Monday, August 3, 2009

What's The Holdup?

Bernanke said this on-camera: "The public does not want Congress to set monetary policy." If that really is the case, then it is odd what the United States Constitution says about this. Consider Article 1.

Section 1. All legislative powers herein granted shall be vested in a Congress of the United States, which shall consist of a Senate and House of Representatives.

Then Article 8 spells out the powers of Congress. These include:

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

To provide for the punishment of counterfeiting the securities and current coin of the United States.

That surely appears as though Congress does have lawful power over money. That in turn seems as though the public can ask Congress to fulfill its duties. That seems as though Congress has the legal right to audit or set policy for the private agency – the Federal Reserve Bank of New York – that executes the monetary policy of the government agency, the Board of Governors of the Federal Reserve System.

As we view the sham hearings of the CFTC and position limits on oil in particular, we are reminded that the hearings are a political cover for higher prices. Constituents are complaining of higher gasoline prices and government is more than willing to respond. What the insiders behind the scenes want to do is suppress oil prices not only to assuage the citizens, but also to keep gold from rising as oil rises. Today suppressing oil prices is truly an awesome task given the composition of sources of supply and demand. Exploration is at a low and that can only eventually bring higher prices.
International Forecaster August 2009 (#1) - Gold, Silver, Economy + More

CFTC Conceals the Real Problem, the Infinite Dollar
Notice that the concern of the CFTC is only why oil went up last year. The commission has no concern as to why oil fell so abruptly from $147 down to $35 even though Don Coxe was widely quoted at the time as saying the government had instigated a massive takedown. The commission's focus is on commodities of "finite supply" and preventing speculation.

History shows that when monetary inflation starts to be evident in the prices of real goods, the first thing governments do is impose price controls. Here we have exactly that in a new way. The CFTC is trying to find a way to disadvantage those on the buy side of commodities of "finite supply." In effect the commission is trying to control prices in the guise of preventing excessive speculation.

The very term "finite supply" means there is a supply crisis in commodities. If these commodities were in abundance, the free market would deal with speculators automatically, because as they drive the price up, the producers produce more and the price comes down and the speculators lose their shirts. What the government would likes to happen is that, as the speculators drive up prices, instead of the producers producing more, the anti-commodity cartel produces more paper promises of more production so that speculators lose their shirts. When the buyers are not speculators but buyers who want delivery, the game ends.

The implication of the CFTC's hearings is that this is the end of the game and the start of a super-bull market in commodities. The problem is not speculators. The problem is the commodity of infinite supply -- the U.S. dollar. Trillions are being created and are chasing commodities of finite supply. Economics tells us what the result will be with or without the King Canute policies of the CFTC.

CFTC: The Key to Market Manipulation
Many expert commentators believe that prices in various markets, especially at the futures exchanges, are being increasingly manipulated. The Commodities Futures Trading Commission (CFTC) has recently begun to hold hearings, ostensibly to consider imposing position limits on bank-based speculators who are falsely posing as commercial hedgers. Position limits were imposed many years ago, in order to stop speculators from gaining enough control over a market to dictate the price.

Big banks, however, have managed to use their influence to get special exemptions and exceptions in order to avoid the limits.

The fact that big banks issue over-the-counter derivatives whose price is set to follow the alleged "market price" of various commodities does not make them dealers in those commodities. Position limits will correctly prevent banks from taking as many positions as they choose, long or short, based solely upon imaginary commodity stockpiles that are really just OTC derivatives. Some commodity prices will rise, and others will fall, as a result of the removal of these exemptions, but the price, whatever it moves to, will more accurately reflect true supply and demand in the real world market.

To utilize deep pockets to successfully manipulate markets, one must first consolidate control over the market. When you want to lower prices, it helps a lot if you can create supplies of the commodity from “thin air” by creating paper derivatives posing as a commodity investment.

When you want to raise prices, it helps a lot if you can use your deep pockets to either stop or slow the issuance of new paper commodities or buy an overwhelming number of long positions, thereby creating an artificial shortage on your own timetable.As the rest of the market panics from your overwhelming manipulation of concentrated positions, you can buy or sell at a profit.

The genesis of the current Commodities Act is found in the Commodity Reform Act of 1922, which represented the first major Congressional attempt to rein in manipulation of grain markets. Futures dealers opposed the 1922 Act vociferously, to the point of bringing the matter to the Supreme Court. But, the high Court rejected their challenge, writing:

...The act in § 4 forbids all persons to use mails or interstate telephone, telegraphic, wireless, or other communication, in offering or accepting sales of grain for future delivery or to disseminate prices or quotations thereof, excepting the man who holds the grain he is offering for sale…and under such conditions as to reflect the general value of grain and its different grades, and which have been designated by the Secretary of Agriculture as "contract markets."…[ii]

Thus, the Supreme Court has made it clear that the true intent of all these Commodities Acts is to rein in manipulation by forcing a tight relationship between the markets and the real world’s supply and demand. That relationship has been thwarted by the fact that CFTC has been playing “footsie” with the big investment banks.

A true hedger is a dealer or producer relying on the cash market to carry on a business in a commodity. Sometimes, to “insure” the safety of his finances, one of these businesses may resort to futures market. That is when it becomes a “hedger”.

A bank makes its money, not by buying or selling the commodity, but, rather, by trading on the futures market. There is no real compelling need to hedge because they don't have inventories of the commodity.

The bottom line is that CFTC has erroneously allowed hedging against hedges. Translated, they have allowed hedges against speculation, not production. This has become a toxic poison which corrupted the futures markets from their intended purpose.

“Hedging against a hedge” is the ultimate manipulative activity, because it allows the creator of speculative instruments (derivatives) to create unlimited quantities of an imaginary commodity stockpile, taking real supply and demand out of the equation.

More frightening is the fact that, when a firm hedges against a derivative, they will be leveraged on both sides of the transaction, while not being in possession of the real commodity. No rational bank, or other person, can consistently earn a profit, on such risk, especially where a futures contract is subject to a possible delivery demands, unless they are able to manipulate the market up and down.

In spite of all the chatter from CFTC about “reform”, their current concern seems limited to helping derivatives dealers to head off serious limits on speculative activity imposed directly by Congress. Were Congress to enact such limits, derivatives dealers, like Goldman Sachs, would find it impossible to use CFTC staffers to circumvent position limits.

The current hearings are fixated on upside price manipulation of the type that caused oil to soar beyond the fundamentals, back in the first half of 2008. Downside manipulation, of the type that is regularly practiced in the gold and silver markets is being generally ignored, in spite of Commissioner Bart Chilton’s valiant effort to put that subject on the agenda.

Countering the hope that we may have in Bart Chilton is the fact that the new CFTC Chairman is Gary Gensler, who is yet another Goldman Sachs man in government. His firm is a primary beneficiary of the present system. They were the first to metamorphose from speculators into fake “hedgers”.

Open Letter to CFTC Chairman Gensler Regarding "Excessive Commodity Speculation"
30 July 2009
Dear Chairman Gensler
I’m an investor in mining and mineral exploration companies. Recently in the financial media, the theme of rising commodity prices from “excessive speculation” has been discussed. From listening to these discussions, it’s apparent that within certain circles, rising commodity prices are prima facie evidence of “excess speculation.” I disagree. There are other causes for rising commodity prices. The most likely cause of future increases in the price of commodities is also the one reason never discussed by politicians, regulators or journalists: monetary inflation.

Congressman Grayson demands Fed accountability
The Constitution grants to Congress power over the currency and power over the public purse strings for a reason - because we are accountable to ordinary citizens through the ballot box. The Federal Open Market Committee isn't.

$500,000,000,000 is ten times the size of the entire State Department budget. Publicly elected lawmakers proposed and debated over 100 amendments to the much-smaller State department budget. Thatís how democracy is supposed to work -- not through secret deliberations in which 12 unelected bankers trample on Congressís Constitutional authority to appropriate funds, approve treaties, and coin money.

Why Bernanke Is in Panic Mode
For the first time since 1914, there is a public debate in Congress over the Federal Reserve's power. Never before has a majority of the House of Representatives called for what should always have existed: Congressional scrutiny over the FED's money. Bernanke says that Ron Paul's bill to audit the Federal Reserve is a bill to audit Federal Reserve policy. Yet the bill says nothing about auditing policy. So, what is he talking about?

What has Bernanke panicked is this: the Federal Reserve has bailed out the biggest banks and has let almost 100 little ones die. This is crony capitalism at its most notorious.

The threat is that Congress will discover what should be obvious: the biggest banks last October almost went bankrupt. Bernanke and Paulson admitted this to Congressional leaders. This is how they got the leaders to authorize the Treasury bailout. This is why the FED swapped marketable Treasury debt for unmarketable toxic debt at face value with the biggest banks.

Which banks? The FED refuses to say.

This is the heart of the matter. This is what has Bernanke in a panic. If Congress compels a full audit – a real audit, not a FED-controlled audit – individual members of Congress will discover that the American financial system is a house of cards. A few of them will release the results of the audit to the public. This will include Website publishers, who will go over the audit, line by line. The mainstream media will face being scooped by newsletter writers, so they will try to publish first.

The public will find out which banks are not safe. This is what has Bernanke in panic mode.

The public will pull deposits out of the biggest, least safe banks and open new accounts at banks that look safer. That will bust some very big banks.

There is no way that the FDIC could cover the losses of even one of these giant banks. It is down to $12 billion in assets, mostly T-bills. It would have to come to Congress for the line of credit that Congress has extended: $500 billion.

The banking cartel would face a breakdown. Why? Because the public would finally learn which big banks got how much money, how much Treasury debt for toxic assets, and on what terms.

Bernanke says this bill is all about criticizing Federal Reserve policy. Not really. It is all about exposing policy to the public, and letting them decide where to deposit their money.

This thought of depositors finding out which banks are at risk is what the Federal Reserve was created in 1913 to prevent. The banking cartel must prevent bank runs from spreading. If the public had explicit information on what the FED did and why, the public would be in a position to pull their money out of illiquid, economically insolvent large banks.

Bernanke feigns a fear of Congress setting policy. What he is afraid of is depositors setting policy. He does not want depositors to see which banks are at risk.

Ron Paul's bill is the first bill ever to gain widespread support in the House to transfer the right to audit the FED to Congress. This is the first time since 1914 that any Congressman has persuaded a majority of his colleagues to assert the legal sovereignty that the Constitution delegates to Congress with respect to money. This is why Bernanke is in panic mode.

Wall Street profits from trades with Fed
Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilise the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

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