Guest Post: Bank Shot

Tyler Durden's picture

By

The banking authorities were shocked - shocked - to discover last week that an awful lot of mortgage paper in this country is not quite in order... appears to contain, er, irregularities... seems less than kosher... frankly, exudes an odor like unto dead carp or, shall we say, a heap of dead carp the size of the building at 3900 Wisconsin Avenue, N.W., Washington, D.C. Any day now we will hear that... mistakes... were... made.

Is it indelicate to say that the USA as an enterprise has its head so deeply and firmly up its ass that the all the proctologists alive on planet Earth could not extract the collective cranium from the collective cloacal chamber even with the aid of a Bucyrus-Erie 1060-WX bucket-wheel excavator? Like, where were we the past ten years? Surely not everybody in the nation was doing bong hits while playing Grand Theft Auto, or watching The Real Housewives of New Jersey, or downing tequila shots and Percocets in the parking lot of the Talladega Superspeedway, or cooking meth in the family room, or whacking it to Internet porn, or searching for "excitement" in one of America's 450 commercial gambling casinos.

Did nobody, for instance at Fannie Mae or Freddie Mac, review any of the paperwork fluttering in from places like Countrywide or Ditech and scores of other boiler rooms where mortgages were hatched like Peking ducklings?  There was an awful lot of it, I'm sure, but aren't there a lot of seat-warmers at Fannie and Freddie who collect their salaries for the express purpose of reading mortgage documents? Was nobody the least bit suspicious about the mysterious flurry of "restaurant employees" and "lawn-care technicians" buying million-dollar condominiums with no money down at terms that would make a three-card monte dealer weep with laughter? After all, they had to sort and bundle all these contracts for the likes of Goldman Sachs and JP Morgan and Citibank - the list isn't that long, but you get the picture....

And speaking of these august institutions, didn't anybody in the divisions charged with assembling complex securities composed of mortgages, or composed of bets against bundles of mortgages, or composed of some notion of something dimly related to a rumor of mortgage lending - didn't any of these expensively-educated chaps or lasses pause a moment in their aardvark-like labors of bonus-seeking to withdraw their snouts from the moist ground where swindles pupate and at least goggle in self-admiration at the fantastic legal novelty of their endeavors.

And what of the numberless agencies, federal on down, starting with, say, the Office of Thrift Supervision, or the Comptroller of the Currency, or the Federal Deposit Insurance Corporation, or the Board of Governors of the Federal Reserve, or the chairpersons of a dozen senate and house subcommittees on matters related to finance, or the various inspectors general from sea to shining sea or the attorneys general of all fifty states plus the US Department of Justice, or the countless fiduciary officers of the pension funds who tripped over each other buying all the tainted paper churned out like so much Purina Rat Chow - or, for Godsake, a lonely loan officer here or there with something resembling a conscience?

Nobody in the USA noticed anything the least bit fishy. And now all that epic rot has eaten through the last hanging tendrils of the banking system. And the whole shootin' match is fixing to seize up and blow like a Chevy Big Block Super Stroker 632 engine that some clown has poured karo syrup into.

But, sadly, I can only return to the trope of cranial rectosis. And when your head is in such a dark place, it's hard to see the truth, let alone tell something you can't even see. And sadly too, the truth is that this ghastly mortgage fiasco was a fraud that the whole nation perpetrated on itself in a tragic rush to get something for nothing. Since the failure of authority is complete, it's now up to nature to act as the arresting officer. She's a harsh mistress. She's going to kick our ass.

I'm sorry, but I don't see anyway out of this. With fraud absolutely everywhere in our banking system, like some advanced metastatic cancer, financial metabolism comes to a sickening stop. Nobody can buy or sell property. Nobody can trust any American financial institution. Money can't circulate. Nobody will be able to get any money. It won't be long before that translates into nobody getting any food. We may be a nation of clowns, but as Lon Chaney famously observed a while ago - when explaining his technique of horror movie-making - "...there's nothing funny about a clown in the moonlight...."

h/t Ian

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Turd Ferguson's picture

And in the midst of all this comes a very late day, 30-point Dow rampjob to eke out a green close for the Nightly News.

 

aheady's picture

That WAS pretty nauseating.

Cognitive Dissonance's picture

There was NO WAY they were going to let this sucker close below 11,000. Christ, they at least want to wear their DOW 11,000 hats on national TeeVee for a few days before this sucker flashes.....er......sorry, flushes once again.

Be reasonable Turd. Da boys just wanna have some fun.

Turd Ferguson's picture

On the bright side, the gold miners index closed above the important 520 level for the 4th time in the last 5 days.

http://finance.yahoo.com/q/bc?s=%5EHUI+Basic+Chart&t=5d

kornholio's picture

this market is not anywhere near a top, this fed induced stock gorge is can continue until gold is 5000 and a loaf of bread is 30 bucks....

Xedus129's picture

30? Thats a bargain, I'll sell you a loaf of white bread August 2011 future for 50$

ToNYC's picture

I'd be more impressed with the quality of your argument were you to bid $50. I'll be at $49 in your face, sucka!

Gromit's picture

why complain, just take the free money.

NotApplicable's picture

Because "free money" is denominated in dollars?

Things that go bump's picture

You can still use them to buy gold.

 

homersimpson's picture

..and there's no such thing as a "free" lunch..

Widowmaker's picture

Sure there is, you steal someone elses.

...just keep on buyin'

B9K9's picture

I wanted to follow up on your post from another thread where you stated that you believe QE will be in the range of at least $5T. I take a diametrically opposite position, and believe not only will we not see QE, but we will actually begin to see some austerity programs implemented, which of course would be highly deflationary.

Since we've staked out two polar opposite positions, I think it might be interesting to flesh out our various pros/cons. (BTW, I view either scenario as fire/ice - under no condition do I see a 'recovery', so it's really just a matter of semantics of how we experience our collective denouement.)

I'll go first:

  1. The power-elite have nothing to gain from hyper-inflation. Moderate inflation drives organic loan growth, while deflation triggers asset repossession. Hyper-inflation just reduces debts in real terms. In your example, if the $5T+ was cycled into the economy @ some velocity multiplier, people might be able to purchase their homes outright and end up being the holders of last resort, not the Fed.
  2. The GOP has nothing to gain from helping out cities, states or fed.gov with their legions of WIC/SNAP dependents and unionized public sector employees. On the contrary, they have everything to gain from going medieval. In addition, the GOP has nothing to gain from attempting to make union pension funds invested in worthless MBS whole. On the contrary, they have everything to gain simply by doing nothing; that is, let the legal process actually work its way through the backlog.

So, to summarize, my position is supported by historical cases where the boom is lowered on those no longer able to continue servicing loans. In addition, it fulfills certain political objectives, that depending on the degree of TEA party infiltration, can be achieved by implementing broad based austerity measures.

As many know, I'm completely agnostic about this situation, so I'm completely open to someone providing a persuasive case in favor of how/why QE would be engaged.

 

Shameful's picture

Reposted from another thread.

 

B9K9

Why do you look at the Fed as an organic entity?  It's really a tool.  It's real owners wield it for power and influence.  In this way it has the same imperative to survive as a hammer.  Sure the hammer may be extremely resistant to harm but it will do what it's master uses it to do.

A currency crisis is baked into the cake now.  Should they do as you suggest and have interest rates at 20% with a full default the dollar will no longer be the reserve currency.  The Fed will lose it's exorbitant private of being able to print to infinity.  So the "rational" choice leads to a massive loss of power for the Fed.  The other option is to simply become the buying of first and last resort.  To take advantage of the reserve status of the dollar and flood the world with dollars while buying any and all asset classes.  Now this will destroy the reserve status as well, and the Fed.  However under this scenario the owners o the Fed can move the performing assets out the back door, mob style (Good Fellas).  And for the kicker they can use these very same assets to buy off political figures to take over the next central bank of the US. 

In you scenario the Fed lives, with a crippled balance sheet and no longer having a reserve currency.  Under mine the Fed no longer exists but it's masters greatly profit and with a little skillful play can use the gained assets to start the ball rolling all over again.  So tell me how my version makes no logical sense?  The Fed is a tool, look to the hand that wields it.

Having said the above I do not think they will announce QE2 at least not Nov 3.  It can be done without the announcement so why spook people.  After all it's not like we will ever see their balance sheets so long as they are a going concern.  The printing will be in full force to loot while the opportunity to loot exists.

So either way the big boys have a dollar that won't be worth spit when either case happens.  So to me I'm looking for what aggregates the most wealth for them.  They pretty much would clear out most remaining assets in this country and use the dollar overseas as well to fund acquisitions.  Sure you claim that people will be able to afford their homes, and? That was a bubble, a house is where you live not some magical wealth asset.  And the meteoric rise in housing will be followed by a corresponding tax increase. Jobs are hard to come by in the hyper inflation and the state can just take the property back via tax lien.  After all if J6P owns the house he is responsible for property taxes.

Mako's picture

The job of the Fed is to get the stupid lemmings into believing there are helicopters coming to save them.  This way the system goes to it's greatest height before collapsing and liquidating.   The collapse and liquidation have always been know, why?  Because it's unescapable in the system you have in place, the only real question is how high you fall from. 

I would say the Fed has done a great job in it's mission.  You should see how many people think the Fed helicopters are going to save them.   Unfortunately for the stupid lemmings, there are no helicopters coming to save them. 

The Fed can never make 1+1 = 3, they certainly are good at convincing stupid lemmings that it does.  Real fun watching this up on the chalk board every day.

tmosley's picture

No-one thinks helicopters are going to save them any more than they think a bullet to the back of the head is going to save them.

Your thought process is mostly ridiculous.

Also, I hate to tell you, but the helicopters are already dropping cash, and they are doing so on a weekly basis.  The amount dropped has yet to fill the hole, but the hole is of finite depth, unlike the amount that can and will be printed.

Funny that you keep saying that people think helicopters are going to save them, even as you cling to paper assets like they are going to save YOU.  "Hyperdeflation", you say!  What a joke.

Mako's picture

Helicopters are not dropping cash.  Where is it at?  Sorry buddy you have no idea how the system works.  I mean you seem to be admitting that helicopters are not going to save you then slamming me for saying it.  Funny stuff. 

"even as you cling to paper assets like they are going to save YOU."

Not only are you an idiot but you are liar as well, never said I cling to paper assets.  Never said any such thing, you say that to make yourself feeling better.   Really what you are is very scared, because you don't want to admit you are going to be fucked.  Oh, yeah your silver is going to fend off the bad spirits.  Sorry buddy you are in for a rude awakening. 

I bet you would hold up those coins to an metorite coming down thinking your silver God is going to save you.  Good luck with all that, I hear it's good against werewolves as well.  Let me know how that all works out.

I bet you wake up every morning to see what your gold and silver is trading at in DOLLARS every day.  Denial comes to mind.  Good luck and all, oh you don't need it, you have some coins.

tmosley's picture

Stock, bond, and commodity markets aren't enough for you, I guess.  You have to actually see money dropping fro helicopters.

Whatever.  You are either saying to hold onto dollars (because you claim hyperdeflation is coming), or you are saying everyone is going to die next week (EVERYTHING IS WORTHLESS OFMGCOPTER).  There is no way to tell, because you have never not even once actually defined your terms.  Either way, your a fucking moron, though.

Turd Ferguson's picture

As long as we're dropping things from helicopters, it is my duty to offer this:

(obligatory)

http://www.youtube.com/watch?v=ST01bZJPuE0

tmosley's picture

Thanks for that.  Mako's incessant defeatism just gets me riled up.  He calls it fear.  I call it identifying the problem, and finding a solution.  People that vaguely realize there is a problem, and fail to quantify it, much less seek a solution, yet go about blathering on about it ignorantly, piss me off.  If he didn't do part three, he would just be a regular sheep.

Mako's picture

Defeatism, sorry you lost the war before ever begun.  There is no defeating the Truth.  Humans have been trying to defeat the Truth for thousands of years and always fail. 

No you are not looking for a solution, the solution is going to happen whether you are looking for it or not.  You are actually running from the solution, that is why you hold your coins up like a Cross like that is going to stop what is going to occur. 

Good luck. 

Bringin It's picture

Mako - if you have a story to tell, just spill the beans.  Resource wars?  Is that what you're getting at?

Calmyourself's picture

I would like to know what your story is as well..  Yeah, umm we got the part about compound interest being unsustainable, there is no solution, its all going down hard, yada, yada

So where is the beef little shark?  Do you have a story of some sort to tell or just dropping in to once again inform us we are all going to die horrible deaths, do you ever expand on that?

Mako's picture

Use your brain, you don't need me to tell you what is going to happen, you already know, all you have to do is listen to yourself... you have most of these answers.

Calmyourself's picture

Fine, humor me, I like your writing style and doomer scenarios are always fun to game out, zombie apocolypse and all..

Seriously, you expect the credit system to fall so hard and so fast that all JIT deliveries will just stop: starvation? Everyone who has a stake in the system (everyone) will just lay down and die. Perhaps, the coal mines will stop digging and we go into the Malthusian Luddite die off that Greenies love so much..

How do you see it coming down, I would like your complete perspective here.  Instead of the constant drumbeat always stopping short of the doomer porn we all love so much, elucidate fully, strip it bare. Because frankly, the blanket statement, we are all going to die, is getting old..

Bendromeda Strain's picture

Since we're talking about the Fed, I was expecting the Scarface helicopter scene...

Big Corked Boots's picture

I'm thinking more like the Apocalypse Now helicopter scene.

And the middle class is on the ground.

El Hosel's picture

   "Helicopters are not dropping cash.  Where is it at?"

    its all in the hole.

    http://www.youtube.com/watch?v=JnX-D4kkPOQ

trav7777's picture

Idiotic.  Helicopters ARE DROPPING CASH.

They are NOT DROPPING IT ON YOU.

They are dropping it to the tune of TRILLIONS onto the favored, elite, political class.  THEY are being made nominally whole while the inflation eats the net worth of everyone below them.

A bag of freaking potato chips costs $4 now.  Real cost of living has gone UP for normal people while income goes down.

THIS IS INFLATION.  As it proceeds and gets worse, the elites' incomes WILL keep pace, as the helicopters drop them cash by the metric assload.  The ordinary people WILL NOT.

This is how austerity LOOKS, a decline in REAL income!

scaleindependent's picture

Excellent post Trav

 

People do not understand that it is not only free money for the elite, but austerity for the rest. That way inflation is delayed.  More importantly, the margin between elite and pawn increases.

Maybe this Captcha will exemplify:

What is?:

Elite + QE + free loans (Fed discount window)+ political impunity + less taxes  >  citizens - (austerity + inflation + political encroachment...)

 

Answer: Yo fucked bitch!

B9k9, imo the elite do not mind inflation as long as their ROI per annum is a multiple of the inflation rate and as long as the inflation is greater than the rate of decline of the commoner's income.

Oh regional Indian's picture

Inflations is a really hard one to see when it creeps.

When I left India in 1995, a few hundred rupee notes, a few 50's, some 10's in yoru wallet, you were rich. Credit cards were the stuff of fantasy and envy.

Came back in 2006..... 3 rupee coffee costs Rs. 15. 

Look into the wallet. A few thousands, a bunch of 500's, some 100's and a fifty if lucky.

Yet, everyone is feeling richer and blowing cash left, right and center.

Dressed up right, inflation is a sweet drug. Masterful illusion of wealth.

 

ORI

http://aadivaahan.wordpress.com

Shameful's picture

So you are seriously telling me it's a safer fall from here then to hyper inflate up?  Seriously?  When Zimbabwe Ben can kick this pig into overdrive and delay the inevitable crash but make it worse, but your saying he won't, why?

And the Fed cannot save anyone save their masters.   The Fed can consume all the bad debt and products and transfer the cleansed assets to it's master.  The Fed is a gigantic sin eater of debt.  You seem to think the big boys will be liquidated as well.  They built the system and have survived worse, the Fed is their tool.

Explain to me why the Fed will not act in a way to benefit their masters and destroy the masses?  For if they were to actually not print more it would end with liquidation but would be less ruinous then the hyper inflationary alternative.

Mako's picture

"Explain to me why the Fed will not act in a way to benefit their masters and destroy the masses?  For if they were to actually not print more it would end with liquidation but would be less ruinous then the hyper inflationary alternative."

If the Fed had all the power you claim they do, we wouldn't even be talking about this right now.  Things would just be super duper right now. 

There is no alternative.  The system will peak, collapse then liquidate.   Only thing the Fed does is try and see if the lemmings have one more shot at escaping the unescapable. 

"The Architect - Denial is the most predictable of all human responses. But, rest assured, this will be the sixth time we have destroyed it, and we have become exceedingly efficient at it."

The unfunded liabilities will be liquidated in mass, eventually a low will occur from which a new base can be formed so the scam can be recycled once again... we have become very efficient at liquidation.  Humans always seem to want a bite of the Apple.

Shameful's picture

So your telling me the Fed didn't stock up on MBS in 08?  That the Fed is an illusion that cannot print dollars into existence?  How did you arrive at this conclusion?  And why would things be super dooper?  When they kick up the main event it will be good until the spike hits and then all hell breaks loose.  For some reason they have not triggered that stampede yet.  The hyper event causes a crash regardless it's just a rapid wealth aggregator vs the slow chain that has been happening.

When did I say the system would not collapse?  It will but the big boys will wipe their feet with the masses first.  Do you really think the mega rich will be roughing it with us post collapse?  No good sir they will have legal total and be totally debt free.  The Fed is a tool, and will be used in it's dieing to protect it's owners.  And when the system starts the very same people will be in charge.

We agree on the collapse but I don't understand why you can't see that the Fed can use it's printing press to shield it's owners.  But hey hope your right, I would prefer them not to be able to gobble up a ton of assets pre crash and then further aggregate post crash.

Panafrican Funktron Robot's picture

If the Fed balance sheet is the driver of it's ability to print dollars, and that balance sheet were to, say, suddenly look really, really fucking ugly on account of that 1.2 trillion dollars notional in MBS holdings that's actually worth more like, oh, absolutely nothing, then yeah, they're going to have some issues executing a monetary solution to the deflationary collapse.

traderjoe's picture

IMHO, their balance sheet is irrelevant. They can print no matter what. Just a click of the mouse...

Shameful's picture

Why would the balance sheet really matter?  The ability to print is divorced from that.  Even if it wasn't it's not like we can get a 3rd party audit of said balance sheet.  It is what they tell us it is.  Enron was more transparent.

Bendromeda Strain's picture

Sinclair will be proven right. Forget the timeline, that's just a totem for the haters to cling to. The point is it will happen, and the answer to when is too soon.

tmosley's picture

You are so stupid that you can't tell the difference between "kicking the can down the road" and "fixing it".  

The can is being kicked as we speak, with printed money.  You don't fucking get it.  This is not a god-damn solution, and no-one but a fucking retard thinks it is.  It's shooting the economy in the back of the head instead of the front.  You can't see it coming this way.  The guy with the gun walks behind you, and you think he's disappeared!  

Yes, the unfunded liabilities will be liquidated, but what the fuck do you think the currency will be that those transactions will be settled in?  Here's a hint:  It's been money for 6000+ years, and can't quintuple in supply overnight.

Oh, but sure, nothing can ever work, and we're all going to die next Thursday.  Mako said so.

i-dog's picture

"You don't fucking get it. This is not a god-damn solution, and no-one but a fucking retard thinks it is."

Excuse me chipping in here! ... but I don't think either B9K9 or Mako are suggesting that the Fed (or their masters) are attempting a solution! They are simply stating "what is" and "what will be". However, I could be wrong.

"Oh, but sure, nothing can ever work, and we're all going to die next Thursday."

I think "all" is an overstatement, and "next Thursday" is probably about a year and half earlier than planned. Therefore, if you don't wish to be part of the "all", I would respectfully suggest that you plan accordingly.

IMO, the charges on the support columns have been set, the planes have already been "hijacked", and only those who have left the building, or are on the ground floor ready to leave as they see/hear the planes on final approach, are going to get out of the WTC* alive this time around. Those on the upper floors will definitely die (or serve out their very limited remaining life on the plantation). Just sayin'.

However, there is still hope for all of us. The Architect also told Neo: "The first matrix I designed was quite naturally perfect, it was a work of art, flawless, sublime. A triumph equaled only by its monumental failure". Complex systems have a way of coming up with "unintended consequences" -- particularly when clever and well-heeled rebels are working hard on thwarting the controllers.

Let's hope the revolution will be televised!

 

* WTC = World Technical Collapse = IMF control of a world currency

Assetman's picture

I completely agree with you on the why's and how's of how the fed SHOULD refrain from further QE.

Perhaps where I differ is that I truly believe that certain members of the Fed (Bernanke, Yellen, Dudley, etc.) are simply too blinded by ideology at this stage of the game-- and will do everything in its power to avoid the deflation bug.  Given the experiences with QE 1.0, the Fed sees they can do more monetizing-- as long as they keep the majority of the QE benefits within the banking system.  That means keeping an eye on velocity and make sure it's a flatliner.

If the powers within the FOMC are persuaded by QE-- that's exactly what will transpire... whether it ends in utter destruction or not.  At question is whether Bernanke is more of a "political beast" or an "academic".  I think he's pretty much spent most of his political bullets to get re-nomination... and the academic in him will keep policy on the same insane course he initiated in March 2009.

I sure hope that you are right on the mark, though... 

B9K9's picture

Thanx for the reasoned reply. I agree that Ben might be an economic ideologue, but his justification/rationalization for QE was never simply debt monetization. He knows that straight-up printing has absolutely no effect other than to ratchet up all commodity input prices across the board.

Rather, as a dyed-in-the-wool supply-side monetartist, his goal was merely one of attempting to re-energize organic loan growth. After all, organic loan growth is the holy grail of all fractional reserve lending. While some may promote demand-side Keynesian spending and others supply-side monetarism, the end objective is the same to all adherents of centralized command economies.

Absent the ability to re-engage organic loan growth at our current level of indebtedness, the best course of action is perhaps to retrench. If we experience the mother of all depressions, it does not necessarily mean the Fed will be finished. Better to live with the $USD enact and possibly able to loan again another day (in this case, at least one whole generation), rather than to purposely explode one's valuable franchise.

One other point I think is important is that while most of us have a fairly realistic opinion of our current state of politics, it is not extremely unlikely that real, meaningful change could occur.

Recall that since 1776, we have had two national scrips and three central banks. The point being that the Fed is running on borrowed time. Bernanke has to be aware that he cannot make unilateral decisions in a vacuum. From my perspective, the notion that Ben will single-handily decide on some incredibly risky program without first giving due counsel to, or properly recognizing the authority of, Congress simply doesn't pass the laugh test.

When the status quo is under fire, sometimes it's best to just wait out events. In this case, waiting out events is highly deflationary. It also just happens to fit perfectly with the TEA party's respective platform(s).

Assetman's picture

Absent the ability to re-engage organic loan growth at our current level of indebtedness, the best course of action is perhaps to retrench. If we experience the mother of all depressions, it does not necessarily mean the Fed will be finished. Better to live with the $USD enact and possibly able to loan again another day (in this case, at least one whole generation), rather than to purposely explode one's valuable franchise.

I decided to highlight the above, because while your response was very well reasoned, these few thoughts encapsuate the decision process in a nutshell.

I'm not sold on organic growth as being the sole reason for the Fed's policy of ZIRP/QE-- but it certainly is one of many.  And while monetization for monetization's sake is admittedly a poor reason to extend a strategy-- the reality is that the Fed has been attempting to: (a) fund the ongoing deficit hole Treasury at low coupon and extended duration; (b) entice organic loan growth, which has been a major fail; and (c) provide broad support for asset prices, underlying the hope that supported prices would translate into improving consumer (and investor) confidence.

Perhaps the more dovish of the Fed members are coming to that conclusion.  I certainly hope they are, because the recent comments coming William Dudley in particular-- not only defy logic, but his conclusions lay the groundwork for some ugly unintended consequences.  Either the FOMC becomes pragmatic in a very big way real soon-- or they keep on driving off the cliff-- in the misguided belief that "mo is better".  Keep in mind, since 2008, our Congress has given the Fed a lot of leeway in taking unilateral actions... it's been an effective way for the sleazeballs to pass the buck and delay the inevitable.

One note in your quote above really strikes at the heart of the matter, though: retrenching would be a very painful exercise but it provides the best chance of keeping the $USD intact.  That shouldn't be overlooked (and hopefully isn't by FOMC members)-- because once the $USD crosses the panic threshhold, the risk the Fed disappears as a central bank entity goes up exponentially.

I think that it's great that you're doing this thought exercise now.  My hope was that the Fed would cycle between reflation and deflation as a means to slowly right-size the financial system-- but yet-- keep the $USD intact.

You apparently have more faith in those smart-@$$e$ than I. 

traderjoe's picture

I'm going to side with the QE's. The system is imploding as we speak - which seems to be a basis for agreement. The question at hand seems to be whether the final currency collapse will come from deflation or hyper-inflation. It's an important, but also in some ways superfluous debate, because it might prove problematic to plan for anything but the 'other side' since the inflection point would be extremely difficult to time. 

Following a CD discussion deep into a thread over the weekend, I believe BB and the FedHeads are level 1 or maybe 2 operatives (in a level 5 world). The system was designed to retain people that believed in the power of the Fed, it's independence, blah, blah. BB et all, aren't in on the end-game, they might actually on some level believe what they are doing is 'helping'. What better way to get plausible deniability than to hire academics whose belief structures fit into the progression to the eventual end game?

This current iteration of the Fed will go out in a blaze of glory 'trying to fix the economy'. They could NOT simply stand by and watch the destruction of the system through deflation. It would destroy the public perception of their status as an agent of the government and an institution that works on behalf of the public. 

They will do QE 2, 3, 4, etc. They will become the buyer of last resort for any number of assets. This will benefit the banks for as long as possible. There's only a 5% chance to re-start the system, but deflation/austerity has 0% chance of working. 

Hyper-inflation will benefit the Fed's impaired assets, and the elite's real investments like land, gold, etc. Sure, it will benefit the "little debtors" (small households), but it will wipe out the merchant class - the lower upper-class, savers, etc. that are net savers, but aren't in on the game (no gold, no farmland, no real assets, just bonds, CD's, bank accounts, even stocks). It'll wipe out the bond-holders, the pension funds (leaving no retirements), etc. In other words, it will wipe out any rivals to the Fed. It will benefit the little people somewhat, but they will struggle with daily living so much that they will be easily moveable. 

Hyper-inflation will leave those in the know (hard assets) well protected, with rivals destroyed, and the masses struggling AND the Fed will have appeared to be proactive. The back-story can be written favorably. At least they tried. Next time, "we'll learn from our mistakes" - not revealing that the system was destined to collapse from the start. Rinse and repeat. 

 

Miss Expectations's picture

Traderjoe,

Since you mentioned the merchant class, I am attaching the most recent missive from Martin Armstrong.  Plenty of nuggets concerning Goldman Sachs, too.

The Athenian Real Estate Panic & Banking Crisis

http://www.martinarmstrong.org/files/The%20Athenian%20Real%20Estate%20Pa...

ToNYC's picture

...certain members of the FED... enablers of fraud, meaningless cippher4s you'd do best not to embody.

ToNYC's picture

..."certain members of the Fed"... enablers of fraud, meaningless cippher4s you'd do best not to embody.

Turd Ferguson's picture

B9: Admittedly, a $5T number is hyperbole and conjecture and I don't offer the number as some potential, November 3 headline: "Fed to purchase $5T in MBS assets".

I do agree, however, with the argument that trillions of MBS are, for all intents and purposes, worthless even though FASB is allowing banks to carry them on their balance sheets at par. The FASB ruling has allowed the banks to "buy time", up to 25 years in some cases. Over those outlying years, the banks can "earn' enough billions to cover their future losses by doing the Fed's bidding...borrowing at the discount window and buy treasuries at auction.

Now comes the MERS/foreclosure/documentation mess. This scandal has the potential to end the "time buying" right now. The worthless paper will be shown to be worthless, regardless of what price-to-maturity matrix you use.

Left with no choice but to keep banks solvent today, the Fed will begin a program of outright MBS purchases, at par, from troubled banks. This will effectively monetize the entire stock of outstanding, worthless MBS. Not in one fell swoop but perhaps in $1T increments. Either way, trillions of fresh $ will be "printed" in order to maintain the current system...fortifying the power of the Fed, Congress and the major banks.

The real interesting, revolutionary shit will be what follows. As the trillions of new dollars eventually find repose in all dollar-denominated assets, what will follow will be extreme, cost-push inflation. Look around. Its already started. Corn is at $5.00/bushel. Beans are $12. The price of cattle and hogs may initially decline as ranchers are forced to sell stock that has become too expensive to feed but then the prices will skyrocket. You and I and all with jobs and middle-level incomes will, most likely, be able to handle the rapidly rising costs of food. But what about the 17.1% (one in six!) of Americans who comprise the U-6? How will they respond when they can no longer feed themselves, much less their families? And what about the third world where most folks try to survive on $1/day? What are those billions of people going to do? And many in the third world live under oppressive, despotic regimes...how will they react?

No, B9, something quite wicked this way comes. No amount of "austerity" can prevent it.

 

B9K9's picture

Fire or ice - yes, austerity doesn't really "fix" anything, just alters the path to destruction.

I guess I'm revealing my base naivete in that I really think at some point the citizenry will act through its representatives in Congress. I just can't see Bennie & the Fed either acting unilaterally OR given the green light to explode the $USD.

From a geo-political strategic stand-point, QE of any meaningful magnitude makes absolutely no sense. While we could possibly handle 100-150 million people on WIC/SNAP resulting from a deflationary collapse (under a farm nationalization & food distribution scheme), under no circumstances can we afford a disruption in our military control of foreign oil resources. That means the $USD reserve status is paramount to all other considerations.

I think we're 99% in agreement with the underlying situation. You appear to believe Ben has the power; I think (the new pending) Congress and the MIC are in control at this point in the game. GS, JPM, the Fed and the whole gang of Wall St criminals had their 2 years. The party is over - fire or ice.