Insolvent Thinking

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 is possible neither Janet Yellen nor another pretender will fill Bernanke's shoes in January. The odds of such a surprise may be once-in-a-history-of-the-universe, but those keep coming at a faster rate the longer we splurge. Simple Ben has been walking both his bank and the world's financial institutions closer to the cliff. Here, we will look at the precarious position of the Federal Reserve and the far-out financial securities entering the pipeline at an increasing rate.

The machinery of state demands exponential buying by banks, insurance companies, and pension funds. The purchasers risk insolvency by doing so. Chairman Bernanke would be the last to recognize this problem, unaware as he remains of his own institution's balance-sheet woes, and not understanding the financial calamity in 2007.

Central banking insolvency does not matter at the moment. The Emperor's New Clothes is preferred by Wall Street and the media alike.

            The Federal Reserve's balance sheet is a mystery, but not that much of a mystery. John Hussman wrote in his November 4, 2013, letter to clients in ("Leash the Dogma"): "A brief update on the bloated condition of the Federal Reserve's balance sheet. At present, the Fed holds $3.84 trillion in assets, with capital of just $54.86 billion, putting the Fed at 70-to-1 leverage against its stated capital. Given the relatively long maturity of Fed asset holdings, even a 20 basis point increase in interest rates effectively wipes out the Fed's capital. With the present 10-year Treasury yield already above the weighted average yield at which the Fed established its holdings, this is not a negligible consideration."

The 10-year yield has risen from 1.40% on July 27, 2012, to 2.6% or so today. Thus, the Fed is insolvent six times over. Life goes on.

There have been no sightings of central bankers jumping from windows yet. Of course, it's not their money; it isn't money at all, so we pretend. Since the Fed governors are academics, their financial knowledge is wanting. A practical reason for reducing quantitative easing (q.e.); actually, a practical reason for never getting started; is the reduction in top-rung collateral. Banks and other financial outfits borrow and lend in the trillions every day. Treasury securities that have disappeared onto the Fed's balance sheet are no longer available for collateral.

The Fed can lower standards of collateral. It has in the past, but it cannot make a bank accept Bit Coin receivables. This was central to the insolvency of Bear Stearns and onward in 2008. J.P. Morgan and Goldman Sachs were not going to repo (lend overnight) with an institution that might be shut the next morning.

This sinkhole of miscalculations was up for discussion on October 18, 2008, when the Wall Street Journal published an interview with Anna Schwartz. The article opened: "On Aug. 9, 2007, central banks around the world first intervened to stanch what has become a massive credit crunch. Since then [note: over one year later - FJS], the Federal Reserve and the Treasury have taken a series of increasingly drastic emergency actions to get lending flowing again. The central bank has lent out hundreds of billions of dollars, accepted collateral that in the past it would never have touched, and opened direct lending to institutions that have never had that privilege. [The Fed will do anything, so watch your wallet. - FJS] The Treasury has deployed billions more. And yet, 'Nothing,' Anna Schwartz says, 'seems to have quieted the fears of either the investors in the securities markets or the lenders and would-be borrowers in the credit market.'"

            Anna Schwartz was co-author with Milton Freidman of A Monetary History of the United States, 1867-1960. She went on to tell the Journal: "[T]he Fed has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is [uncertainty] that the balance sheets of financial firms are credible." This was true although Simple Ben and aligned interests still refer to the "liquidity crisis," not the "insolvencies" in 2007 and 2008. The title of the Journal's interview was "Bernanke is Fighting the Last War."

And now, Fed Chairman Bernanke has led the Fed itself into insolvency. You can be sure there have been high level meetings at the largest financial institutions, pondering what to do if a fellow Too-Big-to-Fail Bank steps away from repo loans between itself and the Fed.

The Fed has introduced a slew of other problems attributable to its q.e. and to ZIRP (Zero-Interest Rate Policy). U.S. money-market funds break even by purchasing lower-rated European bank debt. Reuters, on September 25, 2013, reported: "Life insurance is becoming an unviable business in Europe as low interest rates reduce insurers' profits, forcing many to compensate with higher-risk investments or move overseas, according to an industry survey." A Bloomberg headline from September 26, 2013: "Pension Funds Need to Buy Higher-Yielding Assets, Allianz Unit Says." Also from Reuters: "U.K. Pension Funds Take on Leveraged Loans in Search of Yield."

The longer investors find themselves buying while holding their noses, the worse are the securities offered. Corruption is one result. The Financial Times reported on November 10, 2010: "[T]he credit rating agencies are using 'deluded' processes to calculate the risks of asset-backed securities (ABS).... 'Here is a situation where you keep putting more untenable risks into the system,'" declared William Harrington, who "spearheaded analysis on derivatives between 1999 and 2010 at Moody's Investors Services."

"However," the Financial Times goes on, "institutional investors such as pension funds and insurers have begun to increase their exposure to ABS once again, as low interest rates force them to search for alternative sources for yield." 

Baseball in Extra Innings: The Wish without the Will

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)

       My ticket to the seventh game of the 1967 World Series between the Boston Red Sox and St. Louis Cardinals cost $8.00. That was in the grandstand. The price of the same seat, for the 2013 World Series between the Boston Red Sox and St. Louis Cardinals (at Fenway Park in Boston), is $300.00. The inflation of words is bound to the inflation of prices. The grandstand is now called the "right field boxes." It looks as though box seats, which were front-and-center, not extending far beyond the home and visiting team dugouts, now run to the right-field, bull pen.

            The regular season price for that same seat in 1967 was $2.25. From a Red Sox program during the 1967 season: "Box Seats...$3.00. Reserved Grandstand...$2.25. Note: Grandstand Admission ($1.50) and Bleacher Seats ($1.00) are on sale at the box office at Fenway Park only on day or night of game." (I do not know what the same seat costs in the 2013 regular season. More than I would pay.)

            The discussion here is not about inflation of prices but the inability of practically any institution, anywhere in the United States, to address its demise. Aside from the World Series, a leading spectator sport at the moment is the Obamacare (the new and outdated nationalized health-care dinosaur) computer system. "What else would you expect from the federal government?" is the accurate but not encompassing cry. What else do we get - if not "expect" - anywhere, today?

            Aside from government, the baseball lesson is just as evident in education, museums, houses, and there is no end to this list.

            Baseball, since 1967, has paid much higher salaries which have been supported by higher ticket prices and other sources of revenue. The middle class must now dig deep into its pocket (or, add to its rising credit-card and student-loan balance) to attend a major league baseball game. However, it is the "other sources of revenue" that have supported the binge.

            The 1967 regular season program lists the souvenirs sold at Fenway Park. It is not a long list. The most interesting are "Key Chain & Miniature Purse...75 [cents] and "Garter...$1.00." Garter? A 1968 program lists a Bat Key Chain & Rabbit's Foot...50 [cents]. The purse is gone. Maybe 75 cents was too much.

            Of clothing, "Baseball Caps...1.50, T-shirts...1.50, and Campus Shirt...$2.00" were it. The program does not note if these were Red Sox caps. They may have been, but an older fan from 1967 tells me we did not yet wear ball caps with team insignias. There is an asterisk beside all of the (non-cap) clothing. The program notes: "Shirts are children sizes only."

            Adults did not wear clothes with words yet. For the most part, children did not either. Watching a sports contest on television today, it is obvious who is playing, when flipping through channels, since most adults suit up for the possibility they will be called upon to pinch hit.

The revenue from television and all of its siblings, including websites, has blossomed. The 2013 Red Sox website sells 33 different hats, the priciest at $39.99. This can not be the full range, since most of the caps are blue. Adults walk the street wearing every color of Red Sox ball cap, pink seems to be the favorite. Sources of income go on, to pastures well beyond tickets, paraphernalia and media income.

Baseball may chase other pockets of revenue, but of diminishing returns. "We'll charge more," seems to work, but baseball has followed this path at the cost of losing its base. Corporate expense accounts fill the seats. Future patrons (children), attend fewer games than before. They drift to soccer and lacrosse.

Quantity destroys quality. In 1967, after the regular season, the first place team in the American League met the top team in the National League in the World Series. That was it. Now, there are layers of playoff games before the World Series, often played into November, when interest in baseball is hard to stir. A few years ago, the commissioner of baseball rued that interest was fading when the World Series was played, and declared Major League Baseball must reduce the number of playoff games to increase World Series drama. What has baseball done since? Added another layer of playoffs.

As to healthcare, it is obvious the entire non-system is a riot of paperwork, constantly lost or slave to some computer's backtalk, a maze of arduous barriers to patients and doctors alike. The confusion needs to be dismantled. Firing every bureaucrat with the power to create forms is a great place to start.

In 1971, 57% of American households watched the Worlds Series. In 2012, 10% did so. Expecting the 10% to finance Derek Jeter's salary is not wise. The problems are obvious; but they cannot (will not?) be addressed. Everyone knows advertisements between innings last far too long now. This, when attention spans have vanished. The box scores for the four games already played in the 2013 World Series show the games lasted 3 hours and 17 minutes, 3:05, 3:54, and 3:34. They seemed much longer, but not having employed a stopwatch, will go uncontested. The seven 1967 World Series games lasted 2 hours and 22 minutes; 2:24; 2:15; 2:05, 2:20, and 2:48, and 2:23. There was talk then about how to shorten games.

In Dawn to Decadence: 1500 to the Present (2000), Jacques Barzun concluded his book looking at the close of the twentieth century from the past tense: "Reforms were much discussed; many were virtually unquestioned and statesmen talked of 're-inventing government.' All that happened was bill after bill put before the legislatures and soon or slowly allowed to die. Such a failure of will, which is to say the wish without the act, is characteristic of institutions in decadence."

Wild Blue Yonder

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)

            In May 2013, the U.S. Treasury had spent up to its statutory debt limit. Treasury Secretary Jack Lew wrote House Speaker Boehner that the Treasury would "begin implementing the standard set of extraordinary measures that allows the Treasury to continue to borrow and spend even after it has hit the legal debt limit."

            Through October 16, 2013, the Daily Treasury Statement showed "Total Public Debt Subject to Limit" at $16,699,396. The "16" is trillions; the numbers are in millions. The "Statutory Debt Limit" (the next line on the Daily Treasury Statement), showed, day-in and day-out: "$16,699,421. The difference was $25,000,000: This figure adds back the zeros not shown on the daily posting.

            The Federal government continued to spend money, aside from showy pockets of austerity: the World War II memorial, for instance, and, aberrations unintentionally demonstrating the vast federal government waste that should be shut.

            The October 17, 2013, Daily Treasury Statement shows the Statutory Public Debt Subject to Limit rose to $17,027,544. Adding in the zeros, this was an overnight increase of $328 billion. Except, it is not. That is, the Statutory Public Debt Subject to Limit is not subject to any limit. The October 17, 2013, Daily Treasury Statement listing for Statutory Debt Limit is *, or "*". Following the "*" we read: *Statutory debt limit temporarily suspended through February 7, 2014."

            Of course, we know this is an artificial construct, as is the debt limit itself. The form it takes was explained in the October 22, 2013, King Report. Bill King quoted Seeking Alpha: "Up until yesterday, Congress had to approve of any increase in the debt ceiling. Theoretically it gave Congress leverage to negotiate with the President before approving of an inevitable debt ceiling increase. Now, if Congress refuses to pass a debt ceiling increase, the President has the power to veto the rejection. In order for Congress to override the President's veto, 2/3's of both Houses of Congress would have to approve of the rejection of the President's veto. There's no way both the Senate and the House would be capable of doing this. In other words, the President now has the ability to unilaterally get rid of the debt-ceiling limit. QE to infinity."

            This may change or it may not. More important than the voting parameters is the knowledge there never was a debt ceiling. Through winks and nods among the Treasury Department, Congress, and the media, buffoonery held the public's attention, when it was all show.

            Of the eye-opening exhibition of government waste, none will be canned, so a single example follows.

            On October 2, 2013, that is: one day into the government shutdown, Air Force Lieutenant General (retired) Clapper, now Director of National Intelligence, testified before the Senate Judiciary Committee:

"I've been in the intelligence business for about 50 years. I've never seen anything like this. From my view... this seriously damages our ability to protect the safety and security of this nation and its citizens..... This affects our global capability to support the military, to support diplomacy, and to support our policymakers.

"The danger here, of course, that this will accumulate over time. The damage will be insidious. So each day that goes by, the jeopardy increases."

            The danger, in General Clapper's view, is probably not what you expect: "This is a dreamland for foreign intelligence service to recruit, particularly as our employees, already many of whom [are] subject to furloughs driven by sequestration, are going to have, I believe, even greater financial challenges. So we're spending our time setting up counseling services for employees to help them manage their finances. So from my stand point this is extremely damaging and it will increase so as this shutdown drags on." [End of testimony].

            Our intelligence agents, for whom General Clapper is responsible, are (were, until October 17) about to sell top secret information to the Enemy. The Evil Empire, it turns out, is that America's best and brightest, defenders of the faith, have hit their credit card limits. Reds under the Bed made for more stimulating drama, even if it was a screenwriter slipping subversive jokes about Stalin's dacha into the Milton Berle Show.

            While the media was talking rot about budget and Treasury coupon payment such-and-such, the Director of National Intelligence for the United States made a clear statement the U.S. intelligence establishment is untrustworthy. Clapper's testimony leads to one solution: the entire intelligence bureaucracy should be fired. Alternatively, it is possible that General Clapper has lost his mind, and should treated as top secret intelligence chiefs who may switch sides at any moment are handled.

In any case, this should have been front page news. Americans should know the imminent danger they face.

            The point was made above about "the public's attention." There can be a difference between "public" and "popular" opinion. Public opinion, orchestrated by such parties as the Treasury, Congress, and the media, is generally successful in molding popular opinion. Examples being the people's willingness to cheerfully buy War Bonds, send their sons, and march off, "over, over there," in the two World Wars.

            A dangerous situation may develop when popular opinion falls flat with the people. This, the entire staff here agrees, was true of the debt ceiling and sequestration debate. Opinion polls do not measure depth of feeling. The media - some of it - seemed to sense this, with a "hey guys, this is important! Wake up! Get scared!" The disengagement contrasts to the high anxiety mood in July 2011, when the same topics cornered attention. In other countries, at other times, when the people stopped believing, they disbelieved everything, true or false.

Loose as a Goose

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)

            President Obama's nomination of Janet Yellen is not unexpected. Nevertheless, it is greeted here with unrequited abjection. Unless the world's financial hocus-pocus comes unglued between now and then, she will inflate electronic money accounts without compunction. By doing so, Yellen will make matters worse (a sampling: real incomes will fall further, the gap between the rich and the poor will increase). She will redefine an acceptable inflation rate at 4.0%. Currently, the Fed is gunning for 2.0% inflation. This will be part and parcel to Yellen's attempt to drive interest rates down at all maturities. The objective will grow harder so require larger electronic deposits.  She will beget looser money and a more destructive policy than Ben Bernanke's: a -4.0% real rate of interest.

That will be her policy. As to the person, Janet Yellen will see exactly what she wants to see, no more and no less. A sampling:

"Will capitalist economies operate at full employment in the absence of routine intervention? Certainly not. Do policy makers have the knowledge and ability to improve macroeconomic outcomes rather than make matters worse? Yes."

-At Yale, in 1999

"While admirers of capitalism, we also to a certain extent believe it has limitations that require government intervention in markets to make them work."

-Magazine interview, 2012

                                            

"I would also like to note that the same research paper [produced by the Federal Reserve staff] analyzed the macroeconomic effects of the FOMC's full program of [Quantitative Easing].... Those simulation results indicate that by 2012, the full program of securities purchases will have raised private payroll employment by about 3 million jobs"

-Denver, Colorado; January 8, 2011

"We failed completely to understand the complexity of what the impact of the decline - the national decline - in housing prices would be in the financial system. We saw a number of different things and we failed to connect the dots. We failed to understand just how seriously the mortgage standards, the underwriting standards, had declined, what had happened with the complexity of securitization and the risks that were building in the financial system around that."

-At Yellen's Senate confirmation as Fed governor in 2010.

And yet, she learned nothing:

"At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked buildup in leverage, or significant asset bubbles that would clearly threaten financial stability,"

                        -March 4, 2013

FUN FACTS:

            In 2009, when Yellen was president of the San Francisco Fed, her researchers calculated the real interest rate should be -5.0% (that is: negative five percent: inflation five percent higher than interest rates, according to the "Taylor rule." At the same time, John Taylor, the Taylor of the rule, calculated interest rates should be 0.5% (positive 0.5 percent).

            In May 2011, the San Francisco Fed decided consumer inflation expectations were flawed, so should not interfere with inflation expectations upon which the Fed pegs monetary policy, since the public does not understand monetary policy. Something like that. To quote a bit, while not being sure at all if this part helps explain the San Francisco Fed's dismissal of the public:

"The... response to noncore inflation cannot be justified in terms of the historical relationships in the data. This disproportionate response is probably the reason why household inflation expectations have not done well as forecasts of future inflation in recent years, a period of volatile food and energy inflation. The poor forecasting performance argues against reacting strongly to the recent increases in household inflation expectations.... It's also possible that households' sensitivity to noncore inflation goes up following substantial, sharp increases in the price of energy and food items, such as those that occurred in the 1970s.... This similarity to the 1970s is unsettling because it suggests that consumers are not accounting for the ways monetary policy has changed over this period."

                        -Federal Reserve Bank of San Francisco Economic Letter, May 2011

            Yellen had left the San Francisco Fed in 2010 for the Fed governorship, but, this is her legacy. She resorts to institutional propaganda (the Fed calls "research") that shields the Fed from any wrongdoing. Therefore, you can count on it: she will always follow a policy of greater monetary inflation.

            The Fed's free wheeling will last as long as the dollar retains its hallowed status. In this regard, Chuck Butler wrote in his October 10, 2013 Daily Pfennig (EverBank):

"Guess who is the newest member on the roster that makes up countries that have signed a currency swap agreement with China?.... It's the Eurozone! The European Central Bank (ECB) announced this morning that they have signed a bilateral currency swap agreement with China to bolster trade financing. Now, Eurozone companies don't have to change their euros to dollars first to settle the terms of trade with China, they just deliver euros, or receive renminbi. This is HUGE folks! China now has nearly all of Asia on their roster, along with Australia, and New Zealand, Russia, Argentina, Brazil and now the Eurozone!

"Talk about gaining a wider distribution of their currency! This will strengthen the international use of the renminbi/yuan. And that's what China wants! They want to keep removing the dollar's relevancy in the terms of trade throughout the world, one country at a time. But the Eurozone is HUGE, folks.

"Remember, the recent (June 28th) talk by People's Bank of China (PBOC) Gov. Zhou, where he pledged to expand cross-border use of the renminbi /yuan, and he encouraged multinational companies to include the Chinese currency in their asset portfolios. When China decides to all direct trading between their currency and other foreign currencies, convertibility will occur, and when all that happens, it's game over for the dollar as the reserve currency folks. I don't know how else I can say this to make it any clearer."

            Chuck Butler could be right.

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.