FedUpUSA

Archive for December 13th, 2011

Yes, stupidity.

Release Date: December 13, 2011

For immediate release

Information received since the Federal Open Market Committee met in November suggests that the economy has been expanding moderately, notwithstanding some apparent slowing in global growth. While indicators point to some improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but business fixed investment appears to be increasing less rapidly and the housing sector remains depressed. Inflation has moderated since earlier in the year, and longer-term inflation expectations have remained stable.

Really?  You didn’t talk to Texas Instruments or listen to them (or Dupont for that matter) did you?

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

Oh really?  You mean like this sort of “non-inflation”?

If you’re not real sharp you might miss it — those are “cases” that are in fact 20 packs instead of 24.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools to promote a stronger economic recovery in a context of price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Narayana Kocherlakota; Charles I. Plosser; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Charles L. Evans, who supported additional policy accommodation at this time.

And what would Evans have done?

The problem here is the lack of available collateral — that is, there’s too much debt and servicing it is sucking up too much production.  This means that there’s not enough left once you pay the service to both cover the mandatory costs (which as the name implies are not optional) and form capital.

This is when the credit ponzi dies — when there is no longer economic surplus produced from more debt.  Put another way, the marginal utility of more deficit spending no matter who’s running the deficit is now negative — the more borrow the worse the economy gets!

This is the inevitable outcome of two exponential functions that you do not allow to come back into balance.  It is not complicated and it cannot be avoided — no matter what you do.

Ben Bernanke and his Fed mates’ secret letterhead: “destroying capitalism from within.”

After four years of disastrously wrong policies, let’s declare stubborn, hubris-soaked wrongheadedness a virtue and saint Ben Bernanke and his Federal Reserve mates.  If we had to distill down the Fed Chairman and the Federal Reserve’s policies since the wheels came off the Fed’s “shadow banking” system of fraud, collusion, embezzlement  and free-floating leverage, we’d have to start with a systems-analysis perspective.

Any system which separates risk from results (gain/loss) is doomed to implode,as the lack of feedback from the real world (also known as consequences) enables the self-reinforcing feedback known as “moral hazard”: losses by those who took the risk to reap a gain are made good by those who did not take the risk and who do not stand to gain from the risk they are covering.

In this case, the  mortgage origination and  packaging “industry” and the investment banks’ origination and marketing of fraudulent-from-inception derivatives “industry” took the risks to reap outsized gains from the financialization of mortgages and other debt instruments via leverage, commodifying debt and  arcane derivatives, all of which were sold as “low-risk.”

Capitalism’s primary characteristic is that capital is put at risk for a gain/loss.If risk is off-loaded onto the Fed’s bottomless balance sheet and the taxpayer via government-funded bailouts and guarantees, then capital is not actually at risk. Thus what we have isn’t capitalism, but cartel crony-capitalism, a phony version of the real thing which guarantees private banking profits and socializes banking losses.

The Fed was recently revealed as having arranged billions in private gain via secretly backstopping the banks with $7.7 trillion.This highlights Bernanke and his buds’ second catastrophically wrong policy, that of systemic opacity.

The acme of open markets is transparency. Without transparency, markets are not free or open, they are manipulated–both to hide those who are benefitting from the destruction of transparency (monopolies, cartels, fiefdoms, kleptocracies, oligarchies, etc.) and to manipulate the market as part of a permanent propaganda campaign to  “manage perceptions:” the market’s up, everything’s dandy.

Bernanke and his faithful banking-sector lackeys have destroyed transparency at every turn, refusing an audit (an audit smacks of–sniff–democracy–how distasteful), masking the $7.7 trillion in backstopping, and hiding the toxicity of the Fed balance sheet, which is loaded with over $1 trillion in distressed mortgage securities that the Fed lovingly took off the bankrupt balance sheets of its craven masters, the banks.

In other words, the Fed has massively rewarded the reckless and rescued the incompetent from the consequences of their actions.If that isn’t the perfection of wrongheadedness, what is?

Then there’s the disastrously destructive ZIRP–zero interest rate policy.The Fed’s idea here is childishly simple, and childishly ignorant: if we lower interest rates to zero, then everyone who is over-leveraged and over-indebted will be able to borrow more, but for less interest, and that will buy the system time to magically heal itself.

The Fed cannot dare grasp that “healing” in capitalism means writing off uncollectable debt and sending insolvent lenders and debtors to bankruptcy court. Capitalism would quickly dispense with their cronies in the banking sector, and so capitalism must be destroyed. That is the Fed’s raison-d’etre: destroying capitalism from within.Lenin would be envious.

ZIRP has myriad pernicious consequences.  Let’s say you have some capital that you want to apply such that it earns a fair return. If interest rates are near-zero, then a fair return has been rendered impossible by Fed policy.

The Fed leaves you only two choices:either put your capital into “risk-on” assets that are inherently risk-laden, or loan the capital out at low rates in an opaque market  and hope you’ll actually get the principal back.

Imagine being in charge of issuing mortgages which weren’t guaranteed by the Federal government agencies of Fannie Mae, Freddie Mac and FHA–that is, imagine you actually lived and worked in a capitalist system, instead of a kleptocratic crony-capital haven.

You might hesitate to loan out large sums of money (jumbo mortgages) in a market where the  risk of a decline in the asset (real estate) is obvious but official manipulation means you can only receive a very paltry return on the capital you’re putting at risk.

Since the market isn’t able to price real estate, risk or credit transparently, then prudent investors would be forced to shun the market: how can you invest wisely when assets, debt and risk can’t be priced by the market?

Prudent lenders would withdraw from such a rigged, risky market, which is precisely what has happened.Literally 99% of the mortgage market is now guaranteed by the Federal fiefdoms, all of which are losing tens of billions of dollars and require monumental taxpayer bailouts to keep underwriting the banking sectors’ private profits.

Private mortgage lending has simply vanished, and no wonder: if you can’t price assets, risk or debt, then only the reckless would enter the market, and even they would only do so if the Fed guaranteed the profits would be theirs to keep but losses could be transferred to the Fed or taxpayers.

The only way to restore trust and clear the market of uncollectable debt is to let the market transparently price, risk and credit–precisely what the Fed’s policies are designed to stop.  The Fed’s knees are chafed from kow-towing to their banker masters, and worshipping the “magic” of their Keynesian Cargo  Cult and  Lenin (“destroying capitalism from within” should be stenciled on the Fed letterhead).

Separate risk from gain, obliterate transparency and choke the market  with zero interest rates, and you’ve not only destroyed capitalism, you’ve also destroyed the economy by rewarding the most venal, corrupt, fraudulent and  capital-destroying players while stranding the prudent on an island of opacity where the true price of assets, credit and risk cannot be discovered.

Charles Hugh Smith – Of Two Minds

Senator Tom Harkin (IA)

Senator Harkin is making an excellent point: Prior to the CFMA of 2000 customer funds could not be invested in other than municipal or US Government debt fully guaranteed by the US Government.

And the Republicans want less regulation, not more, and they are not calling for people to go to prison and every dime missing taken back from the executives who ran the company so the customers are made whole.

Yep.

As it stands right now any account you hold at any brokerage can be effectively stolen through being lost via the same mechanism.  Got that?  Good.  Your 401k, IRA, anything — all at risk.

Now here’s the disingenuous part of this: It wasn’t the “investment” that led to the problem.  It was off-balance-sheet games that led to the exposure and leverage being hidden from regulators, customers and investors.  Yet nobody is calling for an immediate end right now to those games.

Senator Harkin, incidentally, voted against repealing Glass-Steagall.

When you’re right, you’re right – and Senator Harkin is right.

He just doesn’t go far enough.