Courtesy of Karl Denninger at The Market Ticker
Good evening. It is a great pleasure to share a meal with the Center for the Study of the Presidency and Congress, and especially with the Center’s fellows. Doubtless your participation in the fellowship program as undergraduate and graduate students–writing and thinking about leadership, governance, and public policy–will prove immensely valuable as you develop your own intellectual and leadership skills and embark on careers that I hope will include a period of public service.
Translation: You need to learn how to lie very convincingly in order to succeed in public policy. I’m one of the best, so listen to me dissemble here and nod your heads as I provide an excellent object lesson.
The first lesson–economic prosperity depends on financial stability–seems obvious, but this connection was not always well understood.
This, of course, is why The Fed sat back and watched the housing bubble inflate. It is often lamented that the lending standards were "violated", but exactly what "standards" existed for a NINJA loan? You know: No job, no income, no assets? Right – none. How do you violate non-existent standards?
Never mind the other conundrum – The Fed’s incessant claim that "it can’t see bubbles." An 80% stock market rally in one year caused by legalized accounting fraud isn’t an obvious bubble? Oil going from $30-85 while supply rockets to record highs – to the point that tankers are leased for speculative storage by banks – isn’t an obvious bubble? Treasuries aren’t an obvious bubble when "magical demand" appears that allegedly is from foreign central banks, but which isn’t reflected in either TIC data or custodial holdings? Pull the other one you jackass.
In contrast, more recent work on the subject, to which I contributed, showed that the health of the financial system and the performance of the broader economy are closely interrelated, both in the short run and in the long run.
Oh, so you allowed all this game-playing, and still do, on purpose so as to create imbalances that you know will damage the economy? How does this escape the definition of economic terrorism?
For example, in October 2008, just weeks after the sharp intensification of the crisis, the Congress authorized the Troubled Asset Relief Program (TARP) to support stabilization of the financial system. It was far from perfect legislation, but it was essential for preventing an imminent financial collapse.
Ah yes, TARP. The legislation born from you and Hank Paulson literally corralling Congressional leaders into a meeting room and threatening them with tanks in the streets, roving gangs of RPG-wielding thugs and non-working ATM cards – you know, demons and devils, apocalypse stuff. This act of intentional deception included lying to Congress about what you intended to do with the money – and we know you lied because Kashkari testified before Congress that the plan had changed before the bill was passed, yet neither you or Treasury notified Congressional leaders.
In the 2009 stress tests, multidisciplinary teams of examiners, economists, financial experts, and other specialists calculated how much capital 19 of the nation’s largest bank holding companies would need to remain healthy and continue lending during a hypothetical worse-than-expected economic scenario. The Treasury Department committed to supplying additional capital as necessary from the TARP. Critics had warned that the stress test could backfire, but as it turned out, the release of the results last May helped restore confidence in banks, and many institutions have since been able to raise capital from investors and repay the capital the government had injected.
That’s an amazing series of lies. First, by The Fed’s and Treasury’s own contemporaneous admissions, you didn’t run anything – the banks ran their own stress models. I will remind you that this same thing was done with Lehman Brothers, which "passed" its internal stress tests and was deemed healthy by The NY Fed (headed by Turbo Timmy Geithner at the time)- only to blow sky high weeks later.
The release of the results last May were a pre-ordained result – which is always what happens when you allow the test-taker to fiddle with the answer sheet while taking the exam! And again, when one first hammers Congress and FASB to make legal accounting fraud balance sheets and thus "stress tests" present false and misleading claims of health. But heh, so long as we can make the stock market go up through these lies all is well, right?
Unfortunately, authorities then were ill-positioned to coordinate an effective international response, as years of bitter wrangling over World War I international debts and reparations had all but destroyed the mutual trust upon which coordination depends.
This time central banks and governments the world over all lied at the same time! Why how wonderful that is! The outcome was great too – just look at Iceland and Greece for examples of how "great" all this is. Speaking of Greece: how does our federal government "borrow and spend" compare to theirs as a percentage of GDP? I understand Greece is running 12.x%. Gee, we’re 11.x% right now, aren’t we? Hmmm…..
In the shadow banking system, loans, instead of being held on the books of banks as was virtually always the case in the 1930s, were packaged together in complex ways and sold to investors. Many of these complex securities were held in off-balance-sheet vehicles financed by short-term funding. When the housing slump shook investors’ faith in the values of the loans underlying the securities, short-term funding dried up quickly, threatening the banks and other financial institutions that explicitly or implicitly stood behind the off-balance-sheet vehicles.
And still are, and still do. Accounting fictions and frauds always end up blowing you to bits. We simply argue over when, not what. But we’ve learned exactly nothing as even after this event the industry has refused to consolidate these entities and even today we have some monstrosities as Wells Fargo with over one trillion dollars in off-balance-sheet entities – holding God-knows-what. And The Fed’s response to this? "Blah-blah-blah-blah look at me with my fingers in my ears and cardboard taped over my eyes!"
The Federal Reserve, with its discount window, was well positioned to provide liquidity to banks by making short-term, collateralized loans.
Collateralized by what? Supposedly only good-value securities, right? But you don’t want to talk about whether the securities tendered really were good value, nor do you want what’s being tendered exposed to public knowledge. Why is that Ben? And by the way, what about your claims that the garbage dumps known as Maiden Lane I-III were all "unlikely to lose anything" that that they were "not being actively managed" as you expected to run them off? If that’s true why are there securities in there (in vehicles created in 2008) that didn’t exist until 2009? And finally, where in Sections 13 and 14 do you find authority to buy toxic trash in the first place, including naked credit-default swaps? Those programs were and are explicitly unlawful but nobody seems to give a damn.
Thus, we were able to help restore the flow of credit to American families and businesses by shoring up important financial markets, such as those for commercial paper and securities backed by consumer loans.
Like hell. Credit card interest rates of 29.9% and the following graph say you’re full of it:
Restore my ass.
Not that we should have more consumer credit, by the way. When the HAMP statistics show that even after modifications the average DTI (that is, debt service to gross, pre-tax income) of the Americans who go through that meat grinder approaches 60%, one thing is clear: the last thing Americans need is to have their credit access "restored."
Indeed, Americans are drowning in their own greed, stoked by mendacious and predatory jackasses in our nation’s banking system – of which you’re the titular head.
Photo credit: Jr. Deputy Accountant