The Market Ticker - Federal Reserve

Has Bernanke Perjured Himself?

nospam@example.com (Karl Denninger) — Fri, 19 Mar 2010 08:28:00 -0400

Remember, Bernanke said under questioning the other day that "they hid it" in response to a question about whether or not The Fed knew about the Lehman "105" repo arrangements, which appear to have been structured to intentionally mislead the public (and investors) about its liquidity position.

But in the deep of the night Financial Times published an article that resoundingly calls "BS" on that claim:

Securities and Exchange Commission and Federal Reserve officials were warned by a leading Wall Street rival that Lehman Brothers was incorrectly calculating a key measure of its financial health months before its collapse in 2008, people familiar with the matter say.

Former Merrill Lynch officials said they contacted regulators about the way Lehman measured its liquidity position for competitive reasons. The Merrill officials said they were coming under pressure from their trading partners and investors, who feared that Merrill was less liquid than Lehman.

Beyond the apparent perjury (which our Congress seems to ignore any time a "powerful" person commits it) there is the larger problem in that if the Chairman of The Fed has lied about this, what else has he lied about?

Most critically, what about all those other banks out there with HELOC exposure behind underwater first mortgages that are not being paid on time?

The Market Ticker has reported on the wildly inaccurate and ridiculous treatment of firsts in this environment - people being "allowed" to remain in a home even though they haven't made a payment in a year - and sometimes two, loans that are reported to credit bureaus as having payments made on them "by agreement" when the consumer is not only not paying but has never talked with the financial institution involved about it. A quick look at the 10Qs and 10Ks filed by the big financial institutions discloses that these institutions have literal hundreds of billions of HELOCs and Second Lines on their balance sheets that are behind underwater first mortgages. Each and every one of those loans is worth nothing if the first mortgage it is subordinate to fails to pay.

There is thus every reason to believe that not only did Lehman materially misstate its balance sheet position and financial strength but that this deception is ongoing right here and now.

Further, Diana Olick of CNBS has reported on what I have asserted repeatedly over the last three years:

If the banks really accounted for all the losses in the home loan market, they'd all be insolvent.

I have every reason to believe that not only is there a pattern of conduct here in deceiving the American People as to the "financial strength" of the banks and other financial institutions in this nation but that this deception is willful, ongoing, and reaches all the way to The Federal Reserve Chairman.

This Financial Times report, along with the report on Lehman Brothers (which asserts that The Federal Reserve Bank of NY had the information necessary to discern what Lehman was doing - whether it acted on it or not) makes a prima-facie case of willful and intentional regulatory blindness to balance sheet fraud and intentional misrepresentation of capital positions.

This is not the only regulator against which such charges have been lodged. OTS appears to have intentionally permitted Indymac Bank to backdate deposits - and the firm subsequently failed.

This sort of regulatory malfeasance must not be allowed to stand.

These are not accidents, they are intentional acts.

When multiple people conspire together to break the law you have the very sort of act that the Racketeering Statutes were designed to prohibit - and punish.

The assertion by The Fed (and FDIC) that "it lacks the authority" to resolve large failed institutions is a lie. "Prompt Corrective Action" (Title 12, Chapyer 16, Sec 1831o) of US Code not only provides all the authority necessary to close a bank - any bank - that fails to meet statutory capital limits it mandates that action.

There is no discretion permitted in that statute and The Federal Reserve, as one of the Federal banking agencies, has no right to ignore this section of black-letter law.

Yet it, along with the FDIC, OTS and OCC all have.

The balance-sheet games and holding of loans that have no collateral and are behind non-performing firsts yet have not been written down to their recovery value, which as a matter of statutory law is zero, is an outrage.

We must not permit federal officials, including Bernanke, to come before Congress and thumb their nose at the rule of law, just as we must not permit so-called "federal regulators" to thumb their noses at the black-letter law that not only is more than sufficient to resolve these failed and failing institutions but mandates that these regulators do so.

Jackassery Patrol (Greenspan)

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 14:53:00 -0400

Now here's a good idea:

“The most pressing reform that needs fixing in the aftermath of the crisis, in my judgment, is the level of regulatory risk-adjusted capital,” Greenspan said in a paper prepared for a Brookings Institution conference today. “Adequate capital eliminates the need for an unachievable specificity in regulatory fine-tuning.”

Banks may need to hold capital equal to 14 percent of their assets, compared with about 10 percent in mid-2007 before the financial crisis, Greenspan said.

Really Alan?

Does the capital have to be real? That's the question, you know. Lehman allegedly had plenty of capital and plenty of cash too - $50 billion worth, in fact, that was allegedly "cash" on their balance sheet.

Oh wait - it wasn't real, was it? Well ok, it was real - for a day. Then it went right back to its lender and the garbage can full of used dogfood that they "tendered" to get the $50 billion came back to them!

This is the general problem with Greenspan's "solution" - all solutions for sound lending require regulators that are not corrupt, so when someone tries to pull a scam like that they get arrested and the scammer is outed so the investing public knows what's going on!

This means that FRBNY (and counterparties!) that become aware of such frauds must have a duty to report them. In this case we know for a fact that counterparties were aware of the problem and we have reason to believe from the narrative that FRBNY was. Yet nothing was done.

But we can't have that! Why if we had that happen then we'd be stuck with firms that couldn't hide risks off their balance sheets, we wouldn't have firms that claimed fictitious levels of cash, and we wouldn't have firms that claim HELOCs are all "money good" when behind underwater and defaulted first mortgages!

All of those sins are still occurring.

I agree that "more capital" solves most problems with banks. But the simplest way to do this is to set reasonable standards for excess capital (e.g. 6% Tier 1) and then enforce one dollar of capital (beyond that "last chance" reserve) for each dollar of unsecured lending.

The "last chance" reserve is thus present to cover the liquidation costs and insure that the FDIC doesn't have to cover anything. Bondholders and shareholders are fully exposed to being wiped out, of course.

If you take this approach then the problem disappears. A HELOC behind an underwater first is an unsecured loan, as the collateral is insufficient to cover the paper. Therefore, if a bank wants to hold a HELOC on a home where the first is underwater they must hold one dollar of capital for each dollar out in that HELOC. If the HELOC is then not paid for any reason, the bank is still secure and cannot go bust.

The question we have to ask is this: Do we really want a secure and sound banking system, or do we want a system that has to be bailed out every few years because at the end of the day too many people are crooked and we haven't busted enough of them for the crooks to be concerned about being arrested.

Fed Didn't Know Lehman Was Book-Cooking? Yeah Right.

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 11:00:00 -0400

I suppose they expect me to believe this:

During congressional testimony, House Financial Services Committee Ranking Member Spencer Bachus asked if the Fed was aware of Lehman's "accounting gimmicks."

"We did not have that information," Bernanke replied. The Fed "had only a couple people in the company to make sure" Lehman repaid money it borrowed from the central bank's primary lender credit facility, he said.

That's funny - the report says that FRBNY had all the information. Now they may not have acted on it, but that's not the same thing as not knowing about it.

Oh wait - he did say that:

"We were not charged with supervising the company, clearly it was a very troubled company," Bernanke said on Wednesday. "We had no authority to require them to do anything."

So if you know someone's going to rob a bank, and you sit back and let them do so because you have "no authority to regulate them", and in fact you trade with them, are you complicit in whatever they pull?

Now there's a good question.

An even better one is whether we should hand regulatory authority to someone who refused to blow the whistle on whatever irregularities it may have observed (like, for instance, gaming the PDCF, being told by Citi they had no good collateral - which I presume means they turned immediately to The Fed with the same garbage, and in fact announcing false "test transactions" that were in fact real transactions)?

After all, if you're the "uber-regulator" and the primary institution charged with overall banking system stability and clearing, you don't have any sort of responsibility to blow the whistle when those who are dealing with you are lying, do you?

I'm Gonna Throw Up (Bernanke)

nospam@example.com (Karl Denninger) — Thu, 18 Mar 2010 08:00:00 -0400

Does anyone remember me ranting at the time of the TARP's passage about an obscure little sentence that allowed Bernanke to set the reserve ratio on the banks to zero?

Well, Bernanke's Congressional testimony yesterday garnered a footnote on the issue, specifically:

Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

Right. The cost is that you have to actually have something called "capital" behind your loan book, and you had a velocity limiter as well.

This is simply unbelievable. To call such a thing a "distortion" is the worst sort of outrage to come from a central banker.

Reserve requirements have largely become a quaint subject since Greenspan effectively eliminated them by allowing almost-unlimited marketing and use of "sweep accounts." But nonetheless they remain one of the checks and balances on potential bank runs destroying a firm's cash position without warning.

The sheer lack of recognition and understanding that we're in this mess almost exclusively due to excessive leverage in all parts of our financial system is beyond ridiculous - especially for an agency that now wants to be granted even more power of oversight and "regulation."

"I'm sorry" isn't good enough when you operate from a perspective that someone else (in this case the taxpayer) gets to clean up your messes, and this sort of philosophical idiocy will do nothing but guarantee that we'll have much bigger banking messes in our future.

Repeal Of Law Needed NOW

nospam@example.com (Karl Denninger) — Wed, 24 Feb 2010 21:03:06 -0500

Watch this clip, right near the end. 4:30 into the clip onward.

Yes, Ron Paul went off on quite the rant.

But that last minute......

The Federal Reserve has the authority to buy the debt of any foreign government, essentially obligating The US Taxpayer to bail them out!

Bernanke says he has no plans, but notice that he did not say they have never done such a thing.

Hmmm.... two-line bill to revoke that BS anyone?

Anyone?

FedSpeak - Humphrey-Hawkins

nospam@example.com (Karl Denninger) — Wed, 24 Feb 2010 10:31:00 -0500

I know, it's not called Humprey-Hawkins any more. Call me old-fashioned.

Here's my view on Bernanke's comments - Bernanke's comments are in italics and indented, mine are plain text:

Chairman Frank, Ranking Member Bachus, and other members of the Committee, I am pleased to present the Federal Reserve's semiannual Monetary Policy Report to the Congress. I will begin today with some comments on the outlook for the economy and for monetary policy, then touch briefly on several other important issues.
The Economic Outlook
Although the recession officially began more than two years ago, U.S. economic activity contracted particularly sharply following the intensification of the global financial crisis in the fall of 2008.

We created a mess with more than 20 years of intentional pumping of risk assets and an ever-present lowering of the Federal Funds Rate on an average basis. We held that rate intentionally low through the provision of excess liquidity so as to cause credit growth beyond the growth rate of the economy. This is, as I have said before, a direct violation of The Fed's primary mandate, which is not to "manage interest rates" but rather to match long-term credit aggregates to growth so that growth potential is maximized without creating dangerous inflationary pressures.

Instead, we allowed those pressures to run rampant, but in active conspiracy with Congress and the BLS, we hid the effects. Specifically, CPI-U does not include actual home prices but rather "Owner's Equivalent Rent" which is cleverly constructed so that lower interest coverage costs result in a false deflationary contribution. This, along with other intentional distortions, allowed us to hide the hyperinflation in home prices that we intentionally caused.

Concerted efforts by the Federal Reserve, the Treasury Department, and other U.S. authorities to stabilize the financial system, together with highly stimulative monetary and fiscal policies, helped arrest the decline and are supporting a nascent economic recovery. Indeed, the U.S. economy expanded at about a 4 percent annual rate during the second half of last year.

The US economy didn't expand at all. Instead, the government borrowed and spent money. Of course in the real world when you borrow you are poorer, not richer, but we don't keep our books the same way everyone else does. After all, we're the government.

A significant portion of that growth, however, can be attributed to the progress firms made in working down unwanted inventories of unsold goods, which left them more willing to increase production. As the impetus provided by the inventory cycle is temporary, and as the fiscal support for economic growth likely will diminish later this year, a sustained recovery will depend on continued growth in private-sector final demand for goods and services.

There is no private-sector final demand. Proof is found in the fact that the government has blown $2 trillion beyond tax confiscations, er, receipts, or roughly 14% of annual GDP, in the last 18 months to falsely inflate said final demand.

Private final demand does seem to be growing at a moderate pace, buoyed in part by a general improvement in financial conditions. In particular, consumer spending has recently picked up, reflecting gains in real disposable income and household wealth and tentative signs of stabilization in the labor market. Business investment in equipment and software has risen significantly. And international trade--supported by a recovery in the economies of many of our trading partners--is rebounding from its deep contraction of a year ago. However, starts of single-family homes, which rose noticeably this past spring, have recently been roughly flat, and commercial construction is declining sharply, reflecting poor fundamentals and continued difficulty in obtaining financing.

We count "transfer payments" (that is, government borrow-and-spend) in those final demand figures, even though doing so is fraudulent. Didn't you catch my "it's great to the be the government" up above?

The job market has been hit especially hard by the recession, as employers reacted to sharp sales declines and concerns about credit availability by deeply cutting their workforces in late 2008 and in 2009. Some recent indicators suggest the deterioration in the labor market is abating: Job losses have slowed considerably, and the number of full-time jobs in manufacturing rose modestly in January. Initial claims for unemployment insurance have continued to trend lower, and the temporary services industry, often considered a bellwether for the employment outlook, has been expanding steadily since October. Notwithstanding these positive signs, the job market remains quite weak, with the unemployment rate near 10 percent and job openings scarce. Of particular concern, because of its long-term implications for workers' skills and wages, is the increasing incidence of long-term unemployment; indeed, more than 40 percent of the unemployed have been out of work six months or more, nearly double the share of a year ago.

It's impossible to find a job - except as a Census worker.

Increases in energy prices resulted in a pickup in consumer price inflation in the second half of last year, but oil prices have flattened out over recent months, and most indicators suggest that inflation likely will be subdued for some time. Slack in labor and product markets has reduced wage and price pressures in most markets, and sharp increases in productivity have further reduced producers' unit labor costs. The cost of shelter, which receives a heavy weight in consumer price indexes, is rising very slowly, reflecting high vacancy rates. In addition, according to most measures, longer-term inflation expectations have remained relatively stable.

When we pump liquidity, people speculate. They have speculated in energy markets. We like this and are heartened by the fact that not too many old people froze to death in their homes over the winter. Oh wait - winter isn't over yet, right? Uhhh....

The improvement in financial markets that began last spring continues. Conditions in short-term funding markets have returned to near pre-crisis levels. Many (mostly larger) firms have been able to issue corporate bonds or new equity and do not seem to be hampered by a lack of credit. In contrast, bank lending continues to contract, reflecting both tightened lending standards and weak demand for credit amid uncertain economic prospects.

Free money and carry trades make a lot of money for Wall Street. Unfortunately they asset-strip the rest of the economy, but we never talk about that. Kiss a bankster - including me please. Left and right cheeks only (and I'll choose which cheeks - bawhaha.)

In conjunction with the January meeting of the Federal Open Market Committee (FOMC), Board members and Reserve Bank presidents prepared projections for economic growth, unemployment, and inflation for the years 2010 through 2012 and over the longer run. The contours of these forecasts are broadly similar to those I reported to the Congress last July. FOMC participants continue to anticipate a moderate pace of economic recovery, with economic growth of roughly 3 to 3-1/2 percent in 2010 and 3-1/2 to 4-1/2 percent in 2011. Consistent with moderate economic growth, participants expect the unemployment rate to decline only slowly, to a range of roughly 6-1/2 to 7-1/2 percent by the end of 2012, still well above their estimate of the long-run sustainable rate of about 5 percent. Inflation is expected to remain subdued, with consumer prices rising at rates between 1 and 2 percent in 2010 through 2012. In the longer term, inflation is expected to be between 1-3/4 and 2 percent, the range that most FOMC participants judge to be consistent with the Federal Reserve's dual mandate of price stability and maximum employment.

The Federal Reserve's mandate is always falsely stated in front of you guys. You never call us on it. You're stupid and I'm laughing at you. In public. Isn't it grand? (PS: The actual mandate is US Code Title 12, Chp 3, Sub1, Section 225a, if you care to look)

Monetary Policy
Over the past year, the Federal Reserve has employed a wide array of tools to promote economic recovery and preserve price stability. The target for the federal funds rate has been maintained at a historically low range of 0 to 1/4 percent since December 2008. The FOMC continues to anticipate that economic conditions--including low rates of resource utilization, subdued inflation trends, and stable inflation expectations--are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Gotta keep that bubble going - if we can. Unfortunately, we can't. Oops.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. We have been gradually slowing the pace of these purchases in order to promote a smooth transition in markets and anticipate that these transactions will be completed by the end of March. The FOMC will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

It didn't work. Math is such a bitch.

In response to the substantial improvements in the functioning of most financial markets, the Federal Reserve is winding down the special liquidity facilities it created during the crisis. On February 1, a number of these facilities, including credit facilities for primary dealers, lending programs intended to help stabilize money market mutual funds and the commercial paper market, and temporary liquidity swap lines with foreign central banks, were allowed to expire.¹ The only remaining lending program for multiple borrowers created under the Federal Reserve's emergency authorities, the Term Asset-Backed Securities Loan Facility, is scheduled to close on March 31 for loans backed by all types of collateral except newly issued commercial mortgage-backed securities (CMBS) and on June 30 for loans backed by newly issued CMBS.

Again, it didn't work. We tried to get the real estate bubble going again, but it's popped. Do you have better duct tape laying around somewhere we can use - this crap we bought at Home Depot doesn't hold up to us trying to pump it again - we keep getting results like this:

In addition to closing its special facilities, the Federal Reserve is normalizing its lending to commercial banks through the discount window. The final auction of discount-window funds to depositories through the Term Auction Facility, which was created in the early stages of the crisis to improve the liquidity of the banking system, will occur on March 8. Last week we announced that the maximum term of discount window loans, which was increased to as much as 90 days during the crisis, would be returned to overnight for most banks, as it was before the crisis erupted in August 2007. To discourage banks from relying on the discount window rather than private funding markets for short-term credit, last week we also increased the discount rate by 25 basis points, raising the spread between the discount rate and the top of the target range for the federal funds rate to 50 basis points. These changes, like the closure of most of the special lending facilities earlier this month, are in response to the improved functioning of financial markets, which has reduced the need for extraordinary assistance from the Federal Reserve. These adjustments are not expected to lead to tighter financial conditions for households and businesses and should not be interpreted as signaling any change in the outlook for monetary policy, which remains about the same as it was at the time of the January meeting of the FOMC.

See above.

Although the federal funds rate is likely to remain exceptionally low for an extended period, as the expansion matures, the Federal Reserve will at some point need to begin to tighten monetary conditions to prevent the development of inflationary pressures. Notwithstanding the substantial increase in the size of its balance sheet associated with its purchases of Treasury and agency securities, we are confident that we have the tools we need to firm the stance of monetary policy at the appropriate time.²

We're lying. But that's ok, because as noted, you're too damn gullible to figure it out.

Most importantly, in October 2008 the Congress gave statutory authority to the Federal Reserve to pay interest on banks' holdings of reserve balances at Federal Reserve Banks. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

Watch my gums move!

PS: The real 900lb Gorilla in the EESA/TARP bill was the little one-sentence change that allowed me to set the reserve ratio at the banks to zero. That jackass Denninger caught it, but few others have and you don't listen to him. Don't worry, banks holding nothing in reserve to back their depositors is not a problem. Just ask Bernie Madoff.

The Federal Reserve has also been developing a number of additional tools to reduce the large quantity of reserves held by the banking system, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate paid on reserves and other short-term interest rates. Notably, our operational capacity for conducting reverse repurchase agreements, a tool that the Federal Reserve has historically used to absorb reserves from the banking system, is being expanded so that such transactions can be used to absorb large quantities of reserves.³ The Federal Reserve is also currently refining plans for a term deposit facility that could convert a portion of depository institutions' holdings of reserve balances into deposits that are less liquid and could not be used to meet reserve requirements.⁴ In addition, the FOMC has the option of redeeming or selling securities as a means of reducing outstanding bank reserves and applying monetary restraint. Of course, the sequencing of steps and the combination of tools that the Federal Reserve uses as it exits from its currently very accommodative policy stance will depend on economic and financial developments. I provided more discussion of these options and possible sequencing in a recent testimony.⁵

We can't sell jack. The MBS we bought (unlawfully, I might add) are severely impaired and if we sell them the market for mortgages will collapse. Therefore, we will do what we always do - can you help me pick up the corner of the rug over here so I can sweep?

Federal Reserve Transparency
The Federal Reserve is committed to ensuring that the Congress and the public have all the information needed to understand our decisions and to be assured of the integrity of our operations. Indeed, on matters related to the conduct of monetary policy, the Federal Reserve is already one of the most transparent central banks in the world, providing detailed records and explanations of its decisions. Over the past year, the Federal Reserve also took a number of steps to enhance the transparency of its special credit and liquidity facilities, including the provision of regular, extensive reports to the Congress and the public; and we have worked closely with the Government Accountability Office (GAO), the Office of the Special Inspector General for the Troubled Asset Relief Program, the Congress, and private-sector auditors on a range of matters relating to these facilities.

Ron Paul is a dangerous asshole and his bill would expose our tampering in the markets. It might even expose criminal malfeasance. We can't have that.

While the emergency credit and liquidity facilities were important tools for implementing monetary policy during the crisis, we understand that the unusual nature of those facilities creates a special obligation to assure the Congress and the public of the integrity of their operation. Accordingly, we would welcome a review by the GAO of the Federal Reserve's management of all facilities created under emergency authorities.⁶ In particular, we would support legislation authorizing the GAO to audit the operational integrity, collateral policies, use of third-party contractors, accounting, financial reporting, and internal controls of these special credit and liquidity facilities. The Federal Reserve will, of course, cooperate fully and actively in all reviews. We are also prepared to support legislation that would require the release of the identities of the firms that participated in each special facility after an appropriate delay. It is important that the release occur after a lag that is sufficiently long that investors will not view an institution's use of one of the facilities as a possible indication of ongoing financial problems, thereby undermining market confidence in the institution or discouraging use of any future facility that might become necessary to protect the U.S. economy. An appropriate delay would also allow firms adequate time to inform investors through annual reports and other public documents of their use of Federal Reserve facilities.

Of course our commitment to openness is fully-consistent with our obstructionism both toward Bloomberg in their FOIA lawsuit and with Mr. Townes and Mr. Issa's subpoenas. We simply need enough time to smash all our hard disks with hammers and shred the paper before you audit us, along with preparing our second set of books.

Looking ahead, we will continue to work with the Congress in identifying approaches for enhancing the Federal Reserve's transparency that are consistent with our statutory objectives of fostering maximum employment and price stability. In particular, it is vital that the conduct of monetary policy continue to be insulated from short-term political pressures so that the FOMC can make policy decisions in the longer-term economic interests of the American people. Moreover, the confidentiality of discount window lending to individual depository institutions must be maintained so that the Federal Reserve continues to have effective ways to provide liquidity to depository institutions under circumstances where other sources of funding are not available. The Federal Reserve's ability to inject liquidity into the financial system is critical for preserving financial stability and for supporting depositories' key role in meeting the ongoing credit needs of firms and households.

Again, we never mention the actual statute (see above) or what it actually requires (ditto.)

Regulatory Reform
Strengthening our financial regulatory system is essential for the long-term economic stability of the nation. Among the lessons of the crisis are the crucial importance of macroprudential regulation--that is, regulation and supervision aimed at addressing risks to the financial system as a whole--and the need for effective consolidated supervision of every financial institution that is so large or interconnected that its failure could threaten the functioning of the entire financial system.

We willfully ignored the CDS and similar games being played by the big banks, and still are. If anything goes wrong we'll simply print money!

The Federal Reserve strongly supports the Congress's ongoing efforts to achieve comprehensive financial reform. In the meantime, to strengthen the Federal Reserve's oversight of banking organizations, we have been conducting an intensive self-examination of our regulatory and supervisory responsibilities and have been actively implementing improvements. For example, the Federal Reserve has been playing a key role in international efforts to toughen capital and liquidity requirements for financial institutions, particularly systemically critical firms, and we have been taking the lead in ensuring that compensation structures at banking organizations provide appropriate incentives without encouraging excessive risk-taking.⁷

You must not take our blinders away and give them to anyone else.

The Federal Reserve is also making fundamental changes in its supervision of large, complex bank holding companies, both to improve the effectiveness of consolidated supervision and to incorporate a macroprudential perspective that goes beyond the traditional focus on safety and soundness of individual institutions. We are overhauling our supervisory framework and procedures to improve coordination within our own supervisory staff and with other supervisory agencies and to facilitate more-integrated assessments of risks within each holding company and across groups of companies.

We are handing out new, better, larger and blacker sets of blinders to our staff. It is most-important that no light get in - or out.

Last spring the Federal Reserve led the successful Supervisory Capital Assessment Program, popularly known as the bank stress tests. An important lesson of that program was that combining on-site bank examinations with a suite of quantitative and analytical tools can greatly improve comparability of the results and better identify potential risks. In that spirit, the Federal Reserve is also in the process of developing an enhanced quantitative surveillance program for large bank holding companies. Supervisory information will be combined with firm-level, market-based indicators and aggregate economic data to provide a more complete picture of the risks facing these institutions and the broader financial system. Making use of the Federal Reserve's unparalleled breadth of expertise, this program will apply a multidisciplinary approach that involves economists, specialists in particular financial markets, payments systems experts, and other professionals, as well as bank supervisors.

We lied about bank stability. We'll do it again as necessary.

The recent crisis has also underscored the extent to which direct involvement in the oversight of banks and bank holding companies contributes to the Federal Reserve's effectiveness in carrying out its responsibilities as a central bank, including the making of monetary policy and the management of the discount window. Most important, as the crisis has once again demonstrated, the Federal Reserve's ability to identify and address diverse and hard-to-predict threats to financial stability depends critically on the information, expertise, and powers that it has by virtue of being both a bank supervisor and a central bank.

The blind are great at elucidating on the finer points of classical architecture - don't you think?

The Federal Reserve continues to demonstrate its commitment to strengthening consumer protections in the financial services arena. Since the time of the previous Monetary Policy Report in July, the Federal Reserve has proposed a comprehensive overhaul of the regulations governing consumer mortgage transactions, and we are collaborating with the Department of Housing and Urban Development to assess how we might further increase transparency in the mortgage process.⁸ We have issued rules implementing enhanced consumer protections for credit card accounts and private student loans as well as new rules to ensure that consumers have meaningful opportunities to avoid overdraft fees.⁹ In addition, the Federal Reserve has implemented an expanded consumer compliance supervision program for nonbank subsidiaries of bank holding companies and foreign banking organizations.¹⁰

Consumers were violated by a gorilla over the last 20 years. Our new tool for this job is over there - he's an Arabian, and rather feisty.

More generally, the Federal Reserve is committed to doing all that can be done to ensure that our economy is never again devastated by a financial collapse. We look forward to working with the Congress to develop effective and comprehensive reform of the financial regulatory framework.

After our cronies are done looting the financial system and are in their G-IVs headed for Paraguay, you can bet it will never happen again.

That which no longer exists cannot collapse.

Fed Changes Terms In Front of OpEx Again

nospam@example.com (Karl Denninger) — Thu, 18 Feb 2010 16:52:00 -0500

This is a load of crap folks:

For release at 4:30 p.m. EDT

We just made sure that anyone who was long into Options Expiration - which is tomorrow - especially on index options which cannot be hedged or traded now, is screwed. Just like in August of 2007 when we did the opposite.

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Of course we couldn't wait until Friday after the close when it wouldn't hose people - instead, we timed this for maximum pain.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

We gave no warning either. Ha ha. You did wear your titanium plate in your pants, right?

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

That's "right now", in case you didn't figure it out yet.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

This is something we did warn about, and in addition we're giving notice. See? Hope you don't get a margin call in the morning - BOOYA!

Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

See above.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

This is something we said we'd do, but heh, you gotta love our timing. We make a practice of burning people - a few years ago it was the shorts (who were right), this time it's the longs (who were also right - well up until this evening!

BTW, I shorted the close on the technicals in the futures (which if this reverses I can hedge and of course can't lose on now) - the market was heavy and it looked overbought, so you'd think I'd be happy.

I'm not - this sort of action, whether I personally make money or lose money, is not the point. The point is that this release was intentionally timed to hurt people, just as was the August 2007 one.

Bernanke and his pals ought to be run out of town on a rail for this sort of repeated abuse. They seem to think that the markets are their plaything, and all they're doing is destroying confidence with each and every move of this sort.

It is not what you do, it is how you do it, and this sort of thing is just yet another reason why The Fed must be audited. The timing on this is too damn suspicious - never mind that someone sold a metric ton of SPY right in front of the announcement - literally by seconds, 2 million shares were unloaded.

Betcha you can't find a cop.

The Fed Has A "Goal" Of Lawful Behavior?

nospam@example.com (Karl Denninger) — Thu, 18 Feb 2010 08:32:00 -0500

Amusing....

Feb. 18 (Bloomberg) -- Federal Reserve officials set a long-term goal to keep only U.S. government securities in their portfolio as they debated how and when to pull back on the most aggressive monetary policy in U.S. history.

Central bankers are planning to eventually remove $1.43 trillion of housing debt from the balance sheet after critics such as Stanford University economist John Taylor accused them of straying beyond monetary policy. Philadelphia Fed President Charles Plosser said yesterday that the Fed’s purchases of housing debt expose it to demands from politicians to support other industries.

Taylor may have accused them of straying beyond monetary policy but stopped short of saying what I have - that The Fed's mandate and lawful authority stops at monetary policy.

Yes, I know all about 13(3). That section of the Federal Reserve Act allows them to make loans to anyone (including individuals!) in "unusual and exigent circumstances." They've done a lot of that too, and whether distasteful or not, it is clearly within the (current) confines of Fed authority.

But asset purchases are another matter. I know all about the debate over the so-called CFRs but a CFR does not override a statute, and the statutes are clear - you need a full faith and credit guarantee for an asset to be able to be owned by The Fed.

The purpose behind this is clear on it's face as well - only such an irrevocable guarantee prevents the possibility of The Fed being used as a vehicle to subsidize losses taken on credit instruments by The American People without the consent of Congress.

Since all revenue bills must (by The Constitution) originate in The House, such a position and clause is necessary for The Federal Reserve Act to be Constitutional on its face. Absent that requirement (in fact and practice, not in principle) The Fed is a blatantly unconstitutional body in that it has usurped the constitutional requirements for imposition of a tax or impost on the American People.

Plosser claims:

Some of the Fed’s emergency actions “blurred the line between monetary policy and fiscal policy, thereby increasing the risk to the Fed’s independence,” Plosser said in a speech. “These policies have veered toward deciding how public money should be allocated across firms and sectors of the economy.”

These "blurring of the lines" are not a risk to Fed independence they are blatantly unlawful as a violation of the Constitutional prohibition on the imposition of revenue and spending except through a bill originating in the House of Representatives.

What Plosser and others in The Fed (and beyond it) refuse to recognize and admit is that these "threats" to Fed independence have and are coming about as a direct consequence of The Fed's wanton violation of the highest law of the land - The US Constitution.

By effectively appropriating funds, beginning with Maiden Lane I (Bear Stearns) which, by the way, is now showing a huge mark-to-market loss (despite claims by Bernanke that such a loss would not happen) and continuing through what I argue is an artifice of a structure with the Maiden Lane vehicles related to AIG, along with the Fannie and Freddie MBS subsidies The Fed has stepped beyond the bright white line that delineates its power and has decided to arrogate to itself the power of the purse - a power that under the Constitution is restricted to The House of Representatives.

That our Congress and Executive is too spineless to stand up to these clowns and throw the lot out on their ear, revoking The Federal Reserve Act due to the willful and wanton violation of the boundaries thereupon along with willful disregard for The Constitution, is where the real problem lies.

Plosser's bleating is amusing, but The Fed finds itself with this pressure as a direct and proximate consequence of its own actions, much like someone who complains about their thumb being in pain - after they hit it with their own hammer.

Wake up Chuck; you're well beyond requests that you smell the coffee - you spilled it down your shirt!

Are You Skeered Hoenig?

nospam@example.com (Karl Denninger) — Tue, 16 Feb 2010 14:02:00 -0500

KC Fed's Hoenig said:

Feb. 16 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the U.S. must take “difficult” steps to reduce spending and increase revenue so the central bank isn’t pressured to fund the “unsustainable” federal debt.

“It is a fact that the current outlook for fiscal policy poses a threat to the Federal Reserve’s ability to achieve its dual objectives of price stability and maximum sustainable long- term growth, and therefore is a threat to its independence as well,” Hoenig said today in a speech in Washington.

Uh huh.

Have you ever had a drunk friend or family member?

Did they ever pester you for a $20 because they were broke - and you knew they were headed straight for the liquor store with it?

Did you give it to them?

Did you call their boss the next morning and make an excuse about them being sick - when they were really passed out with their head hanging over the toilet bowl?

This, by the way, is called enabling, and it makes you just as responsible for the bad act as the person doing it, because but for your help they couldn't have gotten drunk.

Well Hoenig, who's been buying up both Treasury and MBS debt for the last year, enabling The Federal Government to run a deficit of more than $1.5 trillion - oh, and they're doing it this year too.

That would be The Fed.

So before you start talking about how "The Government" must get control, stop enabling the very irresponsible behavior that you're complaining about!

There ends our lesson in political BS for today.

Wow, Look At My Jaws Move: Bernanke

nospam@example.com (Karl Denninger) — Wed, 10 Feb 2010 10:43:00 -0500

You have to love the hubris:

Also, before long, we expect to consider a modest increase in the spread between the discount rate and the target federal funds rate. These changes, like the closure of a number of lending facilities earlier this month, should be viewed as further normalization of the Federal Reserve's lending facilities.....

Yeah, as if you have control of this Bernanke.....

That's up 500% in the last few weeks. Yes, it's very low (0.1%) but remember the target is 0 - 0.25%, and the discount rate is supposed to be above that.

So in reality there's some pressure building here, and when the IRX gets to, oh, 3 or so (which at this rate of change it will rather soon) The Fed will be forced to either crank up more QE or raise the rates to follow!

The Fed sets rates eh? What's this chart say?

The red line is the 13-week T-Bill rate, and the blue line is the Fed Funds rate (now discontinued since they went to the "range rule", but it shows the point.)

Which leads which Bernanke?

In virtually every case the market rate moves first, and The Fed FOLLOWS the market, not the other way around.

This, by the way, is rather obvious. If The Fed was to try to move the market when it did not want to move, it would have to expend an infinite amount of funds to do so - either printing an infinite amount of money (destroying the dollar) or soaking up an infinite amount of dollars (destroying itself.)

Those who pray at the alter of Fed Omnipotence are rabid idiots; The Fed's own data, which is produced above, proves it.

Moving onward...

These loans were made with great reluctance under extreme conditions and in the absence of an appropriate alternative legal framework. To preclude any future need for the Federal Reserve to lend in similar circumstances, we strongly support the establishment of a statutory regime for the safe resolution of failing, systemically important nonbank financial institutions.

As opposed to willful and intentional blindness when it came to the creation of fully synthetic CDOs written by primary dealers, over which The Fed has regulatory jurisdiction, which were then "swapped off" to an alleged "insurance company subsidiary" which had no money to pay?

While it is true that The Fed had no regulatory power over AIG it is absolutely false that The Fed had no ability to stop this abuse, since the abuses originated in and were promulgated through firms over which The Fed did and does have regulatory power.

Of course admitting that you missed this would be equivalent to admitting that you really are either stupid or bought (whether monetarily or simply by ideological bias) and that won't do, will it? You'd prefer to simply ignore this like you ignore your plethora of false and outrageously-blind pronouncements on the economy in general, including your claim that there was no housing bubble, that we would not slip into recession and that "subprime is contained."

Keep flapping your jaws Ben - it's what you're best at.

FOMC Statement 1/27 In English

nospam@example.com (Karl Denninger) — Wed, 27 Jan 2010 14:28:00 -0500

Tickerguy's translation of the FOMC statement:

Release Date: January 27, 2010

For immediate release

Information received since the Federal Open Market Committee met in December suggests that economic activity has continued to strengthen and that the deterioration in the labor market is abating.

We used the crooked durable goods numbers which were later admitted to be a "statistical error", and what's better, we think that nearly a million people leaving the labor force last month was a good thing - not bad.

Don't worry, you don't need jobs - government handouts work just fine.

Household spending is expanding at a moderate rate but remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.

Households are spending the handed-out money. However, credit is and continues to contract as households are rejecting the continual bending over they're taking by the banks, especially on their credit cards.

Business spending on equipment and software appears to be picking up, but investment in structures is still contracting and employers remain reluctant to add to payrolls.

Businesses are buying boxes to give to their employees so they can box up their stuff as they're fired and shown the door. We count this as both "equipment" and "software".

Firms have brought inventory stocks into better alignment with sales. While bank lending continues to contract, financial market conditions remain supportive of economic growth.

We buy futures in the overnight every time the market threatens to go down. Oh wait, we're not supposed to talk about that, right?

Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

You're going to take it in both holes and like it.

With substantial resource slack continuing to restrain cost pressures and with longer-term inflation expectations stable, inflation is likely to be subdued for some time.

Deflation is winning. Rates are still zero which denotes an emergency. But after two years, saying that really pisses people off, especially when we just got skewered by Paulson in sworn testimony (that bastard!) who said we printed money.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The emergency is not over.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter. The Committee will continue to evaluate its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

We bought $1.25 trillion of securities in a box but when we opened it we found that it was in fact dead and decomposing fish. The old saying about "throwing good money after bad" comes to mind.

In light of improved functioning of financial markets, the Federal Reserve will be closing the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility on February 1, as previously announced. In addition, the temporary liquidity swap arrangements between the Federal Reserve and other central banks will expire on February 1. The Federal Reserve is in the process of winding down its Term Auction Facility: $50 billion in 28-day credit will be offered on February 8 and $25 billion in 28-day credit wil be offered at the final auction on March 8. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30 for loans backed by new-issue commercial mortgage-backed securities and March 31 for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

We're shutting all the crap down - it didn't work.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted.

Tom Hoenig is the only one with a brain. The rest of us like lying to the public - "its all getting better but we still have an emergency!"

Yeah.

AIG and NY Fed: Who's Involved?

nospam@example.com (Karl Denninger) — Wed, 27 Jan 2010 08:47:00 -0500

Here's a CNBC video on the matter...

Jim DeMint may not be ready to call this a "cover up" but DeMint also is bringing to the forefront a number of points that I have repeatedly made, specifically:

It was securitized debt that was rife with fraud that led to the blowup. But what's not being said - still - is that without this fraud-laced securitization party there would have been no bubble either!
DeMint asserts that Ben Bernanke and the FOMC was involved in the bailout and secrecy play with regard to AIG. No, really? The NY Fed doesn't pass gas without the approval of the FOMC! So yes, the FOMC was involved - and it is only reasonable to assume so was Bernanke.
While DeMint didn't say it, I will: The essence of all asset bubbles is fraudulent credit creation. While the form of these fraudulent securities vary from one bubble to another the essence of the scam never does, because in order to screw people in the sale of securities you must lie in some fashion (whether by omission or commission) about their value.
These bubbles happen because we refuse, as citizens, to demand that the law be enforced. In this specific case (the housing bubble) the warnings were clear as early as 2004 and included the FBI, HUD and private credit analytic firms all issuing loud and strident warnings that the non-conforming mortgage market was rife with fraud and that in one classification of this paper (ALT-A mortgages) nine in ten mortgages were not properly underwritten - that is, the income and assets claimed did not match reality.
In the 1990s the essence of the scam was the claim that The Internet is doubling in size every three months. It was: for about six months in the late summer of 1995 and through the early spring of 1996. I know because I was running the Chicagoland area's largest ISP at the time, had access to the core Internet routing tables and was forced into buying hardware to keep up with the expansion of processing power and memory required to keep track of it. The driver of this crazy expansion was the release of Windows 95, which for the first time made connecting to the Internet a "non-technical" accomplishment. But by the end of 1996 the expansion rate was slowing substantially and into 1997 and 1998 the rate of growth, while still substantial, was more akin to a "growing nicely" industry - simply because virtually every PC out there was already online.
Fraud in all of its forms is - or at least is supposed to be - against the law. If I represent to you a growth rate that is not supported by the facts and a projection that has no realistic possibility of being fulfilled (as was in the case in the 1990s) or if I make claims such as Bernanke did in 2005 - "U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households" I have intentionally deceived you and when you rely on that expert opinion and are harmed as a result I have committed fraud - whether I can be sued or prosecuted for it or not. 25% in two years? During the same two years per-capita income grew seven and a half percent. Strong growth in incomes supported this advance eh? That wasn't a mistake, it was a lie. In this regard Bernanke had good company, including virtually everyone in the housing industry. Anyone remember the books written by the NAR's "chief economist"?
Let's not forget folks - The FBI warned in 2004, before these books were published, and a year before Bernanke's famous pronouncement in the health of the housing market - just prior to his nomination as Fed Chair - that there was a fraud problem in the mortgage market.
It appears that The Fed was neck-deep in all of this - Zerohedge published an article which appears to document that Soc Gen had pledged reference securities at the Fed Discount Window that had a value of 49 cents on the dollar, probably without a material haircut! In other words this French firm was funding itself with money from our Federal Reserve with securities pledged at "par" that were in fact worth less than half and for which the taxpayer was on the hook for.

I recognize that Congress doesn't like the idea of cracking open the fraud-laced securitization "industry" nor examining exactly who was responsible for all of the fraud in mortgage securitization and peddling through the economy. The Fed has even less incentive to do so, given that it has now bought more than $1 trillion of potentially-contaminated securities from Fannie and Freddie!

Nonetheless we will not and cannot have a sustainable economic recovery until we drive the fraud out of our financial markets and set an example for the future by investigating and prosecuting those involved in it this time around, as a means of sending a strong message that these sorts of shenanigans will not be tolerated.

The simple fact of the matter is that the bad debt generated by this fraud extravaganza still is in the system. Unlike in the 2000-2003 Nasdaq market collapse when the vast majority of the fraud-laced securities (stocks and such peddled during the Internet boom) were flushed from the marketplace as the firms collapsed this time we have instead transferred much of this bad debt to the government's balance sheet and otherwise backstopped those who were involved in the scams rather than forcing them to eat their own cooking. No small part of that decision is almost certainly traceable to the fact that virtually everyone involved in either falsely representing the "value" of these securities and their creation or in the willfully-blind pronouncements of economic health are in the government or their "pet" industry - the big banks - in some form or fashion.

As a consequence the drain on the economy caused by this panoply of scams and rip-offs remains as all this bad debt continues to demand service in the form of interest payments lest the destruction of underlying asset value bubble to the surface. We have banks claiming to have "money good" 2nd liens on their books which are behind deeply-underwater first mortgages that aren't being paid (and which in fact are legally worthless in the inevitable foreclosure that must eventually follow), Fannie and Freddie bought an unknown amount of impaired paper, both securitized and in raw loan form, thus compromising their balance sheets to the point that both effectively collapsed, and we have "backstopped" the issuance of so-called "insurance" on these securities (by AIG which was writing this paper with no money to pay) and yet we claim that "the economy and banking system has been stabilized and is recovering."

In a word: Baloney.

Far more ominous for the economy and political system going forward the people have figured it out. It may have taken two years but we are finally seeing evidence that the common man realizes he was had during the bubble years and that this was no accident or "irrational exuberance" - it was a deliberate scam and asset-stripping scheme that enriched a few thousand people on Wall Street and in Washington DC.

Continued refusal to deal with the facts will lead to severe political consequences come November. Massachusetts makes clear that while you can fool the American People for a long time, once they wake up it's too late - your political life timer has expired.

The Fed Is Politicizing The Fed

nospam@example.com (Karl Denninger) — Tue, 26 Jan 2010 13:47:00 -0500

Richard Fisher (President of The Federal Reserve Bank of Dallas) bleats that:

There are many roadblocks we must overcome to get our economy running again. Businesses must develop sufficient confidence in the future to begin expanding their order books and payrolls. Banks must be willing and able to lend again. And consumers must regain the wherewithal to open their pocketbooks.

Notice what's missing: Households and businesses must have the earnings capacity to be able to borrow based on production, not based on speculative frenzy.

The burden of making the tough decisions needed to make our country's economy sound again falls on the sole body responsible for taxing and spending our money: Congress.

Really Dick?

Then why did The Fed take the consequence of that decision out of Congressional hands when it started buying Fannie and Freddie paper?

The impulse to use Mr. Bernanke as a political punching bag raises the specter that, instead of doing the right thing, Congress may seek to pressure the Fed to print its way out of this crisis. We know from history that when fiscal authorities attempt to monetize their debts, the result is inevitably inflation.

Again Dick, who is it that "printed" their way out of the financial mess that you allege was entirely Congress' doing when it comes to the GSEs? Who forced Bernanke to buy over $1 trillion in mortgages and GSE debt - acts that I have and continue to argue are outside of The Fed's lawful authority?

We are not accountable to any Washington politicians, Democrat or Republican. We are politically agnostic and are guided solely by what we believe is the best way to encourage sustainable economic growth anchored by price stability.

This is only true until and unless you take a political action by your own hand. Once you do this you have no room to complain that the consequence is that The Fed becomes embroiled in political controversy.

Congress didn't "tamper" with the independence of The Federal Reserve. The Fed destroyed its own independence by inserting itself into markets where it had absolutely no business participating, including but not limited to Fannie and Freddie.

Monetary policy does not include bailing out failed or failing institutions by propping them up with printed money and advocacy of accounting changes that legalize acts that were formerly flat-out fraudulent.

Nor does it include having a Fed Chairman who is up for re-nomination having a conversation with the Senate Majority Leader where he appears to promise an "easier lending" environment in return for a "yes" vote.

Yet The Fed has done all of the above, and now, having made a bed of its own doing and feathered by protecting its cronies on Wall Street while tramping all over Main Street and the Citizens, it's upset that the consequence of inserting itself into the political process is a groundswell of demands for full transparency, audits and investigations - as with any other political organ that has access to the citizen's support via taxation.

We the people have every right to make these demands Mr. Fisher - it's our money, not yours.

If you don't like it then stop meddling in the political sphere, stop buying agency securities, stop bailing out failed and failing firms, do your damn job when it comes to regulation and disgorge the crap you are currently holding on your balance sheet.

If you instead insist on acting like a political animal then shut the hell up and accept that with your insertion into the political process you have invited the scrutiny that comes along with the acts of your own hand.

We'll start with a full audit and I suspect will shortly need to empanel a Grand Jury as well.

Oh, So The Fed DID Hide Documents?

nospam@example.com (Karl Denninger) — Tue, 26 Jan 2010 08:15:00 -0500

From the wire:

WASHINGTON -(Dow Jones)- The special inspector general for the government's $ 700 billion Wall Street rescue plan is opening a pair of probes into the government's rescue of American International Group Inc. (AIG), including efforts to slow public disclosure of all of the terms of the deal.

....

Additionally, Barofsky said he is reviewing the cooperation of the Federal Reserve with his staff's attempt to conduct an audit of the AIG transactions. Some of the documents recently turned over to the Oversight panel "were not provided to the SIGTARP audit team during the course of the audit."

This is all anyone should need to call for The Fed to be fully audited now and on an ongoing, permanent, annual basis, along with seeing if there is a criminal charge we can locate that fits this (obstruction perhaps?)

Darrell Issa seems to have this one right:

The report, prepared by staff for Rep. Darrell Issa (R., Calif.), calls the central bank a "quasi-governmental agency, unaccountable to the American people." The Fed's actions during the AIG rescue, including the effort to withhold the names of the insurer's counterparties, "demonstrates the threat that the Federal Reserve poses to basic principles of American democracy," the report concludes.

Let's not forget who was running the NY Fed at the time, and what job he holds now.

Oh Timmy? TURBOTAX TIMMY!

Yeah you.

I look forward to seeing you in the dock and while you're in there let's toss Bernanke in with you - I don't believe for a second that he wasn't both aware of and signed off on what you were up to there in New York.

FEDGATE!

A Message To Our Senate: Defeat Bernanke

nospam@example.com (Karl Denninger) — Sun, 24 Jan 2010 13:44:00 -0500

The reaction from Wall Street and The White House should not have surprising when it comes to Bernanke's nomination. We heard people like Robert Gibbs say:

Asked about the potential financial repercussions of the U.S. Senate voting against Bernanke, Gibbs said, "The best way to not have to deal with those repercussions is to support Ben Bernanke for a second term."

Gibbs said senators could support stability in the financial system by backing Bernanke's renomination.

This is a blatant and outrageous lie.

The historical record is clear and incontrovertible. Ben Bernanke caused, both directly and indirectly, the housing bubble and as a consequence the inevitable crash.

He has refused to take actions that would prevent it from happening again. Indeed, he has promoted even more concentration of risk through intentional acts of aggregation of banking interests, taking "too big to fail" to a new level of "outrageously too big to fail."

And finally, he has argued for and fostered a ridiculously unsustainable spending binge by Congress which has destroyed The Federal Government's ability to effectively intervene when, not if, the next market crisis comes.

The facts are simple:

Bernanke intentionally allowed the growth of credit aggregates at rates of 50% to 100% faster than GDP over the last decade, a direct violation of the law governing The Federal Reserve and the underlying and necessary predicate for the bubble to occur. Bernanke was, in fact, the loudest Federal Reserve advocate of Greenspan's "easy money" policies after the 2000 Nasdaq market collapse.

Bernanke has willfully and intentionally ignored basic mathematical facts related to the growth in credit aggregates - specifically, that permitting credit aggregates to grow faster than GDP always must eventually, if maintained, lead to a massive credit bust. This is a function of basic mathematics - specifically, exponents. All the fancy "econometric models" in the world cannot violate the basic laws of mathematics.

Bernanke refused to regulate lending and securitization by the banks during the housing bubble despite the fact that the FBI issued a formal warning of massive fraud in 2004 and both HUD and Corelogic issued studies in 2005 and 2006 showing nine of ten borrowers in "ALT-A" loans had lied about their incomes. Without suckers to buy these worthless securities this irresponsible lending could not have taken place.

Bernanke's willful refusal to both conform with the law and regulate the banks fostered the environment in which they have and continue to asset-strip the citizens of this nation. Bluntly put the big banks are paying out 1% of GDP to a few thousand people not due to hard work, industry and innovation but rather due to rank exploitation and deliberate mispricing of risk with the costs of these outrageous and intentional acts shifted to the citizens of this nation.

Bernanke has intentionally concealed the terms and beneficiaries of bailouts and handouts despite multiple requests from Congress and The Press, has fought FOIA requests, has ignored Congress outright and just recently failed to fully comply, in the opinion of Representative Darrell Issa, with the Congressional subpoena issued by the committee on which he sits.

Bernanke has in fact been dead wrong on virtually every pronouncement he has made over the last ten years on economic matters, including claims that there was no housing bubble as late as 2006, that subprime was contained, that we would not experience a recession, that his policy prescriptions would stabilize the economy and job market and that if EESA/TARP was passed the stock market would not collapse. Each and every one of those claims was in fact wrong. A weatherman would be fired for a predictive record far better than Bernanke's.

Bernanke claimed, in sworn testimony, that he would not monetize the debt. While he was speaking - almost literally to the hour - The Federal Reserve was in fact monetizing $300 billion in Treasury debt and $1.2 trillion in Fannie and Freddie Securities - securities we now know are stuffed full of fraudulent mortgages that Fannie and Freddie bought during the bubble years.

Bernanke has refused to accept responsibility for his policies. He gave a major speech in January in which he defended not only his record but also the willful and intentional misapplication of his favored policy "pointer", known as The Taylor Rule. The author of that rule, a highly-respected academic professor, responded with a scathing (in academic terms) reply pointing out that "as written" Bernanke and Greenspan had held interest rates far too low for too long and thus fueled the speculative frenzy that led to this collapse.

Bernanke claims to have a plan to exit his "extraordinary measures" but has refused to explain that plan. This is likely because he has not supported the mortgage-backed security market, he is, in fact, the market, having now bought literally more than the entire net issuance in 2009! The reason Bernanke has not explained his exit strategy is simple: he doesn't have one.

Bernanke has willfully and intentionally ignored obvious and clear indications of front-running in the bond market while he has been running his "quantitative easing." There have been inexplicable pricing moves in the Treasury Market in the very specific issues that were then bought by The Fed just hours or days later. While there is no "smoking gun" proving that The Fed has communicated to certain market participants what would be bought, and then intentionally overpaid for those very same securities, it is impossible to look at this market's performance in an objective, statistical fashion over the last year and not reach the inescapable conclusion that someone, or a handful of someones, have been cheating.

The people have had it with Bernanke, the banks and The Federal Reserve's complicity and willful blindness in the looting of our nation.

We the people are tired of being told that we not only must sit still for being looted on the way up but then must bail out those who get caught holding the bag when the inevitable bust follows the fraud-laced boom - a pattern of conduct that has been intentionally played out at the expense of Americans twice in the last ten years.

As a matter of public policy these actions are irresponsible, unacceptable and outrageous. They constitute outright theft from the citizens of this nation both on the way up and on the way back down.

There are many who say that "there is no other reasonable alternative." This is outrageously false as well. Paul Volcker is one obvious choice, assuming he wants the job. Another obvious choice would be John Taylor - author of The Taylor Rule and a highly-respected academic. There are others, of course but these two are clear alternatives that make sense, with Mr. Volcker being arguably the best-respected central banker of the last 100 years and the man who singularly put a stop to what could have easily been a disastrous descent into monetary hell in the 1980s.

The Senate has 1/3rd of their ranks up for election. Every Senator standing for election this year that votes for Bernanke is at risk of losing his or her seat, as Massachusetts shows.

Remember Senators that Massachusetts saw a more than thirty point swing from Democrat to Republican - and to a near-literal unknown candidate - in less than thirty days time.

There is not one Senate seat that can survive such a swing at the polls.

NOT ONE OF YOU HAS A SAFE SEAT.

Massachusetts was about much more than health care. It was about the Democrat Majority the people put into power claiming that they would bring change to Washington DC - that "captains of industry" would no longer be free to loot and steal from the common man in all of its forms, whether it be in health care, offshoring jobs, passing 2,000 page bills in secret or predatory lending. Instead of keeping that promise The Democrats instead increased the looting of the people, with big banks now paying out 1% of GDP in bonuses - $145 billion - to a few thousand people with each of those dollars literally stolen from the rest of us.

We the people have had enough and you are on notice: What happened in Massachusetts can and will happen across this land come November. We, not you, are the ones with the power and we WILL dispossess you of your jobs just as you have allowed the banksters to dispossess us of our homes, our wealth and our jobs.

Remember well as you vote Senators, because we the people are damn tired of being looted, financially raped and robbed, and Ben Bernanke both put in place the conditions leading to and has in fact refused to put a stop to these acts!

IF YOU DON'T PUT A STOP TO IT HERE AND NOW WE WILL FIRE YOU AND REPLACE YOU WITH SENATORS THAT WILL.

That's a promise.