FedUpUSA

Archive for the ‘Federal Reserve’ Category

This Sunday Funnies cartoon is courtesy of Merle Hazard who says “We Can’t Go On Together with Suspicious Minds, Because Were Leveraged too Much Baby”

Concept by Merle Hazard, Art by Grey Blackwell. The cartoon also appeared on Jon Shayne’s Blog.

Here is a list of Songs and videos by Merle Hazard, not to be confused with Merle Haggard.
Inflation or Deflation?

Link if video does not play: Inflation or Deflation
Mike  “Mish”  Shedlock  – Global Economic Analysis

The U.S. and European economies are firmly between various rocks and various hard places.

Having stipulated that “Forecasting Is Not Humanity’s Strength,”  I will not make any foolish forecasts that will assuredly be proven wrong, but it is undoubtedly true that the U.S. and Europe are both entering a “crunch time” politically and financially.

In essence, both economies are between multiple rocks and multiple hard places. Eventually, this ceases to be an academic question and becomes one of actual financial impact on people via higher taxes, smaller checks, lower purchasing power, etc.

For example, the dismal failure of the Federal Reserve’s QE2 goosing of the economy has eroded its political support and thus its freedom of action.  Fed Chairman Ben Bernanke has the look of someone who is realizing his own limits and is thus pondering retirement (a speculative forecast I made last year, i.e. that Ben wouldn’t last and would be forced out or quit).

Bernanke has more or less confessed that he 1) doesn’t understand why the economy isn’t responding “like it should” i.e. as described in textbooks, and 2) that he is tired of the political heat created by QE2 and he is dropping the burden of “saving” the U.S. economy.

He looks like  a person who has lost his confidence and is going through the motions until he can figure out a way to exit the leadership stage gracefully. It is painfully obvious to all that his QE2 did nothing to heal the real economy while attracting global attention and ire. The whole project was lose-lose, with the only gain being “extend and pretend.”

Meanwhile, the Fed has to keep printing money to enable every debt holder has enough to service their debt next month, never mind next year. As frequent contributor Harun I. noted in a private email to me, the amount of leverage is so staggering that if “real money” (cash, gold, etc.) were applied to debt, a vast sum would still be left unpaid.

That’s a rock and a hard place, to be sure, as I have noted on the blog: if you print enough money to keep the Status Quo in “extend and pretend” mode, then you get inflation, which creates another set of difficulties and acts as a tax on the entire economy.

The loss of faith in Fed fixes is profound, part of the delegitimization process I have mentioned in previous Musings and blogs.

The same loss of faith is evident in Europe.  The EU leadership has to cobble together another “extend and pretend” bailout of Greece, but nobody believes it will fix anything–that belief has been shattered. Once that faith is lost, then the value of “extend and pretend” is lost as well.

There is no way Greece can meet its debt obligations, even as its creditors clamor for it to sell off its assets.  Why bother, if most of the debt will remain unpaid?  The answer is to transfer the wealthof thenation to international banks, of course, but the Greek people may not acquiesce in their impoverishment.

The only other option is for bondholders to “take a haircut,” that is, get back less than 100% of their bond.  The EU leaders are banking (pun intended) on some sort of “minor default” being the “fix” that puts the problem to rest, but they fail to grasp the subsequent loss of faith in the entire euro banking system.

If Greece’s bondholders are going to take a loss, then what’s stopping those holding Irish, Portuguese, Sanish or Italian debt from taking a loss as well?

The answer is of course nothing: there is no way to stop the “haircut” from happening in every cituation where the borrower is insolvent.

And as borrowers default, then so too do insolvent lenders.

This is the ultimate rock and hard place:the only way to clear the economy for future growth is to clear away the deadwood of uncollectible debts, yet clearing away the impaired debt will necessarily take down all the “too big to fail” banks on both continents, an action that is politically “impossible” as those banks have their hands on the throats of the governments in question.

As I have noted before, once faith in “extend and pretend” policies has been lost, then the next “extend and pretend” fix will no longer have its desired effect of calming the waters. Indeed, the failure of central institutions to grasp the nettle will be recognized as a failure that dooms the Status Quo.

The “solution” for three years has been “extend and pretend,” and now that faith in that muddle-through strategy has been lost, then there are only two choice open to policy makers:

1) enact a visibly transparent “extend and pretend” fix once again, basically pushing the crisis forward once agin for a few weeks or months, or 2) grasp the nettle and pursue a politically “impossible” real fix that wipes out uncollectible debt and insolvent borrowers and lenders.

Unfortunately for the Status Quo, the cat is out of the bag, so to speak; nobody believes minor policy tweaks  or more bailouts will actually fix their economies. So the “extend and pretend” fixes that will be presented  as meaningful will be increasingly recognized as artifice and propaganda.

This will feed the profound political disunity that already characterizes the politics of the U.S. and the E.U.

I would like to believe that the people are finally ready to lead their leadership  to real solutions, but their insecurity, doubt and fear about their own slice of the pie seems to have frozen them in a weird warp: they recognize “extend and pretend” is futile, but they have no confidence in the “impossible” choices, either, as the risk is doing anything other than “extend and pretend” frighten them.

The way out of the dilemma would be a new political consensus forms in favor of writing off all bad debt and breaking the banks’ grasp on our collective throats.  Right now that seems as “impossible,” but all sorts of other “impossible” things have happened in the past decade.

The one thing we know is truly impossible is that “extend and pretend” will actually fix anything.

As noted here before, a number of intersecting cycles suggest the end-game of “extend and pretend” will play out in 2012-2013.

Charles Hugh Smith – Of Two Minds

Stephen Roach on US Economy

Jan. 26 (Bloomberg) — Stephen Roach, non-executive chairman of Morgan Stanley Asia, talks about the U.S. economy and Federal Reserve monetary policy.     Roach, talking with Tom Keene on Bloomberg Television’s “Surveillance Midday” at the World Economic Forum in Davos, Switzerland, also talks about China’s economic strategy and the prospects for Europe. (Source: Bloomberg)

Jim Rogers, when he made that statement, was referring to the lunacy of using public money to preserve failed private enterprise in a “capitalist” economy. That is what we did, after all. We saved failed institutions, failed individuals, and failed thinking. That is wrong on many levels. But we went a step further: we saved dishonesty, criminality, and corruption. That is a far more serious proposition.

Bill Black is arguably the most important voice when it comes to the criminality that was preserved. If you are not well-versed in the criminal aspects of the crisis and in Gresham’s Dynamics, the following is an important video to watch (I recommend following the Powerpoint presentation while running the video – filmed 2/18/2010):

Powerpoint slides from the presentation can be viewed here.

Steinhardt Lecture 2010 at Lewis & Clark College presents Dr. William Black from The Resource Lab on Vimeo.

Capitalism requires failure. Without failure, the worst actors game the system so that they are able to thrive. In the process, they deprive honest entrepreneurs of opportunities that make a capitalist economy stronger and more resilient. Without failure, Gresham’s Dynamics – in banks, in ratings agencies, in government, in academia – are perpetuated and catalyzed. And without failure, moral hazard corrupts the thinking of all market participants; they are taught that crime pays and honesty is, in some ways, punished.

We have perpetuated criminal environments that are not going to resolve themselves. Those environments are once again buried in profits and bonuses and rising stock prices and lobbyist-written legislation that creates opacity. But the criminality has not been addressed. Since our leaders are not undertaking the house-cleaning that could rid us of the worst actors and send a message to others, we have to expect the corrosive results of institutionalized dishonesty to continue to undermine our capitalist economy in fundamental ways. Unfortunately, we likely will not have the luxury of being able to lower interest rates and loosen credit availability so as to paper over our economic problems next time… we have played those cards.

The USA has arguably been stressed to its limits when it comes to public debt, private debt, currency debasement, and interest rate drops. Add in rampant dishonesty in the highest echelons of private and public power, and we are facing a serious threat to our well-being.

Predicting how this will play out is impossible. But ignoring the big issues is a mistake. At the very least, if you want to protect yourself and your community, you have to pay attention to what is happening in our macro-economy. And since no mortal with a job outside of finance can possibly stay on top of these issues, it is vital to find analysts who are not compromised.

Capitalism Without Failure

Hell has frozen over.

These columns have defended the independence of the Federal Reserve from attacks on the right and left, but after last week the central bank is on its own. It’s impossible to defend the Fed’s rank electioneering as it lobbies for more political and taxpayer intervention in the housing market—just in time for the election campaign.

This extraordinary political intrusion came in the form of a 26-page paper that the Fed sent to Capitol Hill last Wednesday, without invitation, graciously offering what Chairman Ben Bernanke called a “framework” for “thinking about certain issues and tradeoffs.” He was underselling his document. The paper is a clear attempt to provide intellectual cover for politicians to spend more taxpayer money to support housing prices.

I didn’t Ticker that paper originally as it was simply too outrageous to bother with.  There’s a point at which The Fed’s actions reach into the realm of rank politicking and attempts to protect their “chosen many” from their own foibles; we’ve certainly seen plenty of games played in the last three years.

But this paper, sent to Congress unsolicited, apparently went too far for even the Journal’s bankster-crank-stroking reflexes.  Among other things it said:

In this report, we provide a framework for thinking about directions policymakers might take to help the housing market. Our goal is not to provide a detailed blueprint, but rather to outline issues and tradeoffs that policymakers might consider. We caution, however, that although policy action in these areas could facilitate the recovery of the housing market, economic losses will remain, and these losses must ultimately be allocated among homeowners, lenders, guarantors, investors, and taxpayers.

This is where the problem is, of course.  Where does the government get the right to “allocate losses” through interventions?  The dirty little secret about the housing mess is that:

• The Fed was largely complicit in causing the housing bubble.  In fact, Greenspan intentionally stoked this speculative orgy and further, both he and Bernanke intentionally averted their eyes from the monstrous credit expansion that “maintained” economic output and which was utterly unsustainable — a mathematical fact that was obvious to anyone who bothered to look at the very data The Fed maintains!  In other words The Fed is now trying to find ways to evade responsibility for what it did.
• The losses are real but being hidden by further Fed actions!  Just one example is the hundreds of billions of dollars of second lines (Home Equity and “Silent Second” mortgages) that are behind underwater, non-performing first line mortgages.  These have an actual net present value in a foreclosure of zero, as they’re not entitled to one penny of recovery until every dollar of the first is satisfied, and the first is underwater and thus will not be fully recovered.  All of our large banks have monstrous exposures in this regard — almost none of these loans were securitized and thus they are all sitting on bank balance sheets, most at nearly 100 cents on the dollar.  These accounting values are fictions.

The reason that The Fed and our Government are desperate to hide these losses, praying for a miracle to somehow keep them from being recognized, is quite simple — these long-duration investments are typically held by insurance companies and pension funds.  Recognition of these losses will cause the allegedly “healthy” firms and funds that hold this paper to be shown to be severely impaired or worse.

Yet there is no evading these losses.  I’ve been pounding the table on these issues for five years and yet the alleged “extend and pretend” game has not led to value recovery.  Instead, the value of homes has continued to decline!  At some point the games end as these notes mature and an actual accounting must be made.  The idea that The Fed would propose that “taxpayers” eat these embedded losses is both an outrage and a circular argument — do you really care if you have your taxes raised to the point that you go bankrupt or you lose your pension and go bankrupt?  Either way you’re bust!

The only solution is to accept that which we cannot change.  Bad loans create losses when the loans are made and nothing can be done about that later on.  You can change who eats the loss, but when it all devolves back down to the public then which hand you pick someone’s pocket with makes no difference at all.

The more important issue here is holding those at The Fed personally and professionally accountable for this massive cock-up.  There is a long history of intentional evasion of the law, including Alan Greenspan’s “approval” of the blatantly-unlawful Citi/Travelers merger that was later made retroactively legal by Gramm-Leach-Bliley and evasion of reserve requirements with sweeps.  These sorts of machinations are nothing more than allowing a gambler to double down on a lost bet, and when one looks at the history of leverage in the financial markets and The Fed’s active and outrageous actions in this regard, given their charter which mandates that they control credit aggregates, it is clearly time to stick a fork in these mendacious bastards and remove the Board of Governors wholesale.

Ben Bernanke’s zero-interest rate policy (ZIRP) and command-economy efforts to maintain mispricing of risk, debt and assets are destroying capital and capitalism.  No wonder his policies have failed so miserably.

To understand why Federal Reserve Chairman Ben Bernanke’s efforts to restart economic “growth” have failed so completely and miserably, we need to compare the present with the end of the Great Depression.There is a wealth of irony in the Chairman’s supposed expertise on the Great Depression, as his policies have backfired on “fixing” the Great Recession.

Rather than “fix” the economic malaise by re-inflating the credit-boom bubble, he has only increased the systemic vulnerability to a much greater crash.

This is akin to an “expert” on World War I recommending a bigger, stronger more costly Maginot Lineas the “solution” to military vulnerability.

In the Great Depression, excessive speculation built on systemic fraud and embezzlement led to the implosion of a vast credit bubble.

The “solution” touted then and now by saviors of the Status Quo was to “save” the financial sector and debtors by substituting Federal spending (with the money being borrowed via the full faith and credit of the U.S.A.) for collapsing private borrowing and spending.

This “solution” failed because it refused to address the real problem, which was over-indebtedness in service of mal-investment.People lost faith in the system for good reason–it was fraudulent and opaque, and thus mispriced risk. If you can’t price risk or assets, then it’s insane to either borrow or invest.

The “solution” to the Great Depression was massive Federal debt and spending on World War II–but the “solution” had a key characteristic that is almost universally ignored.

Depression-era calls to bulldoze homes to be rebuilt and destroy grain so it could be regrown were rightly dismissed as mal-investment on a vast scale. But war is more or less an equivalent “consumer” via destruction.  Hundreds of ships were built and then sunk, thousands of aircraft were built and then shot down or lost, and monumental mountains of provisions and supplies were manufactured and then either consumed or lost to enemy submarines, bad weather, rot and a host of other causes.

At the end of the war, most of the leftover goods manufactured–ships, tanks, aircraft, munitions, etc.–were mothballed or scrapped.

Despite this staggering waste, the war spending launched a long boom.  How did it work this magic? One, it constructed new plant; unlike the Keynesian calls to bulldoze houses so they could be rebuilt, the war investment created factories that could then be converted to produce consumer goods.

More importantly, the war spending created a vast pool of private capital–what we call savings.As resources were diverted to the war effort, rationing limited both the manufacture and availability of consumer goods. Meanwhile, tens of millions of people were put to work, either in the Armed Forces or in the war manufacturing sector, and most had few opportunities to spend money. Industrialists also piled up war profits.

Though extend-and-pretend policies did not write off the overhang of debt that had depressed the economy and destroyed the market’s ability to properly price risk and assets, this gargantuan pool of private capital simply overwhelmed the remaining debt overhang.

Third, trust in the system was restored: the Federal government had effectively “won the war” by printing money and drawing upon the nation’s vast surplus of energy and labor, and the manufacturing and financial sectors had been brought to heel by the extraordinary demands of the war and by legislation that had responded to financial fraud and over-reach.

Recall that the root of “capitalism” is capital.  Capitalism requires two fundamentals–capital to invest and open markets for goods and services that openly price risk, assets, hedges and goods.

Note that debt is not listed.  Debt is not essential to capitalism. Indeed, if we explore the roots of modern capitalism in the 14th and 15th centuries, we find that commercial credit and hedges were the key ingredients, not debt. Lacking sufficient coinage to handle the rising volume of trade, merchants settled accounts at the great trading fairs in Europe.

Long, risky trade voyages were hedged with the equivalent of options and limited stock companies that distributed risk for a price. Leverage was limited by the transparency and appetite for risk.

Compare that with Bernanke’s policies, all of which severely punish savers (i.e. the accumulation of capital) and reward leverage and debt.By lowering interest rates to zero, Bernanke has imposed the opposite of the World War II experience of forced savings–he has made cash into trash and pushed everyone into risk assets.

By making credit dirt-cheap and backstopping financial-sector losses (i.e. institutionalizing moral hazard), Bernanke has destroyed the market’s ability to discipline mal-investment and openly price risk and assets.

World War II launched a boom precisely because private capital accumulation/savings were enforced;  when the war ended, there was a vast pool of capital available for investment and consumption.

Bernanke’s policy is to punish capital accumulation and reward leveraged debt expansion.Rather than enforce the market’s discipline and transparent pricing of risk, debt and assets, Bernanke has explicitly set out to re-inflate a destructive, massively unproductive credit bubble.

This is why Bernanke has failed so completely, and why he will continue to fail. He is not engaged in capitalism, he is engaged in the destruction of capital, investment discipline and the open pricing of risk, debt and assets.When the next “credit event” sweeps round the Fed’s Maginot Line of encouraging mal-investment and masking fraud and rolls up the entire financial sector’s defenses against mispriced risk and credit, Bernanke will be inside the over-run HQ, wondering how his “brilliant” policies could have failed so spectacularly.

Charles Hugh Smith – Of Two Minds