Archive for the ‘Shadow Banking’ Category
Nearly four years after the financial crisis began, regulators on Tuesday finally agreed to the criteria they will use to decide which parts of the shadow banking system to regulate, but they still haven’t imposed tougher standards on a single insurer, hedge fund, private-equity shop or money-market mutual fund. Failure to do so exposes the U.S. economy to unnecessary dangers.
How about putting a stop to counterfeiting?
Yes, let’s just call this what it is: counterfeiting of our nation’s currency by these institutions. And we haven’t stopped it because if we do then we’re forced to face reality, and that’s a bad thing from the point of view of all the pigs at the trough — including those in DC.
For the first three months the Federal Government added $359.1 billion in new debt to the Federal Balance sheet. This is approximately $1.4 trillion, or 9.4% of the economy.
To put this into proper perspective one must understand that this is 9.4% of alleged “demand” for goods and services that does not actually exist. That is, it is fake demand, as you and I do not earn enough money to pay for those goods and services. By conjuring this new debt out of thin air the government is presenting to the economy a claim of demanded goods and services that doesn’t really exist and never did.
We have been told that the economy “de-levered”. This is a lie.
What reduction of leverage? The Federal Government has simply stepped in to prevent the removal of that excess leverage. And by doing so it has taken over the role of the “shadow banking system” in propping up demand — replacing what was blatant and outrageous counterfeiting of our nation’s currency.
There has been no enforcement because the people in DC — including Bernanke — know damn well that the day that this leverage comes out mathematically a deflationary depression cannot be avoided.
But the idea that we can continue to avoid the need to adjust our economy back down to that which we can actually pay for with real production and real earnings is a fallacy. Eventually one must stop borrowing more and more money to present a false picture of demand. Your only option is to do it voluntarily or be forced into it when the lenders realize they will never get repaid and cut up your credit line.
There are those who think there is some way to avoid the pain that has to be taken in the economy. That we can avoid telling seniors the truth — their “Medicare” was never funded and won’t be, because it can’t be. That students now amassing $100,000 in debt to get a degree in sociology were fools and lived high on the hog beyond their ability to pay — and thus will go bust (as will the schools that led them on.)
That everyone cannot have a pony, to be blunt.
I’m quite surprised that the charade has gone on as long as it has, to be frank. I didn’t think we’d get through 2010; the 2009 scam in allowing the banks to “extend and pretend” would blow long before now. That they got more than a year beyond my wildest expectation without it all coming apart has been a rather rude surprise.
But no small part of that surprise came about because I never believed our elected and appointed officials were so dumb as to try to run this scheme this far out, for this long. They know the disaster that waits around the corner. They know full well, especially Bernanke, that the real monetary inflation over the last few decades looks like this:
The hubris displayed by these jackasses thinking that mathematics — the basics of exponential functions and the ever-larger amount of distortion that must be added just to tread water — can be cheated is astounding. It boggles the mind to believe that any man, or any set of policies, can cheat math; that sort of magical thinking borders on what infested the dark ages in the form of alchemy.
I believe that Bernanke, and the rest of the FOMC, are coming to realize that their grand scheme not only didn’t work but can’t. Oh sure, there is one constant in Washington DC — you will never hear anyone there say “I fucked up.” Three little words that are simply never spoken within the beltway.
The not-so-amusing part of this mess is that not only does Bernanke know how far he’s in the soup but I suspect he knows how far Obama has shoved him down the bowl of the toilet. Obama’s recent tirades against the United States Supreme Court has now led to a formal rebuke and “homework assignment” in one of the Courts of Appeals. His revisionism has departed from reality to the point that the Journal’s outline this morning reads like something of Aesop.
But all of this comes from the same delusion — that the leverage of the last 30 years, and the political promises, could somehow be met and the people who were alleged “beneficiaries” would get their “free cheese.”
That’s a lie, and it’s one that we had better get out in front of and deal with, whether we want to or not. We must tell the truth. Our legislators are no better at this than Obama is, despite the Journal’s protests to the contrary, and Mittens Romoney is one of the chief architects of leverage abuse himself. He will no more balance the budget and withdraw the morphine that we have built our current house of cards on than will Obama.
There is no solution to be found in more fraud. And make no mistake — the claims being made in this regard are nothing more or less than frauds. Our Central Bankers are fraud enablers — they knew damn well that the so-called “MBS” had no mortgages in them, for example, and that these loans were being written to people who had no money, no job, no assets and no ability to pay. They didn’t care because if they blew the whistle on this scam and shut it off the banks and non-bank institutions, such as insurance companies and pensions, would have been instantly rendered insolvent.
But pretending you’re solvent doesn’t make it so, and continuing to do the same thing that rendered you insolvent makes you more insolvent. In this regard Paul Volcker’s brush with the banks is instructive — he knew they were all broke after they made disastrously bad loans without regard to ability to pay but while he provided them forebearance on their marks he also told them that they had to get that crap off the balance sheet and stop lying or he would close them down.
In short, he told them to get the leverage out of the system and do it in a reasonably-contemporary fashion — or else. They complied because the alternative was that they were all out of business and they knew it.
This time around we’ve done nothing of the sort. We’ve not done anything aobut the scams and frauds. The claim of “de-leveraging” is a damned lie; all we’ve done is shifted who’s carrying the leverage, adding ever-more to the Federal Government in a puerile and futile attempt to prevent recognition of the truth.
It won’t work folks. It never has in the past and it won’t this time. All it will do is make things much, much worse. As we have seen massive shifts in the markets and a dramatically “straight up” sort of market mentality has taken over the dangers have gone through the roof. The markets, addicted to the morphine provided by The Fed and Obama, are now at the point of being so addled that the “hot money” bubble risks bringing not just recession but a literal collapse of our government’s funding.
If you believe this is hyperbole you’re simply dead wrong. The deferment of bad debts does not make them disappear, and when the root of the problem is compounding deferment makes the problem much worse, as the distortions compound as well. We are now in a position where a literal 30% or more of our economy exists through nothing more than compounded leverage abuse and should the Federal Government’s deficit spending disappear through choice or externality an immediate contraction in GDP of more than 10% would result.
We still have the ability to choose to do the right thing, but that choice is soon to disappear.
To those who say that the “powers that be” will never allow this to happen, the simple reality is that the choice isn’t theirs to make. If you believe it is then it is incumbent upon you to demonstrate through mathematics how they’re going to achieve what you claim will occur.
Discussion (registration required to post)
With the FOMC meeting currently in full swing, speculation is rampant what will be announced tomorrow at 2:15 pm, with the market exhibiting its now traditional schizophrenic mood swings of either pricing in QE 6.66, or, alternatively, the apocalypse, with furious speed. And while many are convinced that at least the “Twist” is already guaranteed, as is an IOER cut, per Goldman’s “predictions” and possibly something bigger, as per David Rosenberg who thinks that an effective announcement would have to truly shock the market to the upside, the truth is that the Chairman’s hands are very much tied. Because, all rhetoric and political posturing aside, at the very bottom it is and has always been a money problem. Specifically, one of “credit money.” Which brings us to the topic of this post. When the Fed released its quarterly Z.1 statement last week, the headlines predictably, as they always do, focused primarily on the fluctuations in household net worth (which is nothing but a proxy for the stock market now that housing is a constant drag to net worth) and to a lesser extent, household credit. Yet the one item that is always ignored, is what is by and far the most important data in the Z.1, and what the Fed apparatchiks spend days poring over, namely the update on the liabilities held in the all important shadow banking system. And with the data confirming that the shadow banking system declined by $278 billion in Q2, the most since Q2 2010, it is pretty clear that Bernanke’s choice has already been made for him. Because with D.C. in total fiscal stimulus hiatus, in order to offset the continuing collapse in credit at the financial level, the Fed will have no choice but to proceed with not only curve flattening (to the detriment of America’s TBTF banks whose stock prices certainly reflect what a complete Twist-induced flattening of the 2s10s implies) but offsetting the ongoing implosion in the all too critical, yet increasingly smaller, shadow banking system. And without credit growth, at either the commercial bank, the shadow bank or the sovereign level, one can kiss GDP growth, and hence employment, and Obama’s second term goodbye.
As the two charts below demonstrate, the economy’s ongoing inability to create any growth in the shadow banking system, primarily as a result of the complete shut down of the securitization machine, has been and continues to be, the biggest threat to the Fed. Specifically, after hitting an all time high of $20.9 trillion in March of 2008, this all too critical source of “credit money” has collapsed by a whopping 25%: since the peak $5.5 trillion of credit, and not just any credit, but shadow, and thus non-regulated credit, has evaporated! And as Q2 demonstrated, after almost bottoming in Q1 following a decline of just $57 billion, or the smallest Q/Q decline since Q2 2008, the drop has picked up again, with a one year high $278 billion plunge in Q2.
Among the liability components of the Shadow Banking system’s credit money abstractions, we look at:
- Money Market Mutual Funds: at $2.6 trillion, a decline of $41.6 billion Q/Q
- GSE and Agency Paper: at $6.5 trillion, a decline of $73.8 billion Q/Q
- ABS Issuers At $2.2 trillion, a decline of $80.4 billion Q/Q
- Repos at $1.2 trillion, a decline of $49 billion Q/Q
- Open Market Paper at $1.1 trillion, a decline of $50 billion Q/Q
- and these declines were offset by a tiny increase of $17 billion to $726 billion at Funding Corporations
Altogether, added across this amounts to a massive $278 billion in the second quarter, and explains why GDP, when the manipulation from the Census Bureau is eliminated would have probably declined. What is worse is that should this decline continue without an offset, there will be no economic growth guaranteed.
So where can said offset come from? Well, just as there is a shadow banking system, so there is a traditional commercial bank system with listed liabilities. To be sure, for the duration of collapse in the shadow banking system, this has been the only offset, although granted one that is not nearly doing a good enough job. Specifically, total liabilities of Commercial Banks in Q2 were $13.4 trillion, an increase of $238 billion in the quarter. Alas, this is nowhere near enough to offset the decline in Shadow Banking, having grown by “only” $2.6 trillion since Q2 2008, even as shadow liabilities declined by double this amount. Yet there was a brief saving grace came in Q1 when the spike in Traditional liabilities more than offset the drop in Shadow, as the cumulative total rose by $337 billion, the most since 2008. Too bad, however, that adding across these two categories (second chart below), we once again witnessed a decline in Q2, amounting to $40.1 billion. This explains not only why QE2 could only do so much, but why GDP growth has rolled over and is now almost certainly negative.
What is most important to keep in mind, is that Traditional Commercial Bank assets only grow courtesy of QE. And with Shadow banking continuing to implode, Commercial Banks have to pick up the slack or else… Which in turn means Bernanke has to keep pumping reserves. Whether banks use these to lend out, or to buy shares of Netflix is irrelevant: remember – America, and the entire developed world, is a credit driven system. Take away credit growth and it is game over.
Which explains why tomorrow’s decision is a formality: Bernanke has no choice but to continue offsetting the relentless contraction in shadow liabilities, which as of Q2 collapsed at an annualized rate of over $1 trillion. Incidentally this, +$1, is the very minimum that Bernanke
will have to bring into reserve circulation to offset the relentless deleveraging of the once biggest contributor to American growth, which ironically is now the biggest adverse factor.
That reversion to the mean sure can be a bitch.
Submitted by Greg Simmons and Brett Buchanan of Scope Labs
Are financial markets a direct reflection of the overall health of a nation? I wish they were not, but I fear they are.
I wonder at times if our nation has entered a state of purgatory –
all of us mulling around in the waiting room to Hell, anxiously
counting the minutes until the grim reaper saunters through the door
sickle in hand his mission to send us off to eternal damnation.
Unfortunately, there is little time to close this door so that we may
stave off this potential fate that looms so near. What we need to alter
this course is a procession of men who possess moral fortitude and
common sense, men of rationality and reason. Men of action who will set
in motion the dismantling of institutions that bleed this nation dry.
Hope is not a strategy. This present state of manufactured optimism
emanating from the White House and our news outlets is contemptible. We
are in dire need of new reformist leadership and of new voices that
will speak the truth. A national purification is long overdue. Time is
not on our side. Look at the track record this nation has racked up
over the last few decades and this economic and moral purgatory in
which we find ourselves might very well mark the beginning of our walk
of death down the long road to Hell.
I make this analogy of a national state of purgatory not in jest,
but rather in practical terms. This nation has gone the way of an
absolute meltdown of morality and ethics. We’ve reverted to a sort of
Wild West where anything goes. From the halls of congress to our
corporate boardrooms our collective morality bar has sunk so low we
cannot go any lower without disconnecting from the great past this
nation is starved to regain. We stand dangerously close to the point
where immorality begets our undoing.
Personally, I am father to a daughter of fourteen years. Brett, my
co-author, is father to a twenty-month old daughter and an
eighteen-year old son. We desperately want to create for our children a
better world. But we are fallible men, and certainly not saints. The
paragraphs you are about to read are not written from some moral high
ground, or a Holier-than-thou pulpit, but rather from saddened hearts
when we see that by walking our own moral tightrope, if we were to
allow ourselves to slip below the bar, however slightly, we would be
just as guilty as the worst perpetrators of our nation’s moral
destruction. Also, when witness to greater moral transgressions, by our
own inaction, we become part of the problem. And we are just two men.
Amplify this by fifty million, one hundred million, or three hundred
million fold and it is no wonder immorality permeates our society.
This article is our personal effort to call people’s attention to
the truth. The brevity of our circumstance is immeasurable by past
reference. Economically, we have never been so challenged. Over the
past few decades a gullible US population cheered the halls of congress
and the Oval Office alike as the incestuous bedfellows of money and
politics ushered in a financial Coup d’état – co-opting our public
trusts with the greed and excess of Wall Street. Profits are now had at
any cost – damn the long-term consequences. Instead of being exposed as
the obvious fraud he was, Bernie Maddoff was coddled by the SEC – an
institution whose role as regulator is a complete failure. As Wall
Street and Washington raped an entire nation, employees of the SEC were
too busy surfing porn on the Internet and running private businesses
instead of doing the jobs taxpayers pay them to do. All the while,
young girls were selling their virginity to the highest bidder in
public cyber-forums where grown men (not hormonally charged teenage
boys) seek out their sexual fantasies in the netherworld of Internet
pornography. What of the wives, children, and even parents of these
men? Do they approve of such questionable actions?
Think of our children turning on the television to see people eating
bile, cow blood, and live bugs for money on game shows like Fear
Factor, or Flavor Flav and his hit reality show where he maintains a
stable of women all of whom physically fight each other to have sex
with him because he’s a celebrity – and a damn ugly one at that. And
finally, there’s always Survivor, the ultimate demonstration of all
things wrong with modern human interaction. A reality show that pits
person against person in a deceitful game of moral destruction where
lack of ethics are rewarded, instead of punished. Survivor, this is
what our nation’s leadership has become. Win at any cost. Damn the
future of anyone but myself.
Morality is in great part the measure of a nation. Have we unlearned
morality? Is this why we find ourselves staring down the abyss?
We are allowing ourselves to become more corrupt by the minute. We
stare into the face of our future being raped, but we do nothing. We
are as corrupt as the corrupters. We accept the unacceptable. We fail
to understand that absolute power, corrupts absolutely. In what will go
down as the greatest financial heist in history our leaders have chosen
to reward corrupt individuals and their hollow corporations for what
are arguably criminal levels of risk behavior by the moneyed elite of
this country. What message does that send to our children, or to anyone
for that matter? Be as corrupt as possible in the US and you will be
rewarded? Be the biggest failure jeopardizing the fate of others then
stand in the corporate welfare line with all the other wealthiest
institutions of the world, your greedy hand extended for a government
bailout check while you simultaneously foreclose on an entire nation?
Talk about the rich corralling the masses. It’s no wonder someone
coined the term “The Sheeple.”
The path we traveled to this purgatorial limbo is both easily
understood and misunderstood. The answers to understanding are
sometimes right in front of us. What are seemingly benign things or
actions, those everyday judgments or decisions we make to do one thing
or another, are not always benign. Tell a little white lie to make that
one sale that will put us into our bonus. Rig the game in our favor so
that we might enjoy a little more opulence for the few decades we have
remaining on this planet. Look the other way while the Federal Reserve
and Wall Street blow economic bubble after economic bubble and in the
process create a six-hundred trillion dollar shadow banking system that
plays by no one’s rules but its own. In the case of Goldman Sachs, and
Wall Street in general, lie, cheat, and steal their way to
profitability at the expense of three hundred million taxpayers. The
fact is that we have become an uncooperative nation willing to take
advantage of anyone for the sake of profit. The idea of building a
cooperative future where everyone wins has been sacrificed at the altar
It might be this purgatorial limbo I speak of is simpler than it
appears. It could be that we are collectively suffering the
consequences of the “Peter Principle”, or getting to the job of
failure. This principle supposes that an individual rises in a
corporate hierarchy to their first level of incompetence. An assembly
worker gets promoted to supervisor then to assistant manager, then
manager, until he next gets promoted to an upper management job for
which he is ill equipped and subsequently gets promoted no further as
he can no longer demonstrate the competence required for the task at
hand. He rather relies on subordinates who are then stuck with an upper
manager who cannot carry out his own duties. Could this be the state of
our nation? Have we been promoted as far as our competence allows? Are
we in fact incompetent to handle our future? Have we now elected a man
just incompetent enough for the Presidency who is being manipulated by
Goldman Sachs, the Federal Reserve, and a circle of (previous) Wall
Street insiders now on the government payroll as cabinet members and
high-ranking advisors? The saddest thing is that we sit idly by whilst
our virtue is being stolen. We do nothing.
A view of the world through rose-colored glasses does no one, any
good. We are not as resilient as we think we are. Instead, we exist in
a world of synthetic productivity where multi-tasking renders us
incapable of doing anything effectively or with any level of
competence. Multi-tasking, that art of simultaneous ineffectiveness is
a counter productive weapon that to a large degree has contributed to
the potential failure of this nation. If you were to listen to Alan
Greenspan however, you would believe that multi-tasking through
technological gains by way of the “new paradigm” was the gold at the
end of the Information Superhighway and that exotic mortgages and the
burgeoning spending class paved the road to riches. We now know these
premises to be empirically wrong.
It can now be argued that what would seemingly be advancements in
productivity are proving to be setbacks. The Information Superhighway
has led us to an era of technological arrogance. In reality all we have
accomplished is to dilute our ability to carry out simple tasks as we
click from a quarterly sales report due in an hour, to Facebook, to
on-line solitaire, to writing an email explaining to our boss why the
quarterly report will be delayed this day. We are a nation of excuse
makers. We look for someone else to keep us one step ahead of our
accumulating debt that smothers the potential of what could have been
an equitable future. Ironically, it is our technological arrogance that
impedes our ability to produce and manufacture our way to prosperity.
Craftsmen who used to flock to this country to fulfill the needs of
a manufacturing base flock here no more. “Made in the USA” used to mean
something. It meant quality. It was the definition of industrial
capitalism. But now through the wonders of globalization we have
exported our craftsmanship through an outflow of jobs to China and
India as we turned everyone in the USA into real estate agents,
mortgage brokers, and web designers – a perfect playground for bankers
to ply their craft, lending money in every creative manner both
thinkable, and unthinkable. “Made in the USA” has been reduced to the
status of punch-line – synonymous only with “Mortgage Backed
Securities” and other “Toxic Derivatives.”
Is it any wonder we have evolved into the ‘entitled society’? If we
weren’t on the government payroll, or subsidized by the US taxpayer
through social welfare then we were borrowing our way to prosperity.
Enter the God-fearing middle class. Just dumb enough to buy into the
scam a couple hundred million people began signing over their
paychecks, selling their future for the enjoyment of having things now.
We were transformed into non-productive Sheeple, selling our souls for
an easier life in lieu of a better future for our children. At our
current rate of productive attrition we will soon be a nation of
declawed housecats, possessing no skill-set whatsoever to survive in a
world where the ability to produce real goods still reins supreme. Yet
we remain the ‘entitled society’, when we are entitled to nothing.
We forget (through economic amnesia) that throughout history all
societies fail. Nicolaus Copernicus maintained that civilizations
failed when bad money, controlled and understood by an elite few, drove
out good money. The same can be said for morality. Bad, drives out
good. This is a reality of which we should all be acutely aware but
rather are immune to its possibility. We dangerously believe we cannot
fail. That, in fact, is the greatest gamble of all. A roll of the dice
against history, a bet against all natural laws of the universe, all
things are in a state of entropy. All things eventually wither away to
nothing. To possess longevity is to be ahead of the universe. Sadly, we
have constructed a fragile world that produces material things that do
not last. The fiat money we use as the currency of our production is by
design, destructive itself. The Federal Reserve prints greed, nothing
more. But still we covet it. We pursue it as if it had value. And in
this pursuit we destroy earth’s resources as if the laws of nature have
no relevance. We believe there is only now.
We, the entitled society, morally and fiscally bankrupt have borrowed,
spent, and bailed our way into a historical corner. Nero should be so
proud. Our public trusts are nothing more than government sanctioned
check-kiting operations shifting liabilities from one credit card to
another faster than our creditors can say “Federal Reserve.” The
Ponzi-scheme that is our fiat currency system is about to go the way of
what was for a time the symbol of American superiority, General Motors.
It used to be said that what was good for General Motors was good for
our nation. As I claimed in 2005 that GM would go bankrupt I will now
guarantee that the US government is soon to follow. How our ultimate
entropy will take form I cannot say, but form it will. We will default.
We will restructure. It will be at this point our arrogance will end.