Fed reopens forex swap lines with Europe...AGAIN!!!

For a third time in two years the Fed is opening up its forex swap lines with the ECB to offer dollar liquidity to European banks and institutions that are caught in a dollar squeeze. If this did not happen the dollar could potentially soar as these institutions--and perhaps the ECB itself--would have to enter the Forex markets and buy dollars.

A strong dollar would be good for American consumers, right? It would be good for the Administration, which could point to a rebounding greenback and take political credit for that, right? But no! They're totally clueless as they sit by and allow this to happen without even taking notice.

What are these forex swaps anyway? Very simple: the Fed gives dollars to the ECB in exchange for euros--an unsecured transaction that leaves the Fed with potentially huge forex losses.

The real question is, where is Ron Paul? Peter Schiff? Jim Rogers? And all the other Fed critics? Here's a situation where they really have something to sink their teeth into (the U.S. government is bailing out European financial institutions while Americans go jobless and hungry) and they say nothing. It's really outrageous!!!

First Chevy Volt PHEV Delivered to Retail Customer

This past week marked what may turn out to be an historic event. The video below documents the delivery of the first GM Volt to a dealership customer. This I believe is the first retail delivery of a production Plug-in Hybrid Electric Vehicle (HEV) in the US.

The Plug-in HEV is different from previously sold HEVs (Toyota/Ford/GM/Honda models) in that it presents the opportunity to drive a car virtually without using any petroleum at all for short range trips (GM says <40 miles), and also allows a fall-back to the use of petroleum gasoline if your trip exceeds this limited range for that day. I see this platform as ideal for an urban commuter who commutes to work each day (20 miles each way), and then perhaps may take a weekend trip that would exceed the 40 mile range of the electric mode. This vehicle can fill both roles.

Toyota has near term plans to deliver Plug-in versions of their current HEVs soon.

The mainstream media of course can't say it on their television channels so I'll say it for them here: UP YOURS OPEC!

Is the Fed's QE2 Leading Bond Prices Down?

Mike made an interesting comment to his previous post on the Fed's implementation of QE2 that may detail the trading relationships between the Fed's bond purchases in QE2 and trading in the bond markets:

The Fed is buying "scale down" and in effect, causing the selloff. They're doing this because they're fixated on quantity ($600 bln) as opposed to price (interest rate). I remember when I was a floor trader. I had clients in the oil business--big firms--who would sometimes want to protect a certain price. They'd give me an order that would be, "Buy 100 (crude), 'worst.'" That meant buy it up...aggressively. When Japan used to actively intervene in FX markets, they wouldn't scale down their dollar buying (or sell yen scale up), they'd buy dollars aggressively to put the USD/JPY exchange rate to a certain level. The Fed is not doing this. By signaling to the market that they will buy scale down, they are actually creating this selloff as nervous longs look to sell before the largest buyer lowers its bid again and as speculative shorts compete for a better price.

If this is not an accurate depiction of the Fed's operations here in QE2 since November 12th, I would request that they then detail what the heck they are really doing. How are they arriving at the price at which to buy the bonds? These would be some good questions for Rep. Ron Paul to ask if he ever gets his "audit the Fed" train rolling. I hope Rep. Paul has the sense to call Mike before any hearings!

Ireland passes bailout package despite opposition

Story at Yahoo!. It seems the Ireland national government has gone against popular opinion and approved the "bailout" deal struck between the Ireland government/banking system and the ECB. Now things should really start to heat up in Ireland. Excerpt:

Finance Minister Brian Lenihan pushed through the 85 billion euros package with the support of independent MPs and told the center-right Fine Gael party that its proposals to lean on senior bondholders would fail because of opposition from the European Central Bank. "Those who think we can unilaterally renege on senior bondholders against the wishes of the ECB are living in fantasy land", he said.

Well it looks like the political opposition at least has a handle on the nature of this screwdeal:

"You have the obscene situation now where the poorest of the poor in Ireland, through their taxes and welfare cuts, are being asked to guarantee the speculation of investors in hedge funds," Michael Noonan, Fine Gael's finance spokesman, and a possible future finance minister, said.

It is interesting that the political "right" in Ireland is in opposition to this unjust policy that strictly favors the banking sector and it's patrons. So at least this opposition party may get to reverse this decision but it not until another government can be established. It looks like this is far from a settled matter.

Fed's poor leadership leaves bond market open to speculative attack!

Back in November when the Fed announced its intention to unleash QE2, they said they would purchase an additional $600 bln of longer term securities. There was no mention of why or how they came up with that number. It almost seems completely arbitrary.

In reading the minutes of that meeting you could surmise that they had two reasons for the move. First, they thought they needed to take action to "promote a stronger pace of economic growth." But where were the guarantees that said buying an additional $600 bln in longer term maturities promoted stronger growth?

There were none.

The second reason given was that they wanted to keep the face value of the securities in their portfolio constant. Apparently they were worried that principal payments on existing agency and MBS securities would lower the overall amount of securities on their balance sheet. So what? Did they believe that would cause interest rates to rise? If they did, there was no explicit mention of that.

Nowhere in the minutes of that meeting was there any discussion of wanting to target a desired interest on longer-term maturities. NOWHERE! It never came up. Instead, the committee members just pulled some seemingly arbitrary number out of a hat--$600 bln--and assumed that's all they needed to do. Pardon my generalization, but it had all the look and feel of throwing something up on a wall and hoping that sticks.

Truth be told, if the FOMC had simply said that it wanted 10-year Treasury yields to be at 2% and that the Fed was going to buy those maturities until it reached that desired interest target, then that's what they would have gotten, with probably far less than $600 billion.

However, by focusing on quantity ($600 bln) instead of price (say, 2%), they left the bond market wide open to speculation. That's what's going on now, speculation. Thnk about it...10-yr Treasury note futures trade a notional amount of about $80 bln per day! Multiply that times 30 days in a month and that's $2.4T notional! That's 30 times more than the $75 bln per month the Fed said it was going to buy. Speculators can easily push bond prices down and yields up in response to the Fed's tepid and ill-thought-out buying program. That's exactly what they are doing.

It's an astonishing thing to say, but the people on the Board of Governors totally lack an understanding of the one thing that the Fed has absolute control over--interest rates. This is truly mindboggling. The members of the FOMC have left the bond market open to speculative attack as a result of their ignorance. And to make matters worse, there will be plenty of negative fallout from this because the commentary that will swirl about--people will be saying that inflation is surging, that the Chinese are selling our debt, that the national debt is skyrocketing, that the dollar is the cause, etc--will completely distort the truth and make policy more ineffective than ever. That means the outcomes will be even more disruptive. The FOMC has 12 members. None of them understood this???? Sadly, that's a correct statement.

The outrageous and misguided views that people buy into

Certain commentators are running around saying things like, “The US economy (GDP) is a ‘phony’ economy because all we really measure is what we consume.”

That’s right; GDP measures what we consume; but everything that is consumed is also produced. Therefore, consumption and production are one in the same, just as is income and consumption or, income and product.

However, if you said that to those commentators they’d say, “Yes but, the United States doesm't produce anything.”

Another completely ridiculous statement.

When GDP is calculated imports are SUBTRACTED OUT OF THE TOTAL because we are measuring gross DOMESTIC product! And even with imports subtracted the number that is left is $14.8 Trillion! That’s not only a very big number, it's also everything that is consumed (AND PRODUCED) domestically, as in Gross DOMESTIC Product or.

The people who make these crazy statements are people who aren’t interested in the truth. They are people who don’t want YOU to know the truth either. They only want to continue spewing their misguided ideology and dogma.

My comments on RT America

Obama Unveils Broad Accord To Extend All Bush Tax Cuts

UPDATE: False alarm, it looks like status quo for fiscal policy, see comments.

CNBC reports this evening; this could be close to what many here have been looking for, excerpt:

"President Obama announced a broad "framework" agreement with Republicans that would extend all Bush-era tax cuts for two years, keep the dividend and capital gains tax at 15 percent and temporarily cut payroll and Social Security taxes."

New to this package is the cuts in payroll and Social Security taxes, and this could be significant. Not much detail provided so far. If anyone sees any details on the package with respect to these two items please post a comment.

Wall Street's the reason why there's no job creation!

Yesterday I decided to do some Christmas shopping so I went to Macy’s Herald Square on 34th Street here in NYC. The place was mobbed as you can imagine. I mean, I could barely get through the front door and once inside just moving around was a feat unto itself. I wanted to buy some clothes for my kids.

After walking around and sifting through piles of clothes unorganized racks (I couldn’t find anyone to help me) I ended up with a few items. When I went to pay I was confronted with a huge checkout line where there was only one person manning the register. There had to be at least six cash registers, but only one person on the job. After standing in line for 25 minutes I got fed up and threw everything down and walked out.

Then I went across the street to Old Navy where I found a bunch of other stuff, similarly selected from chaotic piles and racks and guess what happened when I went to pay? Same thing! This time, however, there were three people working a bank of 10 registers.

Then it dawned on me why we’re having a jobs crisis in this country. Companies are being forced to become miserly when it comes to their work staff so they can keep labor costs down and report bigger and bigger profits every quarter to please Wall Street analysts and fickle investors. If not, the Street will punish their stock and their executives will be out of a job. The result of this maniacal drive for profits is a horrible shopping experience for consumers, many of whom can’t find work, but could be gainfully employed were it not for the fact that we let Wall Street dictate everything we do!

Ireland’s rescue package: Disaster for Ireland, bad omen for the Eurozone

Interesting article on the structure of the loan arranged last week by the international community to the current government of Ireland, written by a former IMF economist now in academia. Hat tip Tom Hickey.

Excerpt:

"This is not politically sustainable, as anyone who remembers Germany’s own experience with World War I reparations should know. A populist backlash is inevitable. The Commission, the ECB, and the German Government have set the stage for a situation where Ireland’s new government, once formed early next year, rejects the budget negotiated by its predecessor."

This may hit at about the same time as the US Tea Party Congress is shutting down the US government due to the national debt limit being hit. 2011 looks like it will be an "interesting" year.

The key here may be whether the citizens of Ireland will really understand what they have been committed to pay, and then whether they will vote, via a new government, to reject it, consequences be damned. I don't know much about the economic understanding of the citizens of Ireland, but here in the USA, I believe the politicians could easily dupe the voters into accepting this type of thing by claiming we "all have to sacrifice", or "we can't leave this to our grandchildren", or some type of similar nonsense theme.

I read another report that had this loan package at fully 50% of Ireland GDP. When Iceland obtained a referendum vote on a similar package for their government due to their bust banks, they rejected it with 93% of voters voting "no", and that package for them was a bit less than 50% of their Iceland GDP. But of course Iceland is not part of the European Monetary System.

The Back of the Rack: Norman on the "Free Market"

Here's an MP3 of Mike from back in February of 2009.  Here, in audio format, he addresses some of the issues related to our "belief" in the "free markets" and whether these beliefs are true, and if they are in fact preventing us from achieving better economic outcomes.

If this is capitalism, who needs it!

Capitalism is best? For whom?

In this country we hear the constant cheering for capitalism, even by people who, amazingly, have lost their jobs or are struggling. Yet, if some of them just simply took a break from all that cheering and focused in on what has really been going on I wonder if they'd be so enthusiastic about picking up the pom poms.

Here's a snapshot of capitalistic America without the blinders of ideological rhetoric.

After tax corporate profits are currently at an all-time record high above $1.4T. In the past two years alone, profis have zoomed up by $800 bln.

Yet the nation's economy is limping along at barely 2.0% growth--well below our capabilies--and unemployment is at 9.6%, up from 5.0% just two years ago even though profits have grown by the better part of $1 trillion.

The stock market is 14% below its 2008 peak and 20% below its all-time high so stock investors have not been rewarded by this capitalist explosion.
Dividends are down by $150 billion in that time, meaning that yet again, investors have not been rewarded.

Real earnings of workers are lower now than they were in 2008 and still below the level they were in 1968 on an inflation adjusted basis!

In the past 10 years corporate profits have increased by 174% and the unemployment rate has INCREASED by 144%

So, where's all the money going? To salaries and bonuses for a small percentage of people at the top.

That's capitalism. Nice system, huh?

Video: British politician slams EU bosses over European crisis

This video basically speaks for itself. The only comment I'll provide is that you just can't beat a well trained British orator.

Citing deficit, Obama freezing federal worker pay

Story this AM from Yahoo! Here comes a small dose of austerity for the US now.

Last fiscal year, total 'Federal Salaries' were $176B, so a small +2% pay adjustment here would have resulted in about a $3.5B additional transfer to the non-govt sector. It looks like this will now not happen.

Even though 'every little bit of fiscal helps', this small foregone fiscal adjustment may not warrant any growth forecasts for next year to be adjusted downward significantly.

John Stossel: Privatization created Thanksgiving...Oh Brother!

First, Happy Thanksgiving to all!

John Stossel is out there (I heard him on Fox yesterday) with a story about the experiences of the Puritan colonists who established the basis for our Thanksgiving Holiday here in the US. I think I've heard Rush Limbaugh provide a similar account some years ago on his radio show. This is an excerpt from a recent column Stossel wrote at the link above that parrots the Limbaugh thing.

"So as it well appeared that famine must still ensue the next year also, if not some way prevented," wrote Gov. William Bradford in his diary. The colonists, he said, "began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, (I) (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land."

Then Stossel jumps to the conclusion:

In other words, the people of Plymouth moved from socialism to private farming. The results were dramatic.

I do not agree with his characterization of the apparent re-organization of the small agricultural micro-economy of that time, and certainly not for the reasons he cites. If you read the words of Bradford, he said:

1. "it well appeared that famine must still ensue the next year",
2. (they) "began to think how they might raise as much corn as they could"

This could otherwise be interpreted that something happened to cause a tremendous collapse in agricultural output, and then the colonists wisely came together as a community to put together a game plan to get through this potentially lethal environment.

Systems of integrated agriculture normally involve the growing of feedstocks and husbandry of livestocks and perhaps this system had failed. This could have easily been due to non-organizational or non-distributional reasons such as disease or drought or both. It would be at that point that a rational community would come together and quickly change over to a subsistence type of agriculture when faced with the real possibility of death by starvation. That is, the normal more complicated approach would have to quickly be abandoned in favor of everybody growing a simple crop that would ensure subsistence for the community, here they apparently chose corn as the crop that could provide that sustenance with the highest probability.

Bradford continues: "they should set corn every man for his own particular", "And so assigned to every family a parcel of land". Read these words; this is a very directive course of action, the fathers of the community organized and directed a course of action to ensure survival (oh no! big government!). Additional seed corn was distributed ("they set corn for every man") and tracts of land were assigned for the families to work. There is no disclosure of any assignment of rights to private property, or any distributional issues or the political things that Stossel forces into this.

It seems to me that they were faced with the real prospect of death by famine in some months, and knew that they had to go back to a subsistence type of farming that would lead to the most amount of food in the shortest amount of time with the least risk, and the 'government' of the time directed this. End of story.

Let's continue with the historic account: "This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many."

Yes "it", that is, execution of the plan to combat the prospect of death by starvation would probably have "made all hands very industrious". It would me anyway!

Think about it, to believe the Stossel and Limbaugh account, you have to believe that the Puritans only wanted to eat 'corn on the cob', this is absurd and non-insightful, and their political observations are deceptive.

Again, Happy Thanksgiving to all and let's all be thankful for the daily gifts He truly provides!

Tea Party Senator Mike Lee on Raising the Debt Ceiling: "No Way"

Here's a link to ABC news video of a short interview with so-called "Tea Party" Senator Mike Lee (R-UT) on his views on the US national debt.

In it the ABC News reporter challenges the Senator with the prospect of cutting the over $1T annual flow of balances that currently make up the deficit, and the Senator indicates that he is ready to vote to seek those types of spending cuts "for our future grandchildren"; and literally falls prey to the deception of inter-generational accounting. (Hey Senator, can I use your time machine some weekend! LOL!)

This "Tea Party" Senator is either a moron or just grossly misinformed about economics to the point of what should be criminal negligence. (Probably the latter.)

If these people succeed in their current goals to destroy another 10% or so of our economy by implementing these levels of cuts when we reach the limit of the current authorized debt ceiling, it may be that we have another 4 months or so to enjoy the American way of life.

Quantitative easing revisted

A new video, this time, with the correct explanation of QE. (I wonder if Warren Mosler did this one!!)

Taxpayers about to be hooked, thanks to "taxpayers on the hook!"

When the government was bailing out GM there were cries everywhere of "taxpayers on the hook." The reality, however, was exactly the opposite: the government injected cash into the economy, saved GM and many workers' jobs and sustained a vital portion of our industrial capacity, which we use every day to produce the goods that Americans and others consume.

This was in no way "hooking" taxpayers.

Now, GM will go public once again and the U.S. government will sell $13 billion worth of the stock that it holds in the company. (See Matt Franko's previous post.)

Ostensibly, this sale of $13 bln worth of stock represents a "payback" to taxpayers (if you go by their "taxpayer on the hook" logic).

But is it?

The government sells its stock to taxpayers, who fork over the dough and that money goes to Treasury...taken out of the economy for good. That's a payback???

The moral of the story is, when you act like you're putting taxpayers on the hook when you're not, you really DO put taxpayers on the hook!!

GM IPO: Fiscal Drag?

GM is going to do an IPO tomorrow to raise some capital. Yahoo! has a story here. Excerpt:

"The Obama administration now will sell 412 million of its 912 million shares, raising around $13.6 billion that will help the government get back some of the $50 billion it loaned GM to save the company from ruin last year."

If this 13.6B is just returned to the Treasury, it may provide fiscal drag this month, as the average monthly flow of fiscal (which is probably all that is holding everything together) is around $110B/month. This $13.6B would represent a bit above a 10% hit to this flow this month, and may be significant.

Quantitative Easing Explained (badly)

There’s a little video making the rounds on the Internet called, “Quantitative Easing Explained.” It’s cute, but don’t be fooled by the cuteness because it’s got pretty much everything all wrong. The video has two robot-like cartoon characters talking about quantitative easing and it starts off by saying that quantitative easing is nothing more than the Fed “printing a ton of money.” That’s the first dose of misinformation. Quantitative easing is NOT about printing money; but it IS about adding new reserves to the banking system. Moreover, reserves are not even part of the money supply and when they’re in the banking system they generally just tend to sit there earning some pittance of interest. There’s no “printing of money” going on; this is a huge misstatement.

Then the characters try to purport that deflation is good because it gives people more purchasing power, i.e. it lowers the cost of things and that allows consumers to buy more. Hell, if you listen to these characters you’d get the idea that all policy—monetary and fiscal—should be focused solely on creating massive deflation because everyone would somehow benefit. This is so wrong it’s ridiculous. What the robots ignore is that in a deflation wages are falling, too, so the real cost of goods and services actually rises. Debt becomes harder to service and asset prices fall (in the current reality home prices are falling, which are most household’s largest asset), so wealth falls. Less wealth means less ability to consume. You get poorer!

The characters try to refute the Fed’s claim that things are deflating by pointing out that prices for such things as food, gas, health care, tuition, taxes, subways, stocks and bonds are all rising. They’re trying to make the case that what we are really experiencing now is inflation, not deflation. Yes, some of those things are rising in price, but there are other items on the Consumer Price Index that are still falling, like housing, apparel and recreation. All told, inflation as measured by the CPI is up 1.1% versus last year. That’s not exactly some out of control hyperinflation.

The video then gets into an area where the full ignorance of its creators goes on display, when it starts talking about monetary operations. Monetary operations are mechanism by which the Fed sets rates or conducts quantitative easing. The characters say that the Fed executes QE by “printing money then buying the Treasuries.” In reality, it’s the total reverse: the Fed buys Treasuries by crediting reserve accounts, simple as that. In other words, reserves are a byproduct of asset purchases, in this case, Treasury purchases. There is no creating money and then buying of bonds.


Their confusion doesn’t end there. They say that the Fed could buy the bonds directly from the Treasury, but doesn’t. Instead, they go on to say, it buys from Goldman Sachs. (Goldman is used throughout the video as a metaphor for greedy Wall Street.)

The fact is, if the Fed bought from the Treasury it would have zero effect on reserve balances because the money would go into the Treasury’s account at the Fed rather than into the banking system, where the Fed wants the reserves to go. Therefore, in order for the Fed’s operations to have any chance of success it MUST buy bonds from the public and not the Treasury because it wants reserve credits to go into the banking system. You or I can buy bonds from the Treasury, but that’s a whole different thing. WE are not trying to affect monetary policy, the Fed is.

The video then makes the totally false claim that the Fed pays Goldman Sachs the worst price for the bonds. This is wrong, wrong, wrong. The way the Fed conducts monetary operations is that it will indicate its intentions and it will buy from dealers at the best price/lowest yield offered. What these guys say is all made up. They’re clearly on a propaganda mission here.

Toward the end they say that the Fed’s first quantitative easing program (QE1),conducted last year, was a failure because it didn’t create jobs or stop the housing market crisis. There’s probably some truth to that, however, it did stabilize the commercial paper market and other vital sectors of the capital markets and it probably helped boost stocks, which have climbed 80% since last year. Housing prices have stopped declining pretty much and the private sector has added about 1 million jobs. Much of this was due to the stimulus and automatic stabilizers, but to flat out state that QE1 was a failure, is just wrong.

The Internet is great, there’s a lot of good information out there, however, you have to be careful because it’s loaded with stuff like this: a lot of bad and misleading information that may be cynically designed to promote an agenda or advance someone's personal ideology. This clearly is an example.

Bernanke: QE Rumours and Interest Rates

Tom Hickey posted a comment at another econ blog quoting Fed Chairman Bernanke from his OpEd on QE2 in the Washington Post last week. Part of it caught my attention:

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
— Ben Bernanke, Washington Post op-Ed, Nov 4, 2010,

Emphasis mine. What data is Bernanke looking at? Here is a snip of the chart for the Ten Year Treasury rate for the last year:



Related to QE, Point A is April 2010 when the Fed terminated QE1. Immediately at that point a significant rally in the 10-year bond ensued that lasted into August with rates falling significantly. This rally was stopped cold in August around the Point B when the rumours of a possible QE2 started in earnest via Steve Leisman at CNBC. Since this time Mr. Chairman, rates have certainly NOT fallen, in fact they look like they are potentially ready for an upside breakout.

If the Fed does not specifically target interest rate levels with QE2, can they hope to lower the longer term interest rates by just "buying"? It looks like we will find out starting today.

Brazil's president...the only guy in the room who gets it??

Brazil's president, Luiz Inacio Lula da Silva, warned that the world would go "bankrupt" if rich countries cut back on consumption and tried to export their way to prosperity. "There would be no one to buy," he told reporters. "Everybody would like to sell."

He's apparently the only guy there who gets it.

Either that, or he wants Brazil's export boom to continue and is scaring other countries into being buyers.

Another unbelievable story from the frontlines...

Here's another unbelievable story from the frontlines.

Yesterday I was at Fox and I bumped into John Ryding of RDQ Economics (that's the name of his firm). Ryding used to be the Chief U.S. economist at Bear Stearns (you may see why Bear fell apart in a moment).

I asked Ryding what he was going to speak about and he replied, "Monetary suicide by the Federal Reserve."

I asked him why he was calling it "monetary suicide?"

He said, "Because that's what the Fed was doing."

Suicide is killing yourself, so I don't quite get how the Fed is comitting suicide, but I digress.

I explained that all the Fed was doing is targeting bond yields lower and the way it does that is by buying bonds. That adds to reserves in the bankng system, which basically just sit there and earn some pittance of interest.

Then he said this...

"I get the part about how the Fed is boosting its balance sheet, but the question is, where are they going to get the offsetting liabilities?"

I kid you not; that is what he said.

I sat there, stunned.

I said, "You mean reserve credits?"

He said, "Yeah."

I told him that reserve credit are just created with a touch on the Fed's computer. Those are credits to the banking system that are called, reserves.

He seemed completely at a loss to understand this.

So here's a guy who many know and who is considered to be one of the top Wall Street economists yet he shows himself to be glaringly uneducated when it comes to the Fed and monetary operations. "Where will they get the liabilities to offset their asset purchases???"

I kid you not, that's what he said.

You can't make this stuff up.

Do you wonder, anymore, why we're in such trouble?

Home Prices: Some Nice Values Developing

Yahoo has a nice story of some reasonably priced homes for sale throughout the USA.

Looks like the 'deflation' in home prices is setting up to provide some nice values. Now if we could only get our policymakers to implement full employment policies so households had the incomes to be able to finance and enjoy them.

Schiff goes berserk!!

I saw Schiff at a conference today at the NYSE. He started screaming at me and shouting obscenities. Many people were standing around stunned. He called me a "fucking bastard!" LOL!!! It was classic. He turned so red and couldn't stop screaming!!! Said I am on a campaign to distort his record.

My discussion with David Walker

I went to Fox yesterday and who do I bump into? None other than David Walker, former Comptroller General of the U.S. and now the president of the Pete Peterson Foundation. Walker is the leader of Deficit Terrorist Nation and he has been on a mission, backed with Peterson’s money, to scare the daylights out of the citizens of this country and our political leadership into believing that Social Security is insolvent and that the nation itself faces bankruptcy unless we reign in runaway spending and the deficits that are accruing.

Back in 2008 I had Walker on as a guest on my radio show on Biz Radio and I got him to admit that there is no solvency issue and that the checks were never going to bounce. As far as I know, I was the only one who has ever gotten him to say that publicly. (I have often asked Neil Cavuto to pose that question to Walker the times when he is on his show and I have personally given Neil the audio clip of that interview, but he hasn’t done it.)

Anyway, when I went into the green room and saw him sitting there, I walked right up to him and introduced myself and asked if he recalled that exchange we had back in 2008. He actually said that he did. So I asked him why he continues to go around saying that social security is facing insolvency.

He said to me that he doesn’t say that.

I questioned him as to what would happen if those deficits were not closed as per his warnings and if the government just kept writing checks. He said that interest rates would rise. Note: he didn’t say we’d go bankrupt; just that interest rates would rise. I asked why he thought interest rates would rise if the Fed sets rates? He said the Fed only sets short term rates, but not “market rates.” I asked him if he was aware that the Fed has been guiding long term rates lower by buying bonds. I tried to explain to him that the Fed could set rates anywhere along the curve, by exactly the same manner of operations that it uses to set short rates. He seemed confused and not fully understanding that the Fed could keep rates low for however long it wanted. Then I brought up the example of Japan, where debt was far higher than in the U.S. and where rates have been virtually at zero for two decades.

He said Japan has no “foreign debt.” I say neither do we, because our “foreign debt” is our own debt—in dollars. Same exact thing as Japan. He had a hard time with that.

Then I asked him if he truly believed that a nation that issues its own currency and where its debts were denominated in that currency could go bankrupt? He responded, “No, that can’t happen.”

Then I followed up by trying to make him see that Social Security or Medicare or any obligation of the government doesn’t face solvency risk by that same logic.

And…he agreed!

So I asked him why he keeps saying it’s going broke?

He says he doesn’t say that. He said that he never says it’s insolvent. (Which is bullshit, because he does say that!)

I told him about what Greenspan said back in 2005 during Congressional testimony, when he was asked that very question, about Social Security solvency. Greenspan said that the Federal Gov’t can pay any amount of money to whomever it wants, but the real issue was whether or not the real assets were going to be there for people to consume. In other words, would we end up having inflation.

Walker seemed to understand this. Then I said that if we were going to have a realistic dialog and discussion about Social Security, we should not frame it in context of risk of insolvency, but rather, whether or not the crediting of bank accounts (issuing checks) was going to lead to inflation down the road. I said that no real examination of that potentiality was ever done. He agreed.

I said that since he is the voice of deficit reduction and fiscal responsibility, he should refrain from using words like bankruptcy and insolvency and reframe the discussion so that people start talking about the real issue; which is whether or not there is a risk of inflation if the government keeps writing checks.

He agreed and said that he won’t talk about solvency. HE SAID HE WASN’T GOING TO TALK ABOUT INSOLVENCY! He also agreed with me that it’s not about interest rates!

In the end he said it’s about inflation and the value of the currency. (I’m not even sure it is about the value of the currency, but I gave him that one!)

So in the end, David Walker, Deficit Terrorist in Chief, basically agreed on all points espoused by the MMT community. He said to me he would characterize it in that way. He said I should ask Neil Cavuto to ask him that question. (I promptly sent an email off to Neil.)

Then he walked out to the studio to do an interview with Fox Anchors David Asman and Liz Claman. Not more than two minutes into this interview, he was talking about restoring SOLVENCY to Social Security.

What a disingenuous, lying, douche bag!

Vintage Norman

At this point in the cycle, as we head into the elections next week and the uncertain outcome it portends, it may be a good idea to re-visit some thoughts Mike had a bit over two years ago at another critical time before an election. For new readers here and old friends....here you go from Mike's blog of September 17, 2008:

"A Dangerous New Policy"

The market turmoil today is easy to explain and easy to correct, but sadly, we will neither get a good explanation nor will we get the proper remedies. You will hear that it is because of the never-ending stream of bailouts that we are suffering through this, however that is not true. Up until last Sunday’s balk by Treasury Secretary Hank Paulson regarding a rescue of Lehman, things had been going fairly well: banks were recapitalizing, shares in some of the most beleaguered sectors like housing and banks were starting to recover, commercial credit issuance was rising, mortgage lending was picking up and most important, the U.S. was outperforming other countries around the world both in terms of its stock markets and its economy. That’s how it looked right up until Paulson uttered those famous last words: “I never once considered using taxpayer money to help Lehman.” What followed was the largest stock market decline since 9/11 and a virtual Who’s Who of financial firms who are now queuing up to witness their own demise. At this very moment, we are in a virtual freefall with no endgame in sight.

Perhaps it was not necessary to save an investment bank like Lehman. After all, in a $14 trillion economy the failure of what was essentially a financial intermediary should have been taken in stride. The problem, as I see it, was that by essentially throwing up his hands and saying that the government was prepared to leave the resolution of this crisis to “the free markets,” he changed the game in one fell swoop.

First and foremost let us understand that the idea of the “free markets” is a fallacy. Markets exist within the framework of a national and indeed, sometimes global, political system; they operate and are governed by laws, regulations and tax codes. In some cases they are even accorded special protections and rights, like in the case of patents and trademarks, etc. The word “free” in free markets is a misnomer. We have competitive markets, not “free” ones.

Yet the fallacy persists and many feel that all problems are better solved by the omniscient free market. Markets do react to problems and eventually “resolve” them, in their own way and sometimes that can be brutal. I’ll invoke the words of the philosopher Thomas Hobbes, who said, when talking about the natural state of nature and man, that life in that state can be “nasty, brutal and short.” As humans we give up some personal freedom to form societies in which there are rules and authorities. This keeps us from devolving into what Hobbes observed as man’s natural state of war and chaos. The markets are no different: they can be reigned over and controlled and corralled to some degree, or they can exist in a wild state.

I believe that our naïve appeals to “the hand of the free market” are being heeded and that is what makes this so very scary. Many of those who have longed for this day will be surprised, and not in a good way mind you. I said on Fox Business the other day that those who were against bailouts are seeing their dreams come true, however, their dreams will soon turn to nightmares. The current situation has devolved into that natural state that Hobbes described. Moreover, no one will be spared; not even those misguided folks who railed against the bailouts thinking that their good behavior (they paid their mortgages on time, never over-leveraged and wisely saved) somehow insulated them from any possible misfortune. They’ll be sadly mistaken.

Even policy makers have gotten influenced by this perception. Misinformed and misguided cries of “taxpayer on the hook” is leading to dangerous new policy, where the government is no longer acting as a backstop or countervailing force (because that is viewed as putting taxpayers in jeopardy) but rather, acting unilaterally to seize private property with some warped idea that the government needs to make profits. This is highly dangerous in my opinion.

Thirty-six hours after Paulson said that he would not help Lehman, he and the folks at the Fed appeared to go back on their pledge, saying that they would rescue AIG, the insurance giant that was taking its last few steps up the gallows. The Lone Ranger came riding in at the last moment. Or did he? For this help (which was not asked for at least in the way it came), AIG would have to pay loan-shark interest rates and the company’s owners—the shareholders—who had already lost pretty much everything (AIG’s largest shareholder, Hank Greenberg, is said to have seen his net worth decline by as much as $7 billion in a matter of days), would have just about zero, as the government takes a majority ownership position.

Herein lies the problem as I see it. The government is not a profit seeking enterprise. Rather, it exists for the public purpose. Yet mandating the government to “make profits” on the false notion that this someone behooves taxpayers, will not only destroy taxpayers but destroy the economy as we know it.

At the end of the day no private business can compete for profits with government in an economy where taxes must be paid in a currency that the government has the monopoly power to issue. Think about it. A company is set up to sell widgets. It has to raise capital (remember, the government’s cost of capital is zero ‘cause it issues the stuff), it makes a profit of $100 and gives 10% to the government as tax, leaving it with $90. It also has to pay back investors or the bank that lent it money to start up. So, it’s really left with less than $90.

In contrast, the profit seeking government uses its own money, which it can issue without constraint, then sells widgets for $100 and pays no taxes to itself. It should be clear that pretty quickly the government ends up owning the means of all production. That’s not called Socialism; that’s called Communism. The markets are not afraid of Democratic Socialism, however, the markets ARE afraid of Communism. Really afraid!

By operating under the false notion that the government must “make a profit” and that private owners and risk takers must be destroyed each and every time a firm needs something as simple as a loan or loan guarantee, private sector risk taking understandably collapses. Who will take risk when the government stands ready to take your property, unilaterally, without invitation or even a discussion of whether or not you are getting some fair compensation for it? The answer is nobody! That is why you are seeing stocks collapse today.

In all of the recent examples: Fannie Mae, Freddie Mac and AIG, the Fed or the Treasury could have extended loans or loan guarantees backed by these companies’ assets, charged an interest rate of whatever it chose, but preferably just above the yield on a 10-year Treasury, say. (Even though it could have chosen 0.0001% or any increment above 0% because the government’s cost of funds in zero) and that would have been sufficient “payback.”



In closing I will leave you with this example: Imagine if you went to buy a house and asked a bank for a loan, which the bank granted at some interest rate above the bank’s own cost of funds. That would be the bank’s “profit.” The bank will also secure the loan with the house. In other words, the bank can take the house if you default on the loan. I’m sure everyone understands this. Now imagine a scenario where the bank lends you the money at a specified interest rate, secures the loan with the property and owns whatever equity you build up in your home as well!! What kind of deal is that??? In the meantime, you are still stuck having to pay taxes and forking out money for the upkeep of the property. Who would buy a house??? The answer is nobody. But that is exactly the system we have set up here with the “bailouts" and this idea that the government should make profits. Herbet Hoover once said, "The business of government IS business." We had the Great Depression afterward.It should be no wonder, then, why investors are dumping stocks.

El-Erian: Federal Reserve 'Terrified' of Deflation

PIMCO head El-Erian was interviewed by CNBC today and is predicting that the Fed will commence with QE2 starting next week because the Fed is 'terrified' of deflation.

Interesting excerpt:

"QE is meant to drive down the price of safe assets so much that we are all pushed into doing something risky," El-Erian said in an interview Monday at a gathering of the Financial Women’s Association of New York."

Do-what?

I view the goal of QE as to increase the price of 'safe' or, risk-free, assets in order to lower the term structure of interest rates, here El-Erian has QE lowering bond prices. Maybe he misspoke, and the CNBC editor didn't catch it.

Although.....PIMCO was a contracted agent of the FRBNY during 'QE1'. Maybe this is what they really did during the first round, as ever since QE1 was over in April of this year, interest rates have fallen significantly!

Do any of these people know what the h they are doing?

QE2, perhaps, but Fed slowly reducing its balance sheet.

There's been a lot of talk about QE2 and the Fed has been purchasing bonds (setting bond rates lower), but it's also been quietly reducing its balance sheet.

These are the total amount of bonds purchased so far in Oct (millions $)

10/22/2010 $2,490
10/20/2010 $660
10/18/2010 $6,260
10/15/2010 $4,690
10/6/2010 $2,069
10/5/2010 $5,190

Total: $21,359

And here is the Fed's balance sheet:






So, yes, bonds have been bought, but as I said, that’s how the Fed sets rates lower.

The important thing, however, is that the Fed’s balance sheet (factors affecting reserve balances) have gone down. So while it is buying bonds, it is also selling other assets or allowing certain liquidity programs to expire. The total amount of reserves credited to the banking system has fallen. No net new “money” has been added.

CNBC: Emergency Alert on Home Prices

Here's a short video report from CNBC yesterday about falling home prices:




The firm that is the source of the price data is reporting a 6% drop over the last few months and projects another 10% drop over the winter months. This de-flationary development will make it more difficult for banks to sell any foreclosed homes they may have in inventory, as it would make any loss they were previously estimating that much worse.

Is this the start of some serious deflation?

Related observation: CNBC reporter Olick makes a statement at the end of the video to the effect that "on Monday GMAC and Bank of America said that they will start some of the sales again and that will just add to the inventory..." This statement does not make sense. Foreclosures will add to inventories, sales will subtract form inventories. I've noticed that some of the mainstream reporting around this "foreclosure" issue is not differentiating between foreclosures and foreclosure sales. These banks I believe have stated that they will proceed with foreclosures as they need to press their legal rights, but I do not think that they are intending to proceed with foreclosure sales in light of the actual capital losses that they will have to realize upon the sale of a home at a price that is less than the loan amount.