The Market Ticker - Federal Reserve

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.

You Stupid Fool (Bernanke)

nospam@example.com (Karl Denninger) — Mon, 16 Nov 2009 14:26:00 -0500

Does anyone remember my ranting at Paulson when he was talking about his "Bazooka"? Here is what I said:

This joins the list of other "dead wrong" statements you've made, of which I am keeping a running copy and sent them around on the 19th of July.

How many times do you get to be wrong as Treasury Secretary Hank before you resign in shame?

And now I must ask again - is that really a Bazooka in your pocket, or an empty launcher? I'm not the only one that's curious you know; the bond market seems to think it smells like BS, and so does the stock market.

Fannie and Freddie collapsed, remember?

Paulson was proved - and rather quickly so - to be completely full of crap.

Bernanke's comments today may have just provoked a dollar catastrophe - a collapse move that may have just begun. Witness this chart:

The market took about 10 minutes to discern that Bernanke's "concern" was BS, and now has pushed in the chips - "all in" - breaking key support below 75 - and still going.

The carry traders have redoubled their bets and obviously intend to force Bernanke to either put up or shut up.

The problem with Paulson's claim is that when the market called the bluff he wound up sticking the taxpayer for up to $400 billion, of which more than $100 billion has now been dissipated.

It appears the FX market intends to force Bernanke (and Geithner) to either defend the dollar or allow it to collapse. The violence of this move and the concurrent "ramp job" that accompanied it in the S&P 500 makes clear a few points though.

The "efficiency" of transmission between this move down and the move up in the stock market is lower than the previous moves have been, although the correlation remains intact.
The FX markets will press this bet incessantly as they did when Geithner last mouthed the "strong dollar" mantra.

The Fannie and Freddie game wound up bankrupting both firms and forcing the government to bail them out.

Who is going to bail out the United States Government if and when the FX markets and carry traders cause a disorderly collapse in the dollar?

Just as with Paulson's idiocy I'll bet not one person in Congress or The Administration will stand up and put a sock in Bernanke, despite the fact that we are again seeing the "ALL IN!" game when the person doing it is holding 2-7 off-suit.

But this post, if Bernanke has indeed provoked a collapse of the dollar, is one I will be printing as a full-page advertisement in USA Today - if there still is a USA Today, or for that matter any other national newspaper to which one can freely insert material, in a couple of years.

FedSpeak Translation 11/16

nospam@example.com (Karl Denninger) — Mon, 16 Nov 2009 13:58:00 -0500

I just gotta.....

When I last spoke at the Economic Club of New York a little more than a year ago, the financial crisis had just taken a much more virulent turn. In my remarks at that time, I described the extraordinary actions that policymakers around the globe were taking to address the crisis, and I expressed optimism that we had the tools necessary to stabilize the system.

I had a load in my pants, but put saran wrap over my underwear so you couldn't smell it. It worked too, didn't it?

Today, financial conditions are considerably better than they were then, but significant economic challenges remain. The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers' forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink. The stabilization of financial markets and the gradual restoration of confidence are in turn helping to provide a necessary foundation for economic recovery. We are seeing early evidence of that recovery: Real gross domestic product (GDP) in the United States rose an estimated 3-1/2 percent at an annual rate in the third quarter, following four consecutive quarters of decline. Most forecasters anticipate another moderate gain in the fourth quarter.

We let banks borrow at zero but you're going to pay 29.9% and like it. Nobody has a job. We're playing Wile-E-Coyote pedaling in air, having not stepped off the brink but gunned it and flew 400 feet off the end. Oh, and the ground is 3,000 feet down.

As for "Real GDP" we count your wealth and output as having grown if you go to the bank and take a $20,000 cash advance on your credit card. That makes you richer, right?

How the economy will evolve in 2010 and beyond is less certain. On the one hand, those who see further weakness or even a relapse into recession next year point out that some of the sources of the recent pickup--including a reduced pace of inventory liquidation and limited-time policies such as the "cash for clunkers" program--are likely to provide only temporary support to the economy. On the other hand, those who are more optimistic point to indications of more fundamental improvements, including strengthening consumer spending outside of autos, a nascent recovery in home construction, continued stabilization in financial conditions, and stronger growth abroad.

Absolutely - those $20,000 credit card cash advances are great - especially when the interest rate goes up to 29.9%. This will absolutely promote a durable increase in consumer spending and go straight to the bottom line of corporations..... until you go bankrupt!

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely. However, some important headwinds--in particular, constrained bank lending and a weak job market--likely will prevent the expansion from being as robust as we would hope. I'll discuss each of these problem areas in a bit more detail and then end with some further comments on the outlook for the economy and for policy.

So long as we can sucker China into buying our Treasuries.....

I began today by alluding to the unprecedented financial panic that last fall brought a number of major financial institutions around the world to failure or the brink of failure. Policymakers in the United States and abroad deployed a number of tools to stem the panic. The Federal Reserve sharply increased its provision of short-term liquidity to financial institutions, the U.S. Treasury injected capital into banks, and the Federal Deposit Insurance Corporation (FDIC) guaranteed bank liabilities. The Federal Reserve and the Treasury each took measures to stop a run on money market mutual funds that began when a leading fund was unable to pay off its investors at par value. Throughout the fall and early this year, a range of additional initiatives were required to stabilize major financial firms and markets, both here and abroad.¹

All these banks are still broke. We papered over the insolvency with printed money, but now we're hearing of people like Goldman changing priority of creditors on some of their deals. Now now, don't sidle toward the door yet - that smell isn't really the curtains burning!

The ultimate purpose of financial stabilization, of course, was to restore the normal flow of credit, which had been severely disrupted. The Federal Reserve did its part by creating new lending programs to support the functioning of some key credit markets, such as the market for commercial paper--which is used to finance businesses' day-to-day operations--and the market for asset-backed securities--which helps sustain the flow of funding for auto loans, small-business loans, student loans, and many other forms of credit; and we continued to ensure that financial institutions had adequate access to liquidity. Additionally, we supported private credit markets and helped lower rates on mortgages and other loans through large-scale asset purchases, including purchases of debt and mortgage-backed securities issued or backed by government-sponsored enterprises.

We let people lie some more. It worked so well during the 2000 era. Home buyers lied about incomes, ratings agencies lied about safety, banks lied to everyone (including themselves and me) and I lied on a daily basis about how "house price appreciation reflects sound fundamentals." Heh, can't change an unbroken record now!

Partly as the result of these and other policy actions, many parts of the financial system have improved substantially. Interbank and other short-term funding markets are functioning more normally; interest rate spreads on mortgages, corporate bonds, and other credit products have narrowed significantly; stock prices have rebounded; and some securitization markets have resumed operation. In particular, borrowers with access to public equity and bond markets, including most large firms, now generally are able to obtain credit without great difficulty. Other borrowers, such as state and local governments, have experienced improvement in their credit access as well.

We own it all - of course we can print up some more (worthless) currency to paper over whatever. That's only going to happen for our friends though - you, the average American, are truly screwed.

However, access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officers Opinion Survey shows that banks continue to tighten the terms on which they extend credit for most kinds of loans--although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms.² The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

Remember when I said "you are screwed"? Yep. "You" includes all the little people. Consumers, small businessfolk, you're all bus fodder and we're gonna back over you after running you down. Gotta make sure you're dead, after all. "Such a lovely house......"

To be sure, not all of the sharp reductions in bank lending this year reflect cutbacks in the availability of bank credit. The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt. Also, write-downs of bad debt show up on bank balance sheets as reductions in credit outstanding. Nevertheless, it appears that, since the outbreak of the financial crisis, banks have tightened lending standards by more than would have been predicted by the decline in economic activity alone.

There's a few of you who have figured it out and given us the bird, refusing to borrow and bankrupt yourselves. The rest of you are bankrupt. Is that "credit-worthy"?

Several factors help explain the reluctance of banks to lend, despite general improvement in financial conditions and increases in bank stock prices and earnings. First, bank funding markets were badly impaired for a time, and some banks have accordingly decided (or have been urged by regulators) to hold larger buffers of liquid assets than before. Second, with loan losses still high and difficult to predict in the current environment, and with further uncertainty attending how regulatory capital standards may change, banks are being especially conservative in taking on more risk. Third, many securitization markets remain impaired, reducing an important source of funding for bank loans. In addition, changes to accounting rules at the beginning of next year will require banks to move a large volume of securitized assets back onto their balance sheets. Unfortunately, reduced bank lending may well slow the recovery by damping consumer spending, especially on durable goods, and by restricting the ability of some firms to finance their operations.

Oh darn they're going to stop us from lying as much. We'll screw you some more in retaliation for that.

The Federal Reserve has used its authority as a bank supervisor to help facilitate the flow of credit through the banking system. In November 2008, with the other banking agencies, we issued guidance to banks and bank examiners that emphasized the importance of continuing to meet the needs of creditworthy borrowers, while maintaining appropriate prudence in lending decisions.³ This past spring, the Federal Reserve led the Supervisory Capital Assessment Program, or SCAP--a coordinated, comprehensive examination designed to ensure that 19 of the country's largest banking organizations would remain well capitalized and able to lend to creditworthy borrowers even if economic conditions turned out to be worse than expected. The release of the assessment results in May increased investor confidence in the U.S. banking system. A week ago, the Federal Reserve announced that 9 of 10 firms that were determined to have required additional capital were able to fully meet their required capital buffers without any further capital from the U.S. Treasury, and that aggregate Tier 1 common equity at the 10 firms increased by more than $77 billion since the conclusion of the assessment.⁴

Colonial Bank was so-well "supervised" that their assets were worth nearly 40% less than claimed when they were finally taken over. They're not alone. Losses of 20, 30, 40 even 50% are not uncommon, but it's all ok - the FDIC ends up eating those. We, as the penultimate bank regulator, rubber-stamp whatever Blankfein tells us to. Ain't life grand when you can make someone else eat your screwups?

The Federal Reserve will continue to work with banks to improve the access of creditworthy borrowers to the credit they need. Lending to creditworthy borrowers is good for the economy, but it also benefits banks by maintaining their profitable relationships with good customers. We continue to encourage banks to raise additional capital to support their lending. And we continue to facilitate securitization through our Term Asset-Backed Securities Loan Facility (TALF) and to support home lending through our purchases of mortgage-backed securities. Normalizing the flow of bank credit to good borrowers will continue to be a top priority for policymakers.

They will lend all you're dumb enough to borrow at 29.9%. See Citibank - the ultimate global bank that has your best interest in mind.

Really.

While I am on the topic of bank lending, I would like to add a few words about commercial real estate (CRE). Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents. These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks' books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed. With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

We looked the other way and encouraged people to build commercial real estate that nobody really wanted or could pay for too, just like houses. But unlike houses (we successfully dumped all that trash on you via Fannie and Freddie - and now the FHA!) we haven't figured out how to make you, the taxpayer, eat this one yet.

We will though - trust us.

Recognizing the importance of this sector for the economic recovery, the Federal Reserve has extended the TALF programs for existing CMBS through March 2010 and newly structured CMBS through June. Moreover, the banking agencies recently encouraged banks to work with their creditworthy borrowers to restructure troubled CRE loans in a prudent manner, and reminded examiners that--absent other adverse factors--a loan should not be classified as impaired based solely on a decline in collateral value.⁵

Delay is important - we'll dump it all on you as soon as you recover from the violation you took over the last two years on consumer lending and residential real estate. Until then we've told the banks to lie about valuations.

In addition to constrained bank lending, a second area of great concern is the job market. Since December 2007, the U.S. economy has lost, on net, about 8 million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent.⁶ Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.⁷

All this lying and scamming (which we countenanced and indeed practice ourselves) has led 8 million people to lose their jobs.

Don't worry, it will get worse. A lot worse.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

I told you it was going to get worse! Didn't you listen the first time?

With the job market so weak, businesses have been able to find or retain all the workers they need with minimal wage increases, or even with wage cuts. Indeed, standard measures of wages show significant slowing in wage gains over the past year. Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending.

Work harder you slave, or you'll get fired! Oh, and spend every last penny - it's important. Especially if you don't have it - go see Citibank - they'll give you that 30% interest rate credit card.

I promise.

The best thing we can say about the labor market right now is that it may be getting worse more slowly. Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

We're running out of people to fire. I can't fire my driver, for example. That would require that I drive myself. Ditto for my butler.

But I can feed him dog food - heh heh heh....

Although economic pain is widespread across industries and regions, different groups of workers have been affected differently. For example, the unemployment rate for men between the ages of 25 and 54 has risen from less than 4 percent in late 2007 to 10.3 percent in October--nearly double the rise in unemployment among adult women. This discrepancy likely reflects the high concentration of job losses in manufacturing, construction, and financial services, industries in which men make up the majority of workers. From the perspective of America's economic future, the effect of the recession on young workers is particularly worrisome: The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent--and among African American youths, it is now about 30 percent. When young people are shut out of the job market, they lose valuable opportunities to gain work experience and on-the-job training, potentially reducing their future wages and employment opportunities.⁸

The young are both stupid and weak. We know they won't revolt - they have had a dozen years of government indoctrination and just finished up the mandatory part. (Thank God this isn't France or those youngsters would have gotten the guillotine out from storage by now!)

Given this weakness in the labor market, a natural question is whether we might be in for a so-called jobless recovery, in which output is growing but employment fails to increase.

This is not a question. The question is whether you will notice that we conspire with the government to simply lie about "output". Witness the so-called "retail sales report" this morning, which we successfully cooked. (As an aside that bastard Tickerguy caught us, but nobody reads him anyway. Fortunately.)

Productivity is defined as output per hour of work. Thus, essentially by definition, a jobless recovery--in which output is growing but hours of work are not--must be a period of productivity growth. In the jobless recoveries that followed the 1990-91 and 2001 recessions, productivity growth was quite strong. It may seem paradoxical that productivity growth--which in the longer term is the most important source of increases in real wages and living standards--can have adverse consequences for employment in the short term. But, when the demand for goods and services is growing slowly, that may be the case.

Work harder or be fired!

In fact, productivity growth has recently been quite high, even when the economy was contracting. Output per hour in the nonfarm business sector is estimated to have risen at about a 5-1/2 percent annual rate so far this year, well above longer-term averages. One reason for recent productivity gains likely was the reaction of employers to the freefall in the economy that began in the second half of 2008. Normally, employers are slow to cut their workforces when the economy turns down. The process of finding, hiring, and training new workers is costly. Thus, if employers expect the downturn will be neither too severe nor too lengthy, they retain more existing workers than they need in the short term, rather than laying them off and replacing them when the recovery begins. However, in the recent downturn, employers were exceptionally uncertain about the future, some even fearing a second Great Depression. Moreover, tight credit conditions left little margin for error. Accordingly, to protect themselves against the worst possibilities, employers shed workers much more sharply than usual in recessions. Thus, the productivity gains this year generally reflected pronounced declines in labor input rather than greater output.

I SAID WORK HARDER AND GET PAID LESS OR BE FIRED!

Will the increases in productivity persist? It is likely that, in some cases, firms achieved their productivity gains by asking their remaining workers to provide extra effort. The additional gains that can be achieved in this way are limited and probably temporary. Although continuing uncertainty and financial constraints might make such firms hesitant to hire, if demand, production, and confidence pick up, they will find their labor forces stretched thin and will begin to add workers. However, other firms, facing difficult financial conditions and intense pressures to cut costs, seem to have found longer-lasting, efficiency-enhancing changes that allowed them to reduce their workforces; and some less-efficient firms, no longer able to compete, closed their doors. Again, improved efficiency confers great benefits in the longer term. However, to the extent that firms are able to find further cost-cutting measures as output expands, they may delay hiring

Employers will stop driving their slaves, er, employees, harder when they fall over dead in the fields. Oh wait - that was so 1800s. Or is it more akin to today? (Let's hope nobody remembers the significance of April 25th, 1792!)

Other factors will affect near-term employment growth as well. Business confidence in the durability of the expansion, for example, will help determine employers' willingness to hire. The current prevalence of part-time work and short workweeks may slow job creation early in the recovery period, as employers may prefer to convert workers from part-time to full-time status and to add overtime work before turning to new hires. In addition, difficulties in obtaining credit could hinder the expansion of small and medium-sized businesses and prevent the formation of new businesses. Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth. Overall, a number of factors suggest that employment gains may be modest during the early stages of the expansion.

The longer we keep lying about this the better the chance we can spool up the jet and get out to Paraguay. Got JP-5?

I return now to the outlook for the economy and policy. As I noted, I expect moderate economic growth to continue next year. Final demand shows signs of strengthening, supported by the broad improvement in financial conditions. Additionally, the beneficial influence of the inventory cycle on production should continue for somewhat longer. Housing faces important problems, including continuing high foreclosure rates, but residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years. Prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions.

By allowing banks to claim loans are good when they're not we're letting people live in homes where they haven't made a payment in over a year! This is broadly supportive of consumer spending. We'll deal with the homelessness later - when we're in Paraguay.

In the business sector, manufacturing activity has been expanding and should be helped by the continuing strength of the recovery in the emerging market economies, especially in Asia. As the recovery takes hold, enhanced business confidence, together with the low cost of capital for firms with access to public capital markets, should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing.

China prints money better than we do. Pay no attention to the empty cities they built, the buildings that collapsed with 3" of snow on their roofs due to shoddy construction, or the schools that collapse in minor earthquakes. That's all good too - it means they have to spend more on construction!

I have discussed two of the principal factors that may constrain the pace of the recovery, namely, restrictive bank lending and the weak job market. Banks' reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty; the fallout for banks from commercial real estate could slow that progress, however. Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

Why is my nose 16" long?

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities. Although resource slack cannot be measured precisely, it certainly is high, and it is showing through to underlying wage and price trends. Longer-run inflation expectations are stable, having responded relatively little either to downward or upward pressures on inflation; expectations can be early warnings of actual inflation, however, and must be monitored carefully. Commodities prices have risen lately, likely reflecting the pickup in global economic activity, especially in resource-intensive emerging market economies, and the recent depreciation of the dollar. On net, notwithstanding significant crosscurrents, inflation seems likely to remain subdued for some time.

Oil has doubled and Gold has screamed higher in recent months. But trust me - there is no inflation. Gas going from $2 to over $3, headed to $8? Naw, that's not inflation. Trust me. (I already bought the aforementioned JP-5 I need to get out of here - suckers.)

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

I'd love to lie about the dollar but it doesn't seem to work! What the hell? You mean there are people smarter than me, and my "jawboning" only works for 10 minutes? Here, you sit on that spike - it'll feel great. I promise.

The Federal Open Market Committee 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. Of course, significant changes in economic conditions or the economic outlook would change the outlook for policy as well. We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.

We're gonna keep screwing 'ya, and you're going to like it.

Don't read up on April 25th, 1792.

Please.

FedSpeak Proves Correlation AGAIN

nospam@example.com (Karl Denninger) — Mon, 16 Nov 2009 12:56:00 -0500

Here's Bernanke's speech and what he said:

We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

That's a new one. You are attentive to it eh?

Well then about this, Sir Jackass?

An EXACT correlation as soon as Bernanke's words were released - synchronized EXACTLY as to time. Dollar spiked, the S&P 500 dropped.

The Fed has the lever to force this carry trade out of the system before it grows large enough to destroy our economy and productivity. They need only raise rates - not a lot - just enough to make our markets unattractive. 2% should do it nicely.

Who can argue that 2% isn't "very accommodative" in terms of rates?

Bernanke claims:

My own view is that the recent pickup reflects more than purely temporary factors and that continued growth next year is likely.

He's lying. If he truly believed this The Fed Funds rate would not be at zero - but it is.

Bernanke "outs" himself by saying:

The demand for credit also has fallen significantly: For example, households are spending less than they did last year on big-ticket durable goods typically purchased with credit, and businesses are reducing investment outlays and thus have less need to borrow. Because of weakened balance sheets, fewer potential borrowers are creditworthy, even if they are willing to take on more debt.

Here's the most-recent Z1 credit graph:

Note that The Fed's "base money" is at present about $1.8 trillion, which is $1 trillion larger than the "normal" $800 billion.

But credit outstanding is some $53 trillion dollars.

Clearly, without credit expansion it is not possible for economic growth to occur. But credit expansion requires economic activity that in turn allows the coupon payments - interest and principal - to be made.

Where is the evidence that this is, at present, possible?

It's absent because it hasn't happened, and that's a major problem. By refusing to allow the market to take care of the imprudent, forcing the default of bad loans and thus clearing them from both the lender and borrower's balance sheets, we have impaired any ability to return to economic growth, as the bad debt and its servicing requirements still exist.

Ben goes on to say:

With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

These "loans" were made imprudently with dramatically-overstated expectations for rents and occupancy. There is no solution to this problem that results in sustainable growth without foreclosure and the loss being taken, just as there is not in residential real estate and home mortgages. Yet the policy of The Fed and government is to "extend and pretend", or worse, take all the trash onto the balance sheet of either The Fed or The Treasury, effectively hiding the losses - for a while. But again, that debt still requires servicing no matter where it is, and that (once again) precludes safe and sound lending, as the debt-carrying capacity has been consumed.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

No, really? You mean that having a McJob isn't as good as screwing together cars? And further, that having your boss scream at you "work harder and faster or GET FIRED!" isn't good for consumer income - and morale?

Weak income growth, should it persist, will restrain household spending.

There is no income growth. Intentional understatements of inflation - hedonic adjustments and the refusal to include actual house price increases, even though the majority of Americans own homes, mean that we have spent the last ten years watching the average American's real household purchasing power be destroyed. Now we add outright job loss and ramping credit card rates to the mix, as if the deception by the government and The Fed was insufficient - kicking people after you've managed to shove 'em in the gutter has become the next great Bankster Sport.

The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent--and among African American youths, it is now about 30 percent.

That's because currency and interest-rate imbalances have resulted in those front-line jobs, including especially manufacturing, all going over to China - where they will work for $2/day. This will not go away without addressing the structural imbalances that The Fed, Congress and The Administration have intentionally created.

Final demand shows signs of strengthening, supported by the broad improvement in financial conditions.

How? Without jobs how does final demand - with 70% of the economy being consumer spending - strengthen? Yes, the government can (and has thus far) blow money it doesn't have, so long as China continues to allow it, and transfer that to people. Is that sustainable?

The outlook for inflation is also subject to a number of crosscurrents. Many factors affect inflation, including slack in resource utilization, inflation expectations, exchange rates, and the prices of oil and other commodities.

The Fed has directly caused the price of oil to more than double since this spring with its zero interest rates and the establishment of the dollar carry trade. There is no evidence whatsoever that Bernanke gives a tinker's damn if your gasoline is north of $3/gallon, so I hope you're prepared for it to go to $5, $6, $7 or even $8 - because if this game continues, it will.

We have a wide range of tools for removing monetary policy accommodation when the economic outlook requires us to do so, and we will calibrate the timing and pace of any future tightening to best foster maximum employment and price stability.

Along with 30% unemployment, 29.9% credit card interest rates and destroyed futures for your children and grandchildren.

Bernanke, Geithner and the Administration all are trying to do the impossible - return to "economic growth" in a credit-based monetary system where the carrying capacity of debt has been effectively reached, WITHOUT forcing the removal of that bad debt by allowing the default of those poorly-underwritten and issued loans.

The immovable object has met the irresistible force.

PS: Oh, Bernanke just said he sees no problems with valuations in the US Stock market. Really Ben? A P/E of nearly 140 is just fine, right? No valuation bubble there!

FedSpeak Translation - There Is No Recovery

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 15:04:00 -0500

Yet more BS Fedspeak, this time in the mainstream media:

In separate speeches, Janet Yellen, president of the Federal Reserve Bank of San Francisco, and Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, warned that rising unemployment could crimp consumers, restraining the recovery. Consumer spending accounts for about 70 percent of economic activity.

That's because there is no real economic recovery at all.

So why is the stock market up so much?

More than happy to show 'ya.

Two charts should suffice:

That is an overlaid chart (as close as I can easily get them to register) on the dollar and The S&P 500 from the March lows to today.

Notice the near-perfect inverse correlation. The Dollar goes up, the market goes down. The Dollar goes down, the market goes up.

Now today, literally minute-by-minute:

Same correlation - near-perfect.

Folks, you don't have to engage in any sort of "conspiratorial" thinking on this whatsoever. You only need examine the facts.

The rally in the market has exactly nothing to do with the economy and the outlook for it. It is tied to one and only one thing - the decline in the dollar.

A WEAKER, EVEN COLLAPSING, DOLLAR IS NOT COMMENSURATE WITH OR INDICATIVE OF A STRONGER ECONOMY.

You're free to believe in any thesis you'd like with regards to economic recovery. But a strong economy is correlated with a stronger currency - that is, the underlying strength of America, along with her ability to support her currency via current and future production, which translates into the ability to raise tax revenues and thus cover debt.

Since March The Federal Reserve and Federal Government have in fact promulgated and prosecuted policies that do the exact opposite. The stock market has responded not to forward economic prospects, as is often claimed, but rather to the "hot money" flows of foreign and domestic speculators and a dollar-based carry trade engendered by The Fed's zero-percent interest rates.

Yes, the stock market could go to all-time highs - for a short while - if this is allowed to continue. But oil (priced in dollars) would be $300 and the dollar would be at 40 - everything you buy that is imported would literally double (or more) in price, and your standard of living, since energy is in everything, would be cut in half - or worse.

How well will the stock market do over the intermediate and longer term when the 70% of the economy that is consumer spending (that's you, dear reader!) is destroyed by ramping import costs - whether the government calls that "inflation" or not?

Japan tried this same game when they got in trouble 20 years ago and they failed to produce lasting economic growth and prosperity. What they did produce was near-exact correlated market rallies and Yen devaluations, but 20 years later, despite huge rallies in the stock market as we have seen in ours, The Nikkei remains some 60% off it's all-time high, with no realistic prospect of reaching that high at any time in the foreseeable future.

The mainstream media will not show you the above charts, as they put the lie to any claim that the market is "foreshadowing" economic recovery in the next six to twelve months.

It is doing no such thing - it is responding to hot money flows that are being intentionally generated and, if you follow them as an investor (rather than as a minute-by-minute trader) you will be crushed, just as those who bet on recovery in Japan following their original collapse were.

Bernanke, Geithner and the other stooges in our government and media are intentionally misleading you.

Again.

"I Am Proud Of Our Record"

nospam@example.com (Karl Denninger) — Tue, 10 Nov 2009 08:07:00 -0500

I'm sure you are, Jeff Kindler.

On Oct. 1, Kindler was elected to the board of the Federal Reserve Bank of New York. Kindler declined to comment.

What did Kindler decline to comment on?

This.

New York-based Pfizer agreed to pay $430 million in criminal fines and civil penalties, and the company’s lawyers assured Loucks and three other prosecutors that Pfizer and its units would stop promoting drugs for unauthorized purposes.

What Loucks, who’s now acting U.S. attorney in Boston, didn’t know until years later was that Pfizer managers were breaking that pledge not to practice so-called off-label marketing even before the ink was dry on their plea.

On the morning of Sept. 2, 2009, another Pfizer unit, Pharmacia & Upjohn, agreed to plead guilty to the same crime. This time, Pfizer executives had been instructing more than 100 salespeople to promote Bextra, a drug approved only for the relief of arthritis and menstrual discomfort, for treatment of acute pains of all kinds.

Oh. A criminal act? And this isn't an "allegation" either - they've pled guilty, so this is now a fact, not an allegation or belief.

And this isn't some little crime either. It's a felony.

But we don't "jail" big corporations for felonious conduct, do we? No, we slap their hands with fines. $1.19 billion dollars (the fine in this case) sounds like a lot of money, but is it?

Pfizer has a Market Cap of $117.64 billion as of this morning, and an enterprise value of $107.59 billion.

To put this in perspective for the "Better Than Average Joe" who has a net worth of a couple hundred thousand bucks this equates to fining him two thousand dollars for robbing a bank - or, since we're talking about selling drugs for unauthorized purposes, dealing crack on the corner.

Of course that "average Joe" wouldn't be fined $2,000. He'd go to prison for 20 years or more. But not Pfizer! A real criminal penalty would end the company.

We all agree that illegal drugs are "dangerous", right? Well, what's peddling drugs for unapproved uses? According to the US Department of Justice:

Across the U.S., pharmaceutical companies have been pleading guilty to criminal charges or paying penalties in civil cases when the U.S. Department of Justice finds that they deceptively marketed drugs for unapproved uses, putting millions of people at risk of chest infections, heart attacks, suicidal impulses or death.

Heh wait - that's exactly the argument we use for locking up drug peddlers on the street corner, right? Hmmm....

See, when you're a "big business", the fines you will be assessed if prosecuted for a felony is just a cost of doing business. Prosecutors won't seek revocation of a firm's corporate charter, and governments won't stop doing business with convicted felon-firms.

Even if it kills people.

And let's remember, Jeff Kindler, who was Pfizer's general counsel beginning in 2002, became their CEO in 2006.

To provide the full context of the lead quote:

Jeff Kindler, who became Pfizer’s general counsel in 2002, supervised the lawyers who made the promises to prosecutors. By 2004, Kindler increased the compliance budget 12-fold. He became chief executive officer in 2006. In Pfizer’s ethics guide, he says stories about misbehaving companies and executives abound.

“Pfizer truly stands apart,” he says. “I am proud of our record.” On Oct. 1, Kindler was elected to the board of the Federal Reserve Bank of New York. Kindler declined to comment.

I'm sure that The Fed buying MBS that are "off label" (that is, without the full faith and credit guarantee that Section 14 of The Federal Reserve Act appears to require) will be right up Mr. Kindler's alley.

After all, unlike the law regulating Pfizer, broken twice while Mr. Kindler was allegedly in charge of compliance in one form or another (once as General Counsel, then again as CEO), The Federal Reserve Act doesn't have an "or else."

FOMC In English

nospam@example.com (Karl Denninger) — Wed, 04 Nov 2009 14:39:00 -0500

Tickerguy's English translation of the FOMC statement:

Release Date: November 4, 2009

For immediate release

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up.

We successfully talked some people into rebuilding inventory and spending money they don't have. Suckers.

Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period.

We don't count the 29.9% interest rates that Citibank decided to charge its credit-card holders in this computation; but if we did that would be considered a good thing, since raping the consumer is positive for banks. Oh, and we're a bank.

Activity in the housing sector has increased over recent months.

Four year olds and cats are cashing the $8,000 homebuyer credit, as the IRS has recently disclosed. This of course supports housing.

Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit.

A huge number of people are out of work, those who have jobs are having their wages and hours cut, your house is still going down in price and Citibank just raised your credit card interest rate to 29.9%. This is all bullish for the economy, of course.

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

We suckered a few of you, but most businesspeople have IQs larger than their shoe size, and refuse to play our game any more. As a consequence our attempt to hose them isn't working out so well.

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 support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

Fraud always works for a while. We can buy trash MBS, for example, and by doing so make things look better than they are. We can also ignore the real capital position of the banks that are under our jurisdiction, including those really big ones that shorted Gold in the futures market at $1,000 and now are way underwater. Never mind that little man behind the curtain, I AM THE GREAT AND WONDERFUL OZ!

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.

The only place pricing power exists is in commodities. Everywhere else prices are collapsing. That's not supposed to happen, but we'll figure that one out later.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. 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.

When something doesn't work, do more of it! That's the ticket! Pay no attention to that asshole Einstein - he's dead, and besides, I'm smarter than he ever was.

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. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt.

We bought it all. We're no longer part of the market, we are the market! We have no freaking clue how to exit from this, and we know that when we do rates will spike higher. Unfortunately we also know that if Fannie and Freddie continue to bleed red ink we will blow up instead of them by doing this, so in March we pinky-promise to stop, even though that will destroy what's left of the housing market.

In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010.

There isn't any more to buy, didn't you hear us up above? Fools.

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. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Its all trash but heh, it's marked to model! I pinky swear it's all worth PAR. Seriously.

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.

We're all in this together, now let's hold hands and......

Oh Boy, Threats!

nospam@example.com (Karl Denninger) — Fri, 30 Oct 2009 12:01:00 -0400

I was wondering how long it would take before the threats really started to show up in earnest..

Kansas City Fed president Thomas Hoenig is circulating a book titled “The Balance of Power: The Political Fight for an Independent Central Bank.” Charles Plosser of Philadelphia said on Sept. 29, “we must preserve” the Fed’s structure.

Must? That implies that there is an "or else" in there somewhere... let's see.... can I find an "or else"?

U.S. stocks, bonds and the dollar would collapse if investors perceive Congress violating the independence of the policy-setting Federal Open Market Committee, said Former Fed Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC.

There it is!

Let's see.... stocks and bonds eh? Which stocks and bonds would be "threatened" if The Fed was forced to account for its actions, like, for instance, to show us all what it bought, with what it bought, and to provide us with CUSIP's so we could look at the current market value (if any!) of these stocks and bonds?

Would that, per chance, be the stocks and bonds of banks that are holding hundreds of billions of dollars of HELOCs on their balance sheets at or close to PAR (100% of face value) when the first mortgage hasn't had a payment made on it in a year, the house is worth 50% of the first mortgage's outstanding balance, and the home is in BubbleVille, CA?

Or would it be the stocks and bonds of institutions that have (between them) well north of a trillion dollars of off-balance sheet "stuff" in a big black box labeled "good as gold", when "gold" really refers to the fact that it is "used dogfood" and has the same color - but not the same mass or consistency?

Would it be all those myriad institutions that The Fed was (along with OTS, OCC and the FDIC) responsible for overseeing and enforcing the strictures of Prompt Corrective Action (12 USC Chap 16 Sec 1831o), a law that has been entirely ignored when it comes to the larger banks in the financial system for more than a decade?

Would it be the institution (Goldman Sachs) linked to the NY Fed who has had board members who also served as the former Chairman of the company that isn't a commercial bank but managed to finagle itself a bank holding company charter - with the permission of the very same NY Fed?

The central bank has also come under fire for granting a waiver allowing a former Goldman Sachs Group Inc. chairman to remain on the board of the New York Fed after the company opted to come under Fed oversight.

What did Dodd have to say?

Allowing banks to select their supervisors is “absolutely backwards,” Dodd said this month, without mentioning Fed interest-rate policy.

Really Chris? That didn't seem to bother you for the last how many years? Why now? A bit short on campaign contributions this cycle?

Some legislators want to “make the institution more political, and I think that’s terribly unfortunate,” Hoenig, 63, Kansas City’s president since 1991, said in an Oct. 9 interview.

Oh, I disagree Mr. Hoenig.

If the process becomes more political it will be by your own hand, and that of the rest of the Fed Governors, and it will be a side effect, not an intended outcome.

You really ought to go stand in front of a mirror, along with Bernanke, Plosser and the rest, and glance thereupon. There you will find the cause of this little mess.

Let's see, shall we count the ways (although I'm sure I'll miss some of them!) I think so.

Greenspan rubber-stamped a blatantly unlawful merger of Travelers and Citibank, then lobbied for the passage of Gramm-Leach-Bliley, retroactively making it legal. That (bad) law was the first of the last line of nails in the coffin of bank regulation that had kept the system sound and functional for more than fifty years.
Brooksley Born warned of the danger of an unregulated CDS market and was literally stomped into the ground by the rank derision of both Greenspan and Larry Summers. She was right, they were wrong and this nonsense allowed the AIG mess to unfold - a mess that was effectively sanctioned by Greenspan and Summers. Where are the apologies and corrections? Missing - the obfuscation continues in this regard!
Bernanke ran his "Depression Avoidance Playbook" to a "T" following the original subprime meltdown. However, he has failed to explain how he can be excused for (1) claiming that house price appreciation was "a reflection of strong fundamentals" in light of the fact that it was driven by dangerous and even fraudulent lending, (2) the nation "was unlikely" to suffer a recession, and (3) failing to detect or get in front of any of the failures prior to them happening. In fact, Bernanke and The Fed granted many Federal Reserve Policy Waivers (the infamous "23A" waivers) that in fact concentrated and increased risk while the crisis was unfolding.
The policies of The Fed were allegedly to "help lending"; in point of fact what Bernanke missed is that while he can provide all the printed money he wants he cannot control where it goes. And "go" it went, right into oil and other commodities first in late 2008 and then again in the summer of 2009, causing not one but two doubles of oil prices off the bottom - first from $70 to $140 and then again this spring and summer from $35 to over $80. This, despite demand collapsing for oil and refined products.
In the same light this "flood of liquidity", instead of promoting economic growth, went into the stock market as well. This has driven the S&P's P/E to one hundred and forty (as of 9/30/2009), a level never before seen in the history of the stock market, and on a historical valuation basis some seven times expected price/earnings value and more than double the previous high of approximately 60 (just before the Tech Bubble collapsed.) Should the stock market correct to a "somewhat reasonable" P/E of 50, the S&P 500 would trade at 375! Should it correct to a "more normal" P/E of 20, it would trade at 150! Of course earnings could (and almost certainly will) improve, but even if they double this implies that "fair value" for the S&P 500 is something close to 300! What are the societal and political implications of that collapse should it come, and how does Bernanke believe he can avoid mean reversion - when every other attempt to do so thus far has failed? Bernanke has done nothing more than create more asset bubbles in a puerile attempt to avoid taking responsibility for the policy mistakes that led to this crisis in the first place.
The Fed (along with the other regulators at the table) have been either willfully blind or intentionally complicit in the "valuation shams" of the last several years. They, along with Congress, twisted FASB's arm into formally allowing what amounts to mythical accounting to be used to "value" assets. This, along with willful and intentional blindness (or worse) toward the requirements of Prompt Corrective Action allowed large banks, of which The Fed is one of their primary regulators, to find themselves in a negative real asset position compared to liabilities - that is, on an accounting basis, bankrupt. Rather than take the institutions into receivership The Fed along with other regulators have looked the other way and "recapitalized" these institutions with taxpayer money via what amounted to locking Congressional leaders in a room and pointing an economic gun at their heads. This isn't the first time either - witness Citibank's history during the Latin American Debt Crisis, LTCM and other episodes. By some accounts several of these institutions have been broke more than once and yet "saved" by this "regulatory forbearance." The cost has been shoveled off to borrowers and the taxpayer generally.
The Fed has arguably violated the black-letter law of Section 14 of The Federal Reserve Act. Section 13(3) currently allows The Fed to make loans under "unusual and exigent circumstances" as it sees fit but nothing in Section 13(3) permits it to purchase assets by printing new bank reserves - that is, by printing money. That function is controlled by Section 14, and a plain reading of that section does not disclose any legal authority to buy Fannie or Freddie paper, nor the assets of Bear Stearns and AIG. Yet all of these programs were in fact put in place and continue to this day.
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.

The Fed has promoted and in fact still is promoting through policy action the lie that credit can expand "forever" at a rate that exceeds GDP. This is mathematically impossible and Bernanke knows it. I do not accept that he is ignorant of this fact as he is clearly an intelligent man and in addition is a credentialed Professor with an advanced degree - therefore, I must conclude that this is not an error but rather an intentional lie. It is, in fact, the big lie upon which all others rest, and yet as I have repeatedly pointed out the mathematical facts are not subject to dispute. To recap, here's the graph:

And to recap on the averages:

GDP growth from the early 1950s onward has been 6.818% annually, debt growth 8.777%, for a spread of 1.959%.

From 1990 onward, GDP grew at 5.396%, debt at 7.907%, for a spread of 2.511%.

From 2000 onward GDP grew at 5.225%, debt at 8.495%, for a spread of 3.270%.

The spread is increasing and the chart above shows that mathematically it is inevitable that you WILL reach the point where debt service cannot be maintained so long as the spread either is maintained or increases. This is the essence of the "Ponzi Finance Indicator" that I have posted before, to wit:

All of this data is from The Fed's own Z1 release and the BEA's GDP series.

You can't argue with your own data!

The outcome of these policies is not in question, as that is a matter of mathematics.

Mathematics that The Fed has willfully and wantonly ignored.

Congress must put a stop to it before the economy and monetary system collapses - not due to "oversight" of The Fed, but rather due to The Fed's own policies, obfuscation and willful disregard of mathematics.

More Fed Perjury? (Grayson)

nospam@example.com (Karl Denninger) — Mon, 19 Oct 2009 21:02:00 -0400

"Does The Federal Reserve try to manipulate the stock market?"

"No Sir, not that I'm aware of."

Oh really Mr. Lawyer?

Oct. 19 (Bloomberg) -- Bank of America Corp. signed off on its government-assisted purchase of Merrill Lynch & Co. after U.S. regulators assured the deal should boost the shares, e- mails from two bank finance executives showed. Instead, the shares collapsed.

"The chairman of the Federal Reserve indicated it would be structured in a manner such that BAC stock should go up when announced,” Chief Financial Officer Joe Price said in a Dec. 29 e-mail to top executives of the Charlotte, North Carolina-based bank, including Chief Executive Officer Kenneth D. Lewis.

The shares instead collapsed, but that's not the point.

The question was whether The Fed has ever attempted to manipulate the stock market, and this email clearly says that indeed, they have done exactly that.

What is the penalty for perjury in front of Congress?

Bernanke Gives Finger To The Law (Again)

nospam@example.com (Karl Denninger) — Fri, 09 Oct 2009 08:26:00 -0400

Kudos to Zerohedge and Jim Bianco on this one.

The Fed has repeatedly claimed they would not monetize the debt, as has Tim Geithner. Two videos:

And then this one (9 minutes into it)

That's pretty clear.

So how does this get explained?

These would be Fannie securities, which, I remind you, are not guaranteed by any agency of the US Government, nor are they full faith and credit obligations of same; they all bear a disclaimer substantially identical to this on the prospectus:

So what did The Fed do? A half hour later, this:

Uh huh. The same Fannie's that were sold a half-hour before.

Now I want to reproduce Section 14 of The Federal Reserve act once again (the salient portion):

Purchase and Sale of Obligations of United States, States, Counties, etc., and of Foreign Governments

(b)

To buy and sell, at home or abroad, bonds and notes of the United States, bonds issued under the provisions of subsection (c) of section 4 of the Home Owners' Loan Act of 1933, as amended, and having maturities from date of purchase of not exceeding six months, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the collection of taxes or in anticipation of the receipt of assured revenues by any State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, and obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof, such purchases to be made in accordance with rules and regulations prescribed by the Board of Governors of the Federal Reserve System. Notwithstanding any other provision of this chapter, any bonds, notes, or other obligations which are direct obligations of the United States or which are fully guaranteed by the United States as to the principal and interest may be bought and sold without regard to maturities but only in the open market.
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.

Again, note the prospectus. It explicitly disclaims such a full faith and credit guarantee. Further, Fannie Mae (formally Federal National Mortgage Association) is a shareholder owned corporation chartered by Congress in 1968 explicitly lacking any such full faith and credit guarantee.

Claims that Fannie is a government "agency" from a legal perspective are, from everything I can determine, factually false.

Fannie was originally chartered in 1938 as a government agency under FDR's "New Deal". However, in 1968 Fannie was converted into a private shareholder-owned District of Columbia corporation in order to remove its activity from the federal balance sheet, and the prospectuses issued were required to have the legal disclaimer of agency status and full faith and credit added to them.

More to the point, US Code Title 12, Section 1717 says:

(B) The other such separated portion shall be a body corporate to be known as Federal National Mortgage Association (hereinafter referred to as the “corporation”), which shall retain the assets and liabilities acquired and incurred under sections 1718 and 1719 of this title prior to such date. The corporation shall have succession until dissolved by Act of Congress. It shall maintain its principal office in the District of Columbia or the metropolitan area thereof and shall be deemed, for purposes of jurisdiction and venue in civil actions, to be a District of Columbia corporation.

Now if you can somehow come up with Fannie being a government "Agency" (when the black-letter law says it is a District of Columbia corporation) then you win the "Rabbit out of a hat" award.

You might also make the claim that this purchase was "open market", and I'm sure that The Fed will claim it is. Whether they first told certain dealers they were going to make that purchase is a further question, but as you can see, it is (or should be anyway) immaterial as Fannie Mae is not a government agency, but rather a shareholder-owned District of Columbia corporation and thus their paper should be ineligible for purchase by The Fed anyway.

Indeed, USC Title 12, Chapter 13, SubIII Sec 1716b makes clear that the partition that took place in 1968 leaves Ginnie Mae as a government agency, while splitting Fannie off as a private corporation.

So, this leaves me with the same question I've had before and adds a few more, specifically:

Under what authority is The Fed buying this paper at all, given the rather clear declaration that Fannie Mae is a private corporation and not a government agency, and in addition its paper does not bear the requisite full-faith-and-credit guarantee?
Did The Fed tell the "lead managers" they were going to buy this paper prior to its sale, thereby allowing these dealers to purchase and then roll over this paper at a "guaranteed profit"?
Assuming that some tortured claim can be made that Fannie is an "Agency" (despite what certainly looks to be clear proof to the contrary) how does The Fed (and Treasury) square the claim that "The Fed will not monetize (the) debt" with the fact that it literally announced this purchase thirty minutes after the offering?
Again, if the claim that Fannie is an "Agency" can somehow be made, how is this scheme of announcing a purchase a mere 30 minutes after the sale a true "open market" operation and not a charade and shell game to get around The Fed's stricture preventing direct purchase?

The world, however, is voting already - with its feet. The dollar is sinking fast as our government refuses to enforce the law and whether Geithner and Bernanke claim they are not monetizing debt traders and governments know they're lying.

Bernanke's gambit is that the devaluation he is engineering will remain controlled. Unfortunately he has managed to produce yet another asset bubble, this time in stocks which (for the S&P) are trading at an outrageous 122 times earnings on the last quarter's (2Q 2009) earnings.

This sort of parabolic pricing move (from the bottom in March of this year), of course, is unlikely to hold up. Consider that while P/Es have reached 60 during bear market "rollovers" in the past, they have never seen valuations like this in the history of the US market. Never mind Treasuries, with the IRX (13 week T-bill) pricing at a vast six (yes, six) basis points of yield as of the close today.

These levels are dramatically and ridiculously unsustainable. The only reason to loan the government money for 13 weeks for a near-zero cost (six basis points is six cents per $100 annualized) is because you either believe massive and outrageous deflation is about to strike or you fear that a near-literal end of the world in other financial assets is shortly upon us. Yet this general level of yield on the IRX has persisted since late last year, with the "recent high" reaching a vast 33 basis points in January.

Meanwhile Gold is skyrocketing - yet another "no confidence" vote.

Bernanke may be able to threaten dire consequences if The Fed is audited and he may be able to baffle Congressmen and Senators to the point that they will not call him on his raw monetization of debt along with what appear to be clearly-unlawful purchases, but he cannot stop the rest of the world from judging his actions.

That judgment is being rendered, and the consequence is being reflected in both gold and the dollar. Should Bernanke lose control of his charade, an outcome that appears increasingly likely, the outcome for markets in the US will be unbelievably chaotic - and undesirable. If you think last fall into the spring was bad, you've seen nothing yet. A disorderly dollar move would force interest rates higher across the board immediately, it would cause an immediate crash in the stock market, and it would cut off federal deficit spending - immediately - forcing repudiation of most government entitlement programs and half the military budget.

There are rumblings from The Fed that it is searching for a "scapegoat" in that it sees a potential "fiscal crisis" on the horizon. This "concern" is insanely misplaced. The crisis is of Bernanke's own making; by literally monetizing the entire second quarter net Treasury issuance Bernanke has ratified the spending policies of the administration while at the same time ratifying the making of unsound, unsustainable and fraudulent loans that Barney Frank and the rest of Congress is also approving of:

Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee, said in an interview that the defaults were, in essence, worth it.

“I don’t think it’s a bad thing that the bad loans occurred,” he said. “It was an effort to keep prices from falling too fast. That’s a policy.”

Got that Ben? You're ratifying the intentional making of bad loans as a policy of the government. Worse, the borrowers know they can't afford the houses:

“I knew in my heart I could not really afford the house, but they gave it to me anyway,” said Mr. Fullenkamp, 22. “I thought, ‘Wow, I’m surprised I pulled that off.’ ”

That's right - the people are pulling a scam, they know it, and you're enabling and powering it forward.

These risks are real and Congress, and the people, must not ignore them.

Anyone who claims that we have a "strong dollar" policy when we in fact have Congress sanctioning and promoting the intentional making of bad loans and then monetizing them to avoid having to recognize the defaults is literally insane. Such a policy is nothing more than Weimar-style printing of money and currency debasement as a formal policy of The United States Government, and if it continues it will lead to a dollar, stock market and government funding collapse.

Toward A Proper Liquidity Mechanism

nospam@example.com (Karl Denninger) — Thu, 08 Oct 2009 12:34:00 -0400

I have promised a treatise on the proper regulation of liquidity in the economy from a perspective of avoiding both speculative credit bubbles and deflationary credit collapses.

There have also been those who disagree with my definition of "money." I will therefore remove that term entirely, since "money" connotes different things to different people and we'll go through the definitions again:

Asset: An item that has value of some varying amount of stability. Examples are a stand of trees, a stack of sawn and finished lumber, a bushel of corn, a house, a car, a CNC machine and a computer.
Currency: An abstraction of a collection of assets, also of varying value against those assets. Often used as a medium of exchange between parties who wish to exchange one asset for another, and sometimes used as an abstracted store of value. Examples include federal reserve notes and quarter coins. Some forms of currency are officially backed or mandated for certain uses, but not all.
Credit: A further abstraction of currency, but generally fungible with currency in commerce. When brought into existence backed by an asset, credit is "hard" or "secured"; when not, credit is "speculative" or "unsecured." Credit always, in some form, requires payment of interest.
Interest: The amount one pays for the use of credit, usually (but not always) denominated as a percentage. The elements of interest are the risk of failure to pay, the risk of debasement of the unit credit is denominated in, the scarcity of credit and the demand for profit on the lending transaction.
Liquidity: The amount of currency and credit in an economic system that is available for deployment (that is, is not committed to some other purpose) at any given point in time.

From this we can determine certain relationships:

The greater the system liquidity the lower the rate of interest, all other things being equal. That is, the more "free and uncommitted" currency and/or credit is available, the less will be charged for its use in recognition that credit follows the classic economic supply/demand curve.
The greater the interest charged the less deployment of credit will take place, and the greater the preference to use credit for productive purposes. As the cost of credit rises its use for speculative or consumptive purposes becomes less desirable compared to saving the funds required prior to their expenditure. Likewise, the lower the cost of credit the more likely it will be used to pull forward demand (consume) or speculate.

It is generally-accepted that significant inflation or deflation are undesirable.

During significant inflation goods become more expensive relative to incomes. If there is sufficient labor pricing power to force coupling of these price increases back to wages, then a wage-price spiral ensues and can quickly get out of control, since labor is the predominant cost for most businesses. If there is insufficient labor pricing power to force coupling of price increases then the standard of living degrades for the citizens, in severe cases sufficiently to force a material part of the population into abject poverty.

Significant deflationary events, on the other hand, bankrupt debtors as the real value of the currency used to pay their debts rises rapidly. This can quickly overwhelm their ability to pay, even when that debt was acquired for legitimate productive purpose. When these entities fail they discharge workers, forcing contraction of GDP which can in turn lead to further insolvencies as purchasing power declines in the population. This too can become self-reinforcing and lead to significant economic dislocation.

It is often claimed that "hard money" is a natural check and balance on the tendency of fiat currency regimes to "run away" into an inflationary mess as a means of "printing" out of sovereign debt. The alternative, however (hard money), has a many-hundred-year history of causing forced inflationary and deflationary spikes that are extremely harmful to the economic climate of any nation, as is shown by the following chart found on Wikipedia:

The inflationary and deflationary spikes are caused by the nature of "hard currency"; once dug out of the ground gold, for example, is not destroyed. When innovations in productivity outrun the ability to provision new currency reserves deflation ensues as the mining rate cannot keep up - the resulting deflation causes business and personal bankruptcies. This in turn causes a contraction in GDP but that cannot be balanced with a withdrawal of the currency base since it already exists! The result is a punishing swing between severe bouts of inflation and deflation; this is unacceptable.

Yet the history of our fiat money regime as practiced to date, while perhaps "better" in terms of violence, certainly isn't in terms of bias, which is clearly inflationary, all the time.

Why?

Simple: Given the proclivity of "choice" the monetary authorities will always choose to try to paper over their friend's mistakes! This requires inflation, not deflation.

Unfortunately such "papering over" ultimately leads to either a Weimar-style collapse or the utter destitution of huge percentage of the population, dependent only on whether wage-price coupling can occur. As inflation is a "silent tax", so long as it does not happen too suddenly people tend to react much as a boiled frog - that is, they don't realize what's going on until they're cooked!

There are two competing issues - if you permit debt to rise faster than GDP over an extended period of time you will inevitably get a "runaway" condition and deflationary credit collapse. This occurs because of the mathematical reality of exponential ("compound growth") functions and no amount of tampering can change it if these relationships are maintained. The following chart demonstrates this phenomena:

But regulating liquidity and thereby preventing this outcome and what is otherwise a mathematically-certain outcome can be done through a ministerial process. Let's go back to one of the charts I recently introduced - the Market Ticker Ponzi Finance Indicator:

This indicator is simply the arithmetic difference in growth rates between GDP and systemic credit outstanding. If this indicator is positive then GDP is growing faster than (or shrinking slower than) credit in the system. If it is negative the opposite is the case.

When the indicator is positive systemic stability in terms of debt coverage is improving, and likewise it is deteriorating when negative.

Since the goal of liquidity regulation is to maintain systemic balance in debt coverage the mandate to be provided as a matter of law to whatever entity regulates liquidity in the monetary system is simple: The Ponzi Finance Indicator must be slightly positive.

Implementation of this mandate is relatively simple, in that excursions beyond a modest negative value (e.g. -1%) denote severe monetary imbalances and produce asset bubbles. The 1990s Asset bubble in Internet Stocks was produced by the severe imbalance in credit and GDP growth in the mid 1980s that The Fed refused to correct, and the Housing Bubble was produced by the continuation of that imbalance from the late 1990s forward. The Fed's current policy, indeed, has spawned yet another asset bubble, this time in stocks which are trading at a completely preposterous 140 P/E ratio as of the end of September 2009, or roughly ten times the historical "fair" valuation. While many will argue that this is an unfair computation given the negative earnings from last year the fact remains that these negative earnings were real; even on a "current" basis of the second quarter alone the P/E is 122. This bubble, like all others, will burst with disastrous consequences.

The solution to this problem is to place system liquidity regulation under a ministerial regime that is respondent only to the Ponzi Finance indicator (and to further mandate that GDP be honestly reported, as distortions in GDP will of course lead to improper adjustments), both as a matter of law. This will result in credit tightening on an automatic basis as long as credit growth is exceeding economic growth - that is, so long as market actors are using credit not for investment but rather to engage in ponzi-style consumption measured simply by the objective on-balance results of credit and output rates of change.

Such a change in policy measure will put a permanent stop to the policy of "bailing out" financial institutions through lowering interest rates at the precise time when they have engaged in Ponzi-style financial maneuvers, creating unsustainable credit. It is precisely this cycle - the political demand to "cover bad bets" made through Ponzi-style financial manipulation, that ultimately, if left unchecked, leads to deflationary credit collapses or even destruction of a nation's currency.

Fiat currency can work, but to do so the liquidity supply must be constrained such that credit growth is never allowed to outpace GDP. Simple sixth-grade mathematics prove this to be the case, and also prove that when this stricture is violated disaster will strike - we are left only to argue over how long we have before it occurs.

Those who argue otherwise, whether on the public or private stage, are committing fraud upon the public and must be held to account for their criminal acts.

So THAT'S Where The Money Went!

nospam@example.com (Karl Denninger) — Fri, 02 Oct 2009 08:13:00 -0400

Back when Lehman went under I wrote a couple of Tickers in which I referenced short-term lines that the NY Fed had open at the time of the collapse, and was wondering what the devil happened to them.

It appears that there was more than just what was "announced" out, however, and that some of that money might have been subject to improper "preference" as Lehman entered bankruptcy:

Billing records filed with the court show the examiner is investigating an issue that has angered many of Lehman's creditors: how the Federal Reserve and the New York Fed -- which lent Lehman $46 billion in cash and securities before its bankruptcy filing last September -- were paid promptly and in full, while tens of billions of dollars in other debts were left to be sorted out in court. It remains unclear when and how much Lehman creditors will be repaid.

Ah. Now that's a problem, but from my view there are two issues here - the bankruptcy law issue and a potentially-illegal "preference" payment, and then there is the part that the WSJ isn't talking about:

Why didn't the NY Fed and Federal Reserve simply seize the collateral they had posted from Lehman for those "loans" and liquidate it?

Remember folks, we are repeatedly told by The Fed that all loans they make are backed by sufficient collateral to prevent loss and are "haircut" to provide them with a margin against potential loss.

If this is in fact true then there was no reason for The NY Fed or Federal Reserve to receive any sort of "preference" payment (unlawful though such a payment would be), as the proper and expected thing to do is simply to seize the collateral they have possession of and sell it!

As such there are only two reasonable explanations for The NY Fed's behavior:

They didn't actually have collateral for those loans, in which case Bernanke is a damned liar, The Fed has been handing out money in violation of the law requiring proper collateral and haircuts, and the next question becomes "how many other times has The Fed done this and are they still doing it?"

or

The collateral they took was insufficient to cover the loan(s) balance, in which case Bernanke is also a damned liar, in that The Fed, contrary to The Federal Reserve Act and thus the law was effectively issuing unsecured loans. (Was that "collateral" worthless CDOs, as just one possibility?)

Of course there is another possibility: The Fed simply doesn't give a damn about what the law says when it comes to preference and established US legal procedure, and neither did the people running Lehman at the time - that is, they believed they could simply do whatever they wanted, preference rules be damned.

But that latter explanation doesn't make a lot of sense. If you have sufficient security in the form of posted collateral and have actual possession of it (electronic or otherwise) in accordance with the law requiring same there is no reason to play this sort of game - simply sell the collateral and recover your money.

Whatever the truth this is just one more reason why we need a full and complete audit of The Federal Reserve.

Given this little disclosure yesterday my curiosity related to the circumstances surrounding Bear Stearns credit line with the NY Fed is heightened considerably. As I have noted on multiple occasions that line was unexpectedly yanked as we went into the weekend where Bear ultimately failed. This act was the proximate cause of their forced merger and near-total destruction of the value held by Bear Stearns' shareholders, and we have never had a cogent explanation for that action; indeed, any such line of inquiry has been met with stony silence.

If, as required by Section 13 of The Federal Reserve Act, the loans made to Bear were properly secured by collateral, there was no reason for The NY Fed to yank those lines on what amounted to essentially zero notice, as had Bear defaulted they could have (once again) simply seized and sold the collateral.

But that line was yanked, which leads to the same two questions that I have related to Lehman's credit line in relationship to Bear Stearns.

Lawlessness, or even the appearance of lawlessness, is unacceptable in any government-linked agency, and we the people have a right to know what is happening with our money.

Audit The Fed!

To Bernanke: It's Time To Stop Lying

nospam@example.com (Karl Denninger) — Thu, 01 Oct 2009 09:27:00 -0400

I know it's a difficult thing to stop lying when you're in Washington DC where the easiest way to determine if someone is being untruthful is simply to observe if their lips are moving, but this is going too far:

And fifth, policymakers should ensure that consumers are protected from unfair and deceptive practices in their financial dealings.

You mean like The Fed has since a formal decision in 1998?

Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

So let's see, you have power, you formally and officially refuse to recognize and use it, then you say that "policymakers should" do the very thing you repudiated?

Why didn't The Fed's chair say "The Fed as a policymaker will ensure that consumers are protected from unfair and deceptive practices"?

The reason for that is simple: The Fed will do no such thing - in fact, according to The Washington Post The Fed adopted a formal policy to ignore such abuses in 1998 - more than 10 years ago!

Let's move on:

To close this important gap in our regulatory structure, legislative action is needed that would subject all systemically important financial institutions to the same framework for consolidated prudential supervision that currently applies to bank holding companies.

Really Ben? This is the same "framework" that has led to nearly 100 bank failures exposing dramatic and outrageous asset over-valuations! Yet despite a two-year unbroken record on this account, with some of these "optimistic" valuations reaching levels that are truly ridiculous, such as Colonial's sixty percent loss on their commercial lending book (and a nearly-40% hidden loss on their ENTIRE book of assets, all hidden until their failure) there has been zero reaction from The Fed to demand that realistic and proper asset valuations be recognized on bank balance sheets.

Or shall we talk about the "off-balance sheet" games, such as Wachovia's practice of writing CDS against their own tranches of OptionARMs as inducement to get people to buy them - a toxic brew that has now landed on Wells Fargo and remains undisclosed as to the exposure it presents to Wells from possible (or even probable) defaults! Wells has some $2 trillion of this off-balance sheet exposure and they're hardly alone in the (ab)use of these "QSPEs" - indeed, those are the same sort of vehicles that a really great energy-related company called ENRON was (ab)using to hide mounting losses that ultimately blew them sky-high.

The Federal Reserve is already the consolidated supervisor of some of the largest and most complex institutions in the world. I believe that the expertise we have developed in supervising large, diversified, and interconnected banking organizations, together with our broad knowledge of the financial markets in which these organizations operate, makes the Federal Reserve well suited to serve as the consolidated supervisor for those systemically important financial institutions that may not already be subject to the Bank Holding Company Act.

It is certainly a good idea to give an institution that formally adopted a policy of ignoring consumer protection yet more responsibility (yes, that's sarcasm.)

Given that The Fed has shown willful and intentional refusal to enforce existing laws along with willful blindness to off-balance sheet exposure and ridiculously-optimistic asset valuations The Fed should not be given any additional supervisory authority until and unless we have 100% transparency in Fed operations and write into law criminal penalties for the FOMC members and Fed District bank directors and officers that refuse to enforce consumer protection laws, allow off-balance sheet exposures that distort financial firm strength, and permit banks to carry assets at values that are materially above actual valuations.

Fed Hubris On Display: Fisher

nospam@example.com (Karl Denninger) — Mon, 28 Sep 2009 08:32:00 -0400

This sort of hubris is almost beyond belief:

But what B-movie writer could have conjured up this scary scenario—Too Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007.

He then goes on to try to plead "Fed as victim" with:

Obstructions in the monetary-policy channels worsened a recession that has proven to be longer and, by many measures, more painful than any post-World War II slump. With its conventional policy tools blocked, the Fed has resorted to unprecedented measures over the past two years, opening new channels to bypass the blocked ones and restore the economy's credit flows.

That is a damned lie.

The Fed hasn't managed to establish "routes around" the blockage at all - they have instead supplanted normal credit flows, and in fact have done so through opacity and intentional hiding of losses.

What's the mark-to-market loss on the Fannie and Freddie paper (which I argue The Fed doesn't even have a legal right to purchase, by the way) in their portfolio? Maiden Lane I-III? Who knows! Taking down nearly 50% of net issuance of Treasuries? Wow, that's a real effective "bypass", right?

Uh, no. Anyone can drive the price of something up by bidding for more of it. But Treasuries were never the problem and credit card interest rates, along with virtually all over real spreads in the real economy, remain outrageously high.

Fisher claims this is a "bad thing" but in fact it is not, for The Fed has in fact ran a Ponzi Economy for the last 30 years, as I have repeatedly documented. Now, having come to the end of the rope they wove themselves they're upset that the Ponzi Game has run out:

Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

See how all that trash got there? How the "TBTF" banks wound up with it on their balance sheets?

It was not an accident - it was an intentional, willful policy of The Federal Reserve, of which Fisher is a part!

Without junk borrowers you don't have trash masquerading as real loans! This was no "accident" of history or some sort of "hoodwink" game being pulled on The Fed - quite to the contrary.

The Fed was not only complicit in the scam it was a chief architect - one without which the mess simply could not have happened in the first place. It was logistically and operationally impossible for these banks to become "Blobs" without the active conspiracy and fellowship of The Federal Reserve.

Today The Fed continues in this role. It has not forced banks to come clean, it has not forced regulatory reform and in fact has obstructed it, it continues to take garbage for "assets" and purchases same, and it has resisted FOIAs intended to discover the truth. It argues that we should "trust The Fed" when in fact there is a nearly-unbroken 28 year history of driving the economy closer and closer to the cliff of insolvency by maintaining an interest rate environment that is low enough that debt grows faster than GDP in the economy as a whole.

This is by definition a destabilizing condition - the mathematics are facts and not subject to argument or dispute, nor is the simple graph that I have presented more than once showing the destabilization:

Again, this chart is simple: Whenever the Ponzi Finance Indicator is negative, the economy is becoming less stable in regard to debt and output - that is, the "coverage" of a given dollar of debt with a given dollar of GDP is shrinking.

When the ratio is positive then coverage is improving.

It is that simple - if the ratio is negative than the market is supporting the use of credit not for productive purposes but rather for pulling forward demand - that is, to finance consumption. This, if carried on for long enough, will inevitably lead to the inability to make the payments and insolvency. This is a mathematical fact, not supposition.

As a result it is axiomatic that when this indicator is negative it is essential that liquidity be withdrawn (and rates forced to rise as a consequence) until this destructive use of credit ceases - and the ratio turns positive. A slightly-positive ratio is desirable over long periods of time - this provides an increasing cushion of debt-carrying capacity, allowing for The Fed to utilize monetary policy as a means of compensation for recession.

But The Fed has done no such thing. It has consistently run a negative ratio on purpose for the last 30 years and in fact has cooperated with the banking industry to loosen standards so as to cause real market interest rates to fall precipitously on a risk-adjusted basis. This in turn has led to a monstrous credit-driven spike in consumption, which looks good in the short term in the GDP numbers but in fact is disastrous when not backed by productive output of our citizens. Pushing paper isn't production - you must mine, manufacture or grow something to actually produce, and yet we have become a "service economy" where most of the manufacturing and too much of the mining is now done in other nations - where labor is 20 cents/day.

The illusionist game of covering up our own pending insolvencies by borrowing against faux "wealth" from phantom price appreciation in our houses has now come to an end. The emperor Bernanke (and Greenspan before him) has been found standing butt-naked behind the curtain pulling the levers but in fact producing nothing other than smoke and obfuscation, not wisdom.

It is time to stop coddling an institution that has wantonly and intentionally participated in the looting of America through active conspiracy with the banksters who wrote knowingly-bad paper and spread it all over the world. This bad debt must be forced from the system and if this means that The Fed must go down in history as yet another "Bank of The United States", then so be it.

STOP THE LOOTING AND START PROSECUTING!

The Horrible Conundrum Facing The Fed

nospam@example.com (Karl Denninger) — Fri, 25 Sep 2009 11:03:00 -0400

The Fed's continued policy pronouncements that:

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 are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

has set up a completely-untenable position for The Fed and the greater economy.

The problem The Fed and America faces is that this latest "blast of the liquidity firehose" is not limited to The United States in its impact.

Indeed, the problems that this sort of "monetary policy" generates have almost nothing to do with the US Economic picture - rather, they have everything to do with the international nature of markets and monetary flows and the impact that such a policy pronouncement has on them.

Specifically, The United States Dollar has become the primary funding currency for carry trades:

“The dollar is the big funding currency,” said Jonathan Clark, vice chairman of New York-based FX Concepts Inc., the world’s largest currency hedge fund, with $9 billion in assets under management. “The reason why people are borrowing the U.S. dollar for carry trade is A: It’s very cheap to fund, and B: The expectation is it’s going to go down.”

This is a tremendously destructive force for an economy, and is largely-responsible for Japan's inability to return to economic prosperity and growth over the last 20 years - the Yen became a funding currency of choice.

But Japan had an advantage we do not - a weak currency benefited to a tremendous degree their exporters, and they are an export-based economy. As a consequence the damage done internally to import prices by the continued downward pressure on their currency was counterbalanced by an improving balance-of-payments picture.

America, on the other hand, has a huge trade deficit. Attempting to reverse this is essentially impossible as we have offshored production to low-labor-cost locales such as Vietnam and China. We are also absolutely dependent on foreign energy sources and despite 30 years of political promises to resolve that problem we have refused to take the steps necessary to do so, including funding massive nuclear energy development and drilling for all of our currently-known resources as a bridge while those nuclear plants are brought online. There is and has been zero political or public will behind accepting that resolving these problems does not lie in "pie in the sky" battery, solar and wind technologies, but rather through aquaculture-produced bioldiesel, massive nuclear power development and full exploitation of our existing fossil-fuel stores, all of which will cause energy costs to rise and exact what amounts to a tax on the American people. In short we demand not only cheap TVs from China and cheap blue jeans from Vietnam but cheap gasoline from Saudi Arabia, and combined this makes addressing trade imbalance politically impossible.

Depreciating our currency makes internationally-represented firms such as Caterpillar happy, but this is a short-term phenomena, as competing producers in China can (and will!) over time cannibalize their sales into that market since their labor costs are so low.

We simply cannot afford to allow a self-reinforcing cycle to become established with dollar-funded carry trades. There is a line beyond which the depreciation in the dollar causes such a trade to become self-reinforcing and extraordinarily destructive. Exactly where that line happens to be is difficult to determine but that a profit/reinvestment cycle "kneepoint" exists is axiomatic.

Should we reach that point the dollar will come under attack in the FX markets to a degree that is literally impossible to stem. FX markets move a couple of trillion dollars a day - intervention in those markets is both insanely expensive and futile over any material amount of time.

This is what those who are sounding the alarm over a potential currency collapse see in the future - and the risk they are speak of is in fact very real.

The only real means of defense against such a self-reinforcing cycle is to limit the number of dollars in circulation. This means raising interest rates - either formally or effectively - through withdrawal of liquidity - forcing an unwind of these trades and raising the uncertainty level high enough that traders will not risk ruin - in other words, we must transform a near-sure-thing to a likely-bad outcome.

This is the flaw in Benranke's central thesis - that The Fed can continually respond to challenges in the economy by making money "cheaper" with each iteration. History shows that indeed this is exactly what Bernanke and his predecessors have done, both formally in The Fed Funds rate and informally through intentional and willful loosening of the constraints on leverage and lending.

Yet this is a road that leads, ultimately, directly to Hell's Gate and somewhere along the line is a one-way trap door.

There is a limit in the economy on debt service at a given level of GDP. The available "slack" between the current interest rates being charged and the maximum sustainable interest rate before default becomes inevitable is the "safety margin" that allows monetary policy to work.

By intentionally eroding that margin over time The Fed has now backed itself into a corner; it reached the "zero rate" boundary and yet wanted even more easing, so it began monetizing debt.

This is as clear of a declaration you will ever see that the economy will not support higher interest cost even with the formal Fed Funds rate at zero.

In aviation circles there is a concept called "the coffin corner" where one approaches the speed of sound in an airframe that is not rated for transonic operation. Briefly as altitude increases the speed at which the plane must travel to produce sufficient lift to keep the plane in level flight goes up. Yet lurking up there is the critical mach number - the point where airflow over the wing approaches Mach 1 (a wing produces lift because the air going over the top surface must travel a greater distance, and therefore there are fewer molecules of air present in a given area over the wing than below - thus, lift) and produces a dramatic increase in drag and/or change in the pressure gradient. If the pilot increases speed to compensate for the loss of lift at higher altitudes he gets closer to the point where loss of control happens due to the latter phenomena. When that margin gets too small something as simple as an ordinary turn (which causes a change in the apparent angle of attack between the inside and outside wings) or turbulence can cause the plane to either exceed its critical Mach number or experience a stall, leading to loss of control.

This is the sort of "needle-threading" exercise that Bernanke is now engaged in, yet he continues to press the envelope further and further, intentionally ignoring the hard numerical facts that continue to mount - we have exceed the maximum debt-carrying capacity in the system and are now turning to outright fraud to hide defaults and insolvencies that have already occurred!

This is an unstable circumstance that must not be allowed to continue. Rather, the authorities must insist on the immediate reduction in systemic leverage and the recognition of hidden defaults, even if this forces major financial institutions out of business, accepting the damage that will accrue to the economy.

The reason for this need is clear: The damage we have accumulated over the last 30 years remains smaller than the damage we will take going forward if we do not quit screwing around.

That is the current loss is the best and in fact smallest loss. This was true in 1987, it was true in the 1990s, it was true in 2001 and was true in 2007.

We have a 30 year unbroken time line of proof that attempting to hide systemic damage and bad debt does not make it go away - it simply hides it in the corner and then piles more bad debt on top of it.

Those who have claimed that we "must not" disrupt these large institutions and that such would cause "unthinkable" economic damage have been repeatedly caught telling only half the truth.

Yes, the damage will be severe, but that is in fact precisely why we must accept it now: it has only gotten continually worse since the 1980s as we have continued to hide rather than accept this damage, and those who have claimed to be able to prevent and reverse the damage have repeatedly, over a 30 year time span, been proved wrong.