Wednesday, March 27, 2013

Money is Gold

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)

I believe Dennis Gartman compiled this list through June 13, 2012.

"Spain is not Greece." - Elena Salgado, Spain's Finance Minister, February 2010

"Portugal is not Greece." - The Economist, April 22nd, 2010

"Ireland is not in Greek Territory." - Brian Lenihan, Ireland's Finance Minister

"Greece is not Ireland." - George Papandreou, Greek Finance Minister, November 22, 2010

"Spain is neither Ireland nor Portugal." - Elena Selgado, again... November 16, 2010

"Neither Spain nor Portugal is Ireland." -Angel Gurria, Secretary-General of the OECD, November 18, 2010

"Spain is not Uganda. - Emeriano Rajoy, Spain's Prime Minister, June 9, 2010

"Italy is not Spain."- Ed Parker, Fitch Managing Director, June 12, 2012

"When it becomes serious, you have to lie." - Jean-Claude Juncker, the Europe Group President, April 2011

"The worst is now over... the situation is stabilizing." - ECB President Mario Draghi, March, 2012

"Uganda does not want to be Spain" - Asuman Kiyingi, Uganda's foreign minister, June 13th 2012

"For a small, open economy like Cyprus, Euro adoption provides protection from international financial turmoil." - Jean-Claude Trichet, President of the European Central Bank, January 2008

"Luxembourg is different from Cyprus" - Business Insider, March 22, 2013

"Latvia is not Cyprus." (Actual quote: "[T]here is no truth in statements that Latvia could become Cyprus." - Kristaps Zakulis, head of the FKTK financial sector regulator, March 21, 2013)

"Slovenia is not Cyprus." - (Actual quote: "I am very sure that we (Slovenia) will not get into such a situation (as Cyprus)," Marko Kranjec, Bank of Slovenia governor.)


"Malta is not Cyprus." - Tony Zahra, Times of Malta, March 23, 2013

"Hungary is not Cyprus." -Financial Times, March 21, 2013, See below

"The Czech Republic is not Cyprus." -Financial Times, March 21, 2013, See below

"Poland is not Cyprus." -Financial Times, March 21, 2013, See below

"Countries like Poland and the Czech Republic have very solid banking systems, completely unlike the situation in Cyprus - and there is no sign of a banking run. The most exposed are Hungary and Slovenia, but even they are a world away from Cyprus's situation." - Jan Cienski, "CEE: Contagion Risk from Cyprus?" - Financial Times, March 21, 2013

"Credit is not money. Credit is trust. Trust can vanish in an instant." - Frederick J. Sheehan, March 25, 2013

TESTIMONY OF J.P. MORGAN - THE MAN - IN 1912 BEFORE THE "PUJO COMMITTEE," a subcommittee of the House Committee on Banking and Currency. Morgan was questioned by Samuel Untermyer. The source is Jeanne Strouse's biography of Morgan:

"Untermyer: "The basis of banking is credit, is it not?"

Morgan: "Not always. That is evidence of banking, but it is not the money itself. Money is gold, and nothing else."
Untermyer asked Morgan whether credit was not based on money - that is, did not the big New York banks issue loans to certain men and institutions "because it is believed that they have the money back of them."

Morgan: "No sir. It is because people believe in the man."

Untermyer: "And he might not be worth anything?"

Morgan, with less than perfect regard for grammar: "He might not have anything. I have known a man to come into my office, and I have given him a check for a million dollars when I knew they had not a cent in the world."

Untermyer: "There are not many of them?"

Morgan: "Yes, a good many."

Untermyer: "That is not business?"

Morgan: "Yes, unfortunately it is. I do not think it is good business, though."

Untermyer did not, apparently, think much of this answer, for he repeated his proposition. "Is not commercial credit based primarily on money or property?"

Morgan: "No sir; the first thing is character."

Untermyer: "Before money or property?"

Morgan: "Before money or property or anything else. Money cannot buy it" - and he elaborated after a few questions - "because a man I do not trust could not get money from me for all the money in Christendom."


"The reason people hold gold is protection against tail risk, really, really, bad outcomes. To the extent that the last few years have made people more worried about the potential of a major crisis, then they hold gold as a protection." - Federal Reserve Chairman Ben S. Bernanke, the greatest tail risk in the West since Genghis Khan, July 13, 2011.

"With the current policy, [European leaders] will need force to keep it going against the interests of the people. You do not need to be a eurosceptic to conclude that such a monetary union is also deeply immoral." - Wolfgang Manchau, Eurozone Break-Up Edges Even Closer, Financial Times, March 25, 2013

The People are growing angry. The People will become very, very angry.

Thursday, March 21, 2013

A Quarrel in a Far-Away Country between People of Whom We Know Nothing

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)

            Even for those living on a distant continent, the confiscation of state-guaranteed bank deposits in Cyprus is a reminder. (At this stage, it is not clear the Eurocrats will succeed.) Governments and central-banks blew their capital to save a financial Ouija board - not system - in 2008. Former Federal Reserve Chairman Paul Volcker reminded an audience last week there is no financial system: "And what I'm talking about is the international monetary system.  Of course you know it's hard to call it a system. A system concerns itself with some interrelated parts and a mechanism that are working together to produce some stability and progress.  That's hardly a description of the international monetary system.  And as many people have said, 'international non-system.'"

            The arbitrary decisions made by Americrats and Eurocrats in 2008, of what to save and what to sink, must veer towards sinking more and saving less in 2013. It has been noted the decision to confiscate bank deposits in Cyprus was a stupid move instituted by the acronyms (ECB, EU, IMF, G-somethings). This should remind residents in other countries that, first, what is theirs isn't, and second, relying on logic (e.g., "the government wouldn't do that, it would be shooting itself in the foot") is not a wise path to self-preservation.

            First, and foremost, the capital on which the bureaucrats can draw is low. That is financial, political, and psychological capital. In 2008, the central banks and governments stood behind the public's bank deposits and panic subsided. The veneer is much thinner now. Again, logic is not the path to estimating when the public recognizes its exposure, since that should have happened so long ago. These are states whose authority only exists as long as their paper-currency bills are trusted. (Yes, buy gold and silver).

All that is left is central-bank, money-printing and assurances of future money-printing - sometimes in the form of guarantees. The guarantees have been recklessly awarded. Revenues are harder to come by. Apparently - at least this is the current story - there was no other source of funds to back the failing Cypriot banks. The Eurocrats had drawn a line in the sand. They would only award X euros to save the banks. Cyprus had to supply the rest. The Euros would not accept debt issued by the Cypriot government as good collateral. (This is farce, given what is permitted.) Where to turn? The bond holdings in the banks were insufficient to make up the difference. Tax receipts are also insufficient, but the arbitrariness of what can be taxed and what constitutes a tax is constantly redefined in the western so-called democracies. So, the Cypriot government announced that bank deposits are hereby taxed - confiscated - to fund the deficiency. What value should bank customers place on deposit insurance in other countries?

Resourceful is spreading - reading a new interpretation by the minister of finance and administration in Spain. From El Pais, on March 19, 2013: bank deposits can be taxed since this would standardize taxes across regions. I have no idea what that means, not speaking Spanish only being one problem. Its importance though, should it be imposed, to the average Spaniard, is not the clumsy legal route to confiscation, but: "the government is taking my money."

Looking to the day of reckoning in the U.S., there are two other potential sources: private or public investment. Cyprus and Russia are negotiating now; Russia potentially supplying the missing capital. Foreign investors made the mistake of supplying U.S. financial institutions with capital in 2008. For the most part, that did not work out well for the investors. Cyprus is much smaller, though. Could Cyprus and Greece join a new ruble block?

Those with assets in the U.S. are well aware of resourceful money grabs by the government in recent years. Theft from General Motors bondholders is an example. When the Federal Reserve is buying 100% of the U.S. Treasury issues and bond yields are rising, the U.S. government will probably apply new confiscatory taxes on savings, investments, and assets. (U.S. Treasury gold holdings will become a point of contention, to express this vaguely, at some point.)

To look optimistically, the discrediting of the power brokers can not come too soon. These awful people are now so bereft of tolerable choices they write the script for their original sin when they speak. On March 19, 2013, German Finance Minister Wolfgang Schaeuble told "lawmakers" the current problem is the result of "a failed business model over decades." Schaeuble is acknowledging the euro was always a fa├žade, a means to a different end than a functioning currency. If those who launched the euro wanted to establish a currency, a currency that required trust across borders in an experiment never before attempted, they would not have plagued it with bubonic pathologies.

Their intention was command and control, as the most prescient critic, Bernard Connolly wrote in his 1995 book, The Rotten Heart of Europe (a new edition was published in 2012): "My central thesis is that the ERM [Exchange Rate Mechanism] and EMU [Economic and Monetary Unit] are not only inefficient but undemocratic: a danger not only to our wealth but also our freedoms, and ultimately, our peace. The villains of the story... are bureaucrats and self-aggrandizing politicians." Monetary union "is a mechanism for subordinating the economic welfare, democratic rights, and national freedom of the European countries to the political and bureaucratic elites whose power-lust, cynicism, and delusions underlie the actions of the vast majority of those who now strive to create a European superstate. The ERM has been their chosen instrument and they have used it cleverly."

Saturday, March 16, 2013

Jail Time?

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)

            "The Fed's alphabet soup of cash-pumping....actions were so reckless that even the outrageous anecdotes to which they gave rise can scarcely capture the lunacy rampant in the Eccles Building. Thus, the nation's central bank actually guaranteed upward of $200 million that had been borrowed by two New York housewives to start a new business [in November 2008 - FJS]. Amazingly, the purpose was to enable this intrepid duo to purchase large volumes of securitized auto loans about which they knew nothing."

            -David A. Stockman, The Great Deformation: The Corruption of Capitalism in America, to be published in April 2013.

Recent attention devoted to banksters by U.S. senators is noteworthy. Not definitive by any means, but the media attention to what could have been ignored may foreshadow a comeuppance.

            Members of the Senate Committee on Banking, Housing, and Urban Development did not let Federal Reserve Chairman Ben S. Bernanke escape "Too-Big-to-Jail" questions at a February 26, 2013 hearing. This is alluded to in "Crony Bureaucrat" and "Eating the Fed for Lunch." Some might think the chairman's elliptical answers an attempt to duck and cover but it is more probable his mind simply drifted off, his wafting countenance familiar to travelers in the Sahara beaten by a mind-numbing sun while draped on the back of an anemic camel famished upon the outskirts of Chenachene.

            However, it was not only Simple Ben. The parade of government officials previously exempt from crony questioning continues. Attorney General Eric Holder was put on the spot before the Senate Judiciary Committee on March 6, 2013:   

SENATOR CHARLES GRASSLEY (R-IA): "In the case of bank prosecution. I'm concerned we have a mentality of 'too big to jail' in the financial sector, spreading from fraud cases to terrorist financing to money laundering cases. I would cite HSBC. I think we are on a slippery slope and that's background for this question. I don't have recollection of DOJ prosecuting any high-profile financial criminal convictions in either companies or individuals...."  

ATTORNEY GENERAL ERIC HOLDER: "....the concern that you have raised is one that I, frankly, share. I'm not talking about HSBC here, that would be inappropriate. But I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute - if we do bring a criminal charge - it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large. Again, I'm not talking about HSBC, this is more of a general comment. I think it has an inhibiting influence, impact on our ability to bring resolutions that I think would be more appropriate. I think that's something that we - you all [Congress] - need to consider. The concern that you raised is actually one that I share."

            The story of the Grassley-Holder discussion was published in the New York Times under the headline: "Big Banks May be Getting Too Big to Jail." The Times lectured the Attorney General: "Apparently, Mr. Holder didn't get the memo. As you can imagine, both the left and the right made hay of Mr. Holder's statement [one issue they agree upon, one issue they may do something about - FJS], using it as a damning explanation for the lack of prosecutions on Wall Street."

            Holder's fear of big-bank failure is without merit. "The Professor Who Did NOT Save the World" discussed some of what the world may finally be willing to recognize.

           David A. Stockman's The Great Deformation: The Corruption of Capitalism in America will be published in April. If public opinion is now tending to acknowledge that it fell for the Hank Paulson-Ben Bernanke, phony, financial-terrorism ploy, it will be timely to throw the book at the culprits. The AIG holding company failure never jeopardized a single insurance policy. General Electric's panic - more exactly, the panic instilled in (and by) Simple Ben and Treasury Secretary Hank Paulson - was for the benefit of CEO Jeff Immelt. Too-Big-to-Fail banks were not only loaded with bad assets, but also enough good assets for the equity and bondholders to absorb losses.

            The top, front-page headlines in the Friday, March 15, 2013, Financial Times ("J.P. Morgan Under Fire for London Whale Saga") and Wall Street Journal ("Senate Slams Bank on 'Whale'") are encouraging. As was the FT report that [Senator John] McCain "accused the bank of lying when it told Senate investigators it had been fully transparent with regulators." Both stories were referring to a "301-page report by the Senate's Permanent Subcommittee on Investigations." And: "The panel has the discretion to make referrals for criminal proceedings to the Justice Department."

The Journal also published (on page 5) a story about a speech Dallas Federal Reserve President Richard Fisher will deliver (not the media's normal practice) on Saturday, March 16, 2013, noting it is unusual for a Fed official to address a partisan political audience (the Conservative Political Action Conference). Fisher will be "pitching his proposal to break up the biggest U.S. banks.... His presence at the conference is the latest evidence of big-bank bashing's broad political appeal."

As Stockman implicitly acknowledges in the following, Ben S. Bernanke has already steered us off the financial cliff; all that's left is to discover how much it hurts when we hit the ground. Still, even if the banksters go on, it is imperative to rid us of Bernanke and his fellow theorists:

"Standing on the edge of financial abyss, the Fed is thus hostage to its own four-decade excursion in money printing and macro-economic management.... [T]be Fed has painted the nation into a dead-end corner. Sundown comes because the Fed dares not let interest rates rise by even a smidgen, let alone 'normalize' or ever again approach something like an honest price for money and debt on the free market... If it did, the vast majority of fast-money speculators who have rented Treasury notes and bonds on 98 percent repo would sell in a heartbeat, causing the price of government debt to fall sharply [with yields rising sharply - FJS]. Then the slower-footed bond fund managers would be forced to liquidate in the face of retail investor redemptions and eventually even insurance companies would panic, selling into a bidless market for government debt and everything tied to it."

Sunday, March 10, 2013

Eating the Fed for Lunch

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)
            The lack of interest regarding just how the Federal Reserve will extricate itself and the rest of us may be a matter of self-preservation. There is no way out from its loony, money hypothesis.

            It is not ironic that the man responsible for extrication is in a trance. Only such a fuzzy-headed, tweedy thinker would have created the greatest moral hazard in the history of the world.

            In review: To attack the debt-induced, financial misdeeds of 2008, the Federal Reserve decided to bloat the clogged channels of badly spent and poorly invested money with more of the same. From a balance sheet of roughly $800 billion in 2007, it is passing $3.2 trillion on its way to $4 trillion by the end of 2013. If there is a change in plans, odds laid here are that we will pass $6 trillion before $3 trillion.

            It was on this last point that several senators quizzed Federal Reserve Chairman Ben S. Bernanke (see also: "Crony Bureaucrat") at a February 26, 2013, hearing of the Senate Committee on Banking, Housing, and Urban Affairs. The means by which the Fed will extract the world's economies from such a burst of academic theorizing falls under the heading of the Fed's "exit strategy."

            Under questioning from Senator Pat Toomey, we learned - as did the startled Senator Toomey - the Fed does not even have an exit strategy:

SENATOR TOOMEY (R-PA): "To what extent are you concerned about asset bubbles...How do you know when there is a bubble and how concerned are you that this absolutely unprecedented monetary policy could manifest itself in inappropriate asset appreciation?"

"CHAIRMAN BERNANKE: "It is a concern as I said in my remarks. We are approaching it two ways. First we are putting a lot of effort into measuring, monitoring, assessing asset prices and financial activities. Secondly, we are trying to make sure that, to the extent there may be some frothiness [unfortunate choice of words - see: Greenspan, Alan; September 26, 2005 - FJS]... in a particular asset class, that the holders of those assets are prepared to deal with those losses...."

SENATOR TOOMEY: "What would the impact be of actually having to liquidate a big portion of your holdings on the bond market, on the equity markets?

CHAIRMAN BERNANKE: "We don't anticipate having to do that."

SENATOR TOOMEY: "Not ever?!?!"

CHAIRMAN BERNANKE: "We could exit without ever having to sell and by letting it run off. ["Run off": Fed balance sheet assets reduced to a level that will not produce inflation. For instance, from $4 trillion, the Fed could sell $3 trillion of Treasury securities. "Who would buy them without bond rates fleeing to double-digits?", some may ask. Thus, the questions raised by the senators, and the fantasy of exiting "without ever having to sell." - FJS] And we could tighten policy by raising rates that we pay on reserves. That would be one strategy, for example. [Bernanke offered no second strategy. - FJS] In any case, we have said that we will sell slowly with lots of notice and we will, of course, also be offering our forward guidance about rates so that there will be a shift in rates expectations on the part of the market. We've given a lot of thought to these issues.

The Fed chairman offered a reflection on investing:

CHAIRMAN BERNANKE: "Senator, if I can make one very quick point. There's no risk-free approach to this situation. The risk of not doing anything is severe as well. So we're trying to balance these things as best we can."

            To discuss each contradiction and betrayal of common sense in the above (and the below) would fill more space than the prosecutor's rebuttal to the O.J. Simpson defense.

            Just a couple of points. First, notice the "first": "measuring, monitoring, assessing..." The process itself is the accomplishment. After the deluge, I assure you, Simple Ben or whomever sits in the witness stand will state: "Senator, we put a lot of effort into measuring, monitoring, assessing asset prices and financial activities." Ben (let's say) will - quite sincerely - consider that a complete and satisfactory summary: an "A" answer, from the A student.

            Second, re-quoting His Simpleness: "in a particular asset class, that the holders of those assets are prepared to deal with those losses...." Bernanke and his chums (New York Fed President Dudley is particularly lucid) have satisfied speculators that low interest rates motivate savers to stop saving and to, instead, speculate.

            Third: Stan Druckenmiller was interviewed after Bernanke's measurement and assessment delirium. He cut right through this "running off" business. As background to Druckenmiller's comments, the Federal Reserve is now buying 80% of all Treasury issues. At last glance, the Treasury refunds $4 trillion of its Treasury issues each year, as they mature. The Fed may soon be buying 100% of Treasuries issued. The $85 billion a month in purchases may need to rise.

            When Druckenmiller managed the Quantum Fund, he gave an annual investment view to clients. The clients joked that his annual view was really a "three-day view" since he might, in an instant, change his mind, then sell and buy in truckloads. (Bold is from Zero Hedge website transcription.)

            Regarding Bernanke's dainty plan: "The chairman testified that [he] will give the market plenty of warning. Do you know what guys like me are going to do when [the Fed] sells the first bond out of 4 trillion?And don't think that letting the bonds run off isn't selling. That debt has to be refinanced. If you do not - if you just let all the bonds run off, that is still 4 trillion in selling. And it's not till they actually sell the first one, it's till you get the whiff - what do you think - what do you think the markets are going to do when they figure out the exit?.... [W]e know that it's not a real market-driven number. And we know the longer you keep it there, the greater the misallocation, and the greater the pain."

Druckenmiller also said: "The Fed is printing a lot of money. They are forcing people into markets.You shouldn't be buying securities because you're forced to buy them by zero rates. You should buy them because you think they're great value. They're great value only relative to zero interest rates. They're not great value on an absolute basis."

"I don't know when it's going to end, but my guess is, it's going to end very badly; and it's going to end very badly because, again, when you get the biggest price in the world, interest rates, being manipulated you get a misallocation of resources and this is going to end in one of two ways - with a malinvestment bust which we got in '07-'08 (we didn't get inflation). We got a malinvestment bust because of the bubble that was created in housing. Or it could end with just monetizing the debt and off we go in inflation. So that's a very binary outcome. [T]hey're both bad."

            Senator Shelby also wanted to understand how the Fed is going to get us out of this:

SENATOR SHELBY (R- AL): Does it concern you... how you might have to deleverage [the balance sheet]? Will that be a challenge to the Fed, or could it be?

CHAIRMAN BERNANKE: ".... In terms of exiting from our balance sheet, we, uh, have put out a couple of years ago, we put out a plan, we have a set of tools, I think we have belts, suspenders, two pairs of suspenders, we have different ways that we can do it, um, so, ah, I'm not, I think we have the technical means to, unwind it at the appropriate time. Of course, picking the exact moment to do it, of course, is always difficult, you know. You want to, you want to withdraw, um, the support at the right time, not too early, not to late, that's always a judgment call. But, in terms of the ability to get out and to normalize our balance sheet, um, we have, again, a set of tools which I'd be happy to go into if you'd like, but which will allow us to normalize policy either by selling assets or by retaining assets [When Sen. Toomey asked, this "couple of year old" plan did not include selling. - FJS] and doing other things like raising the interest rate we pay on reserves."

Separately, Bernanke ducked Senator Shelby's specific question and his answer left us wondering how he has managed - legally - to deal through so many windows:
SENATOR SHELBY: "Is your portfolio public?"


SENATOR SHELBY: "It's public. In other words, the $3 trillion in value of your portfolio, it's public as to what securities you have, and what they're doing, performing and non-performing?"

CHAIRMAN BERNANKE: "They're all performing. Every single one. I mean, they're all Treasuries and Treasury-guaranteed agency securities."

SENATOR SHELBY: "Just about all of them are Treasury or Treasury-Related?"

CHAIRMAN BERNANKE: "By law, we can only buy Treasuries and Agencies."

SENATOR SHELBY: "And they're all performing now?"

CHAIRMAN BERNANKE: "One hundred percent."

Again, separately, and MAYBE NOT QUITE LONG ENOUGH:

SENATOR SHELBY: You studied the Fed a long time before you came to the Fed. Has there ever been a [Federal Reserve] balance sheet close to [$3 trillion]?"

CHAIMRAN BERNANKE: "I don't think so"



Separately, the Fed Chairman asserted: "My inflation record is the best of any post-war Fed chairman." Thanks to Paul Brodsky at QB Partners for the observation: "And he was right! Look at this! He blew 'em all away!"



            It's out there now. As Stan Druckenmiller explains: it will hit us in one form or the other. The Fed will continue with its ad lib pontificating, but when it loses control of the markets, the Fed and investors in "particular asset classes who... are prepared to deal with those losses...." - the vast majority - will get eaten for lunch. 

Thursday, March 7, 2013

Crony Bureaucrat

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)

The bureaucrat is similar to the cockroach. Both "species adapt readily to a variety of environments, but prefer warm conditions found within buildings." Both "are among the hardiest insects." (Wikipedia's descriptions, for interested entomologists) Madonna (the exhibitionist) captured the nexus: "I am a survivor. I am like a cockroach, you just can't get rid of me."

            Federal Reserve Chairman Ben S. Bernanke is the consummate bureaucrat. His pretense of expertise (economics) is of minor interest. As a thoroughly modern, American bureaucrat, he and his institution are seemingly indispensable. His is no different than the Department of the Interior; both constantly hire staff, convene committees, expand budgets (although, the Federal Reserve has no budget: the envy of its contemporaries), pass rules, mandates, laws, more rules, create more paperwork, and pass new rules regulating the new paperwork. In the Fed's case, it specifically expands money growth, credit facilities, regulatory responsibilities. The only possible change to the Fed's monetary policy is if it purchases $170 billion securities a month, from $85 billion now. It must never change course, but smother earlier contretemps by expanding the same.

In a different sphere, the Fed has refused to puncture Too-Big-to-Fail banking. In fact the Big Five banks hold a much larger proportion of bank assets today than when they became insolvent in 2008.

            Over the course of human experience, the failure of Chairman Bernanke to foresee and dispose of the worst miscreants during the 2008 crisis would have ended his career, at the very least. But he is an American bureaucrat. A survivor. He snuggled in the Eccles Building, then issued statements that satisfied his handlers and spared him the roach trap.

      Before the Financial Crisis Inquiry Commission, on November 17, 2009, Chairman Bernanke testified: "First, is that 'too big to fail' is a very, very serious problem, and one that was much bigger than expected. And I think it's absolutely critical that if we do one thing in financial reform, it is to get rid of that problem. It has to be possible for firms to fail...."

            Note: Too-Big-to-Fail [TBTF] was
the top problem. Bernanke told the FCIC to emphasize this. In fact, Simple Ben never intended to act. He may not have - and may not still - understand his aimlessness since he is a survivor. No matter what he does or does not do, we can not get rid of him. (Vice Chairman Yellen would be worse.) If you listen when he speaks, his is a world of processes - of agendas, of "measuring, monitoring, assessing activities" of "establishing rules", of "developing orderly authorities" of "moving in the right direction," but of never, ever succeeding at what he sets out to accomplish.

            This does not matter. See for yourself in Bernanke's testimony before the Senate Committee on Banking, Housing, and Urban Affairs on February 26, 2013. The quoted portions concentrate on Too-Big-to-Fail. We could read his responses to bubble fears (he has none). Or, the Fed's exit strategy (we learned he doesn't need one). But, he identified TBTF as the "absolutely critical" problem to solve, three-and-one-half years ago.


Bernanke has not shied from the claim since. This is the lovely situation of the bureaucrat. He can bore his audience with procedural guidelines but never need accomplish a thing. Americans are suckers for 12-step-plans, white papers, blue-ribbon panels, think-tank studies, all of which could be launched to the Moon without being missed.

Bernanke spoke on his home turf, the campus of Princeton University, on September 24, 2010, two-and-one-half years ago: "Prior to the crisis, market participants believed that large, complex, and interconnected financial firms would not be allowed to fail during a financial crisis.... As a result...firms thought to be too big to fail tended to take on more risk, as they faced little pressure from investors and expected to receive assistance if their bets went bad.... The resulting buildup of risk in too-big-to-fail firms increased the likelihood that a financial crisis would occur and worsened the crisis when it did occur."

Here, Bernanke identified a failing that was important to correct. He then went on to describe the Federal Reserve's efforts to address Too-Big-to-Fail: "One response to excessive risk-taking is stronger oversight by regulators, and the recent legislation and the rules and procedures being developed by the Federal Reserve and other agencies will subject systemically critical firms to tougher regulatory requirements and stricter supervision.... The financial reform legislation took an important step in this direction by creating a resolution regime under which large, complex financial firms can be placed in receivership, but which also gives the government the flexibility to take the actions needed to safeguard systemic stability."

In other words, he was full of words, and he survives. He is eternal. This is one of the most serious problems in the United States today: the crushing weight of the immobile bureaucracies that enslave us. If half the government and quasi-government workers were laid off tomorrow, the GDP would jump 400%.

What follows is the to-and-fro of senators questioning Simple Ben at the February 26, 2013 Senate Committee on Banking, Housing, and Urban Affairs. To ponder: Do you think this guy is going to wake up some morning and say: "Hey, I was wrong about QE. Let's back off and let the market set interest rates."?

Chairman Ben S. Bernanke, Semiannual Monetary Policy Report to the Congress, Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington, D.C., February 26, 2013:

Senator Jeff Merkley (D-OR):

CHAIRMAN BERNAKE: "...Too-Big-to-Fail [TBTF]: we also agree that that's something that really needs to be addressed and that many of the parts of Dodd-Frank are intended to address that and we're pushing those as hard as we can."

SENATOR MERKLEY: "Thank you and I think it does certainly say to us we're a long way from getting there [from eliminating TBTF - Bernanke had just ducked Markley's interrogation regarding large banks' regal status as "Too-Big-to-Go-To-Jail-for-Their-Crimes" - FJS] if we're afraid of any form of shakiness of these large banks. .....There's another aspect too.... It continues to tell folks it's safer to invest in large banks rather than community banks. The community banks would have been shut down or at least investigated thoroughly.... Is this sort of bias counter-productive to the overall health of our economy?

CHAIRMAN BERNANKE: Absolutely. It means the playing field is not level. It means there's not market discipline so there's too much risk-taking. ...., So, getting rid of Too-Big-to-Fail is, I think, an incredibly important objective and we're working in that direction."

Senator Bob Corker (R-TN):

SENATOR CORKER: "We watch regulator capture take place here, where basically the regulators end up working for the people they regulate....Upon exit [when the Fed unwinds the securities it has accumulated - FJS], do you concern yourself at all with the Fed being viewed as not as independent as it used to be, and working so closely with many of these institutions you regulate?"

CHAIRMAN BERNANKE: "Well we're concerned about perception, but none of things you've said are accurate."

SENATOR CORKER: Oh, yes they are."

CHAIRMAN BERNANKE: ".... [The Federal Reserve] paying interest [to the banks] on beneficial for the taxpayer...."

SENATOR CORKER: ".... It's really helping the institutions...."

CHAIRMAN BERNANKE: ".....It's not helping the banks."

SENATOR CORKER: "When you exit, when you draw the money supply in...."

CHAIRMAN BERNANKE: "There is no subsidy involved."

Senator Elizabeth Warren (D-MA):

SENATOR WARREN: I'd like to start with a question about Too-Big-to-Fail: We haven't gotten rid of it yet. Now we have a double problem. The big banks - big at the time that they were bailed the first time - have gotten bigger. And, at the same time, investors believe with TBTF out there, it's safer to put your money into the big banks and not the little banks, in effect creating an insurance policy for the big banks. The government has created this insurance policy, [that is] not there for the small banks... Bloomberg [calculated the subsidy that is received by the large banks from borrowing at lower rates than small banks] is $83 billion that the big banks get... in what is essentially a free insurance policy. They borrow cheaper than the small banks do. I understand we're all trying to get to the end of TBTF [Not so fast, Liz - FJS] ....Until we do, should the big banks be repaying the American taxpayer that $83 billion subsidy they are getting?

CHAIRMAN BERNANKE: "The subsidy is coming because of market expectations that the government would bail out those firms if they failed, those expectations are incorrect...."

SENATOR WARREN: "The $83 billion says that...there really will be a bailout for the largest financial institutions."

CHAIRMAN BERNANKE: "That's the expectation of markets, but that doesn't mean we have to do it."

SENATOR WARREN: "....But I don't understand. It is working like an insurance policy. Ordinary folks pay for homeowner's insurance. Ordinary folks pay for car insurance and these big financial institutions are getting cheaper borrowing, to the tune of $83 billion in a single year, simply because people believe the government would step in and bail them out. I'm just saying if they're getting [this subsidy], why shouldn't they pay for it?"

CHAIRMAN BERNANKE: "I think we should get rid of it." [Huh? - FJS]

SENATOR WARREN: "....We've now understood this problem [Too-Big-to-Fail] for almost five years. So when are we going to get rid of it?"

CHAIRMAN BERNANKE: "Well, some of this, you know, ah, as we've been discussing, some of those rules, uh, ah, take time to develop, uh, ah, the [FDIC's] orderly liquidation authority, we've got the living wills. I think we're moving in the right direction. If additional steps are needed then Congress can obviously discuss this but we've got a plan and we're moving in the right direction."

SENATOR WARREN: "Any idea when we'll arrive at the right direction?"

"CHAIRMAN BERNANKE: "It's not a zero-one thing. Over time....this is a problem we've had for a long time, and we're not going to solve it immediately."

SENATOR WARREN ".... What's happening is the big banks are getting a terrific break and the little banks are getting smashed on this. They are not getting that kind of break. And that has a long term impact for the whole financial system."

Senator David Vitter (R-LA

SENATOR VITTER: "My top concern is actually exactly the same as Mrs. Warren's and I think that is a statement in and of itself. That there is growing bi-partisan concern across the whole political spectrum, about the fact - I believe it's a fact - that TBTF is alive and well....."

SENATOR VITTER went on to read from an FDIC study that stated the TBTF banks receive a subsidy. This is separate from the academic study Bloomberg drew upon in calculating the $83 billion subsidy.

CHAIRMAN BERNANKE said nothing worth repeating.

One lesson from all this (coming to mind as I finish) is the difficulty even those thought to possess great power - the senators, in this case - have in getting some cockroach bureaucrat to
do something!

Friday, March 1, 2013

Dissension is Overrated - Part II

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 "The Coming Collapse of the Municipal Bond Market" (, 2009)

On Wednesday, February 20, 2013, RORO (risk-on, risk-off) hit the RO switch (risk-off) when the Federal Reserve released minutes of its January 29-30, 2013, FOMC meeting. The media explanation for tumbling commodities and stocks was that "many" of the attendees, rather than "some" (at the previous meeting) voiced misgivings about money printing.

This is nonsense. "Dissension is Overrated" (January 10, 2013) addressed the 2013 FOMC lineup. Federal Reserve Chairman Ben S. Bernanke has a lock on 10 of the 12 votes. He can expand the Fed's balance sheet at will. Currently, the Fed is buying $85 billion of U.S. Treasury and mortgage-backed securities a month. He has made it clear the only direction is more.

Taking the media's explanation for the February 20 sell-off as is, the market reaction to the Fed minutes lacks an understanding of central bankings' modus operandi. Debtor nations intend to devalue their currencies more than the competition. Only one can win. United States officials have served notice that the U.S. dollar will depreciate the most. Do they have what it takes?

We will know in time. If past is prologue, the United States will win ("win" as established within the upside-down world of central banking), with all paper currencies losing considerable pricing power in their race to the bottom. The only sensible course is to buy gold.

It is instructive to recall how selfishly American officials treat the rest of the world. The 1971 decision to abandon the Bretton Woods agreement (by which, the U.S. was contractually obligated to pay an ounce of gold in exchange for $35 to foreign governments) was a default on an obligation. Yet, Martin Mayer wrote of the meeting at Camp David (where the decision to severe the gold link was reached): "The fact that this procedure would violate American treaty obligations does not seem to have been mentioned by anyone..." The sole motivation among the gathered seems to have been Nixon's reelection campaign.

In December 1971, the Group of 10 met (representing home-turf currencies). The consequent Smithsonian Agreement established relative exchange rates. President Nixon who really should have known better (this three-day meeting was the first multilateral attempt at negotiating currency parities since Bretton Woods and the first attempt ever at fixing rates-of-exchange among purely fiat currencies), concluded the meeting by proclaiming this "was the most significant monetary agreement in the history of the world."

Within weeks, the U.S. clawed for a greater devaluation of the dollar. The United States was among the Group of 10: all large creditor, nations: except for the U.S, the sole debtor in the Group. The new Secretary of the Treasury, George Schultz, tried to align the U.S. with the less developed countries, as a "member of a forum at which the voices of the poor [countries] would be heard." This was a disgraceful maneuver, and Schultz failed. In Martin Mayer's words, Schultz wrapped himself "in the mantle of pious internationalism that comes so naturally to Americans who are misbehaving." The pattern of U.S. misbehavior remains true to this day.

The weekend before the FOMC minutes were released, February 15-17, 2013, the G-20 finance ministers met in Moscow, a gathering promoted as an end to "currency wars." Among the points-of-view were countries battered by rising prices. Besides being a complete disaster in the U.S., Bernanke's quantitative easing drives up grain and energy prices around the world. (Gas prices are up 50 cents in the U.S. since Simple Ben started QE3).

Representing these interests (not in an official capacity), Brazilian Finance Minster Guido Mantega has blasted the too-big-to-think central banks for years. In 2010, he accused the United States of starting the "currency war." His admonitions in Moscow were to no avail. For instance, on Sunday, February 17: "There was no censure of the Japanese attitude, which was considered a policy to develop its economy and not to intentionally devalue."

There was not a chance of a currency agreement, regarding the yen or anything else, from the moment Ben Bernanke arrived. He stepped down from his troika on Friday, February 15 and declared: "The United States is using domestic policy tools to advance domestic objectives." The Fed chief added: "We believe that by strengthening the U.S. economy we are helping to strengthen the global economy as well," donning, as he was, the mantle of pious internationalism that comes so naturally to Americans who are misbehaving.

Back to FOMC dissenters and their influence on markets: Bernanke made it clear his is the only opinion that matters: "With unemployment at almost 8%, we are still far from the fully healthy and vibrant conditions that we would like to see."Bernanke will inflate at an accelerating pace. The other central banks will chase him.