Debt Bubble Chronicles: Does Bernanke REALLY Think QE Will Boost Home Prices… Or is He Simply Trying to Hide an Even Bigger Problem?

Phoenix Capital Research's picture

it’s worth putting things in context.


The world,
particularly the US, has been in a bond bull market for roughly 30 years.
During that time bond prices (black line) rose almost continuously, while
interest rates (blue line) dropped.



So here we
are, interest rates are the lowest they’ve been in 30 years, and Ben Bernanke
wants to make them fall even lower. His public reasoning is he wants to
maintain the housing market and spur investment in business.


But does it?


rates have been at 0% for nearly two years. Despite this as well as a massive
home-buyers tax credit, housing prices have, at best, stabilized a bit… but any
claim that low interest rates have stimulated a housing recovery is flat out



As for low interest rates spurring investment in
business, this claim is also nonsense. I don’t remember seeing any headlines
about companies increasing their capital expenditures or hiring employees?
Instead big business is putting its excess cash to work with buyback programs.


Time Warner Cable plans $4 billion stock buyback‎


CBS Broadcasts Solid 3Q Results, Announces Stock
Buyback Program


Entergy 2011 EPS Target In Line With Views, Ups Share


§  Visa Says Quarterly Profit Rises, Sets $1
Billion Buyback Plan


§  Rent-A-Center Boosts Stock Buyback Plan 33%
To $800M


Let’s be
blunt here. Corporations know that the recovery is not real. Revenues at
S&P 500 companies still remain 11% below their Spring 2008 levels. That’s
why companies are not bothering to hire or expand their operations (cap ex).
Instead, they’re buying stock in their companies.


After all,
companies only issue stock buybacks for two reasons 1) they think shares are
cheap or 2) they’ve got nothing better to do with the money. Given that the
same corporate insiders voting to issue these buyback programs are dumping
their PERSONAL shares hand over fist (the insider selling to buying ratio for
the month of October ranged from 229 to an unbelievable 2,019), I somehow doubt
these folks think their stocks are cheap.


Thus, both
of Bernanke’s claims (that QE will help housing and spur business investment)
are a crock. So what’s the REAL reason he’s frantic to kep interst rates low?




According to
the Office of the Comptroller of the Currency’s Quarterly Report on Bank Trading and Derivatives Activities for the
Second Quarter 2010 (most recent), the notional value of derivatives held by
U.S. commercial banks is around $223.4 TRILLION.


Five banks
account for 95% of this. Can you guess which five?



Gee, that
looks a bit like a list of the TOP banks Bernanke’s been bailing out/
backstopping/ funneling cash since the Financial Crisis began doesn’t it?


Now, why
would Bernanke be so hell-bent on keeping interest rates low? After all, how
much of the $223 TRILLION in notional value of derivatives is related to
interest rates?


Try $188


Yes, thirteen times the US’s entire GDP
and nearly four times GLOBAL GDP.

Now, of
course, not ALL of this money is “at risk,” since the same derivatives can be
traded/ spread out dozens of ways by different banks as a means of dispersing

However, given the amount of money at
stake, if even 2% of this money is “at risk” and 10% of that 2% go wrong, you’ve
wiped out ALL of the equity at the top five banks… and likely kicked off
another systemic implosion at the same time.


If you think
Bernanke isn’t aware of this, consider that his predecessor, Alan Greenspan,
knew as early as 1999 that the derivative market, if forced into the open and
through a public clearing house would “implode” the market.


Don’t buy
ANY of Bernanke’s claims that he’s trying to help housing or business. If he
had ANY interest in helping the little guy, his track record wouldn’t be so


No, Bernanke
is doing one thing and one thing only: trying to shore up the overleveraged,
derivative-riddled balance sheets of the Too Big to Fails. He is sacrificing
the US Dollar, middle class, savings, and possibly even the Republic just to
aid his Wall Street masters.


Those who
aren’t prepared for what’s to come as a result of this miscreants policies are
going to lose a lot… maybe EVERYTHING.


Don’t be one
of them.


Graham Summers


PS. If
you’re worried about the future of the stock market and have yet to take steps
to prepare for the Second Round of the Financial Crisis… I highly suggest you
download my FREE Special Report specifying exactly how to prepare for what’s to


I call it The Financial Crisis “Round Two” Survival
. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).


Again, this
is all 100% FREE. To pick up your copy today, got to
and click on FREE REPORTS.





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whiskeyjim's picture

And if you believe those graphs that show housing markets have stabilized, I have some houses in Florida and California to sell you.  How many can I mark you down for?

nohweh's picture

Have to say, here in Aus we have a Govt sanctioned 4 bank cartel that

originates 90% of residential mortgages (fractional reserve of course), where

the mortagee usually provides 10% deposit (the reserve) and the bank

advances its digital 90% balance. Recently our Central Bank increased

the cash rate by 25 basis points, and now the cartel is adding up to an

additional 20 points on top of that (45 points), based on the claim that

their funding costs have increased. They are not even fooling our

politicians and MSM parrots anymore.



nohweh's picture

Thanks Withdrawn Sanction, appreciate your elucidation on the FED.

You, the people, must continue throwing cream-puffs at City Hall until

you drown the bastards.

TuesdayBen's picture

Great post.  I agree that BB is fighting to keep the TBTFs from failing.  I think he is fighting the same fight as in 2008 - fighting to keep the global financial system from total collapse.  The reason the entire global financial system is at risk of collapse, rather than just those banks that made bad mistakes, is the hideously complex and widespread web of derivative financial instruments that exists today.  If the big players at the core of the derivatives biz go belly up, there is one hell of a worldwide mess.  In that scenario, I wonder what happens to the little guy.  The owner of a $3MM office property, who refi'd in 2007, whose lender at that time refused to offer fixed rate debt, but sold him on an interest rate swap that fixed his borrowing cost.  His lender then went out and hedged that with one of the big boys, pocketing a really nice fee up front.  Even smaller banks were pushing their loan officers really hard to sell rate swaps to borrowers, because they were enormously profitable up front.  So if the whole system collapses, what happens to the guy with the $2.4MM SWAP on his $3MM (now $2MM) office property....??

Careless Whisper's picture

He is sacrificing the US Dollar, middle class, savings, and possibly even the Republic just to aid his Wall Street masters.

his wall street masters? nah, he works for the people.

i'm just wondering about all that derivative exposure; don't the big banks have that exposure with each other? so basically if one goes down, they all go down? not sayin that's a bad thing, just sayin.


gmak's picture

I am amazed at how someone quotes a notional amount and predicts armageddon. That $188 Trillion tied to interest rates is not the real exposure.

1. An interest rate swap involves no exchange of principal (notional), and the cash flow (if done via ISDA documentation) is the net of two interest rate coupons - usually one fixed and one floating. I can opt to receive a fixed rate (coupon) on a notional amount, and pay a floating (usually a spread against LIBOR in the underlying currency) - or vice versa. My payment or receipt is the net of what I am required to pay, and what I am required to receive.

2. If I am an IB and I put on an interest rate swap as part of a deal with a client, chances are that I have hedged it away with an equal and opposite swap - locking in a spread or fees. In reality, the total exposure is zero for me. However, anyone adding up the notional will now have twice as much due to the fact that they are adding the notional of two swaps (which cancel each other out).

3. Let's say that as a matter of course of business, I have many swaps with the same counterparty, put on for various unique business reasons. These swaps could result in a NET notional exposure of zero, with all the coupon payments in both directions (fixed and floating) netting out, or leaving a very small net payment. Yet, anyone adding up the notional would come to the conclusion that there is a huge exposure.

I'm not saying that there isn't risk in the system - but it cannot be measured by quoting the sum of all notional without regard to the sign or direction of the swap. Nothing can be concluded or extrapolated by saying that the sum of all the notional of all the interest rate swaps is 188 trillion. I know a company that borrows in the market and lends to businesses to underwrite trade. They borrow using fixed rates in a variety of currencies, but always swap to a floating rate USD - and their loans are made in floating rate USD as well. Adding up the notional on the swaps would show an amount in the billions - yet the swaps are part of a conversion to remove interest rate risk and guarantee a spread on their business. This leaves mgmt as being credit risk managers instead of interest rate managers - a far different risk.


QQQBall's picture

The answer is not that we don’t have good, smart people trying to solve our problems. Obama’s staff is stocked with capable, bright people including Secretary of the Treasury Tim Geithner,...

You lost me right there

Ripped Chunk's picture

Bigger problem in hiding. Ben continues to conceal.

Collapse of all monetary systems world wide.


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Samual Adams's picture
‎"When the government violates the rights of the people, insurrection
is for them the most sacred of rights and the most imperative of duties" - Declaration of the Rights of Man (1789)
RockyRacoon's picture

So, I guess the question is, since this is the course the Fed intends to take, how much is this going to cost?  How much needs to be "printed" to fill the black hole of these derivatives?   At what point do we say "NO MORE!".  Wasn't that about a trillion dollars ago?  Will it take a complete transfer of all the assets of the U. S. plus a wheelbarrow full of IOUs to get this taken care of?   And who benefits?  We get to go back to business as usual and run up another "asset" class to oblivion?  We now know the problem -- what's the solution?

tony bonn's picture

irs are the hydrogen bomb of the derivatives world...those things will blow up....not sure when but that moment will be the teleological moment of the financial hubris of the financial elite.

Quinvarius's picture

I have to agree.  I never thought they were doing any of this for the economy.  The cheaper programs like the housing subsidy and cash for clunkers actually had some effect for a little while.  If they wanted to address the economy, they would have done similar things.  But all they have been doing is printing and looting for the banks.  That is why it will never stop no matter how much inflation shows up.  There is no way to make the banks solvent.

Fraud-Esq's picture

I'm with this. monetizing or laundering..

nohweh's picture

thanks honestann, now I know I can trust them

honestann's picture

Yup... just not rationally or justifiably.

honestann's picture

You want a new housing boom?  That is utterly trivial to create.  All the FederalReserve and government of the USSA need do is --- zip, zero, nada, nothing.

Specifically, if the FederalReserve removed itself from the lending business (to banks and the USSA), and the government of the USSA closed down FannyMae and FreddieMac, prices of homes would drop 50% or more in just a few months... at which point.

The low prices would cause the housing market to boom.

The predators-that-be have destroyed, and continue to destroy the housing market.

aerojet's picture

Sure, at the cost of making everyone who is current on their mortgage payments underwater instantaneously.  This might also piss off anyone who owns their home outright.  Not that I care, but I would have to default on my mortgage if such an event were to occur.  Why is "punish savers" always the only viable strategy?

honestann's picture

That is the risk everyone takes when they make a purchase.  Why should people who are and were responsible be punished to support people who were irresponsible and/or misguided?  Explain that to me.

Also understand that mortgages are debts collateralized by the home.  Thus homeowners who were mislead and scammed by the banks can ethically and legally stop paying their mortgage payments, and hand back the keys when the bank decides to take control of the collateral... exactly how it works in commercial real-estate, by the way.

Therefore, those folks who are "underwater" have a way out without loosing very much, since down payments were irresponsibly held absurdly low by the banks the past several years.  In the scenario I outlined, they can rent for a year or three, then buy a home at 1/3 the price and be far, far ahead of where they are now.

And the ever-increasing millions of folks who cannot afford their own home, or who are responsible and refuse to buy at these insane prices, or who are responsible and refuse to buy before they have saved the nominal 20% down payment... they too can finally get a home at a fair price.

So, the solution I give is the best solution for nearly everyone... not to mention the natural and ethical solution.

Future Jim's picture

Could it be that China plans to introduce a gold backed currency, which would then replace the dollar as the global reserve currency?

honestann's picture

Let's hope so.

We all should switch to demanding gold as payment, and buying and selling with gold.

I have already done so with 96% of items I need to buy.  The other 4% I have not found suppliers willing to exchange their products for gold.  BTW, that 96% is up from 28% four years ago.

nohweh's picture

I am just a financial ingenu from down-under. Can someone tell me

that the FED is not just a Warburg created private banking cartel?

Withdrawn Sanction's picture

Yes, Warburg was on hand to help draft the 1913 Act, as were reps of National City (Rockefeller), and the House of Morgan (not to mention some bit players from the Senate Banking Committee).  Its creation was done in secret because the American public had twice rebuffed the creation of central bank.

The construct these anti-Americans devised made the District Banks the locus of power initially and these FR Banks were owned by the commercial banks in the respective districts (it was a form of mock federalism designed to overcome resistance of those who opposed centralized banking power married to centralized political power).  Member banks were required to purchase shares in their respective district bank.  The Bd of Governors (where the locus of power rests today) is a quasi-govt entity.  Quasi in that it does not have to suffer annual appropriations (like the Dept of Commerce of Defense Dept does), report in detail on its operations, or otherwise submit to meaningful public scrutiny.

Tick, tock...Big Ben.

gkm's picture  These may give you some insight.  Note they are in reverse order of play.  The bits on the Fed are at the end of the 3rd one and throughout the second one.

honestann's picture

Sure they can.  Just not honestly.

Raging Debate's picture

You are correct. The fees are really what have been pulled forward. Two or three trillon on roughly sixty trillion of derivatives. But none of us can know for certain, can we? Correct that one party theoretically loses fees on a side of the trade but the losing side on the fees had to be paid off too or they would have given up the goose.

Don't forget what a lot of the derivatives funded, it was the final acceleration of the rise of the East, the lovely mandraking game played out over forty years. Oh and love the circus of calling China the enemy. What is almost humorous is that unlike the 1890's or the 1970's tens of millions now know the Wizard Behind the Curtain. Also would be hillarious if not so deadly is the Chinese/Russians not playing hoops like they said they would but that is more insurance to force the West into payments for all the friends of the circle but cannot be met.

  Hopefully, TPTB realize all of this and attempt a shot at global democracy instead of the God's and Clods society. If not, that physical hedging is going to come in awful handy.

Problem Is's picture

Excellent Post: Built on Fact
A disingenuous bearded cue ball like Bernank-ster always has his hands in his pockets playing TBTF pocket pool one way or another...

Timmay Can't Play TBTF Pocket Pool
Even when Timmay was at FRBNY...

No nads...

b_thunder's picture

"... Bernanke is doing one thing and one thing only: trying to shore up the overleveraged, derivative-riddled balance sheets of the Too Big to Fails. He is sacrificing the US Dollar, middle class, savings, and possibly even the Republic just to aid his Wall Street masters."


Bullseye!  100 and 1 % correct.  Just wanted to add that Hank Paulson and Tim Geithner have exactly the same motives, even though unlike the "independent" Fed Hank and Timmy suppsoed to be Public Servants.


Everybodys All American's picture

Shut down all the banks involved with the sub prime and derivatives market.  Bankruptcy is their solution.

Prop up the banks that are left behind. Jail all Goldman Sachs, JP Morgan, and Bank of America execs.  If we did this two years ago I virtually garuntee we would not need QE2.

covert's picture

brilliant well written. fantastic investigation.


Psquared's picture

It has absolutely nothing to do with the housing market, liquidity or interest rates. It has to do with stabilizing the bond market and the dollar. The Chinese have telegraphed their intention not to buy Treasuries. The Fed has become the only buyer.

spanish inquisition's picture

So you should be able to take the amount and timeframe of the derivitives (edit: specific to interest rates) and figure out how long and how much devaluation Bennie needs to keep his buddies in the game. (ie. 8 years at 0% with another 40% devaluation in the dollar) 

janchup's picture

Let the banks fail; no more derivatives problem.

Ethics Gradient's picture

That would solve other problems as well. Overpopulation being the main one.

jm's picture

I agree with the premise that QE is chiefly about shoring up insolvent bank balance sheets. 

But the discussion re: derivatives is just awful.  I'm certainly not the world's greatest expert, but seriously... at least figure out how a swap works before you comment on OTC derivatives and how they create some kind of waking hellscape.

It's an interesting subject.

Peak Everything's picture

Maybe. But higher interest rates also bankrupt the US government and collapse the economy faster, even without derivatives. I see all these complicated explanations for QE like BB is trying to explode inflation in China faster than the US, or the US wants to devalue faster to increase export competitiveness. To me the simplest answer is the most probable. Namely that the US wants/needs to spend more than its income and has no choice but to print.

Buck Johnson's picture

I totally forgot about the derivatives, this is a big problem that will come to the forefront very very soon.

StychoKiller's picture

Please?  Something's gotta get the party started!

Anal Picnic's picture

They have a saying in Texas, "You dance with the one who brung ya." For you sophisticates, "follow the money" or, as I tell my husband every now and then, "If you a peek at the curtains, show me who's daddy." 

moneymutt's picture

By the way, once again, every intervention is on behalf of big banks but made to look like it is for regular people, homeowners.

Regular people, and banks would be better off if they took the money they are printing and hired people to do useful stuff...or if you treat people like banks, simple hand the money to people for doing nothing...shoot, we are suffering the weakness of the dollar anyway, at least we should get something from it.

Ned Zeppelin's picture

Of course, the actions are alwayes justified by a pack of lies about helping  J6P. 

moneymutt's picture

To all you liberterians out there, the derivatives market is a completely free, unregulated by govt market. Only govt involvement was when we bailed AIG out in 2008...if govt had stayed out, would have been horrible global crash and seizing up. If govt protected bank deposits, things would have gotten back going after practically every debt in world and most people's wealth wiped out....not that wouldn't have better than what we have now...but still major pain due to out of control, manipulated, corrupt market that would have allowed bankers that crashed their companies still to exit with fortunes while everyone else wiped out.

aerojet's picture

Here we  go, bashing libertarians for not being regulatory enough.  Last time I looked, the SEC wasn't doing jack shit about many excesses and outright fradulent activities.  Brooksley Born warned us all about the derivatives market and nothing was ever done to rein it in, so spare me that free market strawman nonsense, okay?  Part of libertarian philosophy deals with keeping markets around to trade in, not greedily blowing everything up and leaving nothing but smoking craters all over the place.  Ethics are completely absent in our system.

StychoKiller's picture

There's ALWAYS a huge, free market in fraud -- feel 'free' to participate -- just don't mistake this for Libertarian philosophy!

Shameful's picture

So all the built in backstops are part of the free market?  I imagine the Federal Reserve is a creation of the free market and not the state as well then?  It's incredibly unlikely this would happen without backstops and guarantees, and even if they did they would go under and lose money.  Due to the statist system men like Jamie Dimon live in opulence while the common man is robbed.  Man so glad we have the state watching out for us.

Dick Buttkiss's picture

Oh pahlease.  This absurd derivatives market only exists because of centralized, fractional-reserve banking, which libertarians rightly hate with a passion.  Which is to say, it's not a free market regulated by the protection of life, liberty, and property; it's a free-for-all "regulated" by the global banking cartel that control all, never mind that it's totally out of control.

What a fucking dumb-ass.

Eternal Student's picture

Heh. That's the same argument that the Communists use. They claim it's a great system, but it just hasn't been tried.

Which I suppose one might apply to Socialism, Fascism, whatever. Theoretical observations are great in theory, but they suck in practice.

aerojet's picture

Bullshit.  You either police yourselves and create a sustainable system or you don't.  Ideology doesn't matter.