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As Fed Creates Russell 2000-Based "Wealth Effect", It Tells Banks To Prepare For 11% Unemployment Stress Test

Tyler Durden's picture


One would think that the S&P doubling from the March 2009 lows would be indicative of a mission accomplished for the Fed's market manipulation, aka Open Market Operations, team. No such luck. In fact, while the abominable Dr Chairsatan and Messrs Frost Sack are spouting garbage about economic recovery to anyone retarded enough to listen (oddly they have found a great audience in Congress) behind the scenes they are telling banks to prepare for a stress test recession scenario in which unemployment is 11%. And since current unemployment is about 23%, and we continue to be in a Depression, we assume this means that the Fed is actively preparing to make sure banks will be able to handle the explosion in economic growth and, oh yeah, hyperinflation, when the $1.7 trillion in excess reserves as of June 2011, finally flood the market. Although since this statement may be sufficient to get Zero Hedge to issue "unsolicited" opinions on the state of the Great Ponzi, we will go with the party line here... Which we find confusing: why would the Fed force US banks to undergo another stress test: aren't they all massively overcapitalized? Wasn't that the whole point of the first fraud of a stress test back in 2009 which had he same credibility as the upcoming European one? And why not cut to the chase and conduct a Ponzi unwind stress test? So many questions...So many more lies.

From Bloomberg:

The Federal Reserve ordered the 19 largest U.S. banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11 percent, said two people with knowledge of the review.

The banks stress-tested the performance of their loans, securities, earnings, and capital against at least three possible economic outcomes as part of a broader capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans last month. The Fed will finish its review in March.

“They’re essentially saying, ‘Before you start returning capital to shareholders, let’s make sure banks’ capital bases are strong enough to withstand a double-dip scenario,’ ” said Jonathan Hatcher, a credit strategist specializing in banks at New York-based Jefferies Group Inc. Regulators don’t want to see banks “come crawling back for help later,” he said.

Crawling back to whom? The next crash won't have the Fed as a backstop - the Fed will be done, as will all central banks. So unless Jefferies envisions Marsians with bags full of cotton plated tungsten Ber-nanks landing some time in 2012 and being dumb enough to bail out the criminal banking syndicate, we fail to see what the dilemma is here.

The Fed’s adverse economic scenario included a 1.5 percent decline in gross domestic product from the fourth quarter of last year through the end of 2011, said the people, who declined to be named because the Fed hasn’t made the details of the review public. The scenario assumed growth resumes, with output rising 4 percent over the fourth-quarter 2010 level by the end of 2013. Unemployment would peak at more than 11 percent by the first quarter of 2012 and drop back to 9.5 percent by the end of 2013.

Instead of engaging in stupid tests which will be gamed by everyone involved, perhaps the Fed should announce to the broader public that it will conduct Ponzi unwind tests: it would be far more interesting to discover what happens to stock markets and the hollow, yet massively "inventoried" US economy, when the Fed finally admits that America has become one big Bernie Madoff Securities Holding Company. We are confident that alone will be sufficient for stocks to perform another massive flash smash. And worst case scenario (should one be able to track down the appropriate people at DTCC): one can always eat their stock certificates. Granted, these being mostly cellulose, their nutritional value is exactly zero, but who cares about fundamentals any more.


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Thu, 02/17/2011 - 14:25 | 970903 Translational Lift
Translational Lift's picture

We are now four months into QG2 and the daily POMO is having little or no affect.  Let me see....what was the definition of insanity again??

Thu, 02/17/2011 - 14:30 | 970928 umop episdn
umop episdn's picture

QE 3, 4, 5, ad infinitum? Listening to the Bernank, and believing the lies? Watching a reality show while the country collapses around you? Is this a trick question?

Thu, 02/17/2011 - 15:02 | 971047 Triggernometry
Triggernometry's picture

Einstein's quote on insanity came before the formulation of quantum theory, by which we now know a different result becomes increasingly inevitable as repetitions increase. Maybe Benbabwe is running the world's first quantum-quantitative finance super computer; as such actions by the FED clearly show some understanding of Heisenberg's uncertainty principle.

Thu, 02/17/2011 - 16:05 | 971296 Translational Lift
Translational Lift's picture

"we now know a different result becomes increasingly inevitable as repetitions increase".

Sounds like a principle Goebbels could have used........but then he came before quantum theory.........

Thu, 02/17/2011 - 17:26 | 971738 hbjork1
hbjork1's picture

T. L.,

Quantum Theory was well developed enough to be called "Theory" by the mid 1920s.  An the folks that developed it, except for Einstein, who was principally responsible for the name and who made it to the US, most were heavily impacted by the war. The theoretical hypotheses developed during the period were important in the development of the A-bomb.  

Gobbels was a misfit that later attached himself to the Nazi cause.

Thu, 02/17/2011 - 17:38 | 971788 Translational Lift
Translational Lift's picture

I am quite familiar with Goebbels and his "cause(s)" somehow I don't think he ever associated with Planck's endeavours.  Forgot to use (sarc)....thanks....


Thu, 02/17/2011 - 14:25 | 970905 midtowng
midtowng's picture

The disconnect of the stock market and the general economy is complete. So is the GDP, and most other economic indicators.

Thu, 02/17/2011 - 21:47 | 972700 Zero Govt
Zero Govt's picture

Face facts we're not data points in Benbabwes calculus, here's his theory:

QE+QE1+QE2+QE3... +QE16 >insert> WS Bankrupts + NYSE = Wealth Effect

That's it! There's no economy, no employment or you and me in there. How could there fuking be, the 'Wealth Effect" is cut straight into bonuses for WS Bwankers to feel better about themselves

Thu, 02/17/2011 - 14:27 | 970910 jus_lite_reading
jus_lite_reading's picture

Dr. Deficit is going Kamakazi. I'm just saying...

Thu, 02/17/2011 - 14:28 | 970916 Cleanclog
Cleanclog's picture

And since the bailouts of the TBTF banks were the most enormous transfer of wealth ever as they were GIVEN taxpayer money and then allowed ZIRP which was essentially free profits to "recapitalize with", while savers were screwed with itsy income, add in the POMO profits for bank PDs, again for no skill required, so more massive bonuses may be awarded to the chosen people - the banksters . . . all I can imagine is that despite all the wondebar news for banks they really are going to implode again - - - and now they're bigger than ever and deposits etc are more concentrated in the TBTFs, so here comes another bailout.  Infuriating - but that doesn't matter either.  

When do we storm the Fed, Treas, and big banks?

Thu, 02/17/2011 - 18:28 | 971993 tsx500
tsx500's picture

i'm ready when you are . . . . .

Thu, 02/17/2011 - 14:29 | 970917 ginunn
ginunn's picture

I assume giving notice means they will have time to buy shredders, delete backup tapes from email servers, finish stuffing the crap they have created since the last test into off-balance sheet vehicles and generally clean house. I'm surprised the Fed didn't assign them their scores in advance too. Maybe that was in a separate memo.

Thu, 02/17/2011 - 14:30 | 970919 thedrickster
thedrickster's picture

"In fact, while the abominable Dr Chairsatan and Messrs Frost Sack are spouting garbage about economic recovery to anyone retarded enough to listen"

Shriveled Teste Boy qualifies.


Thu, 02/17/2011 - 14:30 | 970921 alien-IQ
alien-IQ's picture

this is just fucking ridiculous.

Thu, 02/17/2011 - 15:06 | 971071 jus_lite_reading
jus_lite_reading's picture

As I have been saying for weeks now, for every tick higher these fake markets go, the more gold and silver I buy. Just managed to talk my partner into bartering me some silver EEagles for some worthless toilet paper...

Thu, 02/17/2011 - 14:30 | 970927 jobs1234
jobs1234's picture

Well Evans thinks that inflation will be below 2% until the end of 2013. Apparently every commodity and PM on the face of the planet earth disagrees.

Thu, 02/17/2011 - 14:37 | 970959 Translational Lift
Translational Lift's picture

The rate we are going....there won't be a 2013.......

Thu, 02/17/2011 - 14:45 | 970988 Cognitive Dissonance
Cognitive Dissonance's picture

Has anyone considered that the hype about 12-21-2012 will be leveraged by the powers that be to enact draconian measures. The more things come apart, the more people will connect it to the myth of 12-21-2012 (with the help of the compliant MSM) the more TPTB can use that to their advantage to crack down and impose stifling monetary, political and military measures.

Self fulfilling prophecy.

Thu, 02/17/2011 - 14:52 | 971014 alien-IQ
alien-IQ's picture

meanwhile in Wisconsin...13,000 people storm the Capitol and the mainstream media promptly ignores the story...which is, luckily for us, cover by...Russia Today...(the irony here is beyond thick)

Thu, 02/17/2011 - 14:58 | 971028 Cognitive Dissonance
Cognitive Dissonance's picture

That's because these things don't actually happen in America, only in third world countries and banana republics where the elite and powerful control the populations.

This was just an unruly line for food stamps. Same ole same old. Not "news" worthy.

Thu, 02/17/2011 - 15:15 | 971103 jus_lite_reading
jus_lite_reading's picture

Amazingly, I have seen/heard very little about this monumentous event outside RT and other "rogue" sources. Funny thing is, our main stream media has become the rogue source!



It's on like Donkey Kong!

Thu, 02/17/2011 - 15:54 | 971257 EvlTheCat
EvlTheCat's picture

Its front page news on just a blurb on  Not that I care about either sources.

Thu, 02/17/2011 - 15:08 | 971075 jus_lite_reading
jus_lite_reading's picture

With talk about perpetual bonds, they must think us idiots. I love this quote, must read:

Basically, we can consider that the events in Tunisia and Egypt have acted as a double trigger violently uprooting the entire Arab world (and the Middle East) of the world before the crisis, a world characterized by the omnipresence of a guardian power, the United States, managing the imbalances in this region with only two concerns: to control the price of oil and ensure Israel's security…

Thu, 02/17/2011 - 14:30 | 970930 Jason T
Jason T's picture

$1.65 trillion deficit and a -1.5% GDP growth?  How is this not hyperinflationary? Remind me, what is backing this Ben Confetti from Washington?

Thu, 02/17/2011 - 14:33 | 970934 lsbumblebee
lsbumblebee's picture

I can understand this. If unemployment drops to 11% consumers might start borrowing again.

Thu, 02/17/2011 - 16:50 | 971526 Canuckistan Al
Canuckistan Al's picture

I think the 11% is a typo. The "zero" key on the Bernanke's keyboard is worn out from all those extra zeros he's added to the money supply. He meant to type "Unemployment would peak at more than 110 percent by the first quarter of 2012"

Seems a more likely scenario to me.

Thu, 02/17/2011 - 14:32 | 970935 bugs_
bugs_'s picture

sounds like this is the "stress test" thats going to get me

Thu, 02/17/2011 - 14:33 | 970939 lunaticfringe
lunaticfringe's picture

Gawd I love ZH. Without you guys, I'd go nucking futs. Check out this headline...I'm not sure it gets any better than this...

Thu, 02/17/2011 - 14:33 | 970942 Cognitive Dissonance
Cognitive Dissonance's picture

Ships Captain (The Bernank) to passengers: "Nothing to worry about. The leak has been contained and we will dock in New York on schedule."

Ships Captain to crew: "Lock everyone except first class below deck and then abandon ship."

Thu, 02/17/2011 - 14:34 | 970948 lunaticfringe
lunaticfringe's picture

No shit. He who panics first, panics best.

Thu, 02/17/2011 - 14:44 | 970985 optimator
optimator's picture

Bankers, women and children, and those on the "Fly now, pay later" plan into the lifeboats.

Thu, 02/17/2011 - 15:23 | 971147 buzzsaw99
buzzsaw99's picture

"Fly now, REDUCE-ALATOR" [/bewitched]

Thu, 02/17/2011 - 15:19 | 971128 jus_lite_reading
jus_lite_reading's picture

Ship's Captain to musicians: "Keep the happy music playing."

Thu, 02/17/2011 - 15:44 | 971226 Cognitive Dissonance
Cognitive Dissonance's picture

I think they went down with the ship. None of them were first class.....except as musicians.

Thu, 02/17/2011 - 14:34 | 970947 101 years and c...
101 years and counting's picture

The Fed is trying to gauge how much QE3 should be when another 12-15 million people lose their jobs due to current inflationary pressures.


Thu, 02/17/2011 - 14:36 | 970953 lieutenantjohnchard
lieutenantjohnchard's picture

yes, exactly. why the stress tests, pomo, glass jaw economy talk if the economy is strong? of course, the red pill folks are keenly aware of the lies and deception.

Thu, 02/17/2011 - 14:38 | 970960 jobs1234
jobs1234's picture

And the AAII survey provides some more laughs, look at some of these responses, even stock market participants are starting to laugh at the BS


Here is a sampling of what AAII members said about the current lack of volatility:”

  • “Although it is very encouraging, I continue to have a low level of anxiety.”
  • “It’s not a false sense of calm, but more an illusion of calm. There is still some serious deleveraging going on in the economy.”
  • “It’s a false sense of security. Everybody is once again believing in the miracle.”
  • “It’s justified…Too many positive developments nationally and internationally with mid-term implications to ignore.”
  • “I believe the lack of volatility signifies that many people may believe the good times have arrived again.”

This week’s AAII Sentiment Survey results:

  • Bullish: 46.6%; down 2.8 percentage points
  • Neutral: 27.9%; up 4.2 percentage points
  • Bearish: 25.6%; down 1.3 percentage points

Historical averages:

  • Bullish: 39%
  • Neutral: 31%
  • Bearish: 30% 
Thu, 02/17/2011 - 14:39 | 970968 ghostfaceinvestah
ghostfaceinvestah's picture

Believe me, the Fed knows what is going to happen when QE ends.

Thu, 02/17/2011 - 14:39 | 970969 jobs1234
jobs1234's picture

Seriously, the more Evans talks, the more I want to buy every PM and commodity not nailed down to the floor:

Fed's Evans says boosting inflation expectations 'appropriately' in the short-term is consistent with Fed's mandate

Thu, 02/17/2011 - 14:40 | 970971 Rainman
Rainman's picture

The real audience for this show be the elected Critters. This test is a faux demonstration of Fed ability to bring restraint to the bankster pigmen....none of it is suitable for an intellectually mature audience.

The Bernank knows Ron Paul and his disciples of reason must be neutralized.

Thu, 02/17/2011 - 14:42 | 970978 AccreditedEYE
AccreditedEYE's picture

This is what happens with an academic at the wheel.... we test. He will not take action, he will not allow the system to take its medicine. Stall, delay and measure... and pretend that the world doesn't really see what's going on and really believes in what you are doing rather than know the truth: everyone is waiting to run to the exits at the last moment... kinda like school kids with their coats on waiting for the final bell. Bernanke is a tool.

Thu, 02/17/2011 - 17:51 | 971857 hbjork1
hbjork1's picture

IMO, don't just blame the academics.  There are academics that have been shouted down and because their disipline did not please the public, they became silent. 

IMO, Greenspan did what he did because he thought he would beeplaced by someone who was less astute than he was who would have kept the party going.  And, truth to tell, the Volker disipline was not too popular with the public.  

We all loved the stock market of the 90's didn't we.

Thu, 02/17/2011 - 14:43 | 970983 NOPOMO
NOPOMO's picture

Tickle me POMO.

It is obvious that Ben believes he can create the well effect.   All Ben is doing is letting the culprits have more time to steal from the markets before it all collapses.  Obviously he does not have them trapped in a chokehold.  Instead he has put the middle class in his cross hairs. 


Thu, 02/17/2011 - 14:48 | 970999 bob_dabolina
bob_dabolina's picture

Joe Cassano can replace Tim Geithner now.

Thu, 02/17/2011 - 14:48 | 971000 jus_lite_reading
jus_lite_reading's picture

Actually this link from Europe might help explain...

Thu, 02/17/2011 - 14:48 | 971002 Orly
Orly's picture

"So unless Jefferies envisions Marsians with bags full of cotton plated tungsten Ber-nanks landing some time in 2012 and being dumb enough to bail out the criminal banking syndicate, we fail to see what the dilemma is here."



Thu, 02/17/2011 - 14:56 | 971017 iota
Thu, 02/17/2011 - 14:53 | 971018 Atomizer
Atomizer's picture

The QE gift that keeps on giving.

Thu, 02/17/2011 - 14:56 | 971027 tmftdoyle
tmftdoyle's picture

Russell within 2.5% of all time high from 2007!

Thu, 02/17/2011 - 15:00 | 971039 oklaboy
oklaboy's picture

buy on the dips! buy on the dips!!!

Thu, 02/17/2011 - 15:06 | 971063 iota
iota's picture

Dips are so 2010. The new acronym is JustFuckingBuy.

Thu, 02/17/2011 - 15:05 | 971058 ShankyS
ShankyS's picture

Simply wonderful -

And since current unemployment is about 23%, and we continue to be in a
Depression, we assume this means that the Fed is actively preparing to
make sure banks will be able to handle the explosion in economic growth


Although since this statement may be sufficient to get Zero Hedge to
issue "unsolicited" opinions on the state of the Great Ponzi, we will go
with the party line here...


Thu, 02/17/2011 - 15:09 | 971077 Dick Darlington
Dick Darlington's picture

Does this delusional minion of THE Chair Creature really get paid??? This and the other comments today: WOW!


02-17 14:00: Fed's Evans see little inflationary pressure until unemployment falls to 'sustainable' rate of 5-5.5%
Thu, 02/17/2011 - 15:09 | 971079 lizzy36
lizzy36's picture

Please, this is all about perception.

Bernanke is looking to solidify his legacy, which took a severe hit because he (along with tiny tim) was the lead regulator and thus actually ALLOWED the 2008 crash to occur. Alas, the wealth effect has eliminated this memory from the 20% of the population that matters to the Federal Reserve. This move is just an attempt to placate the other 80%.

Thu, 02/17/2011 - 15:14 | 971095 BKGuy
BKGuy's picture

As long as FAS 157 remanins a joke and anything toxic can be held in the "maturity portfolio" and marked to model, any "stress" can be assumed away by rosy growth assumption inputs. Thus, these (as well as the first round) are a total sham.

Thu, 02/17/2011 - 15:16 | 971104 HarrisonBergeron
HarrisonBergeron's picture

Has the Fed gone full retard on this one?

Thu, 02/17/2011 - 15:37 | 971195 Weisbrot
Weisbrot's picture

how would you Quantify that? QER ?

Thu, 02/17/2011 - 15:24 | 971153 Ned Zeppelin
Ned Zeppelin's picture

If you are paying attention: the S&P keeps going up in the face of marginal and outright bad news.  Commodities appear to be close to some sort of moon shot increases.  There is talk of huge budget cuts and tax increases "or else."  Bernanke speaks, and people do not challenge him. In other words, outright madness continues unabated.

Off the rails time may be sooner than we think. 

Thu, 02/17/2011 - 15:25 | 971154 jmc8888
jmc8888's picture

The ponzi unwind stress test of Glass-Steagall or we're just tossing salad.

Thu, 02/17/2011 - 15:34 | 971187 Weisbrot
Weisbrot's picture

considering some parts of the USA are already at 15% or more, they should already know what 11% will look like.

Thu, 02/17/2011 - 15:37 | 971201 curbyourrisk
curbyourrisk's picture


Thu, 02/17/2011 - 16:00 | 971278 Seasmoke
Seasmoke's picture

is 11% up or down from here ?

Thu, 02/17/2011 - 23:46 | 973039 StychoKiller
StychoKiller's picture

11% is down from the current levels.  We'll get back there by employing pitchfork sharpeners and torch distributors!

Thu, 02/17/2011 - 16:01 | 971280 EvlTheCat
EvlTheCat's picture

They are probably trying to see if the U.S. banks can take the punishment so the FED can extend more credit lines to Europe so they can avoid the double dip they are heading for.

Thu, 02/17/2011 - 16:18 | 971348 karzai_luver
karzai_luver's picture

This stress test is a cover so the pigs can pay out even more bonus bucks as they can tell the sheep, "see we are well capitalize you will never have to bail us out again no matter how we loot the place".


Dimon and the other gods wish to slip the surly bonds of reality and pay out the final round of TheBernanks fiat.


That is all.


Thu, 02/17/2011 - 16:12 | 971321 dhengineer
dhengineer's picture

A headline unemployment number of 11 percent would mean a real unemployment number (ala John Williams) on the strong side of 25 percent, or worse than the 1930's.  And weren't the original "stress-tests" (or JO sessions, whatever) using an 8-percent number, that was quickly passed up in real life?  They are so far behind the curve, it's pathetic.

On an off-topic thought... there are about 13,000 public-sector crybabies demonstrating in Wisconsin right now about the proposed cuts in union benefits... Um, do they get paid for today, do they have to take a sick day or personal day?  They are abandoning their work places and still get paid, right?  As a self-employed worker, I get neither sick time or vacations, and I pay for 100 percent of my own retirement and health insurance.  If I don't show up, I don't eat.  The 99ers get nothing at all when week 100 rolls around.  Welcome to real life, chumps.  The gravy train is over, and the banksters are eating your lunch...

Thu, 02/17/2011 - 16:21 | 971367 karzai_luver
karzai_luver's picture

They are doing you a favor, since you don't have time to spare to overthrow this sham let those who are sucking on the teat do the dirty work.


Works for me.


Any protest is a good protest from where I sit.


Maybe next week they show up with something to burn the sucker down with.


Go for it public employees, take it out.


Thu, 02/17/2011 - 17:11 | 971654 sellstop
sellstop's picture

The stress test on the Russell starts tomorrow.


Thu, 02/17/2011 - 19:54 | 972304 chump666
chump666's picture

F*** the Fed, their unrealized losses are of the charts they will never raise rates.  US banks will go through a wave of write-downs end yr.  The Fed prints...the end game is locked in for 2011.

Thu, 02/17/2011 - 21:32 | 972693 Buck Johnson
Buck Johnson's picture

Something is headed our way this year.

Fri, 02/18/2011 - 00:21 | 973099 glenlloyd
glenlloyd's picture


Something wicked this way comes

Fri, 02/18/2011 - 10:57 | 973356 thedrickster
thedrickster's picture


Fri, 02/18/2011 - 03:31 | 973371 DukkButt
DukkButt's picture

Noticed just the other day when I went to the bank that the FDIC has reintroduced their "unlimited" guarantee of transaction accounts (non interest bearing checking accounts, basically). They put that on the first time when WAMU tanked when large depositors got scared and started taking there money out. After the "panic" was over, they went back to the $250,000 limit, until now. I wonder what it is they are preparing for? What do they expect to happen here real soon? Anyone heard more about this?

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