QE's Paradox: It Won't Work


Here’s history and fact:

Ten Year Treasury.  As soon as the QE buying began, interest rates did not go down, they went up.

The dollar.  As soon as QE began the dollar collapsed.  When the threats began, it once again started a second process of collapse – a process that continues today, and is now headed to historical lows.

The fact is that Japan has spent 20 years playing the QE game, and has failed to lift their economy out of recession.  Growth has not returned and their economy has failed to find its footing and truly recover.  The Nikkei is trading at 25% of its historical high – 25 years into this mess.

There is no solution found except through normalization of the interest-rate premium to borrow and forcing the fraudulently-issued credit into the open.

Japan has spent that 25 years trying to prevent that from happening.  They have buried all the bad credit – the fraudulent credit, and their banks – rather than allowing it to come to the surface and default.

We’re doing the same thing.

The fact is that the bubble blown in housing was no accident.  The foundational securities – the REMICs and MBS – that the bubble was predicated on were fraudulent.  Huge percentages of the loans did not meet the representations and warranties when they were sold to investors.  These lies were inherently necessary as nobody would have bought these securities otherwise.

On top of that artifice was then built more fraudulent artifices.  CDOs, CDO^2s, all sorts of complex gimmicks.  All bogus.  Every one of them.

But the grand-daddy was not just paying off AIG’s bets with taxpayer money. 

No, the purpose of that act was concealing the fraudulent underpinning behind all these loans.

Ask this question folks: why do you need “robosigners” and bogus affidavits if you have the actual paper that documents the debt?

You don’t.  You file with real affidavits and real paperwork.

So why doesn’t that paper exist?

This was not about being “go go” during the bubble years.  It’s not hard to put in place the systems and structures to properly comply with state law and IRS regulations on these instruments. 

But if the actual paper – the loan files along with the notes – passes to the Trust as is required, and is really endorsed, it can then be audited.

Then, when there are losses, the fact that the trust was sold a bill of goods is exposed and the entity that did the selling is in trouble.  A lot of trouble.

Why do you think the banks are resisting turning over these notes and files now to Fannie and Freddie?

Because the Enterprises themselves had difficulty obtaining the loan documents needed to perform this assessment, FHFA issued subpoenas for various loan files and transaction documents to trustees and servicers controlling or holding the documentation.

Wait a second….. if these “loan documents” are not in Fannie and Freddie’s custody, were the notes endorsed over?

If they were not, are all of the Fannie and Freddie REMICs also defective?

Good question.  And one we deserve answers to.

Look folks, we keep talking about how “The Fed will Save The Day.” 

But Japan’s Central Bank can’t even save ONE DAY when it comes to their intentional devaluation of the currency aligned with their “QE” announcement:

Literally, within four hours, not only did the entire intended impact of the move come off, but it didn’t stop there.  The Yen continues to get stronger because Japan is caught in a deflationary spiral and further QE simply feeds it.

There’s only one way out for Japan – and for us.

The fraudulent paper has to be forced into the open.

In this case it begins and and ends with mortgage securitization. 

We must force the defective securities into the open.  We must force all REMICs to prove the provenance of their loan paperwork and compliance with the PSAs.  If they cannot, because they are not properly constituted and operated, then they must be unwound and the bad paper put back on the originators.

If this detonates derivatives then it does.

If this detonates banks then it does.

We must get the bad debt out of the system.  We must stop the continual attempts to lie about asset quality and cover it up with government borrowing, and the heroin injections from our Federal Reserve that is attempting to conspire in papering over all the bad paper in the market along with “enabling” the government’s complicity.

This has to stop.

If it doesn’t we will reach a point where we brick ourselves at a government level into a corner where we can no longer finance our debt by any means other than monetization – that is, additional QE.

At the point that this occurs you had better already have a plan in place and executed to survive without all that “extra support”, because it will disappear in a disorderly disintegration.

On the path we are on, I give this from 12 – 24 months, and the “last opportunity to cancel self-destruct” will occur well before destruction occurs.  In fact, we may now be close to that point – today.

And yeah, I know, that’s an aggressive forecast.

It is nonetheless true.

Discussion (registration required to post)