It is possible neither Janet Yellen nor another pretender will fill Bernanke's
shoes in January. The odds of such a surprise may be once-in-a-history-of-the-universe,
but those keep coming at a faster rate the longer we splurge. Simple Ben has
been walking both his bank and the world's financial institutions closer to the
cliff. Here, we will look at the precarious position of the Federal Reserve and
the far-out financial securities entering the pipeline at an increasing rate.
The machinery of state demands exponential
buying by banks, insurance companies, and pension funds. The purchasers risk
insolvency by doing so. Chairman Bernanke would be the last to recognize this
problem, unaware as he remains of his own institution's balance-sheet woes, and
not understanding the financial calamity in 2007.
Central banking insolvency does not matter
at the moment. The Emperor's New Clothes is preferred by Wall Street and
the media alike.
The Federal Reserve's balance sheet is a mystery, but not that much of a
mystery. John Hussman wrote in his November 4, 2013, letter to clients in ("Leash
the Dogma"): "A brief update on the bloated condition
of the Federal Reserve's balance sheet. At present, the Fed holds $3.84 trillion
in assets, with capital of just $54.86 billion, putting the Fed at 70-to-1
leverage against its stated capital. Given the relatively long maturity of Fed
asset holdings, even a 20 basis point increase in interest rates effectively
wipes out the Fed's capital. With the present 10-year Treasury yield already
above the weighted average yield at which the Fed established its holdings, this
is not a negligible consideration."
The 10-year yield has risen from 1.40% on
July 27, 2012, to 2.6% or so today. Thus, the Fed is insolvent six times over.
Life goes on.
There have been no sightings of central
bankers jumping from windows yet. Of course, it's not their money; it isn't
money at all, so we pretend. Since the Fed governors are academics, their
financial knowledge is wanting. A practical reason for reducing quantitative
easing (q.e.); actually, a practical reason for never getting started; is the
reduction in top-rung collateral. Banks and other financial outfits borrow and
lend in the trillions every day. Treasury securities that have disappeared onto
the Fed's balance sheet are no longer available for collateral.
The Fed can lower standards of collateral.
It has in the past, but it cannot make a bank accept Bit Coin receivables. This
was central to the insolvency of Bear Stearns and onward in 2008. J.P. Morgan
and Goldman Sachs were not going to repo (lend overnight) with an institution
that might be shut the next morning.
This sinkhole of miscalculations was up
for discussion on October 18, 2008, when the Wall Street Journal
published an interview with Anna Schwartz. The article opened: "On Aug. 9,
2007, central banks around the world first intervened to stanch what has become
a massive credit crunch. Since then [note: over one year later - FJS], the
Federal Reserve and the Treasury have taken a series of increasingly drastic
emergency actions to get lending flowing again. The central bank has lent out
hundreds of billions of dollars, accepted collateral that in the past it
would never have touched, and opened direct lending to institutions that
have never had that privilege. [The Fed will do anything, so watch your
wallet. - FJS] The Treasury has deployed billions more. And yet, 'Nothing,'
Anna Schwartz says, 'seems to have quieted the fears of either the investors in
the securities markets or the lenders and would-be borrowers in the credit
market.'"
Anna Schwartz was co-author with Milton Freidman of A Monetary History of
the United States, 1867-1960. She went on to tell the Journal:
"[T]he Fed has gone about as if the problem is a shortage of liquidity.
That is not the basic problem. The basic problem for the markets is
[uncertainty] that the balance sheets of financial firms are credible."
This was true although Simple Ben and aligned interests still refer to the
"liquidity crisis," not the "insolvencies" in 2007 and
2008. The title of the Journal's interview was "Bernanke is
Fighting the Last War."
And now, Fed Chairman Bernanke has led the
Fed itself into insolvency. You can be sure there have been high level meetings
at the largest financial institutions, pondering what to do if a fellow
Too-Big-to-Fail Bank steps away from repo loans between itself and the Fed.
The Fed has introduced a slew of other
problems attributable to its q.e. and to ZIRP (Zero-Interest Rate Policy). U.S.
money-market funds break even by purchasing lower-rated European bank debt.
Reuters, on September 25, 2013, reported: "Life
insurance is becoming an unviable business in Europe as low interest rates
reduce insurers' profits, forcing many to compensate with higher-risk
investments or move overseas, according to an industry survey." A Bloomberg
headline from September 26, 2013: "Pension Funds Need to Buy
Higher-Yielding Assets, Allianz Unit Says." Also from Reuters: "U.K.
Pension Funds Take on Leveraged Loans in Search of Yield."
The longer investors find themselves
buying while holding their noses, the worse are the securities offered.
Corruption is one result. The Financial Times reported on November 10,
2010: "[T]he credit rating agencies are using 'deluded' processes to
calculate the risks of asset-backed securities (ABS).... 'Here is a situation
where you keep putting more untenable risks into the system,'" declared
William Harrington, who "spearheaded analysis on derivatives between 1999
and 2010 at Moody's Investors Services."
Posts
