Ron Paul slams Fed’s bond-buying program; Political Pressure on Fed Mounts
by ilene - February 9th, 2011 3:49 pm
Courtesy of Mish
MarketWatch reports Paul slams Fed’s bond-buying program
Outspoken Federal Reserve critic Rep. Ron Paul, R-Texas, slammed the central bank’s latest $600 billion bond-buying program on Wednesday, saying it and near-zero interest rates haven’t led to job creation in the United States.
“Over $4 trillion in bailout facilities and outright debt monetization, combined with interest rates near zero for over two years, have not and will not contribute to increased employment,” Paul said at a hearing of a House Financial Services subcommittee he heads.
“Debt monetization” is a reference by Paul and other Fed critics to the Fed’s latest bond-buying program — a characterization rejected by Fed Chairman Ben Bernanke.
In essence, Paul is charging that the central bank is enabling profligate spending by the government. The term “debt monetization” is a buzzword for how some poorer countries conducted policies in the post-World War II era.
Political Pressure on Fed Mounts
WSJ’s Sudeep Reddy reports on concerns the Federal Reserve could be facing political pressure from Congress, as Rep. Ron Paul holds the first hearing of a new Fed oversight committee. Separately, Fed Chairman Bernanke updates Congress on the economy.
If the above YouTube does not play here is a link: Rep. Ron Paul Ignites Fed Worry
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Digg“If These Allegations Are Correct, It Appears To Have Been A Direct Transfer Of Wealth From The United States Treasury To Goldman Sachs Shareholders”: Josh Rosner
by ilene - January 28th, 2011 12:41 am
Courtesy of The Daily Bail
Our favorite quotes so far from today’s FCIC report and reaction from analysts…
- "Less than a 3 percent drop in asset values could wipe out a firm." – FCIC Report
- "The AIG counterparty bailout, which was spun as necessary to protect the public, seems to have protected the institution at the expense of the public." – Josh Rosner
- "The total was for proprietary trades," the report asserts. "Unlike the $14 billion received from AIG on trades in which Goldman owed the money to its own counterparties, this $2.9 billion was retained by Goldman."
- "At the time, the idea was the sucker could go down because there wasn’t enough liquidity in the system, money wasn’t moving, and you could see a domino effect," said Ann Rutledge, a principal at R&R Consulting in New York, which specializes in structured finance. In reality, she contends, those fears were overblown: There was ample money in the financial system. Rather, individual institutions did not have enough cash on hand to survive their losses, she asserts. But the fear of a broader liquidity crisis was used as justification for what now appears to have been a backdoor means of bailing out Goldman, said Rutledge.
- The details in the commission’s report leave Goldman "naked," she added. "It doesn’t have the fig leaf of a systemic risk argument. Normally what happens when you have a sophisticated institution that’s doing stupid credit stuff is you let them eat it, but that didn’t happen in the bailout."
- "If these allegations are correct, it appears to have been a direct transfer of wealth from the Treasury to Goldman’s shareholders." – Josh Rosner
What Most People Don’t Realize About The Fed’s Superpowers
by ilene - January 27th, 2011 2:33 pm
Bob Prechter’s Conquer The Crash reveals whether the Fed really can rescue the US economy
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By Elliott Wave International
Since its creation in 1913, the primary intended role of the U.S. Federal Reserve Bank has been that of protector. In theory, the central bank was bestowed with the power to shape monetary policy in a way that would keep both booms and busts in check. The two main tools at its disposal — interest rates and money creation — would provide a "ceiling of normalcy" above expansions AND a "net of safety" below contractions.
To this day, the financial mainstream holds great faith in the Fed’s ability to fulfill its save-the-day duties — as these recent news items make plain:
- "Why Raising Fed Funds Rate Is Positive For Equities." (Seeking Alpha)
- "Fed’s Moves Lift All Asset Classes." (Associated Press)
- "US Stocks Erasing Losses: The aggressive moves of the Fed have been an important driver for the stabilization of stock prices." (Bloomberg)
But of all the variables the Fed creators took into account, there’s one glaring factor they neglected to consider: Namely, it cannot force consumers to spend, creditors to lend, or businesses to borrow. The events of 2007-2009 "credit crunch" and the subsequent "Great Recession" made that obvious. Remember how the government was upset at banks for sitting on the bailout funds instead of lending them out to consumers? And consumers weren’t exactly lining up on the street to get a loan, either.
The Fed’s inability to change social mood is the central theme in Chapter 13 of EWI President Bob Prechter’s NY Times business bestseller book Conquer the Crash. There, Bob describes the Fed’s strategy of lowering the federal funds rate to stimulate spending to be as effective as "pushing on a string." Writes Bob:
"The primary basis for today’s belief in perpetual prosperity and inflation with an occasional recession is what I call the ‘Potent Directors Fallacy.’ It is nearly impossible to find a treatise on macroeconomics today that does not assert or assume that the Federal Reserve Board has learned to control both our money and our economy. Many believe that it also possesses the immense power to manipulate the stock market. The very idea that it can do these things is false."
And so begins one of the most groundbreaking studies into the very real INABILITY of the Fed to fell the great bears of economic declines, or…
Ambac Accues JP Morgan of Fraud in Ongoing Mortgage Suit
by ilene - January 25th, 2011 4:07 pm
Courtesy of Yves Smith of Naked Capitalism
One of the big reasons there have been so few fraud charges leveled against what looks like clear and widespread banking industry is that under the law, “fraud” is pretty difficult to prove. Needless to say, that puts commentators in a bit of a bind, because they can be depicted as being hysterical if they use the “f” words, since behavior that is often fraud by any common sense standard may be hard or impossible to prove in court.
The hurdle in litigation and prosecution is proving intent. Basically, the party who is being accused has to not only have done something bad, he has to have been demonstrably aware that he was up to no good. Thus po-faced claims of “I had no idea this was improper, my accountants/lawyers knew about it and didn’t say anything” or “everyone in the industry was doing it, so I had not reason to think this was irregular” is a “get out of jail free” card. Similarly, even if lower level employees knew that their company was up to stuff that stank, if the decision-makers can plausibly claim ignorance, again they can probably get away with it.
So it is gratifying in a perverse way to see a case in which the perp not only looks to have engaged in chicanery, but the facts make it pretty hard for him to say he didn’t know he was pulling a fast one. And even more fun, it involves JP Morgan, which has somehow managed to create the impression that it was better than all the other TARP banks, when on the mortgage front, there is plenty evidence to suggest that all the major banks have been up to their eyeballs in bad practices.
The case involves the bond insurer Ambac and the mortgage company EMC, which was the Bear Stearns conduit for buying mortgages to securitize and now thus part of JP Morgan. In 2010, reports surfaced that EMC had been falsifying mortgage data to keep its pipeline moving as fast as Bear wanted and contain costs.
But a suit by bond insurer Ambac alleges far more serious misbehavior. The discovery process in outstanding putback litigation has unearthed a scheme to defraud investors and Ambac and led the bond insurer to add fraud charges to its complaint. The Atlantic, which broke the 2010 story, gives a…
Stock World Weekly
by ilene - January 23rd, 2011 3:20 pm
Here’s the newest: Stock World Weekly Newsletter. Comments welcome! – Ilene
Archives here.
Sorry Charlie, Meredith Whitney Lives in a Free Country
by ilene - January 19th, 2011 1:58 pm
Courtesy of Joshua M Brown, The Reformed Broker
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I’ve always been a fan of Charlie Gasparino’s, I like his hard-nosed, old school journalism style and generally have agreed with a lot of his opinions over the years. But his rant about Meredith Whitney’s municipal bond research is so far off the reservation, he may be in danger of losing his Indian name (Reports With Martinis).
Here’s Gasparino excoriating Whitney for being negative about the prospects for municipal fixed income investing in the Huffington Post:
And yet, as the municipal market is crashing on her prediction, with deals being pulled and slashed in size, with prices falling and taxpayers having to pay extra so cities and states can sell debt, Whitney is refusing to release the actual report that would tell us how she came to such a brash, and unprecedented prediction, on the grounds that her research is proprietary and for the use of the clients of her research firm only.
It’s about time Whitney came clean and released her report to the public so we can determine if it should be given so much credence; and if it shouldn’t, traders and investors can stop a possibly misguided prediction from causing further damage.
Hey Charlie, I don’t exactly agree with Whitney’s assertion that a Munigeddon is imminent, but she has the right to publish her research as publicly or as privately as she likes. I’ll also note that muni bonds are suffering from limited liquidity as the mutual funds that make up a large portion of their ownership are seeing week after week of redemption. Little Meredith Whitney may have a decent platform but she hardly moves hundreds of billions of dollars.
No, if anything, the blame here goes to the municipalities themselves for writing checks and making promises that their tax bases couldn’t cash. The townsfolk won’t get fooled again – they are at the school board meetings and the Town Halls, they know there isn’t any money there. Whitney’s call has simply been the most vocal expression of this general consensus.
Don’t kill the messenger.
Source:
Meredith Whitney Should Show Her Cards (Huffington Post)
Read Also:
20 Shocking New Economic Records That Were Set In 2010
by ilene - January 18th, 2011 4:21 pm
Courtesy of Michael Snyder at Economic Collapse
2010 was quite a year, wasn’t it? 2010 will be remembered for a lot of things, but for those living in the United States, one of the main things that last year will be remembered for is economic decline. The number of foreclosure filings set a new record, the number of home repossessions set a new record, the number of bankruptcies went up again, the number of Americans that became so discouraged that they simply quit looking for work reached a new all-time high and the number of Americans on food stamps kept setting a brand new record every single month. Meanwhile, U.S. government debt reached record highs, state government debt reached record highs and local government debt reached record highs. What a mess! In fact, even many of the "good" economic records that were set during 2010 were indications of underlying economic weakness. For example, the price of gold set an all-time record during 2010, but one of the primary reasons for the increase in the price of gold was that the U.S. dollar was rapidly losing value. Most Americans had been hoping that 2010 would be the beginning of better times, but unfortunately economic conditions just kept getting worse.
So will things improve in 2011? That would be nice, but at this point there are not a whole lot of reasons to be optimistic about the economy. The truth is that we are trapped in a period of long-term economic decline and we are now paying the price for decades of horrible decisions.
Amazingly, many of our politicians and many in the mainstream media have declared that "the recession is over" and that the U.S. economy is steadily improving now.
Well, if anyone tries to tell you that the economy got better in 2010, just show them the statistics below. That should shut them up for a while.
The following are 20 new economic records that were set during 2010….
#1 An all-time record of 2.87 million U.S. households received a foreclosure filing in 2010.
#2 The number of homes that were actually repossessed reached the 1 million mark for the first time ever during 2010.
#3 The price of gold moved above $1400 an ounce for the first time ever during 2010.
#4 According to the American Bankruptcy Institute, approximately 1.53 million consumer bankruptcy petitions were filed in 2010, which was up 9 percent…
Settling Prosecutions For Pennies on the Dollar Is a Type of Bailout
by ilene - January 15th, 2011 4:40 pm
Courtesy of Washington’s Blog
The following is an excerpt of my much longer roundup of the many covert ways the government is bailing out the giant banks.
Fraud As a Business Model
If you stop and think for a moment, it is obvious that failing to prosecute fraud is a bailout.
Nobel prize-winning economist George Akerlof demonstrated that if big companies aren’t held responsible for their actions, the government ends up bailing them out. So failure to prosecute directly leads to a bailout.
Moreover, as I noted last month:
Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (representing up to 70% of all stock trades) and high proportions of other trades as well). This not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this,this, this, this and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country’s derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance to manipulate the market.
Fraud disproportionally benefits the big players (and helps them to become big in the first place), increasing inequality and warping the market.
[And] Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
***
Finally, failure to prosecute
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“The Fed No Longer Even Denies that the Purpose of Its Latest Blast of Bond Purchases … Is To Drive Up Wall Street”
by ilene - January 15th, 2011 4:36 pm
Courtesy of Washington’s Blog
The stated purpose of quantitative easing was to drive down interest rates on U.S. treasury bonds.
But as U.S. News and World Reported noted last month:
By now, you’ve probably heard that the Fed is purchasing $600 billion in treasuries in hopes that it will push interest rates even lower, spur lending, and help jump-start the economy. Two years ago, the Fed set the federal funds rate (the interest rate at which banks lend to each other) to virtually zero, and this second round of quantitative easing--commonly referred to as QE2--is one of the few tools it has left to help boost economic growth. In spite of all this, a funny thing has happened. Treasury yields have actually risen since the Fed’s announcement.
The following charts from Doug Short update this trend:
Of course, rather than admit that the Fed is failing at driving down rates, rising rates are now being heralded as a sign of success. As the New York Times reported Monday:
The trouble is [rates] they have risen since it was formally announced in November, leaving many in the markets puzzled about the value of the Fed’s bond-buying program.
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But the biggest reason for the rise in interest rates was probably that the economy was, at last, growing faster. And that’s good news.
“Rates have risen for the reasons we were hoping for: investors are more optimistic about the recovery,” said Mr. Sack. “It is a good sign.”
Last November, after it started to become apparent that rates were moving in the wrong direction, Bernanke pulled a bait-and-switch, defending quantitative easing on other grounds:
…
Could the U.S. Dollar Rise 50%?
by ilene - January 13th, 2011 3:33 am
Courtesy of Charles Hugh Smith, Of Two Minds
Conventional wisdom is that the Fed wants the U.S. dollar lower, so it must drop. But the dollar seems to be lacking proper obedience to the Fed’s grand commands.
Before you shout that all fiat currencies go to zero, let’s stipulate that the U.S. dollar has already proceeded 95% of the way to zero. According to the handy BLS inflation calculator, the 2010 dollar is roughly worth 4.5 cents of the 1913 dollar. Put another way, it now takes $22.10 to buy what $1 purchased in 1913.
(Interesting that the BLS inflation calculator only goes back to the birth of the Federal Reserve….)
So a 50% rise in the dollar would register as a mere blip on a 100-year chart. I mention this to put a 50% rise in perspective. It will seem like a large move in the present, but on a longer timeline it wouldn’t be that big a deal.
How could the dollar rise when the Treasury and Fed are moving Heaven and Earth to drive it down? Let’s turn to the Fed Flow of Funds for some perspective: what happened from 2007 (pre-recession) to the present?
Household Real Estate Assets: $22.7 trillion to $16.5 trillion: -$6.2 trillion
Corporate Equities: $9.6 trillion to $7.8 trillion: -$1.8 trillion
Mortgage debt: $10.53 trillion to $10.12 trillion: -$ .41 trillion
Household/non-profit Net Worth: $64.2 trillion to $54.9 trillion: -$9.3 trillion
And this is after a tremendous run-up in both bonds and stocks since early 2009. Add in whatever estimates of commercial real estate losses you reckon are semi-accurate and other impaired enterprise assets currently valued at "historical cost," i.e. marked to fantasy, and you get a number well north of $12 trillion even at conservative estimates.
The Fed has fought off this mass devaluation of assets by expanding its balance sheet by $2 trillion. First it sought to stem the collapse of the housing market by buying $1.2 trillion in impaired mortgage backed securities (taking garbage off the banks’ balance sheets) and now it is trying to suppress interest rates by buying $1 trillion in Treasury bonds (recall that QE1 already loaded the boat with T-Bills, so QE2 is simply adding another $600 billion to an already heavy cargo.)
In both cases the Fed’s campaigns are mere rear-guard actions: housing continues to slip, and the tides of higher yields and rates have started rising despite the Fed’s…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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