Chris Whalen: "Why The Fed Must Let Rates Rise"

Tyler Durden's picture

From Chris Whalen, posted on Reuters

Why the Fed must let rates rise

This week all eyes are on the Federal Open Market Committee
(FOMC) and Federal Reserve Chairman Ben Bernanke. The FOMC must decide
whether to stop monetizing the federal debt issued by the Treasury,
which is what the U.S. central bank calls “quantitative easing.”

Americans continue to believe — and hope — that the Fed can save us
from our collective idiocy when it comes to debt, both public and
private. While there are growing signs that the Fed’s zero interest rate
policy, or “ZIRP,” is greatly damaging individuals and financial
institutions alike, we also need to question whether the Fed can let
rates rise without provoking another financial assets collapse.

In effect, the Fed and other global central banks are all caught in a “Catch-22″ situation, to borrow the phrase from the 1961 novel by Joseph Heller.
The Fed’s aggressive easing of interest rates and purchases of
trillions of dollars in Treasury debt and other assets has stabilized
and even raised the price of financial assets, but in other respects the
Fed’s policy of reflation has failed — especially compared with past
interest rate cycles.

In a comment published by IRA this week, Chief Monetary Economist of Cumberland Advisors Bob Eisenbeis notes:

“From the 50s through 70s, the main channel for monetary
policy was through housing: when interest rates exceeded the Reg Q
ceilings that banks and thrifts could pay for funds, the supply of
funding to housing was cut off. Then construction declined and the
effects rippled through the rest of the economy. Most of the economic
models have that structure and international isolation embedded within
them. Yet this is not the world that policy makers are now dealing with …

In an earlier comment in one of my pieces on,
I looked at the fact that “the Fed faces continued asset price
deflation at home even as the impact of its accommodative policies are
already boosting global inflation.” My friend and mentor Alan Boyce, who
ran the risk book at Countrywide, has been trying to educate people in
Washington about the lack of “trickle down” money in terms of the Fed
reliquifying the housing sector.

While the Fed’s QE and ZIRP have been a boon to the largest banks and
investors on Wall Street, Main Street has been left in the cold. The
continued decline in home prices in February as reported by Case-Shiller
— now down eight months in a row — has been ignored to a great peril by
the Obama administration. As I’ve noted previously in this blog, how
does President Obama expect to win reelection if the U.S. housing sector
and the banks that hold these assets are melting down come election day

Last summer, my firm earned condemnation from Wall Street for
suggesting that U.S. banks were not out of the woods and that net
interest margins were starting to fall. Dawn Kopecki at Bloomberg
reports: “At JPMorgan, almost half of the New York-based bank’s earnings
came from the release of reserves previously set aside to cover bad
loans. Net revenue at the second-largest U.S. bank dropped 8.9 percent
to $25.2 billion.”

The reason that revenue at many banks is falling is largely to the
Fed’s policy stance, but also reflects the still dismal economic
situation on Main Street. Most banks are seeing the revenue from
interest earnings fall as older assets run off and new assets with far
lower yields are put in their place. But the lack of demand for credit
from consumers and business is also a big factor behind the sharp drop
in bank assets.

The chart below is of the gross loan yield for Bank of America vs.
its large bank peers. It is taken from the IRA Bank Monitor using data
from the FDIC and shows the gross yield on the loan book for Bank of
America Corp’s subsidiary banks going back a decade. Notice that in the
2000 timeframe, just before Chairman Bernanke joined the Fed and his
predecessor Alan Greenspan stepped on the monetary gas pedal, bank’s
were earning yields on loans almost two times of today’s levels. Notice,
too, how competition in the 2005-2007 period drove bank loan yields
down, but from 2007 the Fed’s QE and ZIRP temporarily boosted lending

however, the benefits of Fed easing and FDIC debt guarantees are
fading. Bank loan yields are starting to fall as lenders compete ever
more aggressively for the few borrowers in the market who want credit
and can actually qualify for a loan. The shrinking pool of earning
assets and the lack of yield on these assets is perhaps the greatest
danger to the banking system — and makes it next to impossible for
Chairman Bernanke to put off raising interest rates much longer.

As we told clients of The IRA Advisory Service last week during the Q1 2011 earnings reports from the banks:

Our predominant impression from top universal banks is
slack revenue to date and weak demand, and thus doubtful backlog going
forward. In Q1 2011 US banks are reflecting the true situation facing
their customers in the US economy. We were struck this past week by the
fact that several bank executives basically said during calls and
Q&A that the Fed needs to allow rates to rise so as to counter the
effects of the accelerating run-off of earning assets and subsidized
funding such as FDIC TLGP. Perhaps the appropriate policy formulation
for the Fed is to force the cost of funds up while continuing to support
overall volume of market liquidity via QE, reductions in bank reserves.
End of QE without liquidity support is a very dangerous path for this
fragile market in our view.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Id fight Gandhi's picture

Why does the fed care so little for the real economy and 99% of Americans. Gas and food up. Oh well it's all good because your houses are falling in value and you ain't getting raises if you have a job.

Fuck this shit.

HelluvaEngineer's picture

Naw, it's cool.  Mitt Romney is gonna fix all this shit for you.

akak's picture

Plastic Man to the rescue!

traderjoe's picture

Really? Was that a legitimate question?

The Fed is a private corporation created by the bankers to cause inflation, lower interest rates, and support fractional reserve banking. Every fiber of its being supports the skimming of the people for the banks. 

IMHO, it is the Original Sin of our economy and monetary system. 

HoofHearted's picture

I'll go with Jacques Rueff here, who says that "la peche monetaire de l'Occident" is inflation. But the original sinner is the Fed.

Just remember there are those of us who are Fed skeptics. Then there are Fedophiles. Dirty, stinkin Fedophiles. Which one are you? 


Goolie's picture

That's right traderjoe, why do people listen to what the Fed says rather than watch what they do?  They say "we believe in a strong dollar policy!" and their actions destroy the value of the dollar.  They say, "we want to help the economy grow and reduce unemployment" but their policy simply transfers interest income from savers to the banks.

I would argue normalized short term rates would actually be stimulative, give the nations widows and savers some interest income they can spend.

jeff montanye's picture

that watch what they do not what they say is good universal advice.  puts the obama administration, where the cog dis between the two is greater than most, in a telling perspective.

Bubbles the cat's picture
Bubbles the cat (not verified) traderjoe Apr 27, 2011 2:50 AM

Yep. No question. The last 3 years should have been spent addressing this problem. And it hasn't been done. Hence why I regard those responsible as, at best, fools or, at worst, criminals. What's next? Wholesale global unrest I believe. A complete mess that didn't have to go this way. One way or another, it will continue to play out on the streets around our world.

bigelkhorn's picture

Most of the US only cares about britney spears upskirts and american idol. all the while they ream up the market and tell you things are great. Time to wake up. 1400 On The S&P Coming? 

Thomas's picture

If they wish to stimulate the economy, they could start by giving me a little more than 0.000...% on my T-backed money market account. I promise I will spend some of it, maybe even on campaign contributions.

Popo's picture

Think about the absolutely enormous number of retirees who have saved a nest egg/retirement fund of $500k to $1m over the course of their lives.  These are hard working, responsible Americans.

At a safe 5% return, those boomers could have lived on $25,000 to $50,000 per year.

Now they're looking at $5,000 to $10,000 per year.   (ie:  POVERTY).

Bernanke is basically exterminating the elderly.  When these people need to pay for non-covered healthcare expenses -- guess what's going to happen to them?  They're dead.

Alternatively, these poor elderly -- who have no ability to recoup losses should they occur -- are being forced into ULTRA HIGH RISK equity markets in search of regular income.  This is *not* the way it's supposed to work.

This is what Bernanke is doing to Americans to save the banks.


akak's picture

Yes, that is a damning indictment of that clueless and sociopathic academic, isn't it?  A crime, much less one of such magnitude, was never more apparent --- and yet is cheered on by millions of sheeple as "proper government economic policy".

Get out the brown shirts and prepare the concentration camps --- mindless America is ready for them.

Anonymouse's picture

You are absolutely right.

But it's not just retirees.  Unemployed people like me were expecting to live off the interest on savings with minimal hit to principal.  But now instead of my expected $75K of interest income, I get about $2-3K.  I could earn marginally higher by using a term deposit instead of a demand deposit, but with the banks having been within hours of failing in 2008 (granted they were referring to money markets being that close, but it would have rippled through), I don't want my money locked up for a long period.

And of course, that $2-3K is nominal.   In real terms, I am losing money by keeping it in the bank.

It is a transfer of wealth from savers to borrowers.  And pinheads like Mark Zandi say "Yes, that is what government should be doing".  Fascist.

HelluvaEngineer's picture

LOL.  Thanks for the chuckle.  BB will say nothing tomorrow except "I hate the dollar".  To which, gold and silver will go into orbit.

Alexandre Stavisky's picture

May I have a cocktail of fire and ice.  And make the ice, hard clear ice that won't melt, and make the fire inferno hot which won't cool.  I don't want to burn my tongue though, nor chill my teeth.

We'll call it the impossible catch-22 'cause it sends you to Heller.  Actually we're already there--just the instant before everything implodes.

HelluvaEngineer's picture

Agreed.  May you live in interesting times, brother.

FunkyMonkeyBoy's picture

Off topic, but where are the BofA hard drive files Julian old son? It's almost May now, think we'd forget your promise?

equity_momo's picture

Forget about that fucking faggot. Irrelevant sideshow like Dancing on Bullshit.

plocequ1's picture

Who the fuck is Chris Whalen? Is he a good cop or a bad cop?

Alexandre Stavisky's picture

If you don't know Chris Whalen, you're in the wrong classroom.  Art history is the shabby building down the lane.

duncecap rack's picture

"My friend and mentor Alan Boyce, who ran the risk book at Countrywide,"

This caught my eye

trav7777's picture

OMFG, the BANKS aren't making enough money...CATASTROPHE

Hephasteus's picture

That's NOT even what this article talks about. There's 2 components to money. Borrowing cost and lending costs. The rate they want to raise is the savers playing bankers rate The homeowner rate is the counterfeiter rate.

When interest is 10 percent and someones grandma in florida is getting 5 percent from money market account there is a collective bankerism going on. In otherwords the bankers go beyond their borders. They have to increase interest they PAY for money to jumpstart the collective bankerism meme. Not what they charge for money. To get a larger mass of people intent on keeping things as they are to subdue those who want to change.

Right now counterfeiters - housing inventories home owners, commercial reit is so fucked up it's keeping the focus on the banks.

Right now retirees and savers are not getting paid to play bankster. Stock market dividends are in the toilet so investors aren't getting paid to play bankster.

Think of it as a core group of people the bankers having a face. When the economy "works" for more people they have a "mask" to wear of happy homeowner counterfeiters and happy savers playing part time bankster.

They have been running too long without the mask and they really really want to put it back on and let ignorant fucks take the heat and conform the masses to their will.

Raise the somewhat innocent through ignorance amateur sheild!!

Hedgetard55's picture

Criminal Bernanke already has his rap ready to go. QE2 successful, interest rates stabilized, economy recovering, stocks booming, banks saved, inflation under control, gas prices up due to higher demand, yadda yadda yadda. We will halt QE unless the recovery falters (i.e. stocks crash).

Global Hunter's picture

"We will halt QE unless the recovery falters", based on what I've seen the last few weeks that won't take long at all, but I'm surprised they've been able to keep it inflated this well for the last 3 or 4 years.

Id fight Gandhi's picture

Success to the fed is the stock market up.

Ben is a student of the great depression? I think he stopped reading when thy said the 29 crash caused it.

Meanwhile even charities like meals on wheels is cutting back, too little donations food and gas too much.

in4mayshun's picture

Maybe he'll pull a Donald Rumsfeld: "Building 7 ?? What building 7 ?? I have no idea what you're talking about."


"Inflation?I have no idea what you're talking about."

Robslob's picture

Actually the Fed is doing us all a gold

ReallySparky's picture

Excellent blog.  Worth visiting weekly.

Your Mama's picture

It doesn't matter what he says just buy the fucking dip !


Id fight Gandhi's picture

What dip? We haven't had a correction no matter what happened. USA debt downgraded, eurozone defaulting, oil high, food high, housing collapse getting worse.

I think they gave up on propping the housing market. Just hand the checks to the bankers.

akak's picture

All of the above just sound like reasons to me why the Fed should be eliminated.

Bansters-in-my- feces's picture

This article is a useless as the rest.

Each and EVERY article should be How to dismantle the FED.

And how "The FED" is NOT ..FED at all,but private.for profit.

Until you's americans tear down the fed building brick for brick/block for block,you's get what you's deserve.

Each and every day of your enslaved lives should be exposing this maddness,and putting an end to it.

And until each and eveyone of you's call it the Non Federal Fed,then the deception is just passed on to future generations of Non Federal Reserve slaves.

WAKE THE FUCK UP...!!!! ...Docile sheeple

rocker's picture

The Problem is the Sheeple, (majority), don't even get it. They think the FED is part of our government. Like another branch.  Most Americans get their news from the Fraud News Fox.  They are Told how to Think and Listen well.

We are Japan now and will remain so for many years. The elitist banking Cartel owns the sheep.

America is doomed. After what I've seen over the past 10 years I think we are the communist nation and Russia is Free nation. Their people get new Freedoms every day as ours diminish.    

skipjack's picture

"Most Americans get their news from the Fraud News Fox. They are Told how to Think and Listen well."

You wake up. Do you think ABC/CBS/CNBS/NBC/CNN/MSNBC educates better than Fox ?

Don't be stupid. The corporate media are all shills TPTB, and you are simply helping them with their dirty work by buying into the Fox Bad meme. They're all bad.

Ropingdown's picture

Vladimir Putin nailed it when the press started complaining about Russian TV bias.  His take? "TV is for the masses.  Intelligent people get their information from the internet." It's a global truth. It's no better here in the US.  It seems more open, but the reality of ratings checks mandates that only stories shallow or exciting enough to hold the eyeballs will be run. 

TruthInSunshine's picture

I have  friend who is an engineer from Italy who works for Fiat. He actually has lived here for a while, as he attended both college and grad school here.

Anyways, as he rightfully points out, the United States, with every single network, cable and radio station all owned by just 6 corporations, has the worst media, by far, of any nation he has traveled to - and he travels all over Asia and Europe for work reasons.

I also had a college professor who talked about regardless as to whether you're conservative, liberal, libertarian - whatever - you have to seek out a completely independent source of media to get any solid information on world events and accurate and unbiased (or least biased) reporting.

The media in the United States really is a sick joke. I literally can't tolerate watching any network or cable news anymore, because of the disconnect between reality and what is reported, the trivial bullshit that is reported - especially given the very significant events of our time, and the sappy idiots who report the news and inteview politicians and other notables and fail to ask intelligent questions or any intelligent follow up questions, even when their is low hanging fruit right in front of them.

Meet the Press and 60 Minutes are great examples of this. It doesn't matter what answer Rumsfeld or Bernanke give; the 'journalist' asking the questions asks no tough questions and never seriously presses the person or calls them out on an even obvious fabrication/lie.

It's sickening,

akak's picture

I have friend who is an engineer from Italy who works for Fiat.

Doesn't everyone (at the point of a gun)?

rocker's picture

@ skipjack    Agreed, they are all bad. No problem with that.  But Fox still wins the We Brain Wash the Most Award.

  This is how they earned by disrespect.  They have a Asshole who said, "You got to shoot them in the Head".

And guess what.  Some mentally stupid did exactly what the Fox Professor told them to do.  So, They are the Worst.

And worse yet, why is he not in Jail where he belongs.   Last time I checked, YOU can't do that or your in jail.

Oh, I know, Fox is above the law because it is entertainment, not news. Fox claims to corrupt more minds then anyone.

cranky-old-geezer's picture

This article is a useless as the rest.

And your comment is equally useless. 

Fed isn't going to be stopped / shut down / eliminated.   

If I see another "they should ..." comment, I think I'll scream.

... hear that GW?

rocker's picture

Understand your position. You must think they are doing God's Work.  Godman Shafts runs the FED afterall.

dogismyth's picture

Yes are so right.  But don't expect an audience here.  Like all blogs, these are the sheeple that continue to play the after day.  They contemplate for hours and days what the Fed will reveal on those special FOMC announcements.  They don't want to change a goddamn thing except their bank accounts.  That is who you are dealing with here and at other blogs.

This article doesn't provide anything but conjecture and speculation, like all the others.  Many spend their time chasing ghosts, or I should say trying to second guess what their masters will do.

They all lie to you, and the ones that don't will never be right.  That's the Catch-22.  So many on these blogs that are so young and inexperienced.  Live your life and get out of this hell hole.  What kind of life is it to steal or profit from the misfortune of others.

Choices in life are simple.  You're just thinking too hard.

BigJim's picture

The vast majority of ZH people 'get' the nature of the Fed.

But calling for its dissolution, thread after thread, is boring and pointless. It's like going to a frat party and suggesting having a good time every 5 minutes.

We all want the Fed destroyed. But even if one of us blew up the Fed, it would be pointless - until the majority of Americans understand the system, they'd just allow our politicians to re-institute it. So until that day, we're stuck with the Fed and trying to second guess its actions, in the hope we can front-run the bastards so we can carry on eating.

sgorem's picture


pragmatic hobo's picture

idiot ... QE2 was designed to raise the rates! And it worked! Now when QE2 is over the rates will go down again.

mayhem_korner's picture

Beg pardon, but did you pass basic math class?

akak's picture

Which must be what explains gold's fall from $1500 back down to the current $700.

TruthInSunshine's picture


Gold is in the early innings of a massive breakout if The Bernank doesn't convert himself into a hawk before tomorrow - which he will not do.