FedUpUSA

Archive for the ‘Federal Reserve’ Category

Much of this will not be new to regular readers, but for those of you who are new to trying to understand our economic situation, or for those of you who have friends and family that never seem to ‘get it’ or continually tell you that you’re nuts, here’s something you can show the skeptics.

The next time you find yourself at a family gathering and Uncle Jim insists that we’re ‘recovering’ and ‘everything’s going to be just fine, ‘ whip this out, you’ll be the life of the party.  

A New Economic Game:  ”The Truth”

Derivatives expert Janet Tavakoli takes a hard look at what — and who — caused the financial crisis.

Janet Tavakoli calls it as she sees it — and what she often perceives isn’t a pretty picture. But for any advisor, or other investment professional, to ignore this industry veteran’s razor-sharp insights would be folly.

A gutsy critic of both Wall Street and the federal government, the Chicago-based consultant, specializing in derivatives and structured products, pulls no punches. Through her independent research into the global financial crisis, Tavakoli uncovered what she calls massive, widespread fraud committed by a network of mortgage originators, securitizers, and rating and regulatory agencies, among others.

Earlier, the founder of Tavakoli Structured Finance, 58, predicted the thrift industry blow-up and the demise of Enron. Then she foresaw that excessive leverage and structured products’ misratings would lead to a global financial crisis.

In her just-published e-book, The New Robber Barons, Tavakoli charges that the relationship between failed mortgage lenders and investment banks that securitized and sold risky loans was “the largest Ponzi scheme in the history of our capital markets … a financial Pearl Harbor,” where “investment bankers piloted many of the planes.”

Now Tavakoli sees another huge financial crisis looming.

The University of Chicago MBA has traded, structured and sold derivatives at firms including Merrill Lynch, PaineWebber and Westdeutsche Landesbank; and she had earlier stints at Bear Stearns and Goldman Sachs. Research recently talked with her about red flags and preventive solutions.

You write that, in the past three years nothing has been fixed but that we must hold Wall Street responsible for the fraud that resulted in the financial crisis. What should be done?

We need to have investigations. But with the pushback and all the lobbying, what they’ve been counting on is that the statute of limitations for some of these frauds is expiring. So if you don’t file complaints, you may not be able to.

Members of Congress are enabling the lack of punishment and covering up great misdeeds in our financial system — and they’re doing it with no fear of consequences — i.e., being voted out of office, in which case they could find themselves the subject of investigation.

What do you mean: “covering up”?

Many people are covering up for cronies who have a lot of money sloshing around. We threw money into the financial system with no accountability and thus made the problem worse. Our system has been completely infiltrated and bought off. Things aren’t changing because Big Money doesn’t want it to change.

What other indications are there of a cover-up?

The MF Global dog-and-pony show. The attitude toward bundlers like Jon Corzine [the firm’s ex-CEO], who is a big bundler for the Obama campaign, is that the guy can do no wrong. This was before he even testified. People who are raising big money for campaigns get off with no real investigation.

In the Sarbanes-Oxley age, for MF Global to say they were unaware of what they were doing beggars belief. And yet there has been no indictment.

Is President Obama part of the cover-up?

Yes, in that he’s enabled it. He’s left people in place who crashed the global financial system in the first place: [Treasury Secretary] Tim Geithner and [Federal Reserve chair] Ben Bernanke. Obama had told us: “You can’t keep doing things the same way and expect different results.” So he’s been quite a hypocrite.

Who else is in the cover-up?

Mary Schapiro was appointed [by President Obama] to head the SEC. She was formerly head of FINRA, the antichrist of investor advocacy! Yet she was chosen SEC [chair] because the regulators are captive by and serve the people they’re supposed to be regulating. They do not serve investors.

In a way, Obama has been the anti-regulator because he didn’t put people in the regulatory agencies, the Fed or the Treasury who would investigate and fix things that are wrong in our global financial system.

If he’s re-elected, then presumably, things will continue in this same way?

Yes.

What if a Republican is elected President?

Who else is not in the pocket of Big Money interests!

So, no matter who’s President, these crimes — if you want to call them crimes — will be perpetuated?

Yes. And we do want to call them crimes! They are crimes.

What should Obama do now to help Americans?

He has a lot of resources at his disposal, one main one being moral suasion — he’s got the pulpit. When there was a crisis, Reagan, Carter, Bush went on television and explained what needed to be done. We haven’t seen that kind of leadership from President Obama. If anything, the American people have been told things to make them think [conditions] aren’t really as bad as they are: inflation isn’t as bad as you think because an iPad is cheaper now — nonsense like that.

So the public is being poorly informed?

Yes. Therefore, financial advisors need to be doing fundamental analysis of investments and not [only] be reading the Wall Street Journal or, God forbid, watching CNBC.

In other words, FAs should do their own research and figure things out for themselves.

Yes. Sadly, you’re on your own. That’s part of how we got into this mess: We lost the art of rolling up our sleeves and looking for opportunities.

On Internet TV, you stated that we’re “absolutely vulnerable to a repeat [crisis] because the fraud went unpunished and we printed money like crazy to bail us out of the last one.” That’s scary.

But the fact is we’ve bailed people out and had no consequences for them. So it emboldened them to turn around and behave in the same way. Look at banks like JP Morgan: Shortly after the crisis, they thumbed their nose at the idea of trying to separate speculation from the rest of the bank. So if you don’t have restraints on behavior, you’ll see it repeated. And now we’ve made it worse. It’s like handing a drunk driver who got into a crash the keys to a bigger, faster car together with a bottle of vodka.

In every area of finance where we bailed people out, you see the same wrongdoers volunteering to help fix the situation. That’s pretty funny: They weren’t trustworthy before, and they’re not trustworthy now.

But what about the investigations that already have been held?

They’re all for show, and people end up with a slap on the wrist for minor issues. Investigators should be looking instead at the interconnected fraud that infected the mortgage lending market. And there is still a lot today, especially fraud on borrowers. If you go to the root of the problem and choke off the money supply, you stop the fraud in its tracks.

But the banks say they lost money.

The fact that a bank lost money isn’t an indication that they were a victim as opposed to being a perpetrator. A classic problem with control fraud is that the parasites destroy the host — in this case, the host being the bank and the parasites being the bank employees. If you were the victim of a control fraud by the people who worked in your own bank but meanwhile, you were collecting huge bonuses, you overlooked the control fraud within your own institution.

Read the rest at AdvisorOne

Issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

I could have written “if all the money vanishes,” but that would be misleading, for all unbacked money will most certainly vanish into thin air.The only question is when, not if. Frequent contributor Harun I. explains why:

Those who fail to understand that the Status Quo is impossible to maintain will be shocked when the disintegration is undeniable. But the whole thing was perverse to begin with. Words like capitalism and meritocracy are thrown around to make people feel good when, in reality, we have never owned anything, not even ourselves.How can we own ourselves when the very thing we use for subsistence can be cheapened or reduced to nearly nothing, not by market forces, but by central banks acting at the behest of governments? When a person does not control his labor, what is he?

I have been studying the monetary history of the world for the past few weeks. I can tell you that the second oldest profession is currency debasement. Nothing is new.

Of course, this should be no surprise, everything is cyclical. Humankind is like the trader looking for the Holy Grail. There is no perfect monetary system, there is only better and worse. And this one ranks among the worst.

I wait patiently for people to come to the understanding that the only way for everyone to get their money would be to destroy its value completely, meaning that a loaf of bread would be a million dollars. If a small fraction of what has to be printed to keep the system afloat has caused the price spikes in energy and everything else, imagine what happens as the disintegration picks up speed.

As the exponential debt curve moves closer to the pure vertical, the rate at which debts come due will approach infinity. Of course, while this is the ultimate mathematical outcome, the reality is that the system will collapse before this point is reached. But don’t think governments will throw in the towel. If history holds true the rise of a totalitarian government is just over the horizon.

Then there are those who get it right and wrong in the same breath. John Mauldin, in a KWN interview, thanked Europe for keeping the heat off the US. Mr. Mauldin apparently does not understand that our monetary policies are transferring what we do not want to the rest of the world, at least for a time, but not much more.

How many more food items be made smaller and sold at the same price? In effect this is a slow starvation of those at the margin. The 46 million American souls on food stamps will soon find their food stamps to be worthless.

Those who assert that a credit system cannot go hyper-inflationary may not have thought through the exponential effects on the relationship of the debt and productivity curves within the context of all money is debt and the only way to create money is for debt to be created. Eventually the debt curve accelerates away from the productivity curve, then the productivity curve collapses all together. Sovereign debt crises caused by governments stepping in to keep the debt system going is the last stage. Then comes the debt/currency collapse.

Even if the Fed stopped printing money, I fail to see the difference between too much money that is worth nothing, and no money at all. It’s not going to matter to a starving man that a loaf of bread is $1 million and he is a dollar short, or if it’s $1 and he is a dollar short.

Thank you, Harun. Many observers have addressed the key concept here, which boils down to this: paper money is an abstract representation of the real world.

This can be explained by a simple example. If there is $100 in the money supply, and $100 of goods and services to trade, then $1 will be exchanged for $1 of goods and services. If the money supply suddenly increases by $100, then the value of the existing $100 declines by half, as the money supply is now $200 and the supply of goods and services remains unchanged. Thus it now takes $2 to buy what $1 once bought in goods and services.

Holders of the currency have had half the value of their currency (what we call purchasing power) stolen by the central bank that issued the additional $100 in money supply.

Here is the primary point: issuing debt and printing money do not create wealth. All they can create is a temporary illusion of wealth.

(This is drawn from Chapter One of Resistance, Revolution, Liberation: A Model for Positive Change (Kindle); you can read Chapter One for free.)

Here is another example. Let’s say that a small group is stranded on a desert island that supports a handful of coconut palms. Each palm produces a limited number of coconuts each season. To facilitate trade, the group issues a currency that represents one coconut. (Lacking a printing press, they have to laboriously carve out a pattern on a rock to imprint a difficult-to-counterfeit stamp on the currency.)

This system works well, as the currency issued matches the number of coconuts harvested annually (for simplicity’s sake, let’s say that’s 100). 100 pieces of currency are issued to match the 100 coconuts that exist in the real world. The currency (let’s call it the quatloo) is an abstract representation of the goods available, i.e. the coconuts.

But then a wise-guy (i.e. the “central banker” on the island) realizes that if he prints another 100 quatloos, he and his buddies can buy up all the coconuts and fish without having created any real goods in the real world: the abstraction is used to con people out of their real coconuts.

The residents quickly catch on, and the “price” of coconuts rises to 2 quatloos. The wise-guy is addicted to the scam, and so he prints 1,000 quatloos, and then issues quatloos in denominations of 1 million.

Soon enough, each coconut costs 1 million quatloos.

Creating debt and paper money does not create real goods and services or real wealth.

As Harun observed, we have been promised trillions of dollars that can supposedly be traded for trillions of dollars in real goods and services, and buyers of bonds have been promised trillions of dollars of the same artificial exchange of paper for real goods.

Just as on the desert island, the growth of actual goods in the real world lags the growth of money, i.e. abstract representations of real goods.

The U.S. Central State (Federal government) has borrowed and squandered $6 trillion over the past four years, and the actual production of goods and services has not risen at all when adjusted for inflation. The central bank (the Federal Reserve) has expanded its balance sheet by $2 trillion, and yet all the assets it have tried to force higher are actually lower when measured in real goods such as gold, oil, wheat, etc.

It’s easy to expand the money supply and difficult to expand the actual production of real goods in the real world. Expanding the money supply and issuing debt that lacks collateral is just like printing quatloos on the desert island: you can print a million quatloos but that doesn’t create a single additional coconut.

If you print enough quatloos, then people will no longer accept them in exchange for coconuts. You will actually need a real coconut to exchange for fish.

This is why Greek towns are reportedly reverting to barter, the exchange of real goods for other real goods. We can anticipate that silver and gold will soon enter the barter as means of exchange that can’t be counterfeited or printed by wise-guys (central bankers).

We can also anticipate the issuance of letters of credit, a practice that stretches back to the trading fairs of Medieval Europe, as described by Fernand Braudel in his three-volume history of early capitalism, The Structures of Everyday Life (Volume 1), The Wheels of Commerce (Volume 2) and The Perspective of the World (Volume 3).

Since gold was in insufficient supply, letters of credit were issued and accepted on a basis of trust. At the end of the great fairs, the letters were exchanged and payment of balances due made in gold or silver. Thus 99 coconuts could be traded for 100 dried fish via letters of credit and the balance due in gold or silver was the value of 1 dried fish–a mere 1% of the total value of goods exchanged.

This is what happens when abstract representations, i.e. “money,” vanish into thin air. Alternative systems of exchanging goods and services arise: actual goods are exchanged via barter, tangible concentrations of value that cannot be counterfeited such as gold and silver are used as a means of exchange, letters of credit or equivalent are traded and settled with tangible goods or gold/silver, and eventually, a means of exchange (“money”) that is backed by tangible goods in the real world that can be trusted to actually represent the value being traded might enter the market.

That which is phantom will vanish into thin air, while the real goods and services remain to be traded in the real world.

Charles Hugh Smith – Of Two Minds

Nearly 3 years on, and there’ve been no prosecutions.  In light of the staggering amount of evidence proving intentional fraud, in addition to stark evidence of complicity by our regulators and the Federal Reserve, not a single person has been charged, but creditors lost over $300 Billion.
 

60 Minutes

Why Politicians Let MF Global Investors Get Taken