FedUpUSA

Archive for December 6th, 2010

One of the Fed’s more arrogant former apparatchiks (of the “100% confidence” interval) Larry Meyer, currently at expert network Macroeconomic Advisors which is used by the likes of Pimco to get inside information on what the Fed will do at its upcoming meetings, appeared on CNBC earlier and attempted to school David Einhorn on “Economics 101.” What ensued was yet another confirmation that these Ph.D’s (a term we always use in the most pejorative, NC-17 context possible) who destroyed the world, have absolutely no idea what the hell they talk about, and make up bullshit scenarios on the fly. Luckily, it has gotten to a point where every incremental statement catches them in one lie or another. It has become grotesquely comic to watch their faces (as in Bernanke of 60 Minutes infamy) squirm as they realize that the end of the system they created and subsequently destroyed, is near.

A selection of Einhorn’s questions:

• “Part of the issue with the deflation is companies improve the quality of their products, so last month the PPI went down because we had a new car year, and they sold you a better car for the same price. Now why is it the Federal feel like you need to have a policy response to auto companies making better cars and selling them to you at the same price? Why do we need to drive up the cost of energy, and food, and cotton, to offset that?”
• “I think if you drive up food and energy prices, which you don’t count in the core PPI or CPI, I think if you don’t count those things in the inflation, you may miss the inflation, and if people have to spend more money on food and energy, they have less money to buy other things, and that could prove to be a net reduction in economic activity…”

And while he is unable to respond to any of these (or other) all Meyer can do is assume the claim that easy monetary policy stimulates aggregate demand as factual, where Einhorn put the smackdown: “I think you can argue that, because we have gotten to the point where the transmission method [sic] is broken. You are trying to create a wealth effect which is another asset-based economy thing, it’s very questionable whether higher stock prices cause lots of incremental demand, and you have the cost of food and energy which are real things that people have to pay for. And if you have to pay $3, $4 or $5 for gas, you have less money to go out to eat.” Meyer’s response once again: is nothing less than derisive laughter with no facts to support his claims whatsoever… except for falling back to Econ 101… which of course is not a science.

Lastly, Einhorn says: “I am worried about a bubble in corn and oil.” The response – blame it all on China. “Commodity prices will go up but it’s driven because Asia and China have adopted US monetary policy which is crazy for them. Absolutely crazy.  And we can’t do anything about that.” And confirming our long-established theory that the Fed is doing nothing less than punishing the American people in order to get China to blink we hear the following from the entrenched demagogue: “That’s no reason why we should keep interest rates higher, to benefit China and Asia, and prevent bubbles there, they have to do it themselves. Look in the mirror if you want to know whose problem this is.”

So true: so let’s create hyperinflation in the US, in the hope that Beijing will finally unpeg. It’s official: the Fed is willing to sacrifice its people in order to win an intercontinental pissing match of a flawed and dying economic theory.

As for Larry, we are confident he will survive long after his entire life is proven to have been a hollow defense of a failed ideology: after all he is one of those “fly on the wall” Fed consultants who gets paid by the PIMCOs of the world to leak inside monetary information to the highest bidder. We would love to know: now that the Gerson Lehrman model is over, when will the true leak of critical inside information: companies such as Macroeconomic Advisors finally see either a subpoena by the AG or an FBI raid… After all what they do is identical to what all those other expert networks do day in and out. Only this time the stakes are that much higher (and the pool of beneficiaries that much, ahem Bill Gross, smaller).

ZeroHedge

Has the Federal Reserve become the Central Bank of the World?  That is what some members of Congress are asking after the Federal Reserve revealed the details of 21,000 transactions stretching from December 2007 to July 2010 that totaled more than $3 trillion on Wednesday.  Most of these transactions involved giant loans that were nearly interest-free from the Federal Reserve to some of the largest banks, financial institutions and corporations all over the world.  In fact, it turns out that foreign banks and foreign corporations received a very large share of these bailouts.  So has the Federal Reserve now become a completely unaccountable global bailout machine?  Sadly, the truth is that we would have never learned the details of these bailouts if Congress had not forced this information out of the Fed.  So what other kinds of jaw-dropping details would be revealed by a full audit of the Federal Reserve?

It is important to try to understand exactly what went on here.  Banks and corporations from all over the globe were allowed to borrow gigantic piles of money essentially for free.  Yes, when you are getting interest rates such as 0.25 percent, the money is essentially free.  These loans were not available to everyone.  You or I could not have run over to the Federal Reserve and walked away with tens of billions of dollars in loans that were nearly interest-free.  Rather, it was only the megabanks and megacorporations that are friendly with the Federal Reserve that were able to take advantage of these bailouts.

In this way, the Federal Reserve is now essentially acting like some kind of financial god.  They decide who survives and who fails.  Dozens and dozens and dozens of small to mid-size U.S. banks are failing, but the Federal Reserve does not seem to have much compassion for them.  It is only when the “too big to fail” establishment banks are in trouble that the Federal Reserve starts handing out gigantic sacks of nearly interest-free cash.

Just think about it.  Which financial institution do you think is in a better competitive position – one that must survive on its own, or one that has a “safety net” of nearly unlimited free loans from the Federal Reserve?

Now that is oversimplifying the situation, certainly, but the truth is that the Federal Reserve had fundamentally altered the financial marketplace and is significantly influencing who wins and who loses.

But even more disturbing is what the Federal Reserve is turning into.  This is an institution that is “independent” of the U.S. government, that does not answer to the American people, that controls our money supply and that is just tossing tens of billions of dollars to foreign banks and to foreign corporations whenever it wants to.

In fact, if Congress had not forced the Fed to tell us what was going on with these bailouts we would have never even found out.

The truth is that the Fed is taking incredible risks with “our money” and yet they want to continue to exist in a cloak of almost total secrecy.

In a recent article in the Washington Post, Dallas Federal Reserve President Richard Fisher acknowledged that the Federal Reserve played fast and loose with trillions of dollars of our money….

“We took an enormous amount of risk with the people’s money.”

Are you deeply disturbed by that quote?

Well, if not, you should be.

The American people became so infuriated about the bailouts and stimulus packages passed by Congress, but it turns out that they were nothing compared to these Federal Reserve bailouts.

U.S. Senator Bernie Sanders is one of the members of Congress that is now expressing extreme outrage about what the Federal Reserve has done….

“The $700 billion Wall Street bailout turned out to be pocket change compared to trillions and trillions of dollars in near zero interest loans and other financial arrangements that the Federal Reserve doled out to every major financial institution.”

In fact, Senator Sanders was so disgusted by how much of the money went overseas that he was led to make the following remark….

“Has the Federal Reserve become the central bank of the world? I think that is a question that needs to be examined.”

Advocates for the Federal Reserve insist that if all of these foreign banks and foreign corporations were not bailed out the financial crisis would have been much worse.  In fact, they say we should be thankful that the Federal Reserve prevented a total financial collapse.

Well boo-hoo!

If our financial institutions are so fragile that a stiff wind will knock half of them over maybe they need to just fail.

You know what, life is tough.  Nobody is going to cry most of us a river of tears if we lose our jobs.  Most of us have learned to scratch and claw to survive with no safety net underneath us.

So maybe it is time for these big financial institutions to start playing by the same rules the rest of us are playing by.

No, when these “too big to fail” financial institutions get into a little trouble they start whining like a bunch of little babies.

“Give us some big sacks of cash!”

“Waaaaaaah!”

Well guess what?  Most of the rest of us are just not going to have too much sympathy for these big banks from now on.

The following is a list of just a few of the banks, financial institutions and global corporations that received nearly interest-free loans from the Federal Reserve during the financial crisis…..

Big U.S. Banks And Financial Institutions

Goldman Sachs
Citibank
JP Morgan Chase
Morgan Stanley
Merrill Lynch
Bank of America
Bear Stearns
Pacific Investment Management Co. (PIMCO)

Big Global Corporations

General Electric
Caterpillar
Harley-Davidson
Verizon
McDonald’s
BMW
Toyota

Canadian Banks

Royal Bank of Canada
Toronto-Dominion Bank
Scotiabank

European And Asian Banks

Barclays Capital
Bank of Scotland
Deutsche Bank
Credit Suisse
BNP Paribas
Societe Generale
UBS
Dexia
Bayerische Landesbank
Dresdner Bank
Commerzbank
The Korean Development Bank (South Korea)

But those defending the Federal Reserve will insist that the financial world as we know it would have ended if the Fed had done nothing.

That may well be true.

The entire financial system might have gone down in flames.

But that just proves the main point that this column has been trying to make for months.

An economic collapse is coming.

The Federal Reserve can desperately try to keep all of the balls in the air for as long as it can, but eventually it is inevitable that this entire thing is going to come crashing down.

The fact that the Federal Reserve had to resort to such extreme measures to “save” the financial system just shows how desperate things really are.

We really have reached a “tipping point” for the world financial system.  There is going to be crisis after crisis after crisis and even bigger bailouts are going to be required in the future.

The world financial system is a house of cards built on a foundation of sand.  The Federal Reserve can keep throwing around gigantic sacks of “our money” as much as it wants, but in the end there is nothing that can be done to prevent the inevitable collapse that is coming.

The Economic Collapse

The Friday jobs report was significant for a variety of reasons but one key theme is that it shows the true fragility of the state of the economy.  Even though it was a net add of 39,000 jobs we need to remember that the nation needs to add roughly 150,000 jobs per month just to keep pace with population growth.  Many economists agree that an unemployment rate over 8 percent is felt by virtually everyone in the economy.  The average American is facing some of the most dramatic changes to our employment market in over a generation.  While the recession on paper has been over since summer of 2009 most Americans would agree that the economy is still in deep problems.  This is because most Americans would view a recovery with actual job growth.  Yet when we look at the Gross Domestic Product (GDP) or the aggregate production of the U.S. we are back and growing.  This dichotomy raises some troubling questions moving forward.  Do we need as many workers to grow?  GDP tells us that we don’t.

Let us look at the GDP chart first:

While it is clear that GDP contracted during the recession it is now moving back up and in record nominal territory.  As many banks are pulling in billions of dollars in profits some sectors of the economy seem healthier than they ever have been.  The deeper issue is that the Federal Reserve lends money to banks yet many of these banks simply chase the next best thing and this doesn’t necessarily mean that it will be good for the domestic economy.  So you have major S&P 500 companies making half their revenues overseas while adding wage pressure on domestic workers.  This is merely an observation of what is occurring.  It is hard to compete with this some may say but the fact that banks are leveraging the credit of the U.S. to invest in areas that hurt the domestic economy is something Americans will have to wrestle with in the coming decade.  If what banks are doing is bad for the domestic economy why allow them to borrow so cheaply from the central bank?

Let us take a look at the damage done in terms of employment:

The U.S. employment market is down by 7,400,000+ jobs from the peak and we’ve been adding more and more workers to the economy.  This has happened via population growth and the natural progression of people entering the work force.  The above chart is clear.  There has been no growth in terms of added jobs.  Yet going back to the first chart of GDP, we are now back to record levels in terms of our nation’s output.  In other words, we are producing even more on a GDP basis than we did at the peak employment level but with 7.4 million less workers.  The stance from banks is that this is an inevitable outcome of globalization and money will chase the lowest cost centers.  Yet this also applies with the Federal Reserve allowing banks to borrow money backed by the U.S. taxpayer and government and then adding no restrictions since these banks chase yields anywhere around the world even if it means hurting the domestic economy.  This is the longer chain and journey that money follows but these will quickly become political questions moving forward.  The fact that Ben Bernanke has now been on 60 Minutes twice in the last few months tells you the Fed is quickly trying to jump ahead and conduct PR operations.

The civilian population ratio is also at historically low levels:

This is a very troubling trend.  In this new economy we are having less and less workers producing more and more.  Yet this is counter to the essence of a strong American middle class and more reminiscent of countries where there is a strong upper-class and the large remainder of the population.  Income disparity in the U.S. is at all-time record highs and this trajectory has been moving forward for two decades now.  The question that many Americans will have to deal with is whether they are happy with this progression of events.  The banking system would like to put this out as some inevitable path going forward but it is not.

Take for example the Ireland bailout.  The main reason the Euro (and the world for that matter) is bailing out Ireland is to protect bondholders.  This was the crux of the U.S. bailouts as well.  But for Ireland, the best option would be to default since there is absolutely no way they can pay back their debts given their GDP.  I agree that this is no light decision but the bailout option is worse.  It is virtually impossible and saddles them with debt for years to come.  This is like someone who over paid for a home and simply has no way of meeting their obligations. The best option is to default, start new and hopefully do it right the second time around (i.e., Brazil comes to mind).  What these bailouts amount to is a prolonging of the inevitable since bank debt holders just don’t want to face the music but this causes sustained unemployment in the working and middle classes of these nations.

In the U.S. we already see this problem with long-term unemployment:

Nearly half of the unemployed are out of work by 6 months or more.  Studies have shown that the longer someone goes without stable work the harder it will be for them to ever get back on economic track.  Yet GDP growth signifies that the economy is growing.  So what then of this large base of unemployed?  Is this simply the new economic reality?  Unfortunately the above chart is counter to what many Americans envision as a strong middle class.  The language coming out from the banking sector is familiar to companies in the 1920s and the belief that there really is no need for a middle class.  That somehow a country is strong if we allow the strongest to manipulate politics and policy to benefit their entrenched needs.

These are challenging questions we face.  I don’t proclaim to have the answers here and you can see from the above charts that the complexities are deeper than merely a simple stump speech.  These are issues we will need to confront as a nation for the decade moving forward.  What I do know is that the current path is slowly eroding the middle class and this isn’t good for the majority in the country.

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