FedUpUSA

Archive for February 10th, 2011

We’ve been over the numerous BS excuses that US Dollar destroyer extraordinaire Ben Bernanke has made for QE enough times that today I’d rather simply focus on the REAL reason he continues to funnel TRILLIONS of Dollars into the Wall Street Banks.

I’ve written this analysis before. But given the enormity of what it entails, it’s worth repeating. The following paragraphs are the REAL reason Bernanke does what he does no matter what any other media outlet, book, investment expert, or guru tell you.

Bernanke is printing money and funneling it into the Wall Street banks for one reason and one reason only. That reason is: DERIVATIVES.

According to the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the Second Quarter 2010 (most recent), the notional value of derivatives held by U.S. commercial banks is around $223.4 TRILLION.

Five banks account for 95% of this. Can you guess which five?

click to enlarge

Looks a lot like a list of the banks that Ben Bernanke has focused on bailing out/ backstopping/ funneling cash since the Financial Crisis began, doesn’t it? When you consider the insane level of risk exposure here, you can see why the TRILLIONS he’s funneled into these institutions has failed to bring them even to pre-Lehman bankruptcy levels.

Ben Bernanke is a stooge and a fraud, but he is at least partially honest in his explanations of why he wants to keep printing money. The reason is to try to keep interest rates low. Granted, he’s failing miserably at this, but at least he understands the goal.

Of course, Bernanke tells the public and Congress that the reason we need low interest rates is to support housing prices. He doesn’t mention that $188 TRILLION of the $223 TRILLION in notional value of derivatives sitting on the Big Banks’ balance sheets is related to interest rates.

Yes, $188 TRILLION. That’s thirteen times the US’ entire GDP, and nearly four times WORLD GDP.

Now, of course, not ALL of this money is “at risk,” since the same derivatives can be traded/spread out dozens of ways by different banks as a means of dispersing risk.

However, given the amount of money at stake, if even 4% of this money is “at risk” and 10% of that 4% goes wrong, you’ve wiped out ALL of the equity at the top five banks.

Put another way, Bank of America (BAC), JP Morgan (JPM), Goldman (GS), and Citibank (C) would CEASE to exist.

If you think that I’m making this up or that Bernanke doesn’t know about this, consider that his predecessor, Alan Greenspan, knew as early as 1999 that the derivative market, if forced into the open and through a public clearing house, would “implode” the market. This is DOCUMENTED. And you better believe Greenspan told Bernanke this.

In this light, all of Bernanke’s monetary policies and efforts are focused on doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails, or Too Bloated to Exist, as I like to call them.

The fact that the bank executives taking this money and using it to pay themselves and their employees record bonuses only confirms that these folks have NO interest in taking care of shareholders or their businesses. They’re just going to take the money and run for as long as this scheme works.

I don’t know when this will come unraveled. But it WILL. At some point the $600+ TRILLION behemoth that is the derivatives market will implode again. When it does, no amount of money printing will save the Too Bloated To Exist banks’ balance sheets.

At that point, it’s game over for Wall Street and the Fed.

Graham Summers for SeekingAlpha

Did you see Ben Bernanke’s testimony before the House Budget Committee on Wednesday? It was quite a show. Bernanke seems to believe that if he just keeps on repeating the same mantras over and over that somehow they will become true. Bernanke insists that the economy is getting much better, that quantitative easing will lower long-term interest rates, that all of this money printing by the Federal Reserve is not causing inflation and that the Fed knows exactly what needs to be done to dramatically reduce unemployment inside the United States.  So is anyone out there still actually buying what Bernanke is selling?  Sure, a handful of people in the mainstream media still have complete faith in Bernanke.  But for the rest of us, it is becoming increasingly clear that there is something really “off” about Bernanke.  So just what is going on with him?  Is he lying to all of us on purpose?  Could he be insane?  Is he just completely and totally incompetent?

Bernanke’s track record of failure is absolutely stunning.  Before discussing some of his most recent comments, let’s review some of the pearls of wisdom that Bernanke has shared with us in recent years….

2005:  “House prices have risen by nearly 25 percent over the past two years. Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamentals.”

2005: “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.”

2006: “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.”

2007: “At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency.”

2007: “It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

2008: “The Federal Reserve is not currently forecasting a recession.”

So should we believe anything that Bernanke is saying now?

Of course not.

Obviously Bernanke has been feeding us all a whole bunch of nonsense for a very long time.

So what conclusion should we come to about Bernanke at this point?

Well, as I see it, there are three primary alternatives….

1 – Bernanke knows that what he is telling us is wrong and he is purposely trying to deceive us.  That would make him a liar.

2 – Bernanke actually believes what he is saying because he is completely delusional.  That would make him a lunatic.

3- Bernanke actually believes what he is saying because he simply does not understand economics.  This would make him completely and totally incompetent.

In any event, someone with Bernanke’s track record should not still have such a high level job.  He should have been asked to resign long, long ago.

But instead, Obama nominated him for another term and he was approved by our incompetent Congress.

It is a crazy world in which we live.

So what is Bernanke saying now?

Let’s take a look at some of his main points…..

Bernanke Says That One Of The Main Goals Of Quantitative Easing Is To Reduce Long-Term Interest Rates

During one interview about QE2, Bernanke made the following statement….

“The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities.”

In fact, Bernanke elaborated on that point during his remarks on Wednesday….

Conventional monetary policy easing works by lowering market expectations for the future path of short-term interest rates … By comparison, the Federal Reserve’s purchases of longer-term securities do not affect very short-term interest rates, which remain close to zero, but instead put downward pressure directly on longer-term interest rates.  With the Fed funds rate at the zero bound, the Fed had to resort to unconventional policy to provide further accommodation.

So how is all that working out?

Terribly.

The yield on 10-year U.S. Treasury notes has risen from 2.49 percent back in November to 3.65 percent at the close of business on Wednesday.

Oops.

Long-term interest rates were supposed to go down as a result of quantitative easing, but instead they have increased substantially.

Looks like Bernanke was wrong about another one.

Bernanke Says That Quantitative Easing Is Not Going To Cause Inflation

The price of wheat has roughly doubled since last summer, the price of corn has roughly doubled since last summer and the price of oil is marching up towards $100 a barrel.

But oh, there is no inflation so there is no need to worry according to Bernanke.

Food riots are breaking out around the globe, but Bernanke says that the inflation in those countries is being caused by their own central banks.

Bernanke says that the Federal Reserve has nothing to do with international inflation even though the U.S. dollar is the primary reserve currency of the world.

Bernanke says that even though consumers are seeing huge price increases in the supermarket and at the gas pump that we aren’t really seeing any real inflation because the fraudulent U.S. consumer price index says so.

It is a wonder that anyone still considers this guy to be credible.

Bernanke Says That Quantitative Easing Is Helping The Economy Recover And Is Reducing Unemployment

During his remarks on Wednesday, Bernanke said that the recent decline in the U.S. unemployment rate was “grounds for optimism”.

And, of course, he is glad to take part of the credit for the “recovery”.

Oh really?

Things are getting better?

As I wrote about a few days ago, the “decline” in the U.S. unemployment rate during January to 9.0% is no reason to celebrate.

First of all, the U.S. economy must add 150,000 jobs each month just to keep up with population growth.

During January, the U.S. economy only added 36,000 jobs.

So why did the unemployment rate go down?

Well, the U.S. government said that 504,000 American workers “dropped out of the labor force” in January.

Well, isn’t that convenient.

Let’s just pretend a half million unemployed workers are not even there.

Yeah, that will make the numbers look better!

Sadly, the number of Americans that are “not in the labor force” but that would like a job right now has hit an all-time record high.  If you add all of those people into the official unemployment figure it would jump to 12.8%.

The truth is that the employment situation in America is not getting any better.  In fact, according to Gallup, the unemployment rate actually increased to 9.8% at the end of January.

Perhaps Bernanke should reconsider how much “better” things are really getting.

Bernanke Says That Now Is Not The Time To Reduce The Deficit

When it comes to the national debt, Ben Bernanke is constantly talking out of both sides of his mouth.

Bernanke is constantly saying that the exploding U.S. national debt is very dangerous (and he is very right about that point), but Bernanke also says that now is definitely not the time to do anything about it.

In fact, recently Bernanke has been purposely stepping into the partisan debate about whether to raise the debt ceiling or not.

Bernanke says that Republicans should stand down and that now is not the time to be playing political games with the debt ceiling.  Bernanke has been warning that the consequences for not raising the debt ceiling could be catastrophic….

“We do not want to default on our debts. It would be very destructive.”

Over and over Bernanke has been saying that the economic recovery is still fragile and that now is not the time be cutting deeply into the federal budget.

So when is the right time?

Well, with these central bankers it seems like it is never time to address all of this debt.  It seems like they always want us to “have a long-term plan” to tackle the debt in the future but to keep borrowing and spending in the present.

Well, it looks like that is exactly what the Obama administration plans to keep doing.  This year it is being projected that the U.S. government will have the biggest budget deficit ever recorded – approximately 1.5 trillion dollars.

Keep in mind that the total U.S. national debt did not surpass 1.5 trillion dollars until the mid-1980s.

That means that this year we will accumulate more debt than we did for over the first 200 years that this nation was in existence.

Oh, but according to Bernanke we better not do anything to address our out of control debt because that would “harm the economic recovery”.

In the end, all of this government debt is going to become so monstrous that it is going to swallow us whole.  We can try to keep running from it, but we can’t hide.  Someday the gigantic debt monster that we have created is going to catch up with us.

So, yes, there are a whole lot of reasons to be really upset with Ben Bernanke.

Perhaps he would be a fun guy to sit down and talk to at a backyard barbecue, but he isn’t the type of person that you would want to entrust with any real responsibility, and he most definitely is not someone that should be running the largest economy in the history of the planet.

The Economic Collapse

The facsimile of U.S. “growth” now depends entirely on Central State manipulation and stimulus of risk trades and financial slight-of-hand.

The U.S. economy has become increasingly dependent on asset bubbles, financial legerdemain, credit expansion, Federal borrowing and the manipulation of risk trades to maintain the illusion of “growth.” Compared to an economy based on organic demand and productive growth, the current U.S. economy is a travesty of a mockery of a sham, and has been since 2001.

There are a number of factors at work, but let’s start with two: the ratchet effect, and the Keynesian Project.

In the ratchet effect, increases are easy and resistance-free: it’s incredibly easy to hire more employees in bureaucracies, for example. But once the ratchet has advanced, it is nearly impossible to return to the previous tooth in the gear.

So for a city government to expand payroll from 10,000 to 20,000 employees was effortless, to reduce a 20,000 person payroll back to 10,000 is exceedingly painful.

The ratchet effect is a key feature of addiction. When one beer no longer creates a “buzz,” then the consumer drinks two, and so on, until a six-pack is the new baseline. Below that level of consumption, the addict gets panicky, for the entire necessity of creating a buzz is at risk of catastrophic failure.

The U.S. economy is now addicted via the ratchet effect to unprecedented levels of Federal borrowing and Federal Reserve credit creation and manipulation. Let’s set aside the fact that America’s Central State has by some calculations guaranteed some $13 trillion in private financial assets via TARP, AIG’s backstop, the takeover of Fannie Mae and Freddie Mac, etc.–roughly the size of the entire GDP of the nation.

Let’s focus instead on the fact that the Federal government must borrow and spend 11% of GDP ($1.5+ trillion) every year, and the Fed must buy $1 trillion in impaired private assets or new Treasury debt annually (another 7% of GDP) just to create an illusory GDP growth of 2.5% a year. So we’re spending/injecting 18% of the GDP to conjure a “growth” of 2.5%.

That means we’re spending/injecting $7 to create $1 of “growth” in GDP. And thanks to the ratchet effect, there’s no going back now without systemic disruption. Does anyone seriously believe spending $7 to birth $1 of “growth” is sustainable? If so, then let’s eliminate that $1.5 trillion deficit spending and the Fed’s $1 trillion-a-year purchases of impaired debt and Treasury bonds, and see if GDP “grows” via organic demand and production.

Everybody knows what would happen: the wheels would fall off the illusory “recovery.” The “recovery” is precisely analogous to an alcoholic who claims to be sobering up but who is actually drinking seven beers a day to get a buzz when a few years ago he only quaffed two or three a day.

Here is the Keynesian Project in a nutshell. Unfettered Capitalism works in straightforward cycles: the organic business cycle of expansion, overcapacity and overleverege inevitably leads to a credit bust in which those whose borrowing exceeds their ability to service their debt go broke, and the dominoes of overcapacity and credit expansion topple as losses mount and consumption based on increasing debt falls.

Bad debt gets wiped out, along with “pyramid-scheme” type assets (mortgaged assets are leveraged to buy more mortgaged assets) and excess capacity. As production declines, workers are laid off and consumption declines, further pressuring impaired financial assets.

As Marx had foreseen, these cycles increase in depth and severity. Though Marx invoked dialectical theory and history rather than the ratchet effect, the basic idea is the same: Capitalism becomes increasingly dependent on financial capital, and the resultant crises eventually become severe enough to take down Capitalism as a sustainable productive system.

Keynes’ proposed to counter these worsening business cycle implosions with massive injections of Central State borrowing and spending. The atmosphere of fear as assets, credit and consumption all contracted would be replaced by a revival of “animal spirits” (the magical elixir of Capitalism), consumption would be stimulated by direct government spending on capital projects and welfare (fiscal stimulus), and banking credit would be restored via stimulative Central Bank credit expansion (monetary stimulus).

But Keynes failed to grasp what Marx had intuited: the ratchet effect. Once the Central State ramped up deficit spending and expansive credit, then the organic economy became dependent on that new level of Central State spending and credit expansion.

As I described in the Survival+ analysis, in effect the central State rescued Monopoly Capital by partnering with it. This results in a financial/State Plutocracy which “saves” the organic economy by taking control of its income streams, credit creation and financial assets.

That is the U.S. economy in a nutshell: a travesty of a mockery of a sham. The consumer became dependent on easy, cheap credit and home equity extraction to maintain his/her consumption. The student became dependent on easy, cheap credit to fund his/her increasingly costly college education. Monopoly capital became dependent on financial slight-of-hand, the debauchery of credit, fraudulent mispricing/masking of risk, stupendously leveraged bets on risk assets, etc. for its swollen profits. Politicans became dependent on unlimited borrowing and spending to keep the illusions of competence, sustainability and “growth” alive.

State and local governments became casinos, dependent on skimming the profits from asset bubbles and financial fraud. Where did New York City’s and New York State’s rising revenues come from? By playing dealer on Wall Street’s scam tables, skimming a steady share of the profits.

Where did California’s bloated state revenues come from? The skimming of capital gains from the Ponzi-scheme real estate bubble.

The stock market rally circa 2003-2008 was merely Travesty of a Mockery of a Sham Phase I. In those glory years of the Central State/Cartel-Capital manipulation, it only required $2 of stimulus and credit expansion to blow $1 in asset bubble “growth.”

But alas, the growth was bogus, illusory, a simulacrum of organic growth, a house of credit cards and fraud that toppled when one card’s overleveraged precariousness was inadvertently exposed.

Now we are in Travesty of a Mockery of a Sham Phase II. As Marx had foreseen, the crises are ratcheting up: now it’s taking $7 of State/Plutocracy intervention to conjure up a pathetic $1 in “growth.” Both are now totally dependent on the substitution of bubbles and fraud for real productive growth.

What Marx failed to foresee was the Central State’s rescue of Cartel-Capital via a partnership: the Central State is now as dependent on financial capital’s maximization of fraud and credit expansion as the Financial Plutocracy is dependent on the Central State to mask and enable its expansion of income and control.

The problem is, of course, that the system cannot support borrowing and spending $7 to create $1 of “growth” for long: eventually, as in all business cycles, the cost of borrowing will exceed the ability of the borrower to service that debt. That’s what Keynes failed to foresee: the way in which the partnership of Central State and Cartel-Capital requires ever greater credit and State debt expansion just to keep the system afloat, never mind growing.

If I loan you $1 trillion at zero interest, with no principal payments, then the cost of servicing that $1 trillion loan is zero. Pretty easy to service zero, isn’t it? That’s the core strategy of the Federal Reserve and the U.S. Treasury.

That’s been Japan’s “secret” for 20 years: as long as the lenders (the Japanese citizenry and life insurance companies, etc.) accepted near-zero interest, then the cost of borrowing additional trillions has been bearable.

But as soon as that $1 trillion requires a serious interest payment, then the ratchet-effect game ends. We are not there yet, but the endgame is no longer over the horizon.

What will TMS Phase III require? $10 in Central State stimulus for $1 in nominal GDP “growth”? Or will it be $20 for every $1 of bogus “growth”?

The stock market is a reflection of this ratcheting up of Central State/Monopoly Capital intervention and manipulation. The stock market took off in the mid-1990s in the “easy money” era, and that led to the Phase I bust of 2000-2001.

That required TMS Phase II, which led to the next asset bubble in 2007-08, and that orgy of fraud and credit/leverage expansion led to an even more severe Phase II bust 2008-09.

If the partnership attempts Travesty of a Mockery of a Sham Phase III, then the consequent bust should return the stock market to pre-Phase I levels: The Dow around 4,000 and the SPX around 400.

Neither the public nor the Standard-Issue Punditry (SIP) understand the addiction-like dynamics of the Central State/Cartel-Capital partnership’s increasingly ineffective interventions on behalf of a facsimile of normalcy and “growth.” Like the addicted junkie, the Central State/Cartel-Capital partnership is approaching the point where their “high” requires ever higher doses of smack.

Nobody knows when the higher doses finally become lethal, but we do know there is such a point.

Live debate on deflation/hyperinflation, February 10, 9 p.m. EST . Most of you are already familiar with bloggers Stoneleigh of The Automatic Earth and Gonzolo Lira. Both are well-informed, articulate and persuasive, so the exchange on a topic of importance to us all (deflation vs. hyperinflation) is sure to be compelling.

Of Two Minds

This cannot be allowed to continue.  These banks are kicking Americans in their gut, and that’s bad enough.  But I cannot stand to allow them to kick our soldiers when they are serving our country and keeping us safe.

I am so disgusted by this because of an example of systematic abuse of soldiers, operating across this state that I will be reporting on soon.  Not just one or two cases, but an entire system set up which deprives soldiers of their rights while they are on active duty and which results in real harm and trauma while they are serving abroad.

I renew my commitment to provide pro bono service to active duty military members and their families who find themselves facing the hell of foreclosure.

WE CANNOT LET OUR SOLDIERS AND THEIR FAMILIES FIGHT FORECLOSURE ALONE WHEN THEY ARE SERVING THEIR COUNTRY.

I CALL ON EVERY ATTORNEY TO MAKE THE SAME COMMITMENT AND I URGE ALL ACTIVE DUTY MEMBERS TO REACH OUT TO ME FOR ASSISTANCE.

MSNBC STORY

Matt Weidner Law