raise our third frequently asked question: Will the Federal Reserve's actions to combat the crisis lead to higher inflation down the road?

The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here. However, as the recovery strengthens, the time will come when it is appropriate to begin withdrawing the unprecedented monetary stimulus that is helping to support economic activity. For that reason, we have been giving careful thought to our exit strategy. We are confident that we have all the tools necessary to withdraw monetary stimulus in a timely and effective way.⁶

This chart does not suggest anything is wrong with our monetary policy or inflation expectations. Really.

Oh, and when inflation is zero but "could move downward from here", that is commonly called DEFLATION. We don't use that word around The Fed though - nor do we ever use the word DEPRESSION, although that's what we're in (and it's going to get a lot worse!)

Indeed, our balance sheet is already beginning to adjust, because improving financial conditions are leading to substantially reduced use of our lending facilities. The balance sheet will also shrink over time as the mortgage-backed securities and other assets we hold mature or are prepaid. However, even if our balance sheet stays large for a while, we will be able to raise our target short-term interest rate--which is the rate at which banks lend to each other overnight--and thus tighten financial conditions appropriately.

We're sitting on a metric ton of crap that is worth a lot less than we paid for it, but we're not going to tell you that. Remember the accounting lies? We're doing it too.

Operationally, an important tool for adjusting the stance of monetary policy will be the authority, granted to us by the Congress last year, to pay banks interest on balances they hold at the Federal Reserve. When the time comes to raise short-term interest rates and thereby tighten policy, we can do so by raising the rate that we offer banks on their balances with us. Banks will be unwilling to make overnight loans to each other at a rate lower than the rate that they can earn risk-free from the Fed, and so the interest rate we pay on banks' balances will tend to set a floor below our target overnight loan rate and other short-term interest rates.

We can't tighten policy and we know it. If we do government interest rates skyrocket and with the government having to roll over $5 trillion in debt this coming year that can and might force interest expense beyond tax revenues. If it does, well, we get this:

Additional upward pressure on short-term interest rates can be achieved by measures to reduce the supply of funds that banks have available to lend to each other. We have a number of tools to accomplish this. For example, through the use of a short-term funding method known as reverse repurchase agreements, we can act directly to reduce the quantity of reserves held by the banking system. By paying a slightly higher rate of interest, we could induce banks to lock up their balances in longer-term accounts with us, making those balances unavailable for lending in the overnight market. And, if necessary, we always have the option of reducing the size of our balance sheet by selling some of our securities holdings on the open market.

We can't sell a damn thing and we know it. That will mark it all to the market and the result will be an instantaneous implosion in the dollar and bond market. Didn't you hear me the first time? Yes, I know my nose is getting longer. Again.

As always, the most difficult challenge for the Federal Open Market Committee will not be devising the technical means of unwinding monetary stimulus. Rather, it will be the challenge that faces central banks in every economic recovery, which is correctly judging the best time to tighten policy. Because monetary policy affects the economy with a lag, we will need to base our decision on our best forecast of how the economy will develop. As I said a few moments ago, we currently expect inflation to remain subdued for some time. It is also reassuring that longer-term inflation expectations appear stable. Nevertheless, we will keep a close eye on inflation risks and will do whatever is necessary to meet our mandate to foster both price stability and maximum employment.

My head is in the sand too. Can I borrow your toothbrush?

How Can We Avoid a Similar Crisis in the Future?
As we at the Federal Reserve and others work to build on the progress already made toward securing a sustained economic recovery with price stability, we must also continue to address the weaknesses that led to the current crisis. Thus, our final question this afternoon is: How can we avoid a similar crisis in the future?⁷

Although the sources of the crisis were extraordinarily complex and numerous, a fundamental cause was that many financial firms simply did not appreciate the risks they were taking. Their risk-management systems were inadequate and their capital and liquidity buffers insufficient. Unfortunately, neither the firms nor the regulators identified and remedied many of the weaknesses soon enough. Thus, all financial regulators, including the Federal Reserve, must undertake unsparing self-assessments. At the Federal Reserve, we have extensively reviewed our performance and moved to strengthen our oversight of banks. Working cooperatively with other agencies, we are toughening our banking regulations to help constrain excessive risk-taking and enhance the ability of banks to withstand financial stress. For example, we have been among the leaders of international efforts, through organizations such as the Basel Committee on Bank Supervision, to increase the quantities of capital and liquidity that banks must hold. At home, we are implementing standards that require banking organizations to adopt compensation policies that link pay to the institutions' long-term performance and avoid encouraging excessive risk-taking.

We don't mind speculation at all, even with your money, so long as you pay for it as a taxpayer. We cannot allow a bank like Government Sachs to lose money when they screw up however. Toward this end we make sure we tell them in advance before we do anything, so they're sure to be on the right side of the trade - and you're on the wrong side.

I mentioned the SCAP, otherwise known as the stress tests. We are applying the lessons learned in that exercise to reorient our approach to the supervision of large, interconnected banking organizations that are critical to the stability of the financial system. In particular, we are taking a more "macroprudential" approach, one that goes beyond supervisors' traditional focus on the health of individual institutions and scrutinizes the interrelationships among firms and markets to better anticipate sources of financial contagion. To do that, we are expanding our use of the kind of simultaneous and comparative cross-firm examinations that we used to such good effect in the SCAP. The Federal Reserve's ability to draw on a range of disciplines--using economists, market experts, accountants, and lawyers, in addition to bank examiners--was essential to the success of the SCAP, and a multidisciplinary approach will be a central feature of our supervision in the future. For example, we are complementing our traditional onsite examinations with enhanced off-site surveillance programs, under which multidisciplinary teams will combine supervisory information, firm-specific data analysis, and market-based indicators to identify problems that may affect one or more banking institutions.

I can make 2 + 2 = 5 if you ask nicely.

Although regulators can do a great deal on their own to improve financial oversight, the Congress also must act to fix gaps and weaknesses in the structure of the regulatory system and, in so doing, address the very serious problem posed by firms perceived as "too big to fail." No firm, by virtue of its size and complexity, should be permitted to hold the financial system, the economy, or the American taxpayer hostage. To eliminate that possibility, a number of steps are required.

Congress has an audit bill out there that we really don't like. We created "too big to fail" and we like it - gimme the button on that financial nuke you proles! Congress MUST NOT take that back from us!

First, all systemically important financial institutions, not only banks, should be subject to strong and comprehensive supervision on a consolidated, or firmwide, basis. Such institutions should be subject to tougher capital, liquidity, and risk-management requirements than other firms--both to reduce their chance of failing and to remove their incentive to grow simply in order to be perceived as too big to fail. Neither AIG, an insurance company, nor Bear Stearns, an investment firm, was subject to strong consolidated supervision. The Federal Reserve, as the regulator of bank holding companies, already supervises many of the largest and most complex institutions in the world. That experience, together with our broad knowledge of the financial markets, makes us well suited to serve as the consolidated supervisor for systemically important nonbank institutions as well. In addition, our involvement in supervision is critical for ensuring that we have the necessary expertise, information, and authorities to carry out our essential functions of promoting financial stability and making monetary policy.

Of course we won't mention that we could have prohibited every bank under our supervision from trading in CDS with AIG since they had no money to pay - but we willfully and intentionally allowed them to buy "insurance" from someone with no money to the tune of hundreds of billions of dollars.

We haven't fixed that either - please don't tell anyone.

Second, when a systemically important institution does approach failure, government policymakers must have an option other than a bailout or a disorderly, confidence-shattering bankruptcy. The Congress should create a new resolution regime, analogous to the regime currently used by the FDIC for failing banks, that would permit the government to wind down a troubled systemically important firm in a way that protects financial stability but that also imposes losses on shareholders and creditors of the failed firm, without costs to the taxpayer. Imposing losses on creditors of troubled, systemically critical firms would help address the too-big-to-fail problem by restoring market discipline and leveling the playing field for smaller firms, while minimizing the disruptive effects of a failure on the financial system and the economy.

This is why we did that in the case of Bear, Lehman, AIG, WaMu and Wachovia.

Oh wait - we didn't even though we could have?? Aw crap you caught me lying again! Now I need a chainsaw for this nose.....

Third, our regulatory structure requires a better mechanism for monitoring and addressing emerging risks to the financial system as a whole. Because of the size, diversity, and complexity of our financial system, that task may exceed the capacity of any individual agency. The Federal Reserve therefore supports the creation of a systemic oversight council, made up of the principal financial regulators, to identify developments that may pose systemic risks, recommend approaches for dealing with them, and coordinate the responses of its member agencies.

The more people that lie the more convincing it is.

Conclusion
In closing, I will again note that in the fall of last year, the United States, indeed the world, confronted a financial crisis of a magnitude unseen for generations. Concerted actions by the Federal Reserve and other policymakers here and abroad helped avoid the worst outcomes. Nevertheless, the turmoil dealt a severe blow to our economy from which we have only recently begun to recover. The improvement in financial conditions this year and the resumption of growth over the summer offer the hope and expectation of continued recovery in the new year. However, significant headwinds remain, including tight credit conditions and a weak job market.

The jobs are gone but we'll fix that - really - with a 100:1 currency devaluation.

The Federal Reserve has been aggressive in its efforts to stabilize our financial system and to support economic activity. At some point, however, we will need to unwind our accommodative policies in order to avoid higher inflation in the future. I am confident we have both the tools and the commitment to make that adjustment when it is needed and in a manner consistent with our mandate to foster employment and price stability.

The more we wave our arms the harder it is to see through them.

In the meantime, financial firms must do a better job of managing the risks of their business, regulators--the Federal Reserve included--must complete a thoroughgoing overhaul of their approach to supervision, and the Congress should move forward in making needed changes to our system of financial regulation to avoid a similar crisis in the future. In particular, we must solve the problem of "too big to fail."

Psst: We already have - it's called accounting fraud, currency debasement and lies.

In sum, we have come a long way from the darkest period of the crisis, but we have some distance yet to go. In the midst of some of the toughest days, in October 2008, I said in a speech that I was confident that the American economy, with its great intrinsic vitality, would emerge from that period with renewed vigor.⁸ I remain equally confident today.

I'm confident you won't bring back the Coinage Act of 1792 - I really don't like that one.

Please?

Senator Bunning Grills Bernanke To A Crisp

nospam@example.com (Karl Denninger) — Thu, 03 Dec 2009 15:22:36 -0500

Gee, so you mean that there are some people in The Senate who actually understand what Bernanke has been up to - and are willing to ream him on it?

Fancy that.... can we find 39 more please?

CALL YOUR SENATORS AND TELL THEM **NAY** ON ANY CLOTURE VOTE - A HOLD REQUIRES 60 VOTES TO OVERRIDE.

Jawbone Failure: Lacker

nospam@example.com (Karl Denninger) — Thu, 03 Dec 2009 08:33:00 -0500

You have to admire the audacity of these clowns:

"To my mind, a natural place to start is asset sales," he told reporters after a speech in Charlotte, North Carolina, playing down fears of market disruptions. "We have to move over time to channeling resources away from the housing market. It doesn't seem advisable to me to build a recovery based on housing."

What Lacker is talking about is the huge portfolio of MBS - mortgage-backed securities - that The Fed has "bought" as part of its "quantitative easing" program.

The problem with this statement is that it is a bald lie.

Literally everything that government and The Fed have done has been predicated on not "building a recovery based on housing" but on attempts to re-inflate the housing bubble! Holding prices high - intentionally - by forcing long-term interest rates for mortgages down is destructive and evil.

Creating the housing bubble - which we now know was not just Greenspan's legacy but in fact was largely Bernanke's fault in that he was one of the individuals at The Fed in the early 2000s that advocated for the ultra-low rate and ultra-high liquidity environment that caused it - was the underlying evil in our economic mess.

Yet to believe that this was some sort of accident is incredibly naive. Certainly where all the "funny money" went might have been an accident, but the creation of a bubble as The Fed's solution to the bursting of the last bubble they created was no accident at all - it was a policy.

My best guess is that the hawkish lies coming out of Lacker and a few others are a reaction to the fact that the market is increasing voting "no confidence" on both The Fed and America's currency - the dollar.

And let's not kid ourselves - all The Fed has to sell is the dollar. Should the dollar collapse The Fed will have literally nothing, and this presumes that the Federal Reserve itself (along with the government) is not sacked.

There is a clear climate of panic in this regard. Gold's parabolic rise is not about "inflation" - Gold has never been a decent inflation hedge; indeed, it has historically underperformed actual inflation, dramatically so, to the point that those who have tried to use it (or silver) as a means of avoiding monetary debasement through inflation have wound up holding a bag of air.

No, Gold is a geopolitical instability and monetary collapse hedge.

And in that regard what Gold's price is telling you is clear:

Now those who are buying Gold in a panic - believing that the dollar will become literally worthless - may be right or they may be wrong, but they are scared, and with good cause. Last year our government had a deficit .vs. income of about forty percent - that is, government spent about $1.6 trillion more than it made ($3.6 trillion spent, $2 trillion - roughly - taken in via taxes.)

Geithner is on TV this morning talking about how we must get deficits down to "about 3%." But he is, I presume, talking about GDP, not the government's size. But even by that measure he's talking about reducing the deficit to $400ish billion.

Bluntly: how?

Look, the CBO says that's a load of bull. They're predicting another $9 trillion in deficits racked up over the next ten years, and that's probably low - the CBO almost always is, because they can't account for legislation (and its spending) not-yet-dreamed of.

Geithner is trying to take a victory lap but in fact his claim of asset price recovery is an outright lie. The dollar has deflated by more than 20% in value .vs. Euros, as just one example. While the S&P 500 and DOW are up by a hell of a lot off the bottom in March when you look at the price of houses, for example, you've lost another 20% of the value of your house when looked at in terms of Euros!

The stock market's rise is EASILY explained - it is the dollar that is sinking, not the market that is rising. But the danger here is that this element of pumping asset prices is now breaking down - that is, the dollar's continued deterioration is now only holding stock prices steady and is no longer having the sort of strong response in stock price appreciation.

The Fed and Treasury, to be blunt, is losing control of the game. Geithner's claim this morning that as "fear has receded money has come out of Treasuries and Dollars" is amusing.

The problem with Geithner's claim is that this sort of move in the dollar, which has caused governments such as China and Saudi Arabia to take huge (hundreds of billions of dollars) in losses on dollar depreciation, is inherently destructive. Oil producing nations will respond to this by tightening the spigot handle enough to make themselves whole over time. But for the utter collapse in oil demand we'd be looking at $200/barrel oil and $6/gallon gasoline right now. That day, if our economy truly recovers along with demand for oil, will immediately assert itself.

So what does Geithner and The Fed intend to do here? They are in a box - the ultimate problem is 20+ years of excessive credit creation - an irresponsible set of policies that in fact violate their mandate under Federal Law.

I'd love to find a way to spin this in a bullish fashion, but I can't. The only way out for the government is to force the bad debt into the open and default it. If they don't - whether via huge tax increases or removal of the subsidies, direct and indirect, on financial institutions, then ultimately The United States Government will go bankrupt.

In 2006 The St. Louis Fed's Laurence Kotlikoff argued that The United States is functionally bankrupt - here and now. He was right, of course, and the interesting part of his solution to the problem was adoption of The Fair Tax.

I have long advocated for this, since it is the only means I've heard elucidated that addresses the structural problems with governing funding.

In any event there has been no recognition by the government that the last 20 years of credit growth is unsustainable and in fact is why we're in this mess. Worse, they seem to think they can drink themselves (and we can drink ourselves as consumers) sober.

Nonsense.

The Last Word On Bernanke: FAIL

nospam@example.com (Karl Denninger) — Wed, 02 Dec 2009 08:19:00 -0500

I have written two Tickers in recent days in which I put forward what I believe is a clear and convincing, if lengthy, case that Bernanke simply can't be justified for re-confirmation - So Bernanke, You Want To Be Reconfirmed? and The Black Hats Strike Back.

But today, on the eve of Bernanke's reconfirmation hearing in the Senate Banking Committee, I want to focus on one and only one thing - The Fed's basic mandate:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Ok.

Let's look at the performance.

We shall first look at the growth of GDP and credit aggregates:

Data is through the latest "Z1" statement showing credit aggregates.

This is The Fed's performance of its mandate. GDP growth is in green, credit aggregates in various shades of orange and red, and the debt-to-GDP ratio in light gray on the right scale.

You can see the problem. "Credit Aggregates" have grown much faster than has GDP. This is the definition of Ponzi Finance - that is, debt pyramiding or "credit leverage."

This is an intentional violation of The Fed's lawful mandate to properly manage the growth of credit aggregates (that, by the way, is what they're really doing - interest rates move in relationship to liqudiity, which governs the growth or contraction of credit aggregates.) Why? Because when credit expands faster than GDP over time, as has occurred here, you have an inherently unstable system that with mathematical certainty will eventually melt down.

In order for the debt to be serviced - debt that is growing much faster than GDP - it should be obvious that ever-lower interest rates are required. When the interest rate "required" to prevent massive default rates from occurring reaches zero, as we have recently seen, The Fed is reduced to the raw printing of money. This in turn debases the currency which forces risk premia higher - and thus causes real rates to rise (despite The Fed's desire to hold them at zero.) If The Fed refuses to allow the market's demand for higher rates to occur then credit - that is, lending - from other than The Fed is simply cut off as the private credit markets will refuse to accept a below-market rate of interest. Only through the force of government can that below-market rate be obtained.

This is the definition of a credit lock-up or "seizure." It is not that there is no credit - it is that the demanded interest rate exceeds what the borrower can afford, because the aggregate debt in the system has reached or exceeded the ability of borrowers to service it.

This is in fact exactly what happened and is a mathematically-certain outcome of The Fed's failure to discharge it's mandate, most particularly since the 1980s.

Before someone shouts out that The Federal Government is the biggest cause (which Bernanke has little direct control over, if any control at all), you must look at this chart, which breaks down the components of debt represented above:

Note that the "pinkish" slice is the Federal Government debt, and that it has exploded in the last two years. But most important to the question of Bernanke's performance, it is not a huge portion of the whole.

No, the big problems are found in Household and Non-Profit credit and financial instruments, along with general non-financial business credit, all of which are under the direct supervisory control of The Federal Reserve through their interactions with the banks in both regulatory and liquidity management roles.

The credit bubble - the root cause of our problem - is not an abstract thing. It was created through the willful mismanagement of Federal Reserve Policy during both Alan Greenspan and Ben Bernanke's time in office.

That mismanagement is a willful and direct violation of Federal Law and must disqualify Ben Bernanke from a second term.

It is that mismanagement that made inevitable the economic pain we have and will suffer. Attempting to provoke even more credit creation will simply lead to a bigger disaster.

While those in The Senate who lament tight credit among "Main Street" are correct, the solution is not to loosen credit there while leaving "Wall Street" with its extraordinarily-loose lending policies. Rather, we must tighten Wall Street's credit by more than we loosen Main Street's, so the net aggregate credit outstanding contracts but is shifted to productive uses rather than financial engineering and speculation. The Fed has utterly refused to do this and in fact has promoted and maintained policies that have done precisely the opposite.

Since the cited law has no "or else" embedded in it, despite the presence of the word "Shall", it is incumbent upon The Senate to refuse reconfirmation, as that appears to be the only enforcement mechanism available.

Should The Senate fail to do so we may as well rip up The Federal Reserve Act as currently extant, as it is in fact a legal nullity.

Fed Margin Calls? (AIG)

nospam@example.com (Karl Denninger) — Tue, 01 Dec 2009 09:49:00 -0500

Zerohedge had an interesting article up yesterday on the possibility of The Fed facing margin calls:

Taken together we read the thrust of this section to mean that a number of European banks, seeking to limit their regulatory capital requirements under Basel I (read: seeking to increase their leverage) bought swap protection on their assets from AIG. These obligations still sit with AIG and, in the event credit markets sink materially, AIG is likely to take losses on these instruments.

Oh. This is a problem folks.

It also calls into question whether these Basel requirements have been gamed here as well as there.

If this is true it is a massive, unbelievable cock-up and puts in stark relief exactly what sort of gaming of the system of so-called "regulatory capital" banks have been running.

The blunt reality is that so-called capital requirements have all been a massive, outrageous, pernicious SCAM if any of this is true.

To buy a swap from a company that has no money to pay and then claim that swap as "money good", thereby allowing you to "elevate" an asset that would normally have to be reserved against with regulatory capital to something that doesn't is beyond outrageous - it is ridiculously fraudulent.

This is the root cause of the so-called "systemic risk" right there and absolutely nobody is willing to take it on.

Basel I (and Basel II) are supposed to set reserve requirements against various types of assets. When regulators permit banks to get around the classification system by buying over-the-counter swaps (or indeed anything that is not centrally cleared and guaranteed money good) they make a mockery of these so-called "safety and soundness" regulations.

Every single person involved in this - in the banks themselves, in the regulatory agencies and in the governments - needs to be thrown out of office at minimum and in my opinion should stand trial for public fraud and corruption.

Oh, and what's worse is that there's no evidence that the gaming of the system has stopped.

Even better, someone is coming after AIG front-month PUTs on the $25, $20 and $17.50 strikes - PUTs with about two weeks left. Over 7,500 of them this morning alone, with the stock trading at $29.57.

Someone thinks it is going to go boom, despite AIG being up $1.25 this morning.

We not only learned nothing, we have allowed these banksters to keep their old leverage games going and add new ones!

AIG CAN STILL BLOW UP, THE SYSTEMIC RISK STILL EXISTS, THE BOMB IS STILL TICKING AND AT ANY MOMENT IN TIME IT COULD GO OFF - BUT THIS TIME IT DETONATES ON THE BALANCE SHEET OF THE FEDERAL RESERVE AND TREASURY DEPARTMENT!

The Black Hats Strike Back (Bernanke)

nospam@example.com (Karl Denninger) — Sat, 28 Nov 2009 13:41:00 -0500

It appears that Ben Bernanke has his knickers in a bit of a bind this morning....

For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

That's correct Ben. Indeed, the only people who aren't calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so. They're quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don't get their way.

There is some history behind this, is there not?

The American Bankers Association secretary James Buel expressed the bankers attitude well in a letter to fellow members of the association. He wrote: "It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious Press, as will oppose the greenback issue of paper money and that you will also withhold patronage from all applicants who are not willing to oppose the government issue of money. To repeal the Act creating bank notes, or to restore to circulation the government issue of money will be to provide the people with money and will therefore seriously affect our individual profits as bankers and lenders. See your congressman at once and engage him to support our interest that we may control legislation."

That would be 1890 Mr. Bernanke. More than 100 years ago. Once a viper, always a viper.

I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers.

You should not have bank regulatory powers. The reason is simple: You have abused them and willfully ignored the abuses served upon the people, specifically:

The marketing of trash securities with alleged "AAA" ratings that you either knew or should have known were backed by no ability to repay on the original terms - indeed, the only hope of payment was the continued appreciation of property values.
The abusive practices of banks with regards to overdraft fees and costs - fees and charges that amount to the imposition of interest rates of hundreds of percent on terms that customers not only did not opt into but could not opt out of. This has generated more than $30 billion in illicit profits in the last year alone. Your belated half-hearted actions in this regard in the last two months come only after decades of abuse and threats to impose that which you would not do as a regulator by statute.
Likewise, the "rate jack" operations of credit card issuers has not come under attack or regulation by The Fed. Indeed, it was once again Congress that had to step in after years of willful blindness on your part.
Finally, The Fed refused to regulate various predatory lending practices - including but not limited to those targeting minorities and low-income persons in general.

In short, The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it. For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.

The Fed played a major part in arresting the crisis.

You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency. Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse, which are:

Excessive leverage - specifically, dodges and cheats on reserve ratios and Tier Capital, including but not limited to Sweep Accounts (first put in place by Greenspan), off-balance-sheet vehicles (Citibank alone has nearly a trillion dollars of alleged "assets" hidden in them) and advocacy of mark-to-myth rather than a strict standard of mark-to-market.
Shifting of apparent risk via derivatives purchased and sold without proof of ability to pay in the event of default. This was the proximate cause of the near-collapse of virtually all of the major banks in this country. While you did not have the authority to prohibit AIG (and others) from transacting in these instruments without sufficient capital to pay dollar-for-dollar of exposure, you did have the authority to prevent banks under your regulatory umbrella from transacting in them and counting them as valid "hedges" against other positions. You willfully and intentionally failed to do so, and still are willfully and intentionally failing to exercise your existing regulatory power to demand that each and every derivative be either with a counterparty that is proven to be able to pay or is disregarded as being "money good" by the bank under your jurisdiction.

In short The Federal Reserve has willfully and intentionally allowed the seeds of this crisis to be sown and grown while blithely reclining in somnescence, smug in the belief that it will be able to paper over any failures by shifting the cost thereof to the citizens of The United States.

The People have (rightly so) said "no f%#$ing way!" and are insisting that this sort of willful blindness and open conspiracy to defraud the public be stopped.

Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

No it won't. Not without real capital constraints and a demand that lending only happens in a sound, secure, and collateralized environment.

Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis." Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.

But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.

Leverage multiplies both risk and reward. There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.) But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.

This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more. We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000. Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.

This time you went too far and the system failed. Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.

We the people must say "no."

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking.

No you haven't. The former 14:1 leverage limit on investment banks, lifted in 2004 at the behest of Henry Paulson, has not been re-imposed. You have not removed the Sweep Account exception put in place by Alan Greenspan. You have not demanded that all derivatives be cleared on a central exchange with a central counterparty, forcing nightly mark-to-market and posting of margin, thereby removing the ability of banks to falsely claim hedges for which the counterparty cannot pay. During the depths of the crisis you even demanded (and got) the right to set the required reserve ratio for a bank to zero - that is, you demanded and got the right to allow banks to take on infinite leverage. This was buried in the EESA/TARP legislation and I, along with just a handful of others, noticed it.

All of this you could have already taken care of under your existing authorities, or you could do all of this tomorrow - but you have done none of it, nor have you pledged to do any of it in the future as a condition of your continued existence as a banking regulator.

In short you are a bald-faced liar.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

The Fed's statements, including yours, demonstrate that you have absolutely no clue as to the path of the economy. In the months and years leading up to this crisis you repeatedly proclaimed that "subprime is contained", that "we will not slip into recession" and the biggest whopper of all, that "house price appreciation reflects strong demand and sound economic fundamentals." None of this was true. Indeed, you are a walking contrary indicator - whatever you pronounce the market would be wise to turn on its ear in terms of actual expectations for the future.

I made most of these points in April of 2008 - but of course you won't pay attention to anyone who gets it right, yes Ben? Nor will you answer those critics, except through Goebbels-style repetition of bald-faced lies.

Or should you read my August 2008 missive in which I cited specifics:

Just like you said "subprime is contained"? (3/07)

Or "we do not expect spillovers from the subprime markets to the rest of the economy or to the financial system"? (5/07)

Or "monetary and fiscal policies are in train that should support a return to growth in the second half of this year"? (4/08)

Or "our baseline forecast is for moderating inflation"? (7/06)

Or ".... expect energy and other commodity prices to flatten out"? (7/07, right before the insane run in these prices began!)

Or if you prefer, you can read about them right here:

Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

Is it possible to be more wrong Mr. Bernanke? I think not.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.

Asset purchase programs.... do they have to be lawful Mr. Bernanke? As I have repeatedly pointed out you have very limited authority to purchase assets and yet you act like those limits don't exist. Specifically, Fannie and Freddie both explicitly disclaim the "full faith and credit guarantee" required under Section 14 of The Federal Reserve Act for you to buy their MBS and debt - yet you have and are willfully ignoring that requirement.

But all of this, Mr. Bernanke, belies the underlying problem - that is, mathematics. The "Ponzi Finance Indicator" tells you (and everyone else who cares to look) exactly what is and has been going on:

This is the underlying issue you refuse to face, because doing so means repudiating decades of bad monetary policy and taking the inevitable hit to your reputation, along with that of The Fed, that would come from doing so. It also would mean accepting an even deeper recession than we are in now - even a Depression.

But if we do not - and you do not - we will follow the path of Japan, which is staring straight down the barrel of government monetary failure. Not today, but tomorrow for certain.

The reality of our situation is quite stark. You cannot expand credit faster than actual GDP - that is, output. Yet GDP is manipulated and falsely reported, with plenty of double-counting. It thus is in fact presented as a much-more rosy figure than reflects reality.

But even with this distortion, credit is growing faster, and has been since 1953. The "spread" has been, on average, about 3%. And as you can see from the chart above, over the last 30 years it has gotten much worse.

The ultimate issue is that as debt grows faster than output the available money to service debt contracts. That is, an ever-larger portion of gross output must be paid in debt service costs.

If an attempt is made to prevent defaults, as you and Greenspan have done, you are forced to drive interest rates lower. This is inherently backward - as one's debt-to-income ratio rises, the demanded interest rate should rise, not fall, as the risk of non-payment increases.

By intentionally tampering with the relationship between credit risk and interest rates the margin between current operating leverage and insolvency narrows. Eventually you reach a zero interest rate.

But with a lower interest rate leverage rises exponentially. At a 10% interest rate the maximum leverage possible is 10:1. At 1% it is 100:1. At 0% you are attempting to divide by zero.

This forces you into "extraordinary" measures. But those are a chimera as well. Dividing by zero is impossible no matter how you try to disguise it, and yet that is what you, and Treasury, are doing.

The simple fact of the matter is that debt service ratios became unsustainable as a direct consequence of your and your predecessor's willful blindness and outrageous conduct. You don't want to admit this, because once again doing so means admitting that you have willfully ignored the math for more than a decade, but it is nonetheless true.

You cannot make a bad debt good by hiding it. Losses happen when bad loans are made, not when they're recognized. There is no escape from this fundamental reality of banking, and you know it.

Only by forcing the bad debt into the open and defaulting it can we clear the excessive leverage and cause debt-service ratios to fall back to sustainable levels. The proper way to do this is to let the market set interest rates based on risk, rather than tampering with liquidity as you have done, and let the market sort out the failures.

Yes, Ben, I recognize that you face a "Hobson's Choice." But it is one of your own making, and the lesser of the evils is to take the damage now while our government's credit is still strong enough to withstand the shock.

Japan took the other path, and they now have a real risk of an actual sovereign collapse. We are following them down the same road, and there is no evidence that you, or other policymakers, recognize not just risk but the mathematical inevitability of where that road leads.

It is time to stop bloviating and dissembling Ben. Our nation needs leadership and truth, not obfuscation and lies. This is not a matter of political will and desire. Mathematics bend to no one - not even Caesar, and should we refuse to acknowledge how and why we're here, along with taking concrete steps to address it, we shall discover that attempting to divide by zero will have disastrous consequences for our economic, monetary and political systems.

Fraudie/Phoney MBS And More Lies From Congress

nospam@example.com (Karl Denninger) — Wed, 25 Nov 2009 09:09:00 -0500

Heh Ben, how's that sphincter (pick which one) feel about now?

NEW YORK (Reuters) - Fannie Mae (FNM.N), shrunk its gross mortgage portfolio by an annual rate of about 28 percent in October and delinquencies on loans it guarantees rose sharply in September, the largest U.S. home funding company said on Tuesday.

The key in the story is that the single-family "serious" delinquency rate (that is, 90+ days behind - in the "forget it, they're hosed" bucket) is now 4.72% of the entire portfolio, where a year ago it was 1.72%.

That's 275% of the previous rate.

Where's the MBS portfolio going? Fannie isn't running it down, you know.

Oh no - those MBS are going right onto The Federal Reserve's balance sheet through "outright purchases" - that is, monetization.

Unlike a loan, which is recourse and can be "put back", these can't. They're owned by The Federal Reserve, which printed up new money (debasing the currency) to purchase an "asset" of questionable (or worse) quality.

The perversity of The Fed's "purchase" program is that it has dramatically boosted the price of these "securities", even as their quality has gone into the toilet.

The outcome of this should not have been in question, of course - you can always drive up the "price" of something by intentionally overpaying for some of that thing. The wise owner of said "asset" will immediately sell it to you, of course, detecting that you are willing to overpay on purpose.

The perversity of such a "program", however, is that it destroys the market. The claim is that such "quantitative easing" is in some way "supportive" of the market for these securities. Nothing could be further from the truth - what has instead happened is that private demand has disappeared as The Fed has been paying more for them than the market price - and as a consequence anyone who might have been a buyer has immediately turned into a seller instead. Worse, the cost of funding new securities has become unattractive for Fannie and Freddie.

Net-on-net the risk of default is being transferred to you as The Fed, if they have taken in so-called "good securities" by intentionally overpaying for toilet paper their actions amount to nothing more than raw printing of money.

The dollar is reacting to this, along with the fact that the so-called "independent" Central Bank has effectively correlated its actions with Treasury, which instantly issued more than $1 trillion in new debt right into its "low interest rate" environment and "Quantitative Easing" program.

Reality is this:

The housing market's performance is not improving - it continues to deteriorate, with loan performance deteriorating, not stabilizing.

Virtually all of the Fannie/Freddie paper that is "Seriously Delinquent" will foreclose. Nobody 90+ delinquent (statistically) cures - those are "hard" defaults that are either in foreclosure or will be in foreclosure.

The Fed will, by the end of the first quarter of 2010, own 20% or more of this paper - and it intentionally overpaid. The losses will be real, they will be in the tens if not hundreds of billions of dollars, and you will eat it via devaluation of the currency and deterioration of your living standard - even if you were prudent.

There is no exit from this policy. Should The Fed dump the MBS paper on the market the price would collapse. Should they not and run it off the value will collapse. Either way the losses are real and will be absorbed - by you.

"Independent" Central Bank eh? Contemplate the wisdom of a so-called "independent" central bank having the right to levy a tax on all Americans - because that's what they're doing, in point of fact, to the tune of hundreds of billions of dollars.

Oh, and to Darrell Issa, who made the comment to a constituent when challenged that HR.3221 of 2008 provided a "full faith and credit" guarantee to Fannie and Freddie, thus making their MBS purchase-eligible by The Fed: That was a lie sir.

HR.3221 did no such thing. It in fact authorized but did not require the purchase of MBS and Debt Instruments by Treasury, to wit (Sec 1117, P30)

‘‘(A) General Authority - In addition to the authority under subsection (c) of this section, the Secretary of the Treasury is authorized to purchase any obligations and other securities issued by the corporation under any section of this Act, on such terms and conditions as the Secretary may determine and in such amounts as the Secretary may determine. Nothing in this subsection requires the corporation to issue obligations or securities to the Secretary without mutual agreement between the Secretary and the corporation.

That's crystal clear. TREASURY is authorized to buy an unlimited amount of Fannie and Freddie paper - either MBS or outright debt issue. But nowhere in this act is Treasury required to do so in satisfaction of debt - that is, nowhere is the implied Fannie and Freddie guarantee modified to an explicit full faith and credit guarantee issued by The Federal Government.

Further, Fannie filed a 10Q effective as of September 30th of this year in which it stated ON THE FIRST PAGE:

Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

End of discussion Mr. Issa. Fannie issued that 10Q as a document filed with the SEC by a firm that has publicly-traded capital stock. Not only does the general rubric of fraud apply should they make a knowingly-false claim, SarBox provides that such documents are specifically attested to as true and correct by the officers of the corporation responsible for said filing.

The reason that Treasury isn't buying these securities, and The Fed is doing so (and in my opinion illegally doing so) is quite simple: If Treasury were to buy these securities it would have to issue Treasury Debt to fund the purchases. This would lay bare on the table the fact that The Federal Government is not running a $1 trillion annual deficit it is in fact running a $2 trillion annual deficit, and the consequence of that recognition by the market would likely be the instantaneous collapse of Treasury Bond prices with a commensurate rocket shot in demanded coupon.

This would force fiscal discipline on The United States Government - a reality you and the rest of Congress, along with Treasury, refuse to face.

This sort of cock-and-bull game of outright lies, which you used to dodge a legitimate question from a constituent at a charity event related to why Congress is allowing The Federal Reserve to buy MBS and Debt that lacks the REQUIRED full faith and credit guarantee, is outrageous.

You should be ashamed of yourself Darrell. I had a much higher opinion of you before you pulled that crap, but it takes only one intentional act of deception to destroy my formerly-high opinion of you.

If you have a cite to an explicit full-faith-and credit guarantee in the law you claimed provided for it, fax it to me and I'll be happy to retract this in public. Until then it stands: your intentional deception, along with that of The Fed and Treasury, is designed to cover up the fact that we're not running a $1 trillion annual deficit, it is in fact double that and Congress, Treasury and The Fed all know that should this become apparent to the market the result will be an instantaneous detonation of the government's ability to fund its operation on anything approaching reasonable terms.

Quite frankly, we deserve exactly that outcome given the outrageous actions taken by both the previous and current administrations along with the willing handmaiden games played by both The Fed and Congress, and I hope we get it - and soon.

So Bernanke, You Want To Be Re-confirmed?

nospam@example.com (Karl Denninger) — Thu, 26 Nov 2009 21:24:00 -0500

On what basis do you come before The Senate with this request?

We continue to see the alleged goal of "sustainable economic growth in an environment of price stability" in your Fedspeak, but the fact is that The Fed has never met that metric - not now, not ever. Specifically:

"All money is debt" in modern monetary systems. That is, it is borrowed into existence. Since 1953 outstanding debt in the system has grown at a 8.78% compound annual rate, a 7.91% rate since 1990 and at an 8.50% rate since 2000. Since you took office the rate has been 8.905%, the highest recorded of those four measurements. Not only has The Fed failed to maintain price stability the instability has risen during your tenure - significantly.

How can you make a claim to adherence to your mandate when The Fed has in fact promoted and operated a monetary system that for the last fifty years has maintained a credit growth rate in excess of GDP growth, typically by 2-3%? I present the following graphical representation of the mathematically-inevitable outcome of such a policy. Since debt must be serviced and paid down with output, promotion and maintenance of such a policy will, with mathematical certainty, result in monetary system failure given a sufficient period of time.

Please explain why The Senate should confirm you when your policy, along with that of all previous Fed Chairmen, has been to permit and foster growth in credit that exceeds GDP - a policy that must, mathematically, eventually lead to monetary and fiscal collapse?

Your most-recent FOMC statement (along with many previous) says: To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt.

Section 14 of The Federal Reserve Act governs the purchase of assets (Section 13, including 13.3, governs the extension of credit, that is, "discounting a note" or "the making of a loan.") It says, in part, that The Federal Reserve is empowered:

To buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest by, any agency of the United States.

The remaining sections do not apply as they are not (a) bullion or contracts for same, (b.1) HOLA-related paper, limited-duration revenue anticipation debt, nor otherwise qualified under that section as limited-duration municipal or state debt, (c) a bill of exchange, (d) a rate of discount applied to loans or otherwise-authorized purchases, (e) a foreign exchange obligation, (f) a bankers acceptance defined under that section, or (g) a supervisory act as provided therein.

It has been claimed at various times that Fannie and Freddie have an implicit guarantee. But that is insufficient. Section 14(b.1) and 14(b.2) both clearly require a full faith and credit guarantee as to both interest and principal by The United States.

Indeed, there has been a claim made that last year's HR.3221, commonly called "The Housing And Economic Recovery Act of 2008", which authorized the conservatorship of Fannie and Freddie, contained such a guarantee. This claim is categorically false. That bill (now law) contained a right but not an obligation for Treasury to purchase an unlimited amount of GSE MBS and Debt Paper, but nowhere does that law ensconce the required full-faith-and-credit guarantee that is required for The Federal Reserve to purchase said securities.

Others claimed that Treasury at the time of taking Fannie and Freddie into conservatorship "indicated" that they would back the debt, at least for now. That's not good enough. The law in question specifically permits Treasury to convert their conservatorship to receivership, in which creditors - including MBS and debt holders - would be exposed to loss. The requirement for full faith and credit in fact is for exactly that, not a nebulous "can be withdrawn at any time" general concept of support lacking the force of law.

Furthermore, Fannie and Freddie have continued to file 10Qs since they were taken under conservatorship. Fannie's most recent 10Q cataloging results through September of 2009 has the following to say on the first body page, which is essentially identical to the disclaimer found on each and every debt prospectus issued by the company:

Although we are a corporation chartered by the U.S. Congress, and although our conservator is a U.S. government agency and Treasury owns our senior preferred stock and a warrant to purchase our common stock, the U.S. government does not guarantee, directly or indirectly, our securities or other obligations.

That is a black-letter disclaimer of the required full-faith-and-credit guarantee that must exist for The Fed's purchases of both MBS and debt to be lawful under Section 14 of The Federal Reserve Act, as published on The Federal Reserve's web site and elsewhere.

Please justify, including a cite to specific enabling legislation or proof that the required full-faith-and-credit guarantee exists, the apparent unlawful activity of The Federal Reserve's FOMC and the apparently unlawful directives issued to the NY Fed Dealing Desk to conduct operations that exceed The Federal Reserve's lawful authorites.

You claimed in a June 5th of 2007 speech that: "However, fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

The facts, however, bear out that you either knew or should have known more than a year earlier that Goldman Sachs, among others, was issuing securitizations with "mortgages" that, on dollar value:

72.21% were taken for cash-out refinances and 12.28% were to refinance existing loans. Only 15.52% of the principal balance was taken out to BUY a house.

Of that 72.21% balance, the AVERAGE FICO of the person taking the cash-out refinance was 604 (!) - the lowest average of all categories. (If that isn't special I don't know what it is - people with severely-impaired credit attempting to keep their head above water by cashing out alleged "equity" in their homes at usurious interest rates!)

The vast majority of the loans had a lifetime maximum rate of 15% or higher, with 26% having a cap OVER 16%. This in a time when "conventional" financing was at half that interest rate. If that's not hard evidence of predatory behavior, what is?

46.85% of the principal balance was stated documentation. That is, no verification of income or assets.

In other words, these were "debt-pyramid" loans being taken out by borrowers to either cash out of their homes to fund their lifestyles, were utterly impossible to be paid as agreed, or both. A year later, FRBNY published a research paper on this topic in which your position as expressed less than a year prior was shown to be fallacious.

Explain the discrepancy between your statement and what primary dealers, whom you have supervisory authority over via the NY Fed Desk (indirectly), were and had been issuing for more than a year as of mid-2007.

On May 31st 2003 you said while speaking in Tokyo: One might argue that the legal objective of price stability should require not only a commitment to stabilize prices in the future but also a policy of actively reflating the economy, in order to restore the price level that prevailed prior to the prolonged period of deflation. You went on to explain that you believed there was a mandate to recover not only bubble-produced previous asset prices but also the imputed additional inflation that "would have happened" over the intervening time period.

The US Federal Reserve has such a mandate. Please clarify and extend your remark, particularly in the case where the prior inflated value of assets that has collapsed, in this case, specifically, houses and commercial Real Estate, were a direct and proximate consequence of both unsound and even fraudulent lending practices, forcing prices dramatically beyond equilibrium levels as a consequence of the classic inflationary mechanism of "too much money (credit) chasing too few goods."

This is particularly topical to the present circumstance given that the context of your remarks was provided with the backdrop of Japanese monetary policy. Their nation (similar to ours) suffered a real estate valuation collapse when their real estate asset bubble popped - a bubble that, like our asset bubble, was generated as a consequence of ridiculously-loose lending standards and speculation.

Indeed, given the above question, where it becomes clear that the alleged "pre-bubble-bursting" price level was achieved as a consequence of creating a credit bubble of unimaginable size, fostered over the space of more than fifty years, it is clear that the claim of policy you made in that speech of 2003 would be in fact a commitment to pursue a mathematically-impossible goal - and one that would lead to the destruction of the currency and possibly political system of the nation.

Please defend the propriety of your comments given these facts and explain both your current position and any current commitment to actions you intend to take in this regard.

In the most-recent Fed Minutes (3-4 November 2009) it was said: Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.

Please square this statement with the following chart, showing the presence of a monstrous dollar "carry trade" - a trade only profitable in the presence of zero interest rates, where the dollar can be borrowed (by primary dealers and other large banking interests) at zero or near-zero rates:

The white line is the dollar on a relative basis, while the chart is of the S&P 500. The correlation since June has been nearly 100%. Not coincidentally, the carry first appeared within weeks after The Fed lowered short-term interest rates to zero.

The size of this "Carry Trade" is currently estimated at more than $500 billion outstanding. During this time the dollar has lost more than 15% of its value against other major currencies - a direct devaluation of every American's purchasing power. During this same time oil has more than doubled in price as have other essential commodities.

Historically, there has never been a carry trade that has unwound in an "orderly" fashion. The Yen Carry unwind featured prominently last year in the stock and credit market crashes. It is entirely reasonable to expect that when the dollar carry trade unwinds it will inflict direct economic loss of at least $50 billion, with 10 or even 100 times as much damage to the economy in knock-on effects from asset value destruction. That the unwind will occur, and this damage will occur, is axiomatic - we can debate only timing, not the event itself, as a carry trade is an inherently unstable condition and is mathematically impossible to sustain on a permanent basis. Further, the asset classes into which the carried funds flow (or spill over into) become bubble-like and inflated in value - claimed "value" that is in the fullness of time proved to be false.

Indeed, the little mini-meltdown over Thanksgiving may be the only warning that the market serves up before things get truly ugly. How far will this little meltdown - or a big one if we refuse to heed it - go? There's no good way to know, but this much I am absolutely certain of: the longer we continue to distort foreign exchange markets with zero interest rate games with the intention of fueling "carry trades" as a means of pumping asset values, the greater the risk of a catastrophic reversal.

On "as-reported" earnings the S&P 500's current 12-month trailing P/E stands at nearly 60. Historical average P/Es run closer to 15. Even with the disastrous 4th quarter of last year removed, the P/E is well over 20.

An increase in short-term interest rates to as little as 2% would make the carry trade unprofitable and halt it immediately, while remaining extremely accommodative in terms of monetary policy. Yet The Fed continues to commit to "extraordinarily low rates for an extended period of time", intentionally fostering enormous distortions in the currency markets and risk assets.

Additionally, China has disclosed that it has taken as much as a $350 billion loss on its holdings since March, and believes it may take another $220 billion should the dollar fall a further 10%. Under what possible scenario do you see China continuing to buy our debt when your actions, along with Treasury's, intentionally wipe out half a trillion dollars of value in the assets purchased from us?

Further, exactly how much "excessive risk-taking" do you need to see before you act when the current P/E on the S&P 500 is considerably higher than the market's P/E was when Alan Greenspan gave his famous "irrational exuberance" speech?

The US Federal Reserve has a "dual mandate" of maximum employment in an envornment of price stability. As shown in the below chart, The Market Ticker Ponzi Finance Indicator, The Fed has in fact promoted a policy of intentional over-expansion of credit:

The Ponzi Finance Indicator is simply the arithmetic difference in percent change between the expansion of credit and expansion of GDP, both on a year-over-year basis to remove seasonal adjustments.

Due to the mathematical realities that govern the behavior of all compound functions (whether they be compound interest, compound growth, or compound debt accumulation) any time there is a difference in growth rates between two compound functions over time the larger will "run away" from the former. This is governed by the immutable laws of mathematics.

When one maintains a negative divergence between the compound rate of debt growth and compound rate of GDP growth, as The United States has since 1953 on balance, and continually, with only one short single-year exception since 1981, the mathematical certainty of debt coverage insufficiency will occur.

Due to the mathematical realities of monetary systems that are debt-based - that is, where "money" is borrowed into existence at interest, it is inevitable that debt-liquidation must periodically occur, bankrupting both borrowers and lenders.

Your actions, along with those of Greenspan before you, have been consistent with bankrupting borrowers who make imprudent decisions. But you have consistently, along with Mr. Greenspan, tried to protect lenders who have made imprudent decisions. This is not only unjust it is mathematically unsustainable and, if it continues, will, as a matter of mathematical certainty, lead to monetary (and likely political) collapse. You simply must be held to account for your actions in this regard, given the mathematical realities that underlie all debt-based monetary systems.

I will not presume to debate the wisdom of a debt-based monetary system in this missive, since the subject of this Ticker is not whether The Federal Reserve should exist as an entity charged with the issuance and management of the nation's money supply. That is a screed for another time.

Rather, this Ticker is focused on your performance as Chairman of said body, along with your performance as a member of the FOMC prior to your appointment.

As Chairman, it is my contention that you have an absolute obligation to the truth - a truth that is driven by mathematical facts, not the fancy of banksters who infest both Wall and "K" Streets, promoting knowing lies related to the sustainability of that which is mathematically impossible.

In that regard you, as with your predecessor, are in my opinion unfit to hold your position - or indeed any position - within The Federal Reserve, and The Senate must vote to NOT confirm you for a second term.

Watt's The Deal?

nospam@example.com (Karl Denninger) — Wed, 18 Nov 2009 08:05:00 -0500

As I noted on Blogtalk a couple of weeks ago, Representative Watt is doing his level best to derail the "Audit The Fed" bill and amendments introduced by Representatives Grayson and Paul.

Representative Watt's "alternative", however, doesn't open The Fed's books - it further snaps them shut! It not only leaves all the existing restrictions against an audit in place and refuses to mandate audits it also places four new restrictions on any such audit activity.

The most outrageous new restriction is that an audit, under Watt's proposal, may not examine the loans or liquidity arrangements that The Fed enters into or the impact of those deals on the reserves, balance sheet or financial condition of either a Fed-regulated bank or The Federal Reserve itself.

It isn't hard to figure out why Watt would want such blanket secrecy. One need only look at his heavily-gerrymandered district, which happens to contain the corporate headquarters of Bank of America.

This gives new meaning to "kneel before Zod."

The Dishonorable Representative Watt must resign - there have been ridiculous and outrageous claims made in the past, but any representation that his amendment would somehow "open the books of The Fed" is an outrageous lie, and further, it appears to be intentionally designed to protect one of the very "too big to fail" banks that likely has caused The Fed to get in trouble in the first place - Bank of America.

The Market Ticker - Federal Reserve

Jackassery Patrol (Greenspan)

Fed Didn't Know Lehman Was Book-Cooking? Yeah Right.

I'm Gonna Throw Up (Bernanke)

Repeal Of Law Needed NOW

FedSpeak - Humphrey-Hawkins

Fed Changes Terms In Front of OpEx Again

For release at 4:30 p.m. EDT

The Fed Has A "Goal" Of Lawful Behavior?

Are You Skeered Hoenig?

Wow, Look At My Jaws Move: Bernanke

FOMC Statement 1/27 In English

For immediate release

AIG and NY Fed: Who's Involved?

The Fed Is Politicizing The Fed

Oh, So The Fed *DID* Hide Documents?

A Message To Our Senate: Defeat Bernanke

BEWARE Senators: The Public Says VOTE NO!

Gee, More Duplicity (Is Someone's Nomination In Trouble?)

The Fed's Lacker: More Threats

AIG: More NY Fed Concealment?

Fed's Bullard Admits To Bubble Blowing...

Where The Sun Never Shines

Fed Bubble Blowing: A Study Of Denial

Where Did The More Than $500 Billion Come From?

FOMC In English 12/16

For immediate release

Calling The Time "Person Of The Year": Jackass

Aha: Bunning And Bernanke (Fan/Fred)

§ 201.108 Obligations eligible as collateral for advances.

The Fed's Dudley: Who Are You Trying To Fool?

Fedspeak Translation 12/7/2009

Senator Bunning Grills Bernanke To A Crisp

Jawbone Failure: Lacker

The Last Word On Bernanke: FAIL

Fed Margin Calls? (AIG)

The Black Hats Strike Back (Bernanke)

Fraudie/Phoney MBS And More Lies From Congress

So Bernanke, You Want To Be Re-confirmed?

Watt's The Deal?

Oh, So The Fed DID Hide Documents?