Hall of Fame

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" (Aucontrarian.com, 2009)

Refreshing was the questioning of Federal Reserve Chairman Ben S. Bernanke by Congressman Scott Garrett from New Jersey in "Shooting Stars." We can hope his influence may spread.

Not to be forgotten are retired legislators, who did their best. Following is the lashing from Senator Jim Bunning to Chairman Ben S. Bernanke at his re-fossilization hearing on December 3, 2009, for a second term as Fed chairman.

Right off the bat it was a pleasure not to hear Bunning thank the Chairman for saving the world during the financial crisis of 2008. Most of the other senators groveled. ("I believe you are the right leader for this moment in the nation's economic history and I believe your reappointment sends the right signal to markets," - Senator Christopher Dodd, chairman of the Senate Banking Committee, said during his opening statement. - CNNMoney]

But, Senator Bunning developed the habit of going straight for the Adam's apple at a young age. Elected to Baseball's Hall of Fame, the right-handed pitcher won 224 games and hit more batters than all but 10 pitchers in the history of baseball.

Extraordinary is not so much what he says, which is true, but that, four years later, there is such a wall of silence, a stillness, that will not speak of the malignant agglomerations swollen to proportions unimaginable since 2009.

Fear of the end, one might agree, is why trivia substitutes for the truth.

Prepared remarks from Senator Jim Bunning(R-KY)  

Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you.  In fact, I was the only Senator to even raise serious concerns about you.  I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right.  But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.

The Greenspan legacy on monetary policy was breaking from the Taylor Rule to provide easy money, and thus inflate bubbles. Not only did you continue that policy when you took control of the Fed, but you supported every Greenspan rate decision when you were on the Fed earlier this decade. Sometimes you even wanted to go further and provide even more easy money than Chairman Greenspan. [FOMC transcripts show Bernanke egged Greenspan into cutting rates and Bernanke provided the academic [sic] apparatus for doing so - FJS]  As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. [This has not changed in 2013. - FJS] And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street. Those purchases, by the way, led to some nice profits for the Wall Street banks and dealers who sold them to you, and the G.S.E. purchases seem to be illegal since the Federal Reserve Act only allows the purchase of securities backed by the government.

On consumer protection, the Greenspan policy was "don't do it." You went along with his policy before you were Chairman, and continued it after you were promoted. The most glaring example is it took you two years to finally regulate subprime mortgages after Chairman Greenspan did nothing for 12 years. Even then, you only acted after pressure from Congress and after it was clear subprime mortgages were at the heart of the economic meltdown. On other consumer protection issues you only acted as the time approached for your re-nomination to be Fed Chairman.

Alan Greenspan refused to look for bubbles or try to do anything other than create them. Likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings. [Today, in 2013, Bernanke brags that he is lifting house prices to artificial levels. - FJS]

Chairman Greenspan's attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

On derivatives, Chairman Greenspan and other Clinton Administration officials attacked Brooksley Born when she dared to raise concerns about the growing risks. They succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. After taking over the Fed, you did not see any need for more substantial regulation of derivatives until it was clear that we were headed to a financial meltdown thanks in part to those products.

The Greenspan policy on transparency was talk a lot, use plenty of numbers, but say nothing. Things were so bad one TV network even tried to guess his thoughts by looking at the briefcase he carried to work. You promised Congress more transparency when you came to the job, and you promised us more transparency when you came begging for TARP. To be fair, you have published some more information than before, but those efforts are inadequate and you still refuse to provide details on the Fed's bailouts last year and on all the toxic waste you have bought.

And Chairman Greenspan sold the Fed's independence to Wall Street through the so-called "Greenspan Put". Whenever Wall Street needed a boost, Alan was there. But you went far beyond that when you bowed to the political pressures of the Bush and Obama administrations and turned the Fed into an arm of the Treasury. Under your watch, the Bernanke Put became a bailout for all large financial institutions, including many foreign banks. And you put the printing presses into overdrive to fund the government's spending and hand out cheap money to your masters on Wall Street, which they use to rake in record profits while ordinary Americans and small businesses can't even get loans for their everyday needs.

Now, I want to read you a quote, Mr. Green-, Mr. Bernanke [laughter, including a smug, patronizing, chortle from Mr. Green-anke - FJS]. That was a Freudian slip, believe me. :"I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks.  Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking.  In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled."

That should sound familiar, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing.  I'm going to ask that the full question and answer be included in today's hearing record.

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.    

Instead of taking that money and lending to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses. Because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean out the management, you have created zombie banks that are only enriching their traders and executives. You are repeating the mistakes of Japan in the 1990s on a much larger scale, while sowing the seeds for the next bubble. In the same letter where you refused to admit any responsibility for inflating the housing bubble, you also admitted that you do not have an exit strategy for all the money you have printed and securities you have bought. [This has not changed. Simple Ben, testifying, July 17, 2013: "If we were to tighten (monetary) policy, the economy would tank." - FJS] That sounds to me like you intend to keep propping up the banks for as long as they want.

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated. Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par. In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank's offer to take a haircut, and you declined it. I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut. Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs [Goldman Sachs Chairman Lloyd Blankfein testified he was never asked to take a haircut - FJS], Merrill Lynch, and a handful of large European banks. I also cannot understand why you did not seek European government contributions to this bailout of their banking system.

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.

Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America, presently.  Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case.  I will do everything I can to stop your nomination and drag out the process as long as possible.  We must put an end to your and the Fed's failures, and there is no better time than now. Your Fed has become the Creature from Jekyll Island.

[End]

Part of Bernanke's response: "Let me just correct one point.... We absolutely believed that AIG's failure would be an enormous systemic risk and would have imposed enormous damage, not just on the financial system, and this is the key point, on the entire U.S. economy and on every American."

If this was true - on the September 2008 day when Bernanke & Co. nationalized AIG - then, no one present understood the difference between a holding company and an operating company. See "The Professor Who Did NOT Save the World", and "David Boies v. Citizen Ben S. Bernanke". If Chairman Bernanke really was that detached from how businesses operate in September 2008, he apparently had no one around who told him the difference by December 2009.

Alternatively, the Fed chairman operates on the Big Lie Theorem, which, if so, is working like a charm and he's not a dumb as he sounds. 

Shooting Stars

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" (Aucontrarian.com, 2009)

Following is a question-and-answer session between Congressman Scott Garrett from New Jersey and Federal Reserve Chairman Ben S. Bernanke before the House Committee on Financial Services, February 27, 2013.

It is puzzling why the Federal Reserve chairman is consistently unprepared to answer questions that fall directly inside the brief he has created for himself. It might be there is no need to understand questions such as those asked by Congressman Garrett, since nobody in the media seems to see through the fraud, either. In any case, this shows again Simple Ben has no idea what he is doing.

The reason for relaying this Q&A is not to explore the measureless depths of Bernanke's ignorance. Instead, the attraction is the final paragraph in which Congressman Garrett speaks. He has an exquisite grasp of how Federal Reserve policy has ruined markets. But, his time was up.

The Chair now recognizes the gentleman from New Jersey, Mr. Garrett, for 5 minutes.

Mr. GARRETT I thank the chairman and I thank Chairman Bernanke. Let me just try to run through in minutes three areas, what you talked about on remittances, what you talked about as far as some of the positive results, and if we have time, some of the effects of the somewhat current loose monetary policy on an international state. So, on remittances, I think you already said that the remittances are here, but they are potentially to go down in the future. If you look at the consolidated balance sheet of the Federal Reserve, we have capital of less than $55 billion, and assets of more than $3 trillion, so that means that all you need is about a 1 quarter of 1 percent increase in the interest rates, and you basically wipe out what you basically have right now, which is a 55 to 1 ratio, and you wipe that out. [Since that date, higher rates have wiped out the Federal Reserve's capital six times over. - FJS] So what is your prediction actually on that going forward with regard to interest rates wiping that ratio out and the effect on remittances to Congress? Can you be more specific on the numbers?

Mr. BERNANKE Certainly. So currently, as I have said, we have in the last 4 years, remitted $290 billion; we currently have more than $200 billion of unrealized capital gains on our balance sheet.  The capital issue is irrelevant. We have additional funding behind the capital. [That is, "we can print more dollars." He has. - FJS] We have $3 trillion of liabilities which are not callable liabilities, like cash, for example.

Mr. GARRETT. I guess I would just ask you if you could follow up on detail on that, because that is not the way I understand it, but I would ask you to put that in writing.

Mr. BERNANKE The main reality here is that if interest rates rise very quickly, then there may be a period where we don't pay any remittances at all to the Treasury. That is the actual outcome. That is important. Under most, and I would say virtually all scenarios, we will be sending remittances to the Treasury substantially higher than the norms established before the crisis.

Mr. GARRETT Since my time is limited, what we are looking at here is around $90 billion in remittances if-you said we could actually see that almost go down to eliminate it. Right now, we are trying to do a sequester at $85 billion. So it sort of puts us in perspective as to what the effect could be as far as your policies there. With regard to the positive indications that you have indicated, you said the stock market and the housing market have gone up because of your monetary policy, but previously you said that the Fed's monetary policy actions earlier this decade, in 2003-2005, did not contribute to the housing bubble in the United States. So which is it? Is monetary policy by the Fed not a cause of inflationary prices of housing, as you have said in the past, or is it a cause of inflating prices of housing? Can you have it both ways?

Mr. BERNANKE. Yes.

Mr. GARRETT. You can?

Mr. BERNANKE. Yeah, we can have it both ways, because they are different phenomena. The mortgage rate, um, uh, is a quantitative thing, so, house prices are going up a reasonable amount, given the strengthening of the housing market, given the strengthening of the economy, given where mortgage rates are. But the amount of movement in mortgage rates, mortgage rates in the early part of this, last decade were around 6 percent. That can't explain why house prices rose as much as they did. Maybe it was a small contribution, but it certainly can't explain the big run-up and then decline.

Mr. GARRETT. But, so now it is. [This was Garrett's dismissal of a man who had no idea what he was saying. - FJS]

So the other area you indicated why we should say your policies are working in a cost-benefit analysis is the stock market. I am sure you are familiar with Milton Friedman's work that says that people only really consume off of their permanent income, which basically means that you don't consume increased consumption because your stocks have gone up in the marketplace. And to that point, I know Mrs. Capito [Congresswoman Shelley Moore Capito, West Virginia, see below for Q&A - FJS] asked the question as to what seniors should do in this situation, and you said, take it out of some fixed assets and put it into the stock market. Heaven forbid that my 90-year-old mother would take her money out of fixed markets and put it in the stock market. I think that is probably the worst advice that is out there. And when you consider that a 1 percent increase in the stock market only has infinitesimal, maybe a 100 percent increase in GDP [sic], I really don't understand: a, how you can give that advice; b, how you can suggest that an increase in the stock market is a positive indicator of your work in a cost-benefit analysis to the rest of the economy.

Mr. BERNANKE. I was, I was not giving financial advice. I apologize if I gave that impression. I was just saying-

Mr. GARRETT. But she was asking you-

Mr. BERNANKE. -that generally-

Mr. GARRETT. She was asking you the question, what should you be doing to benefit the seniors, what should we say to the seniors. And your comments were-

Mr. BERNANKE. What I was saying was that the economy will get stronger because of good policies and that in turn will cause rates to rise in a sustainable way. If we were to raise rates prematurely, we would kill the recovery and rates would come down and we would have a long-term situation with very low rates.

Mr. GARRETT. But wouldn't you have provided for the certainty in the marketplace so you could have more price transparency? Earlier, you said that some risk-taking in the market is appropriate. That was one of your opening comments. Sure, risk-taking is appropriate, but it is appropriate when there is actual price discovery. When you have a market that is distorted, as it is right now by the Fed's monetary policy, you really don't have true price discovery. And so when you do risk-taking now, it is based upon I not really knowing what the appropriate value is of land prices, equity markets prices, so risk-taking now is worse than risk-taking is when the Fed's actions do not distort the marketplace. If you would say-

Chairman HENSARLING. The time of the gentleman has expired.

THE Q&A BETWEEN CONGRESSWOMAN SHELLEY MOORE CAPITO AND HIM:

MRS. CAPITO: Many of us are in that sandwich generation trying to help our parents, and our parents are doing a pretty good job trying to help themselves, but they're relying on their good planning and investments if they have been lucky enough to invest. And the dividend and interest availabilities to them are crushing our seniors as they see their healthcare costs go up. And some of the policies that you put forward I think, and that the Fed has, has caused concern for those of us who are concerned about seniors who don't have the ability to get another job, that's played out for them. What, what can I tell my seniors back home that is going to give them some optimism that they're going to be able to rely on that good planning that they had to carry them through the senior years?

HIM: Well I would say first that savers have many hats. They may own fixed income instruments like bonds, but they may also own stocks or a house or a business. All those other assets benefit when the economy strengthens and those values have gone up. The stock market is roughly doubled as you know in the past few years.

This was quite specific advice to Mrs. Capito. Besides crawling into Lucifer's den before answering Congressman Garrett, why is this nincompoop telling old people to buy stocks AFTER the stock market has doubled? We might give him the benefit of the doubt that, since Bernanke has banished "actual price discovery" in all markets, and thinks he can do so forever, he will double Mrs. Capito's money over the next few years.

Of course Chairman Bernanke is not the only lifetime bureaucrat to offer carpe diem financial advice.

Following is the good word of David Stockman, author of the masterpiece,  The Great Deformation: The Corruption of Capitalism in America . He was interviewed by Market Watch on April 3, 2013. Eric Rosengren is the President of the Boston Fed.

DAVID STOCKMAN: If you have your money in a 401(k) but you get it out of the stock market or ETFs or bond funds that have duration exposure, and you stay very liquid even if you're making almost no return, thanks to Ben Bernanke, who's crucifying the savers of America on a cross of ZIRP, at least you're safe. In the world ahead, there is such a huge collapse coming in the financial markets, the third one since 2000, it's better to preserve your capital, stay liquid, keep your head down, don't borrow money unless you absolutely have to. That is very discouraging because people would like to earn a return on their savings.

When we have this character Rosengren up in Boston saying, it's a good thing, we are trying to induce people to go into risk assets. Who in the hell is Rosengren to tell old ladies of America they have to buy junk bonds because the Fed tells them to!!!!! If the old ladies feel safer in a CD, they ought to be able to earn something besides dog food money on it. There is going to be a revolt against these arrogant mandarins running the Fed, they will rue the day they arrogated to themselves such massive power. [Italics are my irrational exuberance - FJS]

Knitting. Still Knitting.

 

Once Again, Do Not Pay Attention to that Man behind the Curtain

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" (Aucontrarian.com, 2009)

            It should be obvious by now that mass democratization over the past century demanded a steady flow of inflation. The inflation of self-esteem: This inspired rights and privileges. These were abetted by a spectacular rise in quantity (inflation) of money and equally sensational erosion of quality of everything: goods, services, education, speech, writing, words, phrases.

            This brings us to the rise of the professorate, over the past century, an obvious failure in quality defeated by hordes of pretenders. The professorate, unsure of its social status, especially in such empty fields as economics, infested the institutional bureaucracies with the twin accomplishments of maiming standards of merit and asserting (their own) accomplishment of reform and democratization. It was they who designed the blueprint for mass bureaucracy (which has smothered initiative, thus resistance, in the mass democracy), and defined official "policy." Today, policy is the assertion of the hour to stay one step ahead of the great, failed experiment of mass democratization for which the faux academics must be held accountable.

We come to the non-decision of Federal Reserve Chairman Ben S. Bernanke on September 18, 2013. Far too much, or not enough, thought is spent anticipating this man's intentions. His non-decision on September 18 was to not "taper" his Money-for-Nothing Policy that central banking bureaucrats have labeled "quantitative easing." An example of "tapering": if he had authorized his clerk to type "135" instead of "145" billion of dollars onto a keypad: that is the U.S. central-banking bureaucrats' elevation of circulating dollars each and every month. (The example may seem unnecessary to some, but Reuters or Marketwatch released a poll on September 18 about the ignorance of Americans. Seventy-three-percent do not know what "quantitative easing" means. It was one of those "ha-ha-ha" see-how-stupid-the-people-are stories. Yet the woman who replied "he does stocks and all that," had a perfect grasp of what Bernanke is up to, if not at the New York Fed, through the Hong Kong Monetary Authority, Chicago, and the two dozen other central banks that are now buying common stock.)

            Brokerage houses and the media offered different reasons for the Chairman's declaration ("the economy is weaker than he thought" and so on), but this all beside the point.

            Bureaucracies inflate. The rise of the bureaucracy goes hand-in-hand with the massing of the people. A bureaucracy will never make a decision that contracts its inflationary determination. This is as true for the Federal Reserve or the Bureau of Labor Statistics (where a "job" is defined as working one hour a week.)

            This is a matter of prestige, power, and cowardice. Never saying "no" permits bureaucracies from taking responsibility for action. They are generally successful at diverting blame for their policies. The recent fifth anniversary of "I remember when Lehman failed" stories did not touch the Federal Reserve or the various housing authorities; yet, they are the central reason for the credit and mortgage collapse.

            Keeping the inevitable inflationary tendency of bureaucratic policy in mind, it is no surprise the academics never thought of how they would reverse quantitative easing. Bureaucrats do not think like that. They whip up grand solutions to illusionary or misstated problems but leave the conclusion to fate. Think of all the grand schemes in housing, health-care coverage, race relations, urban redevelopment - never a conclusion, never an academic bureaucrat held accountable.

            From the moment Ben Bernanke was introduced in Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, through this current diatribe, it has been stated and emphasized there would never be an end to money-for-nothing, the last hope after a century of academic and bureaucratic meddling. Bernanke or the court jester who succeeds him will expand paper (electronic pulses, if we must) currency until the collapse.

            This is the simple and direct reason that, all talk to the contrary, gold, silver, proficiency at carpentry or farming are worth one's attention.

            Although the media will run around with its head cut off looking for culprits and explanations, let us not lose sight of the current kingpin who is central to the awful battle ahead of us: Ben S. Bernanke.

Why Academic, Money-Printing, Central Bankers Will Not Change Course

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" (Aucontrarian.com, 2009)

            The Federal Reserve may sell a bond or two in the coming months, but Ben or Jan or Big Lar can be trusted to inflate. The professors know no other course:

Johann Peter Eckermann's conversation with Goethe, February 1, 1827:

"We talked about the professors who, after they had found a better theory, still [ignored it: a very loose consolidation - FJS] 'This is not to be wondered at,' said Goethe; 'such people continue in error because they are indebted to it for their existence. They would have to learn everything over again, and that would be very inconvenient.' 'But, said I, 'how can their experiments prove the truth when the basis for their evaluation is false?' 'They do not prove the truth,' said Goethe, 'nor is such the intention; the only point with these professors is to prove their own opinion. On this account, they conceal all experiments that would reveal the truth and show their doctrine untenable. Then the scholars - what do they care for truth? They, like the rest, are perfectly satisfied if they can prate away empirically; that is the whole matter.'"

- Conversations of Goethe with Eckermann

Notes

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" (Aucontrarian.com, 2009)

Between October 1998 and November 1999, the Nasdaq composite rose 150%. Everyone who was invested believed in Alan Greenspan and the Federal Reserve. At a Grant's Interest Rate Observer conference in November 1999, Michael Steinhardt, one of the best traders over the previous three decades, did not buy it.

He did not think the Fed's leadership would be worth much when it was needed most. He spoke about Wall Street's abandonment of controls, leadership and responsibility: "The liquidity safeguards, historically, were the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms. They were the mechanisms that the stock exchange itself had provided, and they were all structured for a system where trading was a very, very small fraction of what we're seeing today. Now there are no specialists' books; there is no serious liquidity provided by brokerage firms; and the trading mechanisms of the exchange are hardly relevant to the sorts of volumes that exist today. So yes, the Federal Reserve, if you define that broad context of liquidity in a financial sense, does still exist, but in a securities market sense, none of the former ones do."

That was 14 years ago. In this age of uplift and improvement, does the current Federal Reserve Board understand the consequences (as seen in April 2000 and in 2007 and 2008) of the lost "liquidity safeguards...."?

This can only be answered in the future, 500 years from now - it will take that long for the human mind to believe this Arsenal of Annihilation was given responsibility above latrine duty. From all sources though, the top of the Fed has grown more withdrawn, abstract, and divorced from reality since the millennium. The king pins are not interested in the functioning of markets. Markets exist to fulfill economic policy of our policy-makers. It is unfathomable to the anointed that government control of markets would even be questioned.

AT THE COUNCIL ON FOREIGN RELATIONS, June 28, 2013:

James Grant, addressing Governor Jeremy C. Stein, Federal Reserve Board: "Good morning, Governor. James Grant of Grant's Interest Rate Observer. Could you help us understand the economic difference - not the legal one, but the economic distinction - between the private manipulation of Libor, on the one hand, and the public manipulation of markets, on the other, doing business as ZIRP, QE, Twist, the "portfolio balance channel"? What ever did happen to the price mechanism?"

Governor Jeremy C. Stein, Federal Reserve Board: "You know, that's a hard question for me to answer, because [laughter] I don't see the connection between these two whatsoever. I mean, obviously, the Libor set - it is a set of criminal and near-criminal activity, which is a very substantial policy concern. A lot of effort is going into trying to, you know, both reform Libor itself, look at other benchmarks, see if they're more resilient. That's a whole set of issues. To be frank, I just don't see the connection to that and the monetary policy issue."

            This is the type of thinking that gives investors confidence (apparently) that the Fed will not permit the stock market to fall 20%. Yet, the man has no interest in how people participate (or don't) in markets.

            Over these same 14 years, technology has turned public-market investing into a much more dangerous arena. Some will say the withdrawal of private money from markets shows the public understands this, since there is very little trading left, except by institutions and their algorithms.

            The curious investigator, 500 years from now, will study our worship of technology despite daily evidence of its failure. Here, we discuss the malfunctioning of public markets. The Nasdaq took a mid-week siesta on August 22, 2013, and there are no answers. (An hour before the Nasdaq died, NYSE Euronext announced a breakdown of its Arca exchange, for symbols from TACT through Z. Two days before, Goldman Sachs pushed a wrong button and stock-options with ticker symbols between H through L fell to $1.00. After the Nasdaq ran through the usual excuses - "software bug" "connectivity issue" "latent flaw" "system overload" - the exchange magnanimously announced it crashed "to protect the integrity of the market.") With technology, any excuse for obvious failure is taken as gospel.

            None of this nonsense would exist if "liquidity safeguards, historically...the specialists' books, the retail system, and the institutional liquidity providers in the major brokerage firms" - that is, people, were still on the chopping block.

            Turning exchanges back into public utilities is sine qua non.

            OF ALL THE COMMENTARY REGARDING THE NEXT FED CHAIRMAN, NONE WAS MORE FETCHING than that offered by star Financial Times columnist Gillian Tett. Under the headline "Central bank's chief needs to master the art of storytelling," she wrote: "The next Fed chair also needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals, without us even noticing. Somebody, in other words, who can cast spells with both their spreadsheets and words. In short, what is needed is nothing less than a monetary shaman."

            A test of such talent will be the day stock markets shut - and never reopen - claiming they are protecting the integrity of the market. Very few will protest.

            In fact, the new Fed head may have more leeway to "shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals." So we learned under the headline: "U.S. Repeals Propaganda Ban, Spreads Government Made News to Americans." ForeignPolicy.com, July 14, 2013 [Note: Bastille Day].

 

Reporter John Hudson: "For decades, a so-called anti-propaganda law prevented the U.S. government's mammoth broadcasting arm from delivering programming to American audiences. But on July 2, that came silently to an end with the implementation of a new reform passed in January. The result: an unleashing of thousands of hours per week of government-funded radio and TV programs for domestic U.S. consumption in a reform initially criticized as a green light for U.S. domestic propaganda efforts. So what just happened?"

 

            That's as far as I got. The propaganda machine seems to be working at full tilt already.

 

            This was announced on the heels (July 12, 2013) of a Washington Post article by Josh Hicks after the Department of Homeland Security had "warned its employees that the government may penalize them for opening a Washington Post article containing a classified slide that shows how the National Security Agency eavesdrops on international communications.... An internal memo from DHS headquarters told workers on Friday that viewing the document from an 'unclassified government workstation' could lead to administrative or legal action. 'You may be violating your non-disclosure agreement in which you sign that you will protect classified national security information,' the communication said. The memo said workers who view the article through an unclassified workstation should report the incident as a 'classified data spillage.'" Hicks provided a link to the double-secret Washington Post article.

OF COURSE, FINANCE IS ONLY A SUBSET OF THE GENERAL DELERIUM. IT WAS QUITE A LEAP for Secretary of State John Kerry to sit before Congress and extort the imagery of Americans dying during the Normandy invasion ("You ask the question, 'Why does the United States have to be out there?' You ever been to the cemetery in France? Ya know, above those beaches? Why'd those guys have to go do that?") as reason to invade Syria. The congressmen did not seem to notice. Maybe they felt sorry for him.. He was stumbling all over the lot trying to make sense.

This is So Depressing

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" (Aucontrarian.com, 2009)

  "Easing of Mortgage Curb Weighed," July 23, 2013, Wall Street Journal

"Concerned that tougher mortgage rules could hamper the housing recovery, regulators are preparing to relax a key plank of the rules proposed after the financial crisis. The watchdogs, which include the Federal Reserve and Federal Deposit Insurance Corp., want to loosen a proposed requirement that banks retain a portion of the mortgage securities they sell to investors, according to people familiar with the situation. The plan, which hasn't been finalized and could still change, would be a major U-turn for the regulators charged with fleshing out the Dodd-Frank financial-overhaul law passed three years ago.... 'My sense is that Washington has lost its political will for serious reform of the securitization market,' said Sheila Bair, who served as FDIC chairman until 2011.

"In addition to the Fed and the FDIC, other agencies involved in drafting the rules include the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Department of Housing and Urban Development, and the Federal Housing Finance Agency.

"Americans Gambling on Rates With Most ARMs Since 2008," July 24, 2013, Bloomberg,

"Jung Lim plans to offset the cost of rising mortgage rates by using an adjustable-rate loan to buy a home for his expanding family....Lim, 38, whose wife is expecting a second child in December, is leaving a two-bedroom condo in Los Angeles's Hancock Park to buy a four-bedroom house in the city's Sherman Oaks neighborhood for $1.12 million. His lender offered him a rate for an adjustable mortgage that is about a percentage point cheaper than a fixed loan.

"In the second year of the U.S. housing recovery, the loans that helped trigger the housing bust are making a comeback. Applications in late June rose to the highest level since 2008 after the Federal Reserve sent fixed rates surging by signaling it may curtail bond buying credited with pushing borrowing costs to the cheapest on record. The average 30-year fixed-rate mortgage jumped 1.2 percentage points in mid-July from May to the highest level in two years, adding about $200 a month to payments on a $300,000 mortgage.

 "'When you give unqualified buyers a rate they won't be able to afford based solely on the presumption that home prices will always go up, it's not going to end well,' said Keith Gumbinger, vice president of HSH.com, a Riverdale, New Jersey-based mortgage website."

"A Hands-Off Policy on Mortgage Loans," July 14, 2005 by Edmund L. Andrews, New York Times

"For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans.... First they issued new 'guidance' to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest only [mortgages] and 'liar's loans' that require no proof of a borrower's income. The impact so far? Almost nil."

"Loose Reins on Galloping Loans," July 15, 2005 by Edmund L. Andrews, New York Times

It has become easier "to get these loans than...two months ago." Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation [FDIC] explained: "We don't want to stifle financial innovation. We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation."

 "Housing Boom Echoes in All Corners of the City," August 4, 2005, by Jennifer Steinhauer, New York Times

"[N]ew homes are going up faster now than they have in more than 30 years....Large tracts of Queens, once home to factories and power plants, are being readied for apartment complexes."

Christopher Wood, October 2005, CLSA, Greed & fear

"[T]he Office of Inspector General of the Department of Housing & Urban Development reported to Congress in October 2004 that it had 450 open criminal single-family investigations related to fraud claims covered by federal mortgage insurance, while arrests have increased by 800% over the past four years."

Wood: "Wall Street is now encumbered with layers of compliance clutter.... As the obsessive focus has grown on 'insider traders' and the like, it remains ludicrous that there is so little regulatory focus on sales practices in residential property."

L.A. Times Housing Blog, under a story about California house prices being down 35% year-over-year, June 8, 2008

"I'm loving all this. I sold a bunch of idiots big, big, ARM's. I knew exactly how to appeal to their big ego's. Got big commissions and have no guilt. Many losers I got loans for are now losing their houses. Ask me baby, do I care! Hey, I just wanna fill my bag, screw you." Posted by: Cheri Ratino

"In Reversal, Fed Approves Plan to Curb Risky Lending," December 19, 2007, by Edmund L. Andrews, New York Times

The Federal Reserve, acknowledging that home mortgage lenders aggressively sold deceptive loans to borrowers who had little chance of repaying them, proposed a broad set of restrictions Tuesday on exotic mortgages and high-cost loans for people with weak credit. Skip to next paragraphThe new rules would force mortgage companies to show that customers can realistically afford their mortgages. They would also require lenders to disclose the hidden sales fees often rolled into interest payments, and they would prohibit certain types of advertising. Borrowers would be able to sue their lenders if they violated the new rules, though home buyers would be allowed to seek only a limited amount in compensation. "Unfair and deceptive acts and practices hurt not just borrowers and their families," said Ben S. Bernanke, chairman of the Federal Reserve, "but entire communities, and, indeed, the economy as a whole."

"A Crisis Long Foretold," December 17, 2007, Editorial, New York Times,

 "An article in The Times on Tuesday by Edmund L. Andrews leaves no doubt that the twin crises of the subprime lending mess - mass foreclosures at one end of the economic scale and a credit squeeze afflicting the financial system - are rooted in the willful failure of federal regulators to heed numerous warnings. The Federal Reserve is especially blameworthy. Starting as early as 2000, former Fed Chairman Alan Greenspan brushed aside warnings from another Fed governor, Edward M. Gramlich, about subprime lenders who were luring borrowers into risky loans. Mr. Greenspan's insistence, to this day, that the Fed did not have the power to rein in such lending is nonsense. In 1994, Congress passed a law requiring the Fed to regulate all mortgage lending. The language is crystal clear: the Fed "by regulation or order, shall prohibit acts or practices in connection with A) mortgage loans that the board finds to be unfair, deceptive, or designed to evade the provisions of this section; and B) refinancing of mortgage loans that the board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower." Yet, the Fed did nothing as junk lending proliferated - including loans that were unsustainable unless house prices rose in perpetuity, riddled with hidden fees and made to borrowers who could not repay. Mr. Greenspan has said that the law was too vague about the meaning of "unfair" and "deceptive" to warrant action.

"The Fed has also disappointed since the current chairman, Ben Bernanke, took over in early 2006. It was not until the end of June 2007 - after the damage was done - that the Fed and other federal regulators issued official subprime guidance. On Tuesday, the Fed issued another set of proposals.... [T]he proposal is weaker than earlier Fed guidance.

"The Office of the Comptroller of the Currency, for example, blocked states from investigating local affiliates of national banks for abusive lending. If the regulators had done their jobs, there might have been no lending boom and no extraordinary riches for the lenders and investors who profited from unfettered subprime lending. Neither would there be mass foreclosures, a credit crunch and a looming recession. This crisis didn't appear unexpectedly. And it won't go quickly away. Congress and the next administration will have a lot of work ahead to clean up the subprime mess - once and for all."

Ben S. Bernanke, November 1, 2006 "Community Development Financial Institutions: Promoting Economic Growth and Opportunity," At the Opportunity Finance Network's Annual Conference, Washington, D.C.:

 "In 1994, fewer than 5 percent of mortgage originations were in the subprime market, but by 2005 about 20 percent of new mortgage loans were subprime.... [T]he expansion of subprime lending has contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent."

Ben S. Bernanke, May 17, 2007 "The Subprime Mortgage Meltdown," at the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois:

"[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Ben S. Bernanke, April 4, 2013, "Financial and Economic Education," at the 13^th Annual Redefining Investment Strategy Education (Rise) Forum, Dayton, Ohio (via video)

"Hello. I'm Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System.... Among the lessons of the recent financial crisis is the need for virtually everyone - both young and old - to acquire a basic knowledge of finance and economics."

 Ben S. Bernanke, May 10, 2013, "Monitoring the Financial System," at the 49^th Annual conference on Bank Structure and Competition sponsored by the federal Reserve Bank of Chicago, Chicago, Illinois

"Not since the Great Depression have we seen such extensive changes in financial regulation as those codified in the Dodd-Frank Wall Street Reform..." 

"The step-up in our monitoring is motivated importantly by a shift in financial regulation and supervision toward a more macroprudential, or systemic, approach..."

 

"Ongoing monitoring of the financial system is vital to the macroprudential approach to regulation. Systemic risks can only be defused if they are first identified. That said, it is reasonable to ask whether systemic risks can in fact be reliably identified in advance; after all, neither the Federal Reserve nor economists in general predicted the past crisis."

Then get rid of Bernanke and the rest of the economists! Every taxi driver, florist, and zen counselor saw years in advance the biggest, best advertised, most anticipated, bubble to burst in the history of the world.

Ben S. Bernanke, Testimony Before the Financial Crisis Inquiry Commission, November 17, 2009 ***CONFIDENTIAL*** (Don't tell a soul.)

 

CHAIRMAN BERNANKE: "[S]hould monetary policy be used to try to knock down bubbles or not? Just for the record, my view is that it can be a backup, but that the first line of defense ought to be supervision/regulation."  

CHAIRMAN BERNANKE: "[U]nder the heading "too big to fail," you're going to look at that, I'm sure, in great deal. You know, why did the firms become so big? Why did they become so interconnected?"

CHAIRMAN BERNANKE: "We are, to some extent, culpable for not doing the subprime mortgage regulation."

 

CHAIRMAN BERNANKE: "So financial innovation we all thought was a great thing -- or maybe we didn't think it, but most people thought it was a great thing. But it obviously had a downside, which like any other invention, it can blow up if it hasn't been safety-tested sufficiently. And that clearly turned out to be an issue in the consumer level, for example. You know, there was a lot of -- there are a lot of people who argued that subprime mortgages were a big innovation, that they allowed  people who couldn't otherwise afford homes, to get homes; and, you know, it was a wonderful thing. So clearly, you know, people didn't understand the vulnerability of, say, 3/27 ARMs to a downturn in house prices, for example."

 

 

Ben S. Bernanke, July 17, 2013, Semiannual Monetary Policy Report to the Congress, Before the Committee on Financial Services, U.S. House of Representatives, Washington D.C.

 

"Housing has contributed significantly to recent gains in economic activity. Home sales, house prices, and residential construction have moved up over the past year, supported by low mortgage rates and improved confidence in both the housing market and the economy. Rising housing construction and home sales are adding to job growth, and substantial increases in home prices are bolstering household finances and consumer spending while reducing the number of homeowners with underwater mortgages. Housing activity and prices seem likely to continue to recover, notwithstanding the recent increases in mortgage rates, but it will be important to monitor developments in this sector carefully."

 

 

"Quicken Pitches ARMs as Borrowers Balk at Higher Rates," August 9, 2013, Bloomberg

 

"Quicken Loans Inc., the online home lender that jumped last year to No. 3 in U.S. originations, is pitching more adjustable mortgages as rising rates put an end to the refinancing boom. About 20 percent of Quicken applications are for adjustable rates, up from 5 percent earlier this year.... Nationally, rates on 30-year fixed mortgages have climbed to 4.4 percent, from a near-record low 3.35 percent in early May.... That gap is where Quicken sees an opportunity..... [T]his week [Quicken] was offering 5-year ARMs at 2.88 percent and 30-year fixed loans for 4.25 percent, according to its website. The pitch for the ARMs, which it calls "Amazing 5 Mortgages," was anchored in the center of the lender's home page."

David Boies v. Citizen Ben S. Bernanke

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" (Aucontrarian.com, 2009)

           A splendid opportunity is in the offing, though it is premature to expect the earth to quake. As background, Hank Greenberg, former chairman of AIG, is suing the United States. The case itself is not the subject here. Starr International Company, in which Greenberg is housing his lawsuit, was the largest shareholder in AIG on September 16, 2008, the day when the U.S. government "seized control of AIG" (quoting from the September 17, 2008, Wall Street Journal).

            Federal Reserve Chairman Ben S. Bernanke played a central role in the seizure. He was subpoenaed to testify (in STARR INTERNATIONAL COMPANY, INC., v. UNITED STATES) on its behalf and on behalf of a class of others similarly situated plaintiffs.

            Bernanke ducked the deposition. The UNITED STATES (the Department of Justice) argued the "deposition would interfere with Mr. Bernanke's important duties in managing the nation's economy and fiscal policy." [My underlining - FJS]

Before returning to this jarring admission from America's National Socialist headquarters, Judge Thomas Wheeler's anger v. the UNITED STATES is offered as background.

A Bloomberg headline on May 17, 2013: "AIG Judge Asks if U.S. Scared Board from Starr Lawsuit." The curious judge was Thomas Wheeler, who expressed "concern" that the U.S. scared off American International Group from joining a lawsuit by Maurice "Hank" Greenberg, its former chairman, challenging the insurer's 2008 federal bailout." Wheeler had a "lingering concern" that a "request by AIG and the government to dismiss [Hank] Greenberg's lawsuit" was a product of the government "intimidating" the "AIG directors who took their seats during the bailout."  

Such a judge, glued athwartship v. the UNITED STATES' attempt to arrogate his courtroom, was unlikely to let the Federal Reserve chairman skip town. And he didn't. In the United States Court of Federal Claims, No. 11 - 779C (Filed: July 29, 2013), Judge Wheeler wrote: "The Court is persuaded that Mr. Bernanke is a key witness in this case, and that his testimony will be highly relevant to the issues presented. Because of Mr. Bernanke's personal involvement in the decision-making process to bail out AIG, it is improbable that Plaintiff would be able to obtain the same testimony or evidence from other persons or sources.... Indeed, the Court cannot fathom having to decide this multi-billion dollar claim without the testimony of such a key government decision-maker.... Defendant [the UNITED STATES' Department of Justice - FJS] contends that Plaintiff should be required to pursue other avenues of discovery first before seeking Mr. Bernanke's testimony. In its July 23, 2013 reply, Defendant also asserts that a deposition would interfere with Mr. Bernanke's important duties in managing the nation's economy and fiscal policy." [My underlining: Note "cannot fathom" - Judge Wheeler is ripping mad - FJS]

Defendant's motion for a protective order is DENIED.

                                                      IT IS SO ORDERED

                                          s/Thomas C. Wheeler

                                          THOMAS C. WHEELER

           

There is so much that is wrong with all of this: The Federal Reserve chairman, 1 - managing the economy and, 2 - running fiscal policy. Leaving aside his eternal bumbling, the Federal Reserve chairman is a bureaucrat with no authority to do either. Fiscal policy is for Congress. Bernanke should be planted in front of a congressional inquiry at this very moment, to explain himself. The Justice Department wrote the "too busy" plea to Judge Wheeler. Instead, it should read what it wrote and draw up charges against the Federal Reserve Chairman. Reading through Judge Wheeler's comments on May 17, 2013, and July 29, 2013, the Justice Department is guilty of obstructing Starr International's case against the UNITED STATES.

Why might that be? Probably because of the central charge: the UNITED STATES exceeded its authority by commandeering AIG without compensation to anyone. If the UNITED STATES is found guilty by the courts, it "should" (it is unwise to say "will" regarding legal decisions and precedent anymore) place restrictions on the government's gargantuan appetite for whatever it wants to control.

The UNITED STATES may also be attempting to preclude an open investigation that will show how Federal Reserve Chairman Ben S. Bernanke, Secretary of the Treasury Henry Paulson and New York Federal Reserve President Timothy Geithner mishandled the 2008 financial crisis. This is not a secret. Books by Sheila Bair and David Stockman, as well as the Financial Crisis Inquiry Report (by the FCIC) have already done so. Yet, the media continues to report how we "must thank Bernanke (or the others) for saving us from a nuclear winter." These advocates have avoided the evidence.

A segment of Bernanke's ignorance was discussed in "The Professor Who did NOT Save the World." In summary: "Those who held insurance policies with AIG or its subsidiaries never bore risk of non-payment."

Bernanke still had no understanding of AIG's structure a year later when he testified before the Financial Crisis Inquiry Commission. The professor did no homework. Lack of preparation by Bernanke is no longer even surprising. His various testimony is shot through with errors.

The FCIC transcript quotes Bernanke on page 28 and 29: "The reason AIG was set up the way it was originally, the financial products division ["Financial products division" was the profit center that sold CDS - FJS], which did the CDS, attached itself precisely because it was a large, highly-rated insurance company with lots of assets. Therefore it could sell CDS without what would otherwise be sufficient capitalization and protections because the counterparties would know that this was a highly rated firm with lots and lots of assets. It was precisely because of that reason when [AIG] financial products [division] had to sell - had to come up with the collateral - and was facing a run on its positions, that the Fed - that there existed the collateral, the assets that the Fed could lend against." [My italics - FJS]

This is all wrong.

The two dopes, that would be former Fed Chairman Greenspan and Bernanke, have never been cornered by the various Congressional and Senatorial Committees. Retired Congressman Ron Paul was a persistent irritant  to the Fed chairmen but he was not a lawyer and not equipped with a good court room attorney's ability to make mincemeat of a fumbling witness. Starr International Company is represented by David Boies, who, if he is at all worthy of his reputation, will twist Bernanke (presumably, he is also questioning Paulson and Geithner) into a pretzel of incomprehensibility. The favorable disposition of Judge Wheeler is wind at his back. Should Boies need any help in how to question the head of the Fed, please send him this way.