Friday, June 20, 2014

The Full Yellen

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at

            As always, there was plenty of talk after Federal Reserve Chairman Janet Yellen held a press conference yesterday, June 18, 2014. Complaints are heard she said nothing of substance, which is true. To what the Fed might do, Yellen answered, "It depends."

            In fact, there is no question what Janet Yellen will do. The Yellen Fed will inflate until the markets tell the Fed what to do. The-then Vice Chair recited all one needs to know on March 4, 2013, in "Challenges Confronting Monetary Policy."

In miniature:

"I'll begin with the Committee's forward guidance for the federal funds rate. The FOMC has employed such forward guidance since 2003 but has relied more heavily on it since December 2008, when the target for the federal funds rate was reduced to its effective lower bound. In current circumstances, forward guidance can lower private-sector expectations regarding the future path of short-term rates, thereby reducing longer-term interest rates on a wide range of debt instruments and also raising asset prices, leading to more accommodative financial conditions. In addition, given the FOMC's stated intention to sell assets only after the federal funds rate target is increased, any outward shift in the expected date of liftoff for the federal funds rate suggests that the Federal Reserve will be holding a large stock of assets on its balance sheet longer, which should work to further increase accommodation. 

"Starting in March 2009, the FOMC's postmeeting statements noted that 'economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period,' and in November of the same year added 'low rates of resource utilization, subdued inflation trends, and stable inflation expectations' as justification for this stance."  In August 2011, the Committee substituted 'at least through mid-2013' for the words "for an extended period." This date was moved further into the future several times, most recently last September, when it was shifted to mid-2015. Also in September, the Committee changed the language related to that commitment, dropping the reference to 'low rates of resource utilization and a subdued outlook for inflation.' Instead, it emphasized that 'a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens,' clarifying the Committee's intention to continue to provide support well into the recovery. 

"Finally, last December, the Committee recast its forward guidance for the federal funds rate by specifying a set of quantitative economic conditions that would warrant holding the federal funds rate at the effective lower bound. Specifically, the Committee anticipates that exceptionally low levels for the federal funds rate will be appropriate 'at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.'"

"....[T]he Committee could decide to defer action even after the unemployment rate has declined below 6-1/2 percent if inflation is running and expected to continue at a rate significantly below the Committee's 2 percent objective. Alternatively, the Committee might judge that the unemployment rate significantly understates the actual degree of labor market slack. 

"....A considerable body of research suggests that, in normal times, the evolution of the federal funds rate target can be reasonably well described by some variant of the widely known Taylor rule. Rules of this type have been shown to work quite well as guidelines for policy under normal conditions, and they are familiar to market participants, helping them judge how short-term rates are likely to respond to changing economic conditions.

"The current situation, however, is abnormal in two important and related ways. First, in the aftermath of the financial crisis, there has been an unusually large and persistent shortfall in aggregate demand. Second, use of the federal funds rate has been constrained by the effective lower bound so that monetary policy has been unable to provide as much accommodation as conventional policy rules suggest would be appropriate, given the weakness in aggregate demand. I've previously argued that, in such circumstances, optimal policy prescriptions for the federal funds rate's path diverge notably from those of standard rules.  For example, David Reifschneider and John Williams have shown that when policy is constrained by the effective lower bound, policymakers can achieve superior economic outcomes by committing to keep the federal funds rate lower for longer than would be called for by the interest rate rules that serve as reasonably reliable guides for monetary policy in more normal times.  Committing to keep the federal funds rate lower for longer helps bring down longer-term interest rates immediately and thereby helps compensate for the inability of policymakers to lower short-term rates as much as simple rules would call for.

"I view the Committee's current rate guidance as embodying exactly such a "lower for longer" commitment...."

            Federal Reserve Chairman Janet Yellen will inflate to infinity since her mind is incapable of grappling with an alternative. 

Monday, June 16, 2014

Princeton Abuses Volcker's Trust

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at

Former Federal Reserve Chairman Paul Volcker (Princeton '49) returned to campus on May 30, 2014. He was treading in the devil's den and has been treated accordingly. It is the homeport of Alan Blinder, Paul Krugman, Ben Bernanke and an arsenal of other pint-sized sophists.

The Daily Princetonian, the campus newspaper, put words in Volcker's mouth that betray his trust and align him with the sorry characters whose contortions he despises. In a dialogue quoted by the Daily Princetonian. [All bold throughout is mine - FJS] the paper claims Volcker said: "The responsibility of any central bank is price stability. I was at the helm at that time. Price stability is two percent inflation, which we can't closely control anyway. They ought to make sure that they are making policies that are convincing to the public and to the markets that they're not going to tolerate inflation.

Price stability is zero percent and Paul Volcker has consistently made this clear.

Quoting from "Transparency has Landed":

"At the spring 2006 Grant's Interest Rate Observer Conference, Volcker told the audience the upstarts were a puzzle to him: 'A great mantra of central bankers these days is 'inflation targeting.' I don't understand that nomenclature. I didn't think central bankers were in the business of targeting inflation. I thought we were supposed to be targeting stability. We all say we are in favor of stability. You hear these speeches, Bernanke saying 'We are in favor of stability. That is why we are targeting inflation.' There is a certain semantic problem for me in that connection.

"Volcker went on to say he had returned from a central bankers' synod in Frankfurt, Germany. On the topic of inflation targeting, he believes he was the only dissenter in the room: 'The debate was me on one side and all of the central bankers on the other side.' It was explained to Volcker 'the importance of inflation targeting was to never go above that. There was an ironclad agreement to keep the inflation rate below that or below the target.'

"Volcker also told his audience: "I can remember my old professors at Harvard, in 1951 or so, saying a little inflation is a good thing. 'We don't want very much, but 2% is good.'"

Paul Volcker continues to punish "inflation targeting." On April 19, 2009, the Wall Street Journal published: "Kohn, Volcker Go Toe-to-Toe on Inflation Target." Donald Kohn was Vice Chairman of the Federal Reserve Board at the time.

From the Journal:

"Federal Reserve Vice Chairman Donald Kohn's question-and-answer session at a Vanderbilt University conference Saturday was going as countless others surely have in his years as a top policy maker. Until Paul Volcker raised his hand. Then, Kohn was grilled over the Fed's apparent effort to convey that it considers a roughly 2% inflation rate to be appropriate for the economy in the long term...  

 "I don't get it," Volcker said, leading to a lively back and forth between the two central-bank heavyweights.  

"By setting 2% as an inflation objective, the Fed is 'telling people in a generation they're going to be losing half their purchasing power,' Volcker said. And if 2% is the best inflation rate, and the economic recovery lags, does that mean that 3% becomes the ideal rate, he asked.

[Interrupting the Journal's account - from Federal Reserve Chairman William McChesney Martin half a century earlier, speaking to the Senate: "[Two] percent in a year may not seem startling, in fact, during the past year average prices have increased by more than 2 percent - but this concept of creeping inflation implies that a price rise of this kind would be expected to continue indefinitely. According to those who espouse this view, rising prices would then be the normal expectation and the Federal Reserve accordingly would no longer strive to keep the value of money stable but would simply try to temper the rate of depreciation. Business and business decisions would be made in light of this prospect." Our so-called economists can not argue against this point, so, they ignore it. This is simple mathematics.]  

"Kohn responded that by aiming at 2%, 'you have a little more room in nominal interest rates ... to react to an adverse shock to the economy.'" 

Not able to argue against simple math, the so-called economists have conjured this entirely specious bogeyman, the wiggle room to fight "adverse shock," that Federal Reserve Chairmen Martin and Volcker, who ran the shop through such horrors, knew was and is a fiction conjured by Inflationists.  

At Princeton, Paul Volcker directed his attention to the so-called economic professors:

Daily Princetonian: "And does high inflation matter as long as it's expected?"

Paul Volcker: "It sure does, if the market's stable. And if it is expected, then everyone adjusts, and it doesn't do you any good. The responsibility of the government is to have a stable currency. This kind of stuff that you're being taught at Princeton disturbs me. Your teachers must be telling you that if you've got expected inflation, then everybody adjusts and then it's OK. Is that what they're telling you? Where did the question come from?"

Paul Volcker will now be cited in economic papers as stating: "Price stability is two percent inflation."

To see how this works, we have the hot-off-the-press IMF Working Paper: "The Case for a Long-Run Inflation Target of Four Percent," by Lawrence Ball, June 2014. Whoever Lawrence Ball might be, this paper is the instrument of Olivier Blanchard, Chief Economist of the IMF, who has sought a 4% "inflation target" to produce "stable ..." for years.  

Following is the sequence of Ball's contrivance:

"Once inflation reached 4%, Volcker and his colleagues did not try to reduce it further."

Later in the paper, Ball drew on that sentence to claim the following: "Why do today's central bankers oppose 4% inflation when Paul Volcker did not?"

Then, by way of those two claims, Ball writes: "It was only around 1990 that central banks began to target inflation rates of 2% or less." In other words, 4% was OK with Volcker in the 1980s; it was only in the next decade central bankers decided they should target a lower rate.

Then, of course, Ball (Blanchard) makes the contrafactual claim: "In the United States, a four percent inflation target would have dampened the Great Recession of 2008-9."

This entire paper is anti-factual, from the very start.

In place of Ball's (really Blanchard's) sweeping claims, the following is from the FOMC transcript, at Paul Volcker's final meeting as Fed chairman, on July 7, 1987. The staff forecast (at the beginning of the meeting) was of a 4.0% to 4.5% inflation rate, with worries the rate was trending higher.

Federal Reserve Governor Wayne Angell mentioned "one can have very modest inflation - less than 4 percent; that's very plausible.". Chairman Volcker grumbled: "Barely less than 4 percent." Volcker went on to say, "the recent evidence is not very good in terms of what is happening in prices...And a lot of hard work will come unwound."

Paul Volcker opposed any inflation from 1987 up to the moment. These wicked men in positions of authority are destroying the public's trust. Paul Volcker manned the Fed in 1979 at such a moment and he restored public faith in American institutions. The so-called economists have destroyed the world economy beyond any possibility of such a restoration today. 

Friday, June 13, 2014

Greenspan in China: Not the Opera (Yet)

Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession has been translated into Chinese. Mr. Fan Zhiqiang, the Assistant Researcher and Program Official of Fudan University, and the Professional Translator and Interpreter at Fudan University in China translated Panderer. He asked me to write an article about Greenspan, which is below.

            I wrote an introduction to the Chinese translation that can be read here.
Mr. Fan Zhiqiang wrote to me in May 2014:

"I am happy to tell you that, on the website of Fudan University Press,a comprehensive academic publishing house of key importance in China and in the World, you can find the announcement and linkage of the Chinese version of your wonderful book Panderer to Power through

            "On May 12, I sent two of my translation books with my signatures to your home. You may receive them within a few weeks. Both books are published by Fudan University Press. One book is my translation of Mark Twain's short stories. It is jointly recommended by Mr. Mo Yan, the Winner of 2012 Nobel Prize in Literature, and other literature figures. [Received. - editor]

"Prof. BA Shusong, the Chief Economist of China Banking Association, is very famous in the financial and economics circle and the world at large. His Sina Weibo (microblog) has more than 7 million fans. [Exceeds the number of AuContrarian fans by over 6.9 million. - editor] Fortunately, Prof. BA Shusong has kindly recommended my translation of Panderer to Power on his Sina Weibo. [This exceeds the number of professors in the United States who wrote about Panderer to Power on their websites, or anywhere else, by exactly - one. FJS]

"Some Chinese websites are also publishing the book reviews of my Chinese version of your Panderer to Power. For example, the website of the famous Phoenix TV, a subsidiary of US News Corporation, published some comments on this book on May 11, 2014. (Please log onto

"Currently, it is selling well on Amazon China. It was ranked No. 18 in the economics section last week [Two weeks ago now. - FJS] according to the website Interested readers can buy this book through the following linkage:权力掮客玩转华盛顿和华尔街的格林斯潘弗雷德里克·希恩/dp/B00KCENMUO/ref=sr_1_1?ie=UTF8&qid=1401109079&sr=8-1&keywords=权力掮客"

That's the end the good news. I will send a separate "Amazon page" that links to Amazon China. Whether or not you plan to buy a Chinese edition of Panderer, it's interesting to see. At least, to me.

Now to You-Know-Who:

Greenspan in China

This book is about the influence of Alan Greenspan. Specifically, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession explains how Alan Greenspan was able, when he was chairman of the Federal Reserve Board, to twist finance and the minds of the average American.

I am not writing here about the life of Alan Greenspan. For this article, I discuss the great influence Alan Greenspan - through the central bank - had over Americans. Secondarily, this is the story of how concentrated power in a few men's hands helped only a few people. Alan Greenspan's decisions made the average person poorer.

A question the reader may ask, upon reading this article, is why I have not written about the time after Alan Greenspan left the Federal Reserve in January 2006. There is not room to discuss Federal Reserve Chairmen Ben Bernanke and Janet Yellen, here. But, all that they have done - to the United States and the rest of the world - was set in motion by Alan Greenspan. Financial, economic, and social turmoil that has gotten worse during the Bernanke and Yellen chairmanships finds its source in the actions and words of Alan Greenspan

            The Federal Reserve is the central bank in the United States. It sets the monetary policy of the U.S. Since the U.S. dollar is still the currency in which most of world trade is conducted, every other central bank in the world is restricted in its ability to conduct a national monetary policy, when the Federal Reserve is run by a reckless chairman. Under Alan Greenspan, who was Federal Reserve chairman from 1987 to 2006, the Federal Reserve consistently held interest rates too low by pumping more dollars into the economy than were needed to conduct business. Some of the "extra" dollars flowed overseas, which is how Alan Greenspan restricted the ability of central banks, including China's, to do what it thought was the best policy for the country.

Until 1971, central banks could not decide, by themselves or among themselves, what the world's interest rates would be. The gold standard prohibited a handful of men (they were all men at the time) from sitting around a conference table with such power over the average person's life. On August 15, 1971, President Richard Nixon announced the United States would no longer redeem currencies presented to the United States Treasury in return for a specific amount of gold. The result of August 15, 1971- both in the United States and abroad - was to create tremendous distortions. (This is a necessary simplification of both the "gold standard" and of "August 15, 1971," given the length of this article.)

The 1970s was a decade of high inflation. Once President Nixon had freed the Federal Reserve from the discipline of a gold standard, the Fed started "making up" monetary policy. This caused turmoil during the 1970s. The currencies (of the United States, the European countries, and Japan) swung violently in relation to each other as did interest rates, unemployment, and prices.

These distortions were reduced in the 1980s. They were not eliminated, but economists in the United States took advantage of the average person's ignorance by saying over and over that Paul Volcker (who was Federal Reserve Chairman from 1979 to 1987) had "gotten rid of inflation."

The American economists have erased William McChesney Martin from history. Martin was the Federal Reserve chairman from 1951 to 1970. In the 1950s, he faced increasing pressures from university economists (mostly at Harvard) who said "the United States economy needs to have inflation so that we can have full employment and we can compete with other countries."

Martin said "No." He fought the politicians, Senators, and Congressmen who wanted the Federal Reserve to produce inflation. The Inflationists had decided the U.S. economy needed prices to rise at a rate of 2% a year.

Why did they want inflation at all? Because, in the short-term, if a central bank "prints extra dollars," the politicians can use the inflated number of dollars to spend money they would not otherwise have. This is known in the United States as politicians "buying votes." That is not always what they are doing. Politicians sometimes have a genuine interest in helping the people. But, creating dollars from nothing only works in the short-term.

On August 13, 1957, Chairman Martin testified before the Senate Committee on Finance. Regarding the target of a 2% institutionalized inflation rate, Martin said: "[Two] percent may not seem startling [but] the price level would double every 35 years and the value of the dollar would be cut in half each generation. Losses would be inflicted on millions of people, pensioners...all who have fixed incomes.... [T]hose who would turn out to have savings in their old age would tend to be the slick and the clever...."

Martin told the Senators the person most likely to be injured in the inflationary cycle was the "'hardworking and thrifty...little man' on fixed income who could protect neither his income nor the value of his savings."

In Panderer to Power, my book about Alan Greenspan, I show how the slick and the clever were able to concentrate and leverage paper assets over the next half-century. No one did more to launch the slick-and-the-clever into isolated comfort, secluded from the average American, than Alan Greenspan.

Back when William McChesney Martin argued against the proposed 2% inflation target, he stated: "There is no validity whatsoever that any inflation, once accepted, can be confined to moderate proportions."

Martin said, at a different hearing: "We are dealing with waste and extravagance, incompetency and inefficiency, the only way we have in a free society is to take losses from time to time. This is the loss economy as well as the profit economy."

That is one of the greatest problems today, engendered by interest rates that have been too low since the early Greenspan Years. Incompetency and waste go on and on, subsidized by price fixing. One form of price fixing when Alan Greenspan was chairman was to push and hold interest rates at much too low a rate. This allowed companies to borrow money when they should have gone out of business. By not going out of business, they made it harder for well managed companies to earn enough money to grow, to hire more workers, or to stay in business, themselves.

Also, by holding interest rates too low, people were able to borrow when they did not have the ability to pay back the loan. Alan Greenspan coaxed millions of people who should not have bought houses into doing so. He did this to keep the U.S. economy operating at a faster pace than it could have without the Greenspan Fed's manipulative policies.

The years since Alan Greenspan started pushing interest rates too low have been very inflationary. American economists say: "There has been no inflation." Recently, these very well paid economists have claimed "inflation is too low."

This is not true for two reasons. First, the prices the average person pays (for food, gas, a doctor, a house: the things they need) have risen much faster than their wages have risen. That is what matters.

Second, prices of assets, including stocks, bonds, houses, and commodities have risen to a tremendous degree since Alan Greenspan became Federal Reserve chairman. Most of these assets are owned by a small part of the American population.

This is not only true in the United States, of course. There are many other reasons for the financial, economic, and social turmoil of 2014. Without understanding the Federal Reserve's role under Alan Greenspan in "creating" false and distorted living standards, studies about the destruction of the monetary unit (the dollar) and of family life in America and elsewhere ignore the elephant in the middle of the room. 

Greenspan Panders to Amazon.China

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009) and co-author, with William A. Fleckenstein of Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. He is researching a book about Ben Bernanke.   He writes a blog at 

The following was written by Mr. Fan Zhigiang,  the Assistant Researcher and Program Official of Fudan University, and the Professional Translator and Interpreter at Fudan University in China, who translated Panderer, sent me the link to Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession:   

"I am happy to tell you that, on the website of Fudan University Press,a comprehensive academic publishing house of key importance in China and in the World, you can find the announcement and linkage of the Chinese version of your wonderful book Panderer to Power through

            "On May 12, I sent two of my translation books with my signatures to your home. You may receive them within a few weeks. Both books are published by Fudan University Press. One book is my translation of Mark Twain's short stories. It is jointly recommended by Mr. Mo Yan, the Winner of 2012 Nobel Prize in Literature, and other literature figures.

"Prof. BA Shusong, the Chief Economist of China Banking Association, is very famous in the financial and economics circle and the world at large. His Sina Weibo (microblog) has more than 7 million fans. Fortunately, Prof. BA Shusong has kindly recommended my translation of Panderer to Power on his Sina Weibo.

"Some Chinese websites are also publishing the book reviews of my Chinese version of your Panderer to Power. For example, the website of the famous Phoenix TV, a subsidiary of US News Corporation, published some comments on this book on May 11, 2014. (Please log onto

"Currently, it is selling well on
Amazon China. It was ranked No. 18 in the economics section last week according to the website Interested readers can buy this book through the following linkage:权力掮客玩转华盛顿和华尔街的格林斯潘弗雷德里克·希恩/dp/B00KCENMUO/ref=sr_1_1?ie=UTF8&qid=1401109079&sr=8-1&keywords=

Monday, June 9, 2014

May 2014 - Crematorium

Frederick J. Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009), which was translated and republished in Chinese (2014). He is researching a book about Ben Bernanke. He writes a blog at

"Groups of women were crushing each other..., a real mob, more brutal for covetousness....the furnace-like heat with which the shop was ablaze came above all from the selling, from the bustle at the counters... There was the continuous roar of the machine at work, of customers crowding into the departments, dazzled by the merchandise and then propelled towards the cash-desk. And it was all regulated and organized with the remorselessness of a machine: the vast horde of women were as if caught in the wheels of an inevitable force."

Émile Zola: The Ladies' Paradise (1883)

            The furnace-like roar to prevent financial immolation must move faster all the time. The Wall Street Journal reported in April that "Xie Daoliang's business survives by trading almost exclusively in a virtual currency, but not by choice. Mr. Xie makes bulldozer treads and other parts for heavy machinery. These days, when he makes a sale he seldom gets paid in cash. Instead, he gets a piece of paper with a value printed on it and a promise from a bank that it will pay at an arranged point in the future. In China's economic slowdown, businesses are having troubles paying suppliers, and banks are getting shy about lending, so cash is scarce. The notes-a form of IOUs known as acceptance drafts - are increasingly being used instead, and Mr. Xie says they really get around... 'At the moment, there's no cash. It's all just bills,' says Mr. Xie... 'It's unreasonable.' Acceptance drafts, which are similar to postdated checks but are guaranteed by a bank or state-owned enterprise, have been a fixture of trade in China for years. But corporate treasurers, chief financial officers, people at small loan firms and analysts say that as the economy slows, cutting into companies' sales, the bills are being passed around more and more. Driving the exchange of paper, analysts say, is an unwillingness, or inability, by banks to meet demand for cash loans, especially from smaller companies. 'The credit transmission mechanism is breaking, or even broken,' said Leland Miller, president of the China Beige Book, a quarterly survey of Chinese businesses and banks. 'Firms are having a difficult time getting access to funding, and for small firms it's extraordinarily difficult.'"

A "credit transmission mechanism [that] is breaking, or even broken," is no way to run a financial economy. A constant infusion, whirling at a faster pace, sustains the world's flagging non-financial economy.

Two weeks before the stock market crash in 1929, the New Yorker described to its readers the feverish levels of real-estate speculation and desperation: "[M]any contractors of estimable standing are ready to take over the 'secondary financing' of not-too-large operations, meaning they will put up most of the cash necessary to complete the building, over and above what the first mortgage provides. They do this in order to keep their operation from falling apart. This loan for the building, which is really a second mortgage, is discounted at some 'big, friendly bank', so that the contractor's money is not tied up after all..."

Without further knowledge it is not possible to know the terms under which the big, friendly bank made the loan. What was the collateral? It is almost certain the collateral booked by the bank received less scrutiny than in 1925 or 1935. The loan for the building (which may never have been built) was expected to move off the books at a profit and at a speed that would prevent the censure of an internal or external audit.

Regarding Mr. Xie's cashless world; it is in a fix: "Trouble in Chinese property also has implications for the country's financial system, in particular the shadow banking sector, which has lent huge amounts to developers and relies on highly-priced land for collateral... In an indication of just how exposed China's economy is to a property downturn, Moody's... estimates that the building, sale and outfitting of apartments accounted for 23% of Chinese gross domestic product in 2013." (Financial Times, May 13, 2014)

The October 1929 furnace-like roar was past the commercial building credit peak (though, not past the building peak.) Sources from the time can be contradictory, but support that conclusion. Estimates showed $675,000,000 of real estate bonds had been sold in the United States in 1925. That was "an increase of more than 1,000 per cent since 1920." Later, calculations would show $54 million were issued in 1921, $752 million in 1925 and $833 million in 1928 - the peak: before $395 million in 1929.

When mortgage-making was accelerating in 2005, faster securitization and deal-making prevented the "real" economy from collapsing. The real economy was missing all the fun. The Bank for International Settlements (BIS - the central bankers' central bank) made this clear in a 1993 report: "Financial liberalization, innovation and other structural changes in the 1980s created an environment in which excess liquidity and credit were channeled to specific groups and markets. These include large institutions, high-income earners and wealthy individuals, who responded to the incentives associated with the changes. These groups borrowed to accumulate assets in global markets - such as real estate, corporate equities, art, commodities, silver and gold - where the excess credit was apparently recycled several times over."
          On Nov. 12, 2013, in London, "Francis Bacon's three-paneled painting 'Three Studies of Lucian Freud' became the most expensive work of art ever sold at auction on Tuesday when it soared to $142.4 million at Christie's." Two days later, in New York, Andy Warhol" set a new all-time record in the pop-artist field, when his "Silver Car Crash (Double Disaster)" sold at NYC auction for $105 million.

          On the same day, Narayana Kocherlakota, President of Federal Reserve Bank of Minneapolis spoke on his home turf. He did his best to boost Christie's stock price: "The Federal Open Market Committee is currently buying $85 billion of long-term assets per month. Recently, there has been an ongoing public conversation about the possibility that the FOMC might reduce its current flow of long-term asset purchases over the next year. The FOMC's asset purchases push down long-term interest rates, and encourage consumers to spend...." Kocherlakota lost the $85 billion battle. When the stock market falls 20%, the FOMC will double the wager.

Eight days after Kocherlakota fired his salvo at battered consumers, he fired his top two researchers for speaking the truth. That was the indictment of the Minneapolis Star Tribune: "President Narayana Kocherlakota fires his best economists because they spoke the truth." The newspaper reported: "The departing economists are Patrick Kehoe and Ellen McGrattan, both highly regarded researchers with long tenures in Minneapolis." (From Bloomberg Economic Briefs: "Minneapolis Fed departing economists Patrick Kehoe and Ellen McGrattan collaborated on a 2008 Minneapolis Fed paper that challenged the efficacy of New Keynesian models in conducting monetary policy analysis. 'Some macroeconomists think that New Keynesian models are on the verge of being useful for quarter-to-quarter quantitative policy advice. We do not. We argue that the shocks in these models are dubiously structural and show that many of the features of the model as well as the implications due to these features are inconsistent with microeconomic evidence. These arguments lead us to conclude that New Keynesian models are not yet useful for policy analysis.'")

            Given the brittle state of finance, it is less perplexing - still, indictable, but less perplexing - that, three days after Kocherlakota's reckless statement, Chicago Fed President Charlie Evans announced the "Federal Reserve should step outside its comfort zone and take a few chances."

The tinder could go up in a flash. In 2012, Miami property developer Martin Marquiles found a big, friendly bank to lend $80 million for a construction loan. His 24-story condominium project ("The Bellini") was backed by 59 paintings (the usual: Jackson Pollack, Mark Rothko, Jasper Johns). That was two years ago. "[T]oday, the list of accepted collateral has expanded," reports the Wall Street Journal. "Steve McQueen motorbikes, Fender guitars... even super yachts and high-speed aircraft have raced onto the list." Luxury watches, jewelry, bottles of rare wine are "being [promoted as collateral]... by banks and auction houses." A Bank of America "credit executive" (name withheld to avoid future embarrassment) turns this collateral into "loans [that] can range from $3 million to $56 million in value." This is going to turn out well, for someone, not for the Bank of America.

Those planning to sell heirlooms should not tarry. The mushroom cloud may keep spreading, but, if past is prologue, when finance stops, the price for stuff vanishes.

On September 26, 2008 - a little over a week after the Lehman failure - the Journal reported: "Wall Street's Woes Hit Highest End." Today, as in 2008, the lower end of the housing market had already come undone.  "For months, as housing values were falling for midsize ranch houses in Stockton, Calif., and Las Vegas high-rises, sales of high-end properties in financial centers like London, New York and San Francisco continued to percolate along.  But that was before last week, when turmoil in the credit markets brought down Lehman Brothers Holdings and imperiled thousands of high-paying jobs. While those rare properties priced at $20 million or more are still holding up, there are signs that the crisis is exacerbating a downturn that was already plaguing properties in the $2 million to $10 million range, a market often sought by Wall Street workers, Since last Thursday, there have been 200 price cuts on properties listed at less than $10 million on Manhattan's Upper East Side or Upper West Side -  a 17% jump from the week before. Deanna Kory, a broker with New York-based Corcoran Group who's handling nearly two-dozen properties priced between $2 million and $10 million, says her showings are down by about 40% in the last two weeks compared to the same time last year. A slew of new buildings set to open in the next year will only increase supply."

At the infamous September 16, 2008, FOMC gathering, Federal Reserve economist Dave Stockton presented the house view: "I don't think we've seen a significant change in the basic outlook. "We're still expecting a very gradual pickup in GDP growth over the next year." "I don't really have anything useful to say about the economic consequences of the financial developments of the past few days." If the meeting is not infamous yet, it will be.

By January 2009, New York was going dark - literally. Half the Broadway theatres were dark by the end of January. Upper end restaurants closed. If not for the Federal Reserve's miracle madness in March 2009 - who knows how far this would have gone? The next time around, we may find out.

Ben S. Bernanke assumed the Federal Reserve throne in January 2006. He was worse than useless. Worse, for one thing - and this is only one of 6,000 reasons -  his fabricated reconstruction of the 2008 financial meltdown was exactly bureaucratic: take no blame, take more control "so it will not happen again," and build the bureaucracy that did not need to be rebuilt. "If we only had more regulation" he whined. Now we have it. "If only Bernanke listened to the bureaucracy that existed in 2006, the bust never would have occurred," should be the message on placards in front of the Eccles building. (Granted, these would be huge placards. Concision may follow.)  The Comptroller of the Currency calculated that credit risk rose for 5% of the banks making leveraged loans in 2005. In 2006, it rose for 69% of banks in the market.

Since Bernanke ignored the regulators, he might, at least, have read a newspaper. Banks did as they pleased, which is to say, their own pursuits developed in an ad hoc nature second only to the Federal Reserve's ad hoc policy. "If borrowers and lenders alike agree the corporate debt boom can't last, why isn't anyone stopping it?" On March 28, 2007, the Wall Street Journal answered its own question: "Hedge-fund managers, buyout artists, and bankers get paid for short-term performance. The long-term consequences of their actions are, conveniently, someone else's problem. People inside the big banks.... don't want to get caught missing the next big deal. Their banks, and their own bonuses, might suffer. So they ply ahead."

A 2004 OFHEO report cited a "March 1999 memorandum from an employee in the Controller's Department [that] described the benefits of a particular brand of software for modeling amortization, noting the software allowed a user to 'manipulate factors to produce an array of recognition streams,' which 'strengthens the earnings management that is necessary when dealing with a volatile book of business.'" The models purchased by Fannie Mae were corrupt. Given how models are worshipped, it's a wonder they weren't thrown in jail for bogus bonuses paid at Fannie Mae.
          In 2014, New York real estate is moving faster than Florida swamps in 1925. The velocity of collateral is stationed at the upper end. Day-trading is back. A family townhouse in Bedford-Stuyvesant (Brooklyn) was sold for $1.2 million on February 21, 2014 and re-sold one week later for $1.85 million. House sales in the Hamptons rose 52% in the first quarter of 2014 (from the first quarter of 2013 - when "the worst winter of the millennium" was not an excuse). The '$5 million and above' trades rose from eight to 37. On May 21, 24/ published: "The 10 Best Cities to Flip a House."

Bigger and faster deals must get bigger and faster. Real estate must accelerate. (Really, the paper - mortgages and their securitization, is what must accelerate. There do not have to be any houses at all, and, someday, we may just find the paper market was so detached from wood and brick, that was largely true. Someday, the world will be astonished at what it did not want to know in 2014.)

Fifty-billion dollar deals are not exceptional anymore, except to all the employees who get laid off to pay down the acquired debt. On May 21, 2014, Tom Keene at Bloomberg, asked Ellen Zentner, an economist at Morgan Stanley: "We continue to see M&A frenzy. All this transactional stuff we're seeing, is this good?" Zentner responded: "I think everyone wants to see increased M&A activity. It's signs of a healthy market."

Everyone, at least in the Morgan Stanley M&A department. Those falling out of the real economy may disagree. That would include the employees who will soon be looking for work after the shuttering of 300 Blockbuster, 300 Sears, 225 Staples, 223 Barnes & Noble, 200 Radio Shack, 180 Abercrombie & Fitch, 175 Aeropostale, 155 Sbarro, 150 American Eagle, 150 Rent-A-Center, 145 Brown shoes/ Famous Shoes stores.

In May 2014, Federal Reserve Chairman Janet Yellen delivered an unspeakable graduation address to the NYU seniors at Yankee Stadium. According to MarketWatch, most of the graduates had never heard of the Governor, one graduate telling the reporter she was being very offensive to ask such a question, which is just sooo 2014. In other developments on the campus, the Harvard Corporation was one of the few to display leadership (again, in 2014) when it prevented graduates' from holding their satanic black mass in Memorial Hall.

Instead Janet Yellen held a Black Mass at Yankee Stadium, extolling the heroism of the Galloping Gourmet, Ben Bernanke, who in Yellen's fantasy: "demonstrated such courage... [H]e took courageous actions that were unprecedented in ambition and scope. [Bernanke's actions were "unprecedented in ambition and scope." - FJS] He faced relentless criticism, personal threats, and the certainty that history would judge him harshly if he was wrong." Oh it will, Janet, and you are doing just what is required to clarify History's ambiguities. Keep pushing the huddled masses to spend and speculate on markets rigged by the Federal Reserve for the one percent.

Keynesian economics did not go far when it was first peddled to the public in the mid-1930s. In Frozen Desire, James Buchan wrote, at the heart of Keynes' General Theory, "the old private virtues (prudence, thrift, kindness) are public vices." Keynes, like most reformers, grew to loath the people he had decided to reform. His Holiness discovered the unwashed were hopeless. Despite Keynes' instructions in The General Theory, the public still wanted to make money and save.

The lifelong currency speculator asserted: "The love of money as a a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease." From the autobiography of Felix Somary, The Raven of Zurich: "Keynes biographer praises him for his prescience about the coming crash. I could quite clearly prove the opposite. ...Keynes, who was even then a widely praised individual, made an odd impression on me. He expressed contempt for economics as a science, and for individual economists, not excluding himself; but was obviously very proud of his talents as a speculator."

Buchan went on to express his own confusion: "I don't know which is preferable: to ignore the avarice that is the chief feature of modern society, or to wish it away! In attempting to restore the ethical component to political economy, Keynes turned virtue on its head: his economics are a sort of Black Mass."

            There is no hiding from the Keynesian Black Mass. In Europe, ECB President Mario Draghi played with his puppets before declaring credit-loosening commandments in early June. Martin Wolf, the predictable establishment mouthpiece at the Financial Times, wrote "Time for Draghi to Open the Sluice," on May 14. Paul Krugman told "a gathering of the European Central Bank's top researchers and policy makers" on May 26, 2014,  the "the ECB and other banks around the world need to raise the inflation targets they have clung to since the 1990s. At 2%, those goals are too low...."

This odious performance was matched at a Cleveland Fed jamboree where Adam Posen, currently head of the Peterson Institute, formerly a member of the Bank of England's Monetary Policy Committee, declared that concern about potential central-bank produced inflation is 'unnecessary hand-wringing.' Posen then boasted:  "I'm not worried that there is an imminent financial stability problem for the U.S.,' Posen added. 'Once you've had a bubble, you are less likely to have one soon afterward."

            Playing Tweedledee to Tweedledum, another Too-Large-to-Think economist, Larry Summers, announced in November 2013 "the economy lately hasn't shown an ability to grow without bubbles (quoting Bloomberg): 'It has been a long time since we have had rapid, healthy growth in the country.'" He went on to say his was "not an argument for bubbles," but, "it was time to change the framework." He offered nothing in this regard, so effectively said we need to pile bubbles upon bubbles and see what happens.

In the same talk, he threw another bowl of pasta against the wall: "On the question of whether the Fed stepping up and providing liquidity when no one else would was the right thing to do, I think historians are going to judge that about 98 to 2." The ratio is probably correct, but not in the direction Summers thinks.

On May 15, 2014, Summers was quoted by Fortune magazine in "a packed auditorium of hedge fund industry professionals at SALT, the annual industry confab."  The phlebotomizing policymaker claimed: "Low interest rates could become a source of instability down the road." One might wonder why he used the future tense. Fortune continued: What's more, Summers said that the Fed's policies are likely making the income inequality problem in the U.S. worse, by helping wealthy Americans who hold the majority of stocks, more than the rest of the country. 'A policy that works by pumping up asset prices is not going to be egalitarian,' said Summers." Did anyone ask about the 98 to 2 call? Had Summers recently read the 1993 BIS Report?

So which is it? Do we want bubbles? Do we have bubbles? Are they good or bad? It depends on the day and audience. On November 6, 2013, Jeffrey Lacker, Richmond Federal Reserve President was quoted in The King Report: "The rich are increasingly likely to remain rich, and the poor are increasingly likely to remain poor." Janet Yellen seemed to acknowledge this when on March 31, 2014, The Great Labor Economist told an audience in Chicago of "the courage and determination of the people" who have suffered "the past six years. [These] have been difficult for many Americans, but the hardships faced by some have shattered lives and families. Too many people know firsthand how devastating it is to lose a job at which you had succeeded and be unable to find another.... . And yet many of those who have suffered the most find the will to keep trying."

It would be more shattering and devastating if the 99% understood how the Fed's money-printing is the central reason they suffer. After years of zero-percent interest, family incomes continue to decline; pensions are imperiled by "going out on the risk curve" to earn a return; savers have been squashed; life insurance, long important to family stability in the West, is being extinguished; endowments, the same.

Galling is how the apparatchiks of poverty are cashing in. Bernanke and his $250,000 dinners with hedge fund managers. Krugman, so casually upping a fabricated 2% inflation "goal," and paid so well for it. Martin Wolf may or many not be getting rich, but he was handed the 2014 Overseas Press Club Award a couple of weeks before his ECB-approved "Time for Draghi to Open the Sluice" headline. These awards are soccer trophies inside the hive of accepted opinion. 

Adam Posen is President of the Peterson Institute. He gouges on the fatted calf bequeathed by Pete Peterson, who established the Institute as a platform for sound finance. Posen, speaking on CNBC in January, bragged that Federal Reserve Chairman William McChesney Martin (1951-1970) employed similar measures to Quantitative Easing during his tenure.

There could not be two more dissimilar approaches to monetary policy. Posen wrote (in Challenge, July/August 2008) inflation rates of "4, 5, or 6 percent a year, say, will [not] hurt growth. It is just not there in the data." He went on to say researchers have found once "you get to an annual inflation rate of 10 percent - some would say 8 percent, some people would say 12 percent," you "begin to see significant negative effects on growth."

On August 13, 1957, William McChesney Martin was dead set against a positive inflation rate to promote growth. Martin told the Senate Banking Committee that the person most likely to be injured in the inflationary cycle was the 'hardworking and thrifty...little man' on fixed income who could protect neither his income nor the value of his savings. Often, he was also the unemployed victim of the collapse." As different groups struggle to insulate themselves from the loss of purchasing power, 'fundamental faith in the fairness of our institutions and our government deteriorates." 
Adam Posen - Heavyweight Inflationist

In the February 25, 2014, Financial Times, Adam Posen, co-author with Ben S. Bernanke of Inflation Targeting: Lessons from the International Experience expressed his pleasure with "Abenomics": "Abe Has Good Medicine but Japan Needs a Stronger Dose." The heavyweight economist offered his blessing: "Japan's recovery program is showing promising early results." Posen warned though, more inflation was needed: "[E]conomic reform programmes fail to deliver.... when policy makers failed to recognize the risk of persistent deflation. Arguably, it has been the case with U.S. fiscal policy since the 2009 stimulus."

More and more. The Federal Reserve's balance sheet has grown from $850 billion in mid-2007 to $4.3 trillion on June 4, 2014.  Arguably, at least Posen is arguing, it should be $10 trillion today. The nearly $4.0 trillion increase over seven years approximates the amount of U.S. Treasury- and mortgage-securities the Fed has removed from the market (without looking further at refinancings, for instance). The lack of "liquid" Treasuries has caused no end of trouble, such as poorer quality collateral (the Fed loves talking about the liquidity it supplies to the market). The relentless otherworldliness of such policymakers falls on the masses to bear.

Posen's Japan (which does what American economists tell it to do) continues to target an inflation rate of 2%. This, in a country where more elderly than babies wear diapers. On May 29, 2014, Japan announced its annualized inflation rate at 3.2%. Ten-year bonds yield less than 0.60%. For those still young enough to work, wages have fallen22months in a row. Since 1997, the average, annual, Japanese salary has fallen by the equivalent of $6,700.

Bernanke-Posen inflation-targeting is worse for the retired. On June 5, in "Abenomics Spells Most Misery Since '81 as Retiree Skimps on Meat" Bloomberg reported that Mieko Tatsunami is "making due by halving the amount of meat I serve and add vegetables.....The price of everything we eat on a daily basis is going up." Trotsky produced similar results in the Ukraine.

On June 28, 1978, Federal Reserve Board Member Henry C. Wallich addressed a graduating class, not too far from Yankee Stadium, at Fordham University. 

Inflation was on everyone's mind and Wallich was forthcoming. "Inflation," he informed the young and idealistic graduates, "is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and aged."

            How is this so? Wallich explained inflation "is technically an economic problem. I mean the breakdown of our standards of measuring economic values, as a consequence of inflation." The strong are smart enough to understand that inflation "introduces an element of deceit into our economic dealings." Contracts are no longer made to "be kept in terms of constant values" but, one party understands this better than the other. Contracts during a period of inflation are made with monetary terms "unpredictably shifting measures of weight, time or space..."

            Among the losers is labor. "Inflation becomes a means of exploiting labor's money illusion." Among the winners, from the mouth of this public servant, is government. "It allows the politician to make promises that cannot be met in real terms, because, as the government overspends trying to keep those promises, the value of those benefits shrinks." This creates a "diminishing ability of households to provide privately for the future.... One may ask whether it is not an essential attribute of a civilized society to be able to make that kind of provision for the future." Wallich went on to emphasize "the increasing uncertainty in providing privately for the future pushes people who are seeking security toward the government." (And so, the public panic concerning Social Security and health insurance today.)

            At the same time, inflation "creates a vacuum in the private sector into which the government moves." He worried that the consequences of the inflation would be "a shift into the third dimension, away from democracy and toward authoritarianism." Wallich's question was more than theoretical; he grew up in the German, Post-World-War-I hyperinflation, which wiped out the middle class.

            On May 20, 2014, Philadelphia Fed President Charles Plosser described the calculus of the world economy through which the "accumulat[ion of] assets in global markets... is concentrated" in a few hands "where the excess [is] recycled several times. In Plosser's words: "[C]entral banks have become highly interventionist in their efforts to manipulate asset prices and financial markets in general.... This approach has continued well past the end of the financial crisis..... [W]e have created an environment in which 'it is all about the Fed.' Market participants focus entirely too much on how the central bank may tweak its policy, and central bankers have become too sensitive and desirous of managing prices in the financial world.... If financial market participants believe that their success depends primarily on the next decisions of monetary policymakers rather than on economic fundamentals... And if central banks do not limit their interventionist strategies...they will simply encourage the financial markets to ignore fundamentals and to focus instead on the next actions of the central bank."

Finance should not be important in the lives of most people. In 1950, the Bureau for Economic Analysis calculated the percentage of the U.S. economy engaged in finance was 9%. There is practically no decision in our lives that does not involve finance today. In 1950, the extent of most Americans' financial dealings were their passbook savings account and house mortgage. Today the average person has been dragooned into money-dealing to survive.

The concentration builds with remorselessness beyond the comprehension of those who fuel it. We get hit with it everyday, often, the Know-it-alls effectively throwing up their hands in an "it's beyond me" attitude:


May 28, 2014. BusinessWeek Headline: Headline: "Fed's Junk-Loan Caution Spurs Creative Accounting Alchemy" Story: "Lenders are increasingly allowing junk-rated borrowers to adjust their earnings to make them look more creditworthy as U.S. regulators increase pressure on banks to refrain from underwriting too-risky deals. Such tweaks, which are permissible under more and more credit agreements, can help companies stay in compliance with their loan terms or to raise debt. More than half of loans this year for issuers backed by private-equity firms allow them to boost earnings by an unlimited amount through projected cost savings from acquisitions and 'any other action contemplated by the borrower,' said Vince Pisano, an analyst at Xtract Research LLC, citing a sample he's reviewed."

May 30, 2014. Bloomberg Economic Briefs:
"The New York Fed's Liberty Street Economics blog takes a look at rising household debt. 'According to our February 2014 survey, 51 percent of the high-risk borrowers have maxed out a credit card in the past year, compared with less than 20 percent for the lower-risk groups.'"

June 2, 2014. Bloomberg: Story: "Unstoppable $100 Trillion Bond Market Renders Models Useless" Headline: "If the insatiable demand for bonds has upended the models you use to value them, you're not alone. Just last month, researchers at the Federal Reserve Bank of New York retooled a gauge of relative yields on Treasuries, casting aside three decades of data that incorporated estimates for market rates from professional forecasters."

June 4, 2014. Bloomberg Economic Briefs: ""Princeton Professors Markus K Brunnermeier and Yuliy Sannikov, writing for Vox,
take a look at the transmission of monetary policy through asset-backedsecuritization. "Euro zone monetary policy transmission is broken. A key aspectof this is the failure of credit to get to small and medium enterprises, and consumers.This column uses the 'I theory of money' to diagnosis the problem andpropose 'prudently designed' asset-backed securitization as the cure.""

June 4, 2014. (This was released just prior to ECB President Mario Draghi's announcement of looser ECB monetary terms) William H. Buiter: The Simple Analytics of Helicopter Money: Why It Works - Always.  From the CEPR abstract: "A helicopter drop of money is a permanent/irreversible increase in the nominal stock of fiat base money with a zero nominal interest rate, which respects the intertemporal budget constraint of the consolidated Central Bank and fiscal authority/Treasury - the State."

Buiter, the Dutch-American- Bank of England Bank Monetary Policy Committee member-Citigroup-skirt chasing-monetary nut, was discussed in"Going Digital.

June 6, 2014. Bloomberg News Briefs: "A National Bureau of Economic Research working paper quantifies the lasting harm to the U.S. economy from the financial crisis: 'In 2013, output was 13 percent below its trend path from 1990 through 2007. Part of this shortfall - 2.2 percentage points out of the 13 - was the result of lingering slackness in the labor market in the form of abnormal unemployment and substandard weekly hours of work. The single biggest contributor was a shortfall in business capital, which accounted for 3.9 percentage points.'"

June 6, 2012.Fox News, GRAZ, Austria - "A devastating fire which gutted a crematorium in southern Austria was caused by an obese woman's excessive body fat blocking an air filter, Austrian public broadcaster ORF reported. The fire occurred at the facility in the city of Graz in mid-April. Firefighters had trouble extinguishing the blaze due to a thick layer of insulation lining the crematorium's walls. Austrian officials investigating the fire found that it was caused by the burning body of the 440-pound woman. The obese corpse reportedly led to overheating in the crematorium's filter system, triggering the blaze. Other recent fires caused by the burning of obese bodies were reported in Germany and Switzerland. Former Graz city fire chief Otto Widetschek said special crematoria for obese people should be set up in Austria to deal with the potential dangers of cremating obese bodies. 'In Switzerland, there is now a special crematorium for XXL-bodies,' he told ORF earlier this week.'"

Photo: Fox News.