Thursday, July 30, 2009

Lynch Mob Wanted

Gallup Poll: Americans Turning Against Federal Reserve
As momentum builds for Ron Paul's efforts to audit the Fed, a new Gallup poll shows that Americans are turning against the Federal Reserve, with just 30 per cent saying the agency is doing a good job.

35 per cent rate the job the Fed is doing as "only fair" and 22 per cent say it is doing a "poor" job.
The contrast compared with when the question was last asked in 2003 is clear. Six years ago, just 5 per cent thought the Fed was doing a "poor" job, while 53% thought it was doing a "good/excellent" job.

According to Gallup editor in chief Dr. Frank Newport, "Americans are blaming to some degree the actions or inactions of the Federal Reserve board" for the economic turmoil.

Increasing skepticism towards the role of the Federal Reserve arrives alongside efforts on behalf of Congressman Ron Paul to audit the Fed with his widely supported H.R.1207 bill.

The legislation would amend existing law to allow the Comptroller General to audit the Federal Reserve Board and its member banks.

Fed Chairman Ben Bernanke seems frightened to death at what might be revealed if the Federal Reserve were forced to open its books and has been busy scuttling around lying about the bill in order to try and shoot it down.

During an appearance on PBS NewsHour which will be aired later this week, Bernanke claims that the bill will hand Congress the power to run monetary policy in the United States.

However, as CBS News' Declan McCullagh points out, it does nothing of the sort.

"This is an odd claim," writes McCullagh. "If you read the bill (H.R.1207), it simply amends existing law to say "under regulations of the Comptroller General, the Comptroller General shall audit" the Federal Reserve Board and its member banks."

Bernanke has proven that he will stoop to any level in order to try and sink the bill, which has the support of over half of the U.S. House of Representatives, even committing an act of economic terrorism last month when he threatened a collapse of the dollar and the entire financial system if the bill was passed.

No escape for Fed
By Hossein Askari and Noureddine Krichene
In contrast to Federal Reserve chairman Ben Bernanke’s testimony last week, we cannot see a safe "exit strategy" for the Fed from its current loose monetary policy. Bernanke’s ambivalent testimony of a safe exit strategy can only heighten uncertainty and exacerbate instabilities. Let’s explain.

In his recent testimony on July 21 before the Committee on Financial Services of the House of Representatives, Bernanke was felicitous that aggressive money policy had averted the collapse of the financial system. However, he omitted to say that the same policy had failed to avert a collapse of real gross domestic product (GDP) and private investment and rising unemployment.
The economic recession continues despite interest rates being near-zero, money supply rising at 22% a year, unprecedented stimuli packages, and record fiscal deficits reaching 13% of GDP in 2009. Bernanke and President Barack Obama’s team had clearly believed that a combination of aggressive money and fiscal policies would secure the return to full-employment and quickly. After all, Larry Summers had predicted the unemployment cresting at about 8%. These expectations were standard Keynesian predictions that have proven to be substantially off the mark.

As clearly implied by Bernanke himself, this policy has so far been self-defeating: "Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II.

"The US economy contracted sharply in the fourth quarter of last year and the first quarter of this year. More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization. The labor market, however, has continued to weaken."

Aggressive policies might have saved bankrupt banks through massive liquidity injections and bailouts and even turned them into profit-making institutions, but these same policies have only shifted the losses to the government and taxpayers, increased the potential of an inflation tax, and could bankrupt the government itself. They have also caused economic losses in form of millions of joblessness and falling economic growth.

In his recent testimony, Bernanke sent conflicting messages describing an "exit strategy" from the unprecedented monetary expansion while reassuring the political establishment that such exit is not immediately in the offing and near-zero interest rates and abundant liquidity would be maintained for some time to come: "The Federal Open Market Committee anticipates that economic conditions are likely to warrant maintaining the federal funds rate at exceptionally low levels for an extended period."

Bernanke noted that many instruments are available to a central bank for draining reserves; however "the most important such tool is the authority that the Congress granted the Federal Reserve last fall to pay interest on balances held at the Fed by depository institutions. Raising the rate of interest paid on reserve balances will give us substantial leverage over the federal funds rate and other short-term market interest rates, because banks generally will not supply funds to the market at an interest rate significantly lower than they can earn risk free by holding balances at the Federal Reserve.”

Past experience showed that any slightest attempt to drain reserves could easily send interest rates to two-digit levels. Would the Fed pay high interest rates on reserves, say at 19%, which was the federal funds rate in 1981 when the Fed slightly drained banks reserves, compared with 0.25% it is paying now? If it would, that would entail huge subsidies to banks, at the expense of the US Treasury, with serious implications for financing the US budget deficits.

Bernanke's ambivalent exit strategy can only heighten uncertainty and exacerbate instabilities. Continued fiscal and monetary expansion may widen US external deficits and end-up creating employment elsewhere in the world. Speculation will continue to be fueled by near-zero interest rates, affording speculators huge arbitrage potentials, or free lunches, between money and non-money assets. Rising public debt could weigh on future economic growth.

Bernanke and the Obama team wanted a short-term miracle of full employment through a narrow mix of unorthodox money and fiscal policies, the consequences of which, namely inflation and violent business cycles, are very well known, and they have ignored supply-oriented policies that could remove distortions, lessen foreign dependence, and restore stable growth.

Most disturbing is that exit from unorthodox monetary policies can only come at the cost of a deep recession, much higher interest rates and effectively placing the exit strategy burden on the Congress and on fiscal policy.

We must emphasize that the prediction of large deficits for the next 10 years by the Congressional Budget Office will do more than unnerve financial markets. The latest prediction, that the deficit will only be $1.2 trillion by 2019, leaves it at a still unmanageable deficit level on the order of 5.5% of GDP. How can the Fed have a safe exit strategy when the higher interest rates of a "safe strategy" would blow what are already unprecedented deficits out of the ballpark?

Opinion: Let's Break Up the Fed
provided by The Wall Street Journal
The Obama administration's plan to increase the powers of the Federal Reserve, says one critic, is like giving a teenager "a bigger, faster car right after he crashed the family station wagon." Treasury Secretary Timothy Geithner disagrees. He argues that the Fed is "best positioned" to oversee key financial companies, and that the Obama plan would give the Fed only "modest additional authority."

Mr. Geithner is right about one thing: The Fed's power is already vast. But it wasn't even well-positioned to supervise the likes of Citicorp. Broadening the Fed's responsibilities won't help. Instead, we should think of how best to dismantle an overextended Fed.

In principle, an exceptionally talented theorist might capably run a Fed focused just on monetary policy. Setting the discount rate and regulating the money supply are centralized, top-down activities that do not require much administrative capacity. But without deep managerial experience and considerable industry knowledge, effective chairmanship of a Fed that relies on far-flung staff to regulate financial institutions and practices is almost unimaginable. The vast territory the Fed covers would challenge the most exceptional and experienced executives.

As it happens, the Fed has been led for more than 20 years by chairmen who had no senior management experience. Prior to running the Fed, Alan Greenspan started a small consulting firm and Ben Bernanke was head of Princeton's economics department. Given their understandable preoccupation with monetary and macroeconomic matters, how much attention could they be expected to devote to mastering and managing the plumbing side of the Fed? While the record of the Fed's monetary policy has been mixed, its supervision of financial institutions has been a predictable and comprehensive failure.

At the very least we should split the monetary policy and regulatory functions of the Fed, as was done through the Maastricht Treaty that established the European Central Bank. What we need now is a debate about how to break up the Fed -- and some of the sprawling financial institutions it supervises -- in order to make both the regulator and the regulated more manageable and accountable.

Bernanke Sidesteps the Three Big Questions, Again
By: Gary North
In a recent international Bloomberg poll, Bernanke was rated by investors as the greatest central banker, the man who saved the world's economy.

All it took was a doubling of the monetary base and $3 trillion – as of today – of government bailout money.

The FED still faces three problems. (1) If it deflates, the financial markets will collapse. (2) If it does nothing, there will be mass price inflation if banks start lending, making use of the FED's doubling of the monetary base. (3) If banks don't start lending, the recovery will not appear. The FED wants to avoid all three.


You Say You Want a Revolution?
Americans should have been in the streets to reclaim the country long ago. Patrick Henry and his fellow patriots are turning over in their graves about the present day USA. The savvy folks I talk to on a regular basis are exceedingly pessimistic that our blessed republic can pull out of this present financial, economic and political tailspin. The US as we have known it is on the ropes.

Our third President and signer of the Declaration of Independence, Thomas Jefferson, long ago stated …”Banking establishments are more dangerous than standing armies”.

He also declared …“If Americans ever allow banks to control the issue of their currency, first by inflation and then by deflation, the banks will deprive the people of all property until their children will wake up homeless.”


A second American Revolution is now at least as necessary as the first one was though few citizens have an overall understanding of the problems we face. Anything short of a complete house cleaning will be mostly a waste of time and effort. The elitist banking entities running and ruining this country must be shown the highway. Nothing less will suffice!

Who exactly am I talking about? The Federal Reserve is exhibit one. Their partners in financial crime like Goldman Sachs (NYSE:GS), JP Morgan Chase (NYSE:JPM), et al absolutely must be excised like the cancer they are.

America’s biggest exports over the last decade have been toxic and fraudulent financial products. The creators of this crap are the ones who have brought us to the present disaster – yet they remain in charge of sweeping changes designed to perpetuate their power and imprison us.

All of these Wall Street entities and the lackey politicians who support them must hit the road. Those behind the scenes pulling the strings have to be stripped of their illicit power.

Concerned Americans have a critical choice. We can rid the system of all the parasites and malignancies or just stay home and continue to get our reality through television.

Goldman Sachs: Gambling With Your Money?
Goldman Sachs is using its new taxpayer-subsidized status to bring increased risk to the financial system, a group of House members charged Monday. They want to know why the Federal Reserve is allowing it.

The group on Monday sent a letter to the Fed asking for an explanation of why Goldman Sachs is being allowed to speculate wildly even while officially redesignating itself a bank holding company, which theoretically means stricter regulation. The bank designation gives Goldman access to dirt-cheap Federal Reserve loans.

Goldman initially applied for the new designation last fall, so that it could access bailout funds (since paid back). Because bank holding companies, unlike investment banks, have access to a host of valuable taxpayer subsidies, they are required to reduce the risk associated with their investment activity. But Goldman then applied to the Federal Reserve for an exemption to the rules, saying that it takes time to alter a business model. The exemption was granted in February -- and Goldman went on to take even greater risks. Its Value-at-Risk model, a widely used measure of the risk of loss, recently showed potential trading losses at $245 million a day; in May 2008, it was $184 million a day.

The bets paid off in the most recent quarter as the market rose and Goldman posted stellar earnings. Morgan Stanley, meanwhile, was similarly given an exemption by the Fed but did what it said it would do and reduced its risk. The company lost money, largely as a result of that decision.

The likely result: Other players on Wall Street will follow Goldman back toward the cliff they dangled over just months ago. In announcing its lousy earnings, Morgan Stanley assured that it will increase the risk it takes in the future. Citigroup is racing to increase its exposure, too, handing another billion dollars worth of chips to its riskiest traders, bringing its hedge fund operations to close to $2 billion. On the brink of collapse, it had scaled such investing down to around $800 million.

Lucas van Praag, a Goldman spokesman, declined to respond directly to the charges in the letter, but said that the firm is working to reduce its exposure.

"We're very cognizant of risks inherent in risk taking. We have one of the highest capitalizations of any bank," said van Praag. He said that the Value-at-Risk numbers, while the only publicly released measure of risk, are only one metric and that internal measures show the bank has reduced its exposure over the past year.

He also took a dig at other Wall Street players who have avoided using mark-to-market accounting in an effort to fluff their balance sheets. Earlier this spring, banks lobbied Congress and the Financial Accounting Standards Board to soften mark-to-market rules. The new rule allowed banks to inflate their balance sheets by claiming that an asset was worth more than it could fetch on the market because the market was frozen. Goldman Sach, said van Praag, doesn't use that slight of hand, so its balance sheet is an honest reflection of its exposure.

"We have dramatically reduced our leverage and as a mark-to-market firm--we aggressively mark our assets to market--our leverage ratio is a true reflection of risk," said van Praag.

Nevertheless, as Wall Street follows Goldman, overall systemic risk is ramped up. Meanwhile, Congress is debating whether to give the Fed authority to regulate systemic risk throughout the economy. The congressional letter puts the Fed on the spot, demanding that it explain why it's allowing Goldman to use taxpayer dollars to increase systemic risk.

"The only difference between Goldman Sachs today and Goldman Sachs last year is that today, the company is officially gambling with government money. This is the very definition of 'heads we win, tails the taxpayers lose,'" reads the letter.

Read the full letter:

Skating on Thin Ice
John Browne
Posted Jul 23, 2009
In combination with reassuring remarks by senior administration officials and retail investors' wish not to be left behind, money has started to move back into American equities. The resultant rally in stocks seems to have validated the preceding optimism.

Among these desperate green-shootniks, the smoking gun of recovery can be found in the exceptional earnings reported last week by Goldman Sachs and JPMorgan Chase, both of which surpassed estimates by healthy margins. These reports may have led to a general market rally, which even bad news about CIT failed to defuse.

In looking realistically beneath the Wall Street and political hype, seven fundamental points emerge which investors should note carefully:

First, much of last week's rise was based on small ‘up' volume. This indicates that the surprisingly good earnings reports led the ‘shorts' to cover in near panic.

Second, we cannot forget that the banks in receipt of TARP funds, including Goldman and JPMorgan, have been able to invest these surplus tens of billions of dollars in the markets, allowing them to capitalize on the great run-up of the last few months. But this is a temporary phenomenon.

Third, some of the major banks, such as Citi and Bank of America, appear to be falling behind government demands for recovery plans. This, combined with the massive exposure of U.S. banks to the declining value of commercial real estate, raises the possibility of another round of bank bailouts.

Fourth, statewide budget crises, such as the one that is coming to light in California, are likely to hit every state with a big city, save perhaps Texas.

Fifth, many investors have become shell-shocked by the 40 percent erosion in their portfolios. They can be forgiven for not jumping back into the equity market action for awhile.

Sixth, the recent spate of federal deficit spending has placed an enormous strain on Treasury debt markets. The United States now faces a sharp interest rate hike, or a loss of its prized Triple-A credit rating.

Finally, while the U.S. stock markets may be rising, the economic picture is far from promising. It is becoming increasingly apparent that short-term recovery is unlikely to occur without significant increases in consumer spending. With unemployment still rising at about 500,000 workers a month, this is unlikely.

Most importantly, long term recovery is impossible without significant structural changes in the economy. Such movements are nowhere to be seen.

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