Guest Post: The Manhattan Project: Did Bernanke Use The Monetary Nuclear Option?

Submitted by Geoffrey Batt.

May 2004

Ben Bernanke and Vincent Reinhart (who until 2007 was Director of the Division of Monetary Affairs for the Board of Governors of the Federal Reserve System) publish “Conducting Monetary Policy at Very Low Short-Term Interest Rates” in The American Economic Review.  How, they ask, can a central bank effectively move beyond conventional policy measures when short term rates are at or approaching zero?  Bernanke and Reinhart suggest three strategies:

1. Convince market participants rates will stay low for a period beyond current expectations
2. Change the composition of the central bank’s balance sheet (credit easing)
3. Increase the size of the central bank’s balance sheet to a level exceeding what is necessary to achieve zero short term rates (quantitative easing)

Strategy #2 is radically aggressive insofar as it contemplates altering the composition of a central bank’s assets- which, in non-crisis conditions, consists almost entirely of Treasuries of various maturities- to include other, perhaps even riskier assets.  For instance:

As an important participant in the Treasury market, the Federal Reserve might be able to influence term premiums, and thus overall yields, by shifting the composition of its holdings, say, from shorter-to longer- dated maturities.  In simple terms, if the liquidity or risk characteristics of securities differ, so that investors do not treat all securities as perfect substitutes, then changes in the relative demands by a large purchaser have the potential to alter relative security prices.  The same logic might lead the central bank to consider purchasing assets other than government securities, such as corporate bonds or stocks or foreign government bonds.  (The Federal Reserve is currently authorized to purchase some foreign government bonds but not most private-sector assets, such as corporate bonds or stocks.)1

October 31, 2008

In the context of rapidly deteriorating market conditions, Jan Hatzius, Chief US Economist for none other than Goldman Sachs publishes “Getting to the End of the Rate Cut Road” in US Economics Analyst.  With overnight Fed Funds at 1%, Hatzius argues the time for more aggressive monetary policy may be at hand.  Specifically:

…Fed officials could start to purchase risky asset[s] such as corporate bonds and even equities.  At present, such an aggressive approach is legally quite problematic, as the Federal Reserve must not take on a material amount of default risk.  Thus, the purchase of risky assets would probably require an explicit stamp of Congressional approval.  Should the economic and financial environment continue to deteriorate, however, it would be foolish to rule out such a more radical approach.2

November 14, 2008

Hatzius publishes “Marco Policy in a Liquidity Trap” in US Economics Analyst, advocating still more radical policy measures.  In his words:

The most radical step would be debt- or even money- financed purchases of risky assets such as nonconforming mortgages, corporate bonds, or equities… Policy makers could focus specifically on the mortgage market, buying up mortgages or entire mortgage-backed securities in size, restructuring the terms on a loan-by-loan basis, and then holding the loans to maturity.  Alternatively, they could target risky assets more generally- private-label mortgages as well as corporate bonds, equities, and potentially a whole host of more exotic securities.  Especially, if such a program were financed by money creation, it would be considerably more radical than anything seen previously.  Hence, the hurdle for adoption is high one, and the political scrutiny in Congress would likely be intense.  Nevertheless, we believe it could become a serious possibility should the economic and financial slump deepen in 2009.3

November 21, 2008

Hatzius publishes “What’s Needed to Stop the Rot?” in US Economics Analyst reiterating his call for unconventional policy action even while noting that it currently sits on shaky legal ground.  That is:

…the Congress should consider providing explicit authority to either agency [Treasury or Fed] to buy a broader range of risky assets, including corporate debt and even equities.  Although many politicians have difficulty swallowing this on philosophical grounds, this week’s market action should convince them that the risks of inaction are serious.  However, such a more radical step is unlikely until sometime in 2009.4

March 13, 2009

Chaos reigns globally.  Respected academics and high ranking politicians call for bank nationalization.  CNBC reports of “secret” meetings at Goldman Sachs amid fears Geithner cannot get the job done.  US equity indices are down more from their highs than the corresponding period in The Great Depression.  Pension funds, 401k plans, endowments, insurance companies, etc., are fully exposed, taking heretofore unimagined losses.  With nearly everyone in the country exposed to equities in one way or another, the unthinkable begins to seem increasingly plausible.  Insurance companies cannot pay claims; pension funds cannot meet their obligations; universities suspend session; Mr. and Mrs. Smith, told just months earlier an unprecedented $700 billion bank bailout was designed to save them and their neighbors on Main St., stand to lose everything.  The Fed, having thrown just about everything in its arsenal at the crisis, appears to be losing control.  In the most desperate of times, Hatzius calls for the most desperate of measures:

…Fed officials might need to expand their balance sheet by as much as $10 trillion to make policy appropriately accommodative (pg. 2)…To be sure, “quantitative easing”- an increase in base money beyond what is needed to keep the funds rate at zero- by itself may not be sufficient on its own because Treasury bills become perfect substitutes for base money once short-term interest rates have fallen to zero.  But the Fed can engage in “credit easing” by purchasing assets whose yields are still positive, including longer-term Treasuries, commercial paper, mortgages, corporate bonds, and perhaps even equities.5

Five days later, the Fed shocks the world (though not, it seems, Goldman Sachs) with its most aggressive policy action yet, expanding both the size and composition of its balance sheet via increased purchases of mortgaged-back securities, agency debt, and long-dated Treasuries.  Spreads immediately tighten; Bonds- both IG and HY- scream higher; equities stage one of the most explosive rallies in history; the debate shifts from bank nationalization to record bank profits and excessive pay; financial collapse, along with the terrifying social, political, and economic consequences associated with it, is averted.  The war, we are confidently told, is over.

Mission accomplished.

Questions, however, still remain:

1. Forget the "Paulson Bazooka," if Lehman’s collapse was a financial Pearl Harbor, was the Fed’s policy response on March 18, 2009 the financial equivalent of Fat Man and Little Boy? (The direct purchase of equities?)
2. In the face of the unthinkable, did the Fed exceed its policy statement by directly buying assets not contemplated therein?
3. Did Bernanke, encouraged by Goldman’s Hatzius, heed his own advice and monetize the equity markets?

At best, the evidence offered here is circumstantial.  This is not, to be sure, conclusive proof the Fed bought equities- nor is it intended to be.  All I have endeavored to do is raise a rational doubt, one that could easily be done away with if Bernanke answered (finally) under oath direct questions as to the Fed's purchase of equities at any point during his tenure as Chairman.  Perhaps Alan Grayson might put his worries about foreign currency swaps to the side, and ask Chairman Bernanke about equities.

(The author would like to acknowledge the generous help of Zero Hedge's Marla Singer in the production of this article).

• 1. The American Economic Review, Vol. 94, No. 2., p. 86. (Emphasis ours).
• 2. "US Economics Analyst," Vol 08, Number 44, Goldman Sachs, October 31, 2008, p. 6.
• 3. "Macro Policy in a Liquidity Trap," US Economics Analyst Issue 8 Number 46, Goldman Sachs, p. 6. (Emphasis ours)
• 4. "What's Needed to Stop the Rot?" US Economics Analyst, Issue 08, Number 47, Goldman Sachs, p. 3.
• 5. "The Specter of Deflation," US Economic Analysis, Issue 09, Number 10, Goldman Sachs, March 13, 2009, pg.3. (Emphasis ours)

Comments

[midnitepoet]

Well; something other than massive Insider Selling and HFT are holding this market up.

[m.g. turner]

1) yes
2) yes
3) yes

1) how'd i do?
2) at this point what can WE do about 1),2) and 3) being true?

[geopol]

Marla,, Take a break and listen to Guthrie Govan,,

http://www.youtube.com/watch?v=7JPPTzQUKdk&feature=channel

[Cheeky Bastard]

OK, I'm usually a rational and composed human being, but if BB is really putting into action the things he mentioned in his 04 article, than i am very much convinced in the pre.meditated nature of the events that took place in 08 and are taking place now.

At first i was just trying to rationalize the action which he took, by subscribing them the category of " BB is a stupid fuck " and kinda wrap my reasoning around that, but if the nature of the actions is fully pre-meditated and planned in advance i will have to find a whole new logic for future events. 

If the continuation of the present actions is more than probable, I'm going all in long until either DJIA hits 17 000 and and SPX 2500 or 2010 elections pass, whichever comes first

Thanks for posting this, now i can plan accordingly.

[Howard_Beale]

Careful now, CB. You are far too rational to go all in on this. The market is far bigger than the Fed, Goldman, and JPM. Didn't the MOF buy equities in Japan when the Nikkei was crashing? Did it help? Hell no. Central banks have tried for eons to prop up various markets to no avail. It was much more blatant in the early 90's but still scoffed at by the much larger global players and the central banks' actions never held. History tells us bear market rallies are vicious and meant to get everyone suckered back in the game. Don't let it be you. Check your chart history, especially 29-33. What we are experiencing is not that different. However hideous the rally seems from the POMO's, shoots rhetoric, HFT, Flash, dark pools, QE, monetization of everything, and most of all killing the shorts--it's just that-excuses for an obsessive bear market rally from a deeply oversold condition. Many cycle traders were looking for a low in early March. Eric Hadik for one, and the ZH unloved Elliott boys--they nailed it. Looked at from a psychological point of view, bear markets need the bounce to calm the fear so the next leg can begin again in earnest. 

Whether the Fed is buying equities or not doesn't matter. They can't hold up a dead cat bounce that has either topped or will top in the next 6 months. BB is a stupid fuck CB. I'm still calling for a March top (if not sooner) and any good dip now will just be another hopeful buying opportunity for those that believe that every other crash--1987, 2000-2002, and now were just buying opportunities for the all great US of A. I don't buy it gang. And I have read the posts all the way down. Go ahead and skewer me. I'm just saying the Fed can't hold this market up just like the shorts couldn't hold it down. I'm a permabear and have stated so many times. Nothing goes down in a straight line and a serious bear market rally was in order in March. So ok everyone--take your shots at me. 

[Anonymous]

Great point...

Also, keep in mind that the extra liquidity/dilution comes at a cost in that it is never evenly distributed. Meaning, every time the FED embarks on a massive liquidity injection, they hurt more productive business activity and encourage more non-productive business activity. Over time, this effect can hurt an economy tremendously..

[JacksWastedLife]

"a massive liquidity injection hurt more productive business activity" - that's it. If everyone around you suddenly got a lot of cheap money it's called inflation.

And why one should bother with production when he could simply take money for almost zero interest and trade bubbled stocks.

[deadhead]

I wish I could have written your piece as well as you did howard.

I happen to agree with you completely.

The current state of matters is more closely related to 29-33 than most people seem to give credence to.  In some ways I think it may be worse because I don't view the usa as the 800 pounder she used to be. She's still a very big girl but there are now others that can give credence to "action/reaction" dynamics.

as we know, calling a top is tough.  i notice your March thoughts and am curious as to that timeframe reference on your part.  though i'm not making a call right now, I have done all my trading and thinking on this matter more from the point of view of the politicians (including the fed in that category by the way) and IF they can or do control the timing to any degree....and, I keep thinking of the mid term elections.  do they let it go really soon, get a leg down out of the way now, suck in more money for treasuries and qe v 2.0 and stimulous versions 2, 3, 4, 5 leading into the fall elections in 2010 or try to go "all the way" through 2010, which i don't think the markets and the rest of the world will allow.

[Howard_Beale]

Hi DH,

I am certain the rest of the world will not allow a run into the 2010 elections either. My March thoughts are based on cycles. Sometimes they work, others they don't, but I have not had a losing trading year in 15 years so that is saying something--I guess (some years were very paltry but up nonetheless).  My current thinking is we get a good selloff over the next few weeks and then Santa comes to town. Early in 2010 (Jan or April) with the last earnings shenanigans from the big banks should do it for my JPM target of $52+. I've had a target of 10,300-10,600 on the DJIA since March this year. So that's my reasoning.

Your questions would infer that the incumbents have control over market behavior but they don't. If the Republicans had been able to truly control the market then Lehman wouldn't have collapsed and AIG wouldn't be our number one stock as US taxpayers. Lest we forget, BB was their boy too and the 2 week rally into the election last year meant squat. The overall shock was already in and the trust was gone. The rule of thumb is if the market sucks, throw the bums out. And it holds true 75-80% of the time. Since we have Democratic rule and this bunch are the pansies of all time, don't count on Obama or BB to have any effect on the Democratic Senate or House elections to matter in 2010. The system is broken.

[deadhead]

good thoughts. glad to hear that you don't think the world will allow this crap to go on without a correction of some sort.  thanks for sharing. do you have the selloff to spx 980ish or down into the spx mid to high 8s.....

[Howard_Beale]

probably closer to the 980-990 camp. High 8's would mean this pup is already on the next leg down.

[Bear]

I believe that the powers to be already know what will transpire ... ZH is not the only pool of intelligencia.

Option 1 - So if they know ... it would make sense to let the market weaken (tumble) now when they still have a shread of BushBlame left and then start pumping (printing) in March.  With The Worst Financial Crisis in History (The Great 2009 Collapse) starting to slow, they start giving away money and jobs to reflate the economy just as they did last March (Stimulus II,III and IV as said above) ... then by November job numbers will have started to improve (if only the Gov jobs) and they can contend that their progroms are working and that we need to stay the course and stick with them.

Option 2 - The dematoads in Washingtion actually believe BB+TG that we can inflate baloons with holes in them and Congress votes to extend the debt ceiling ... then March looks like a point of exhaustion. If they do this and keep up the 'good work' until March, the Dems guarantee a magnificent loss in Nov. (unless a group of well meaning fools succeed if creating a third party) ... then Nov goes to Dems and they stay in power for a generation after taking all our civil liberties.

I believe our powers are most concerned about a massive run on the insolvent banks and this is why they have helicoptered so much cash. I am sure they have contingency plans to close all Am banks should a hint of a run occur. Do they close the banks and markets for 10 days and then all TBTF banks reopen under the control of the Gov? This provides a wonderful Obama 'Opportunity' to replay FDR and rest control from the People and give it to the Few.

If the MBS/CDS/etc. problem is as large as it is proported to be ... how does the Gov get out of the hole if not by taking over the financial system. Should we actually and truthfully have growth return; how does the FED soak up the liquidity? The have to Monitize America by taking control of all financial assets.

So much will happen so fast that no one will have time to react to anything. Prepare your market strategy now ... I think the market goes zip zag up until it goes straight down; maybe with no warning in the middle of the night.

Of course take this lightly since I am daBear.

[deadhead]

thanks for the thoughts Bear....

most plausible scenarios.

i think you are spot on in re the grave concern about the banks and the populace's potential reaction.  I fully expect to hear the most popular word of early 2009 re-enter the lexicon....Nationalization.

[Howard_Beale]

Excellent points indeed. I also believe it will all happen so fast that there will be only shock.

[Anonymous]

mbs buys are supposed to be done in March, 20B a week liquidity pump gone.

[jm]

No shots coming from my direction.  I do however wonder if there is a qualitative difference in past economic interventions compared to now.  I'm not enough of a historian to know, but you speak as though you've had some black swans under your belt, so I'd like your thoughts.

The scope and nature of the interventions we've seen this year and going into the next are not just about dollars thrown into a black hole.  Basic coordinating mechanisms of the economy are being reconfigured. 

Institutions and interest rates have little information content regarding scarcity because they are now levers of control.  I'm not talking about QE... the Treasury has seen it and survived many times.  But the legal bedrock of capital structure has offered little safety this year.  There is the threat of government control of huge chunks of industry and housing.  There is no exit strategy for this, but has the song been played before? 

I often have to check myself about being apocalyptic but the historical precedents for these misadventures never show anything good coming from it.   

[Howard_Beale]

This is by far the largest and stupidest intervention of all time due to BB's thesis work and belief that printing money and the dollar weakening is a steady bet to stave off a systemic collapse. He is unfortunately wrong since the final bubble to break is the debt bubble--consumer to corporate to government. This has been obvious since 2000.

But I also see no exit strategy other than flat out raising rates. And as I think we all know, their information tells them that there is no lending, banks need free money, and any move to the contrary would send us down fast (which is my preferred move other than a slow painful death of the dollar). Other than that, the answer is to get rid of BB and bring in a man like Volker to let TBTF's fail, interest rates rise, and the system cleanse itself out of debt. It would be terribly painful in the short term but save the country. However, my belief is that this won't happen and thus we are going back to the ways of the Depression. Capital structures are frail and debt laden--and similar to the early 30's--they are a house of cards, ponzi, call it what you want. Government control is a temporary placebo. They aren't really that different historically--just on a much grander scale. We are a land of Zombie banks much like Japan but they knew when to stop the presses but it took them almost a decade to finally write off their toxic waste. BB doesn't see the similarity. Just remember, funds of funds were the ponzi of 1929--nothing has changed.  

[deadhead]

perfectly written Howard.  Volcker must be just sick right now.

there are more voices being raised to break up the TBTFs.....i saw the UK gov was the latest to talk about it.  naturally, bb disagrees.

this will be so interesting to watch play out....

[Howard_Beale]

Indeed it will, DH.

[Gussiefink-nottle]

Howard, I think you are right. Bernanke is obsessed with the belief that his predecessors during the 1930's acted too little and too late to prevent the Great Depression. His analysis is that if sufficient liquidity is pumped in to the system  then deflation can be prevented, confidence can be restored and the whole merry-go-round can be kept turning. Like a gambler in a casino, he will keep doubling his bets in the hope that the ball will finally land on red. Intervening to prop up equity prices, and suppress the price of gold, so restoring confidence would fit right in with his thinking.

Nobody has tried this strategy on this scale ever before, so we have no idea whether it will work or not. However, history is littered with examples proving that debasement of currencies leads to catastrophe, so take your pick. Maybe nothing can stop deflation when a massive bubble bursts - its just meant to happen. Trying to prop up the bubble by encouraging people to take on yet more debt when the problem was caused by the fact that they were maxed out in the first place seems to me to be utterly perverse.

[Howard_Beale]

+10

[deadhead]

well put together gussiefink. thank you.

[Anonymous]

Thank you. I appreciate it is slightly off topic, but I would be interested in you guys' opinion as to whether, with all eyes concentrated on the west and its problems, the next black swan event could be a China bust. There appears to be unnerving similarities with Japan in the 1980's. Ridiculous property prices, and a bottle of Petrus fetching $95,000. Interesting article in the Economist, plus this http://www.china-briefing.com/news/2009/10/22/is-china-heading-for-a-bub.... Any thoughts?

[Ben Graham Redux]

+100

[deadhead]

On China:

1. They lie more than the US gov't.

2. They are creating a classic bubble.

3. They have a nascent economic infrastructure, which will take generations to mature. That fact alone means choppy waters.

4. The internal unrest will explode several times over the next decade.

[Oxytan]

I'm enjoying this topic and learning a lot, thank you all!  Perhaps I can contribute as well since this thread reminds me of an article by John Mauldin from earlier this summer.  I don't think the shock will come from China, but from Japan instead.  John's article "Buddy, Can You Spare $5 Trillion?" to me illustrates how Japan is heading straight for an economic wall "If rates were to go up by 1%, let alone 2%, over time Japan's percentage of tax revenue dedicated to interest payments would double to 18% and then to 40% and then just keep going up. It is conceivable that it will take 100% of tax revenues in less than ten years, at the current trajectory."  Perhaps less than 10 years indeed.  A default in Japan under the current circumstances would be one big Global Black Swan.

[deadhead]

great point...it could be asian contagion all over again.

great britain is certainly trying to make a play at being number one.

[Anonymous]

A look at http://www.federalreserve.gov/RELEASES/g19/current/
shows that consumer debt has only dropped 4.5% since it's high in 2008. The last time it was at this level was between 2006-2007 when credit was still flowing. As a side note: consumer debt in 1945, as the war was ending, adjusted for population growth and inflation was 5% of the current level.

I wonder if the elevated level of consumer debt, despite the headlines of America deleveraging, is more a result of the banks affinity for screwing programs by raising rates, fees and penalties. Throw in some for desperation personal deficit financing before the credit lines got cut and it seems that 100 Billion is about all the room there is to reflate the balloon if they could do that, despite wide spread reports of banks cutting total credit availability by trillions.

Of course if the Govt is now guaranteeing iffy mortgage loans which is much higher in total than consumer debt and juicing that with a 8G tax credit ( 1.5 million applications were reported fraudulent ). That 8G being the replacement of the teaser rate which is 30% of current home sales and dropping as the 11/30 deadline approaches.

I think the Fed has put it's final stand on the market, hoping to recreate a wealth effect. Anecdotal, but people are staying in hoping against hope they see their once left for dead 401ks come back to life.

I just don't think that they are going to get the desired effect of a market induced wealth effect because in order to translate that wealth into consumer activity requires the consumer taking on more debt. They can't sell. They can borrow against the 401k, but who will do that with the horror of 6 months ago still fresh?

The banks don't have the capital to lend under any circumstances. New consumer activity based on optimism fueled by higher net worth to take on more debt may have worked in the past. But as the crash of 29 showed us, it took 25 years , or a generation, to reach the high of Oct 1929.

The great unknown is when does the merry-go-round stop?

[Anonymous]

No arguments here

Waldo

[Anonymous]

That's an interesting position to take! I don't think that you can assume it was premeditated though; in fact given access to the same amount of information as BB, it would be logical to come up with a series of possible outcomes and corresponding reactions. This would be extrapolated across more than just a best/worst case scenario. I would expect them to find a few different courses of action to take depending on the possible outcomes of subsequent reactions the 60k dollar question then becomes the best means to exit.

BB isn't stupid, rather he is viewing things 5-10 years into the future. If you study his deflation paper in 2000, you can see he anticipated 8 years into the future, I'm sure he was able to see what the outcome would be from low interest rates and a housing bubble thus began working on various strategies to offset the financial fallout. As a policy maker he's getting his chance to put these strategies to the test; you may think he's stupid, but the truth is he was anticipating the potential fall out long before you were aware of the problems.

I'm not siding with him, or giving his actions any justification. Simply put he knew what the problem would be and the best course of action to mitigate the problem for the near term. Once a reasonable balance can be struck then a new set of problems will be generated that we will need to deal with.. I would be more interested in seeing subsequent papers written perhaps an exit strategy can be found in some of those that would better help one to orient themselves.

Personally I feel that we'll hit a commodity boom similar to a year ago (or was it two already?) we'll see a bottoming dollar and eventually raising of interest rates. Deflationary credit environments won't allow for much inflation assuming one looks at the macro picture as opposed to various asset classes. So yeah, oil may hit 85-100 a barrel, but eventually the projects that were invested in back in 2006, will come online in 2011 and rising interest rates will crush speculators out of the markets (as an example).

Remember this is a marathon not a sprint.

[Anonymous]

Nobody can control the fin. system in such a measure. You give too much credit to CBankers, just as cheeky does when he says that this was planned.

The economy is just like an ecology. Man failed when they tried to build artificial ecosystems of practical scale. Nothing is different with an economy.

Traditionally, CBankers had a resposibility towards the monetary system and nothing else. If they are infested with ideas typically coming from political economists, irresposible behaviour results. Ideas like for instance: "central banks act as buffers to smooth out the business cycle". Or worse, like what Marla investigated above.

If you want to see a resposible CB, look at the ECB or the Bundesbank. But they have it easy. The FED is encumbered with the impossible task of managing a international reserve currency in times high and low. A task that it is not chartered with nor it can be achieved by means that we know of today.

Time will come when it will be realized that an international reserve currency or instruments derived from it are not necessary: we already have one - gold. Regional blocks can have their own currencies that, if managed resposibly (even allowing for the rather socialistic CB "buffer" role), will float favourably against gold and if not will be punished. Such arbitrage can only be done with real capital and not borrowed paper like what is done today. The reason is that a zero-sum game must be played at a certain level and gold provides the substrate for that to be done globally. Savers, the ones that postpone their consumption, will then not be vulnerable to politically pumped global arbitrages (carry trade!) and high finance will cease to suck away resources by frontrunning citizens.

Besides, we are in need of an aswer to the question: what is real capital? The base money? Well, one can extrapolate the FED actions to the point where they finance deposits (base money) with printing. A vague definiton of real capital is the edge that financiers have over the populace and they are now openly stealing from them so that the edge can stay sharp.

Freegold, the essence of the above, is the arbitrage mechanism that works on a macroscale far better than the free-floating government debt system. Read the blog of fofoa for more info. Critical posts are appreciated!

[Marvin T Martian]

"The economy is just like an ecology. Man failed when they tried to build artificial ecosystems of practical scale. Nothing is different with an economy."

that is precisely the reason for the crash.

unfortunately current policy aims to restart and continue ad nauseum the artificial ecosystem.

said artificial ecosystem caused increasing global imbalances, thermodynamics caught up, and the crash attempted to rectify imbalances in the ecosystem and restore natural order. unfortunately, globalization as we knew it cannot exist in nature. nevertheless, the fed bet the farm on restoring their collapsed ecosystem, but this will fail in the long run from a practical standpoint.

i think currency volatility will increase going forward as hyper-liquidity goes into overdrive as  capital sloshes around the globe seeking a safe harbor, which will only increase and exagerate extreme imbalances.

although i do believe that the only way to stabilize the system will be some form of a precious metals-backed currency or IMF SDR (likely silver, while pegging silver to CB gold), the truth is that a nation with a trade deficit cannot and a debt-based economy have a gold standard. so the global economic order will have to change drastically (whether slowly or quickly, sooner or later i won't guess), and in such a way that they have no other option left.

merely 'embracing' gold won't cut it- there must be genuine value in a currency for it to be exchanged for gold, so unless it's either officially or semi-officially interchangeable non-value currencies would go extinct and we'd be bartering with grains of gold or, hopefully, electronic 'gold credits' if economies are to be anything but local.

this transition, should it happen, would be quite uncomfortable as it would lay waste to the dollar-centered globalization which has created america's 'standard of living bubble'.

at the endo of the day, CB's will have no choice but to stabilize the system and bridge the gaping chasm between fiat currency and value. but they won't do it until they've exhausted every other option first, so things will get worse before they get better.

[Anonymous]

The whole point is that nobody needs to "stabilize" anything, lest it is in the domain that the institution has been chartered with by time-tested principles of responsible housekeeping. Gentle nudges here and there are OK but the line must be drawn somewhere. Otherwise we suffer the same ordeals that at the end gave birth to the time-tested principles I mentioned above.

Wall street and political econonists that redescovered Marx (social-democrats we call them in Europe or pure socialists when they are feeling really playful with with OPM) have surpassed the line.

All the above is nicely summarized by Martin Armstrong. He is a curious case but his historical writings are educationally interesting and entertaining (not the cycles stuff, that I am very sceptical about).

Freegold is not a gold standard nor it is in any way restricting fractional banking, credit-based economies etc. It is only restricting the meddling in monetary affairs by politics and ideology.

Freegold will happen with the minimum of effort and who knows, it maybe already there (look at the first item declared on the asset sheet of the ECB, what do you think it is? fofoa has it on his site). There is nothing internationally that needs to happen for us to have that system. No G20s, G50s or G100s. No Bretton Woods or similar. Just enforce the basic laws in our constitutions and the Rule of Law.

Besides, the zero-sum game that gold offers is compatible with the limited resources, Peak Oil and all that doom&gloom we all secretely subscribe to.

Germany is already on the way there (new government), as well as Japan. I am living in The Netherlands are we are here properly socialistic with no end in sight. If the Germans indeed get the taxes lowered and move out of the crushing public-debt spiral, the queen will lose one subject (although I wouldnt mind beeing the future subject of our princess, ahem, wink wink...).

[Sancho Ponzi]

The Fed could easily trade under the guise of 'Hedge Fund ZeroShort' operating out of the Caymans, Bermuda, whatever. Bernanke's got the powder (cash) to push around SPY, the usual shorts (FAZ, SRS.) CIT, C, etc. If liquidity becomes a problem, he simply buys more toxic crap or plays one of his other liquidity cards. 

As a market maker, the Fed makes GS look like the homeless guy trying to hustle four bits from you in the grocery store parking lot. I'd bet everything this is already happening because it explains so many of the current market 'peculiarities'. 

[Sqworl]

1912: In the December issue of, "Truth," magazine, George R. Conroy states of banker Jacob Schiff,

"Mr Schiff is head of the great private banking house of Kuhn, Loeb, and co, which represents the Rothschilds interests on this side of the Atlantic.

He has been described as financial strategist and has been for years the financial minister of the great impersonal power known as Standard Oil.

He was hand in glove with the Harrimans, the Goulds, and the Rockefellers in all their railroad enterprises and has become the dominant power in the railroad and financial power of America."

1913: On March 4, Woodrow Wilson is elected the 28th President of the United States.  Shortly after he is inaugurated, he is visited in the White House by Ashkenazi Jew, Samuel Untermyer, of law firm, Guggenheim, Untermyer, and Marshall, who tries to blackmail him for the sum of $40,000 in relation to an affair Wilson had whilst he was a professor at Princeton University, with a fellow professor's wife.

President Wilson does not have the money, so Untermyer volunteers to pay the $40,000 out of his own pocket to the woman Wilson had had the affair with, on the condition that Wilson promise to appoint to the first vacancy on the United States Supreme Court a nominee to be recommended to President Wilson by Untermyer.  Wilson agrees to this.

Jacob Schiff sets up the Anti Defamation League (ADL) in the United States.  This organisation is formed to slander anyone who questions or challenges the Rothschild global conspiracy as, "anti-semitic."

Strangely enough, the same year that they do this they also set up their last and current central bank in America, the Federal Reserve. Congressman Charles Lindbergh stated following the passing of the Federal Reserve Act on December 23,

"The Act establishes the most gigantic trust on earth. When the President signs this Bill, the invisible government of the monetary power will be legalized.......The greatest crime of the ages is perpetrated by this banking and currency bill."

It is important to note that the Federal Reserve is a private company, it is neither Federal nor does it have any Reserve. It is conservatively estimated that profits exceed $150 billion per year and the Federal Reserve has never once in its history published accounts.

[ToNYC]

This resonates nicely with forums / Macroeconomic forums on Central Banking on this site

http://conspiracyrealitytv.com/rothschilds-and-the-federal-reserve/

[Apocalypse Now]

1913 is also the year the modern IRS was created.

We pay interest and taxes to the same group, although there is an intermediary.

[Hephasteus]

The IRS was to try to avoid state betrayal. By taxing the people directly they try to avoid states leaving. It was never ratified and the first thing states did during the great depression was start printing currencies.

[Anonymous]

CB - I tend to ascribe to the theory even if the PowersThatBe wanted to, they can't always manipulate there way out of things, and the longer the poofed up markets with financially rigging, the harder the fall...so I do think even if evil lurks its power is sometimes overblown, as Mish is constantly pointing out BB has more or less blown his wad of QE and can't fight the deflation occuring because of credit collapse, over-capacity, and social mood turning fearful...having said that, the more I hear about what went on 15, 10 and 5 years ago, they more I see reasonably smart people (not geniuses but smart) that had warnign after warning and fought it all tooth and nail. Greenspan knew subprime was a huge liabiliity from 2000 when people in Cleveland already had whole neighborhoods wiped out and that is was obvioulsy the loan origninations were not being done in good faith and people were exporting fraud to other people. I also look at the interest rates we had in 04, 05 and see we didn't get back down that low again til this Jan??? and that was after the swiftest freaking reduction evah. WTF were rates doing that low in mid 2000s when housing was already crazy nuts and needed no more boost.

Seemed a bit off to me even at the time, and I had no idea how loose lending had become compared to a re-fie I had done just a few years before that WF raked me over coals over a $125 non-payment of a medical bill (because of a dispute) 6.9 yrs before even tho I had perfect credit, been in house with lots of equity for 10 years, same steady job the whole time etc..And about 2 years later I talk to a home builder that tells me about a janitor who had huge house built with something called a "no-doc" loan (I had never heard of such a thing no bieng in the biz) that they didn't even have to show income for the mortgage!?!...I was shocked...how had 40 years of lending practice change so quickly. The home builder told me the guy would be a renter in a year or two, and then about the same time I heard 25 of mortgages in MN were interest only...not Cali, not FL but MN...then I knew we were sooo soo f!#$@d. And the Fed knew all this. The Fed was supposed be policing this fraud, and they and WH admin was instead actively stopping states trying to do soemthing about it. The Fed has legions of number crunchers...don't tell me some geeks that had been working for them for thirty years weren't going nuts about what they were seeing, I know it was a mania, but even Greenspan and BB can't be that dumb with all the information they had at hand and historical knowledge or how far the mean it was.

And there is the way they treated anyone that tried to limit them, control it a bit, like the Frontline on the CFTC Brooksley woman being taken by Greenspan, Rubin etc..In retrospect, they seem way way to hyper vigilant about the regulators squealing on them. The FED and banks were doing so freaking well it seemed strange to me they would freak out so much about some regulation...like a big business that is making huge profits will often concede something to the govt regulators knowing one, they have plenty of profit to handle pesky little "tax" on them, and its better to give a little then resist hard and then have govt get more riled up about it. But instead, in restrospect, I think they were trying to wipe out the history of the warnings they were getting, making a case that everyone was doing it, we all got caught in it.

ala Naomi Shock Doctrine, it seems everytime a very forseeable crash/tragedy happens, especially when we later know what those in the know knew, it is often said "gosh, noboy predicted this, who would have known" and then they take advantage of the crisis they let happen. I heard it after 9/11..."who would have known, how could we have seen this coming" even tho we now know that had lots of worries and lots of warnings, after Katrina, "who would have known, no one predicted this" and even Brownie looked good when vidoe taped showed him warning admin properly. The next time I hear a politican say who would have known, no one predicted this" I'll know what they really are saying we knew, we predicted this but we kept you in the dark and let it happen for our evil purposes.

[Fritz]

Talk about the ultimate Dark Pool!

Anything is possible - Its likely the Fed had this playbook written out years ago.

[Anonymous]

Why else would someone specializing in the causes and analysis of the Great Depression become Chairman of the Fed in 2006? Ben has been groomed for his time in the spotlight for quite a while.

[Cognitive Dissonance]

The quantity and total duration of the emotional, physical and Karmic energy expenditures required of all parties involved (Fed, Treasury, GS and select friends) to keep this Ponzi afloat is surely sufficient to wean the world of it's addiction to oil.

One of life's little lesson dear mom taught me at an early age was that it's so much easier to tell the truth than it is to tell (and then perpetually maintain) a lie. Sadly, the very fact that I took this lesson to heart means that I would immediately be the hands down looser in any modern day corporate or political equation.

Mom always wondered if I would amount to anything. Does being the consistently poor but honest odd man out quality for at least a participation award?

Come on, throw me a bone will ya?

[Cheeky Bastard]

CD, i fully agree with your hypothesis. I, for one, always thought this is the main reason the crisis was triggered. To lower the dependence on oil, and to lower the daily oil consumption in western industrialized nations. And i think we will remain in this limbo until either

a) green energy becomes cheap and accessible 

b) a major break trough in nuclear fusion

Until then the oil production will keep falling, the inventories will build up, the price movement will be sideways, and parallel with that, big money will flow into the alternative energy sector, various types of public transportation will become widely used, the suburbia will start dying ( as seen now with all the housing inventory on the market ), the inner cities will start to take major investments and will again be rebuilt, the remaining parts of what was suburbia, will become either fields, or woods or be used for food production. That is a small part of what this crisis is all about, but the most important nonetheless.

[anynonmous]

and the title of that chapter might be Eugenics, Energy and the Economy

perhaps a joint effort by Holdren & Chu

meanwhile Obi has gone on the offensive dissing any who would question the "settled science" of human caused Climate Change http://www.france24.com/en/node/4908569

[Anonymous]

human induced climate change is the biggest
fraud, hoax, and lie since the press asserted
that obama is a natural born us citizen....

obama was born in kenya; is an indonesian
citizen, and is not even naturalized....

www.obamacrimes.com

thus it is entirely within character that the
anti-christ is lying about climate change which
is not even close to being a settled science....

nonetheless the lysenkoists have the upper
hand of tyranny and are using this charade as
a pretext for further nazification of the usa....

fuck obama...

[JacksWastedLife]

lies, damn lies! He is Irish - O'bama, you know.

[geopol]

There is a new movie coming out by independent movie director Chris Smith with Micheal C. Ruppert called coLLapse..You can see reviews on his website http://www.fromthewilderness.com/, also a movie with the same Peak Oil bent called Oil Smoke and Mirrors http://oilsmokeandmirrors.com/, talks about forced demand destruction.

And the myth of the war on terror. Daniel Ganser   Nato's Secret Army's

http://www.voltairenet.org/article144748.html

[Anonymous]

it's sad that this might be news to most sheeple....

the oligarchs have been planning world
population destruction for decades....they are
now building to a crescendo and that fake
war on terror is the channel for achieving a major
war to accomplish it as well as through
economic crisis to force starvation....

terrorism is a trademarked product of the us
intelligence establishment....

operation paperclip had devastating impacts on
the usa such that we are the 4th reich...

[Anonymous]

“…always thought this is the main reason the crisis was triggered. To lower the dependence on oil...”

Okay (admittedly) my attention span is somewhat short this afternoon and I’ve only skimmed Batt’s article so I should probably shut up and come back later this evening with a longer attention span... surely you jest, I’m misreading what you’re saying or both. I don’t see “TPTB” soon to be revealed as the long lost benevolant dictator/father figure in a modern day redo of “Father Knows Best” leading to the dawn of a new day.

[ToNYC]

Domestic-sourced natural gas now providing 92% of U.S. daily use (the balance from Canada and Mexico, but totally North American) can fuel our current crop of vehicles, cars and heavy trucks,  at the present time. All we need is the will to pull the plug on OPEC and agents and brokers draining 150 Billion per year ($70 per barrel times 5.9 million barrels per day(EIA stats)  times 365 days)..lots of smoke and mirrors in the way of this realization you see. Once that cash is out of the country it is free to be stolen on the return, and you bet it is.

[Anonymous]

The U.S. has plenty of coal and natural gas and there are American companies with technologies to convert natural gas, coal or biomass into liquid fuel, e. g. SYNM or RTK.

[agrotera]

CD--Anyone who chooses money over integrity, is the loser ...you are a treasure...

Hey, i was looking up W.C. Fields quotes earlier and here are a few for you...

"Remember, a dead fish can float downstream, but it takes a live one to swim upstream.

...Start every day off with a smile and get it over with. 

...If I had to live my life over, I'd live over a saloon."

and a smile for you too!

Agrotera

[Cheeky Bastard]

Agrotera, baby,  thank for the words under Andy's article. I really appreciate it.

But, also, it would be no big deal if i left.

:D

[agrotera]

Cheeky, it is important to know the truth, and here is one for you...

when i read what you said, "But, also, it would be no big deal if i left." I got a cold sweat all over my body and that is because, it is just flat out a gift for me everytime i read your words.  I look for your posts, and sometimes, if i can't see you posting, i don't even bother to read the comment sections ( i have a few others who i love and this applies to, too) i know sometimes things get so hecktic for me, i just can't participate all i would like and that is understandable for all of us, but please don't leave because i would cry--come on now, i am a nice girl, please let that be enough of a big deal for you to know that your presence here is more important than you know...

It is amazing to feel such kinship for folks even though we have never met face to face.  But, we all have a signature.  And a few times, i think i have even recognized people who went anonymous from their usual avatars and that just goes to show how each of us has a very unique impact on everyone else--like a stone in the pond.  I will be so sad and miss you so much if you aren't here.

[Careless Whisper]

I have a man crush on him.

[Johnny G.]

From your youtube posts of shirtless men, I would have assumed you were a female.  Perhaps it's not a man crush, but a touch of moisture crush.

[Careless Whisper]

No JohnnyG I'm 100% man. I do prefer guys but the shirtless men posts are because Robo is sooo one sided with his eye candy. But Johnny, who wouldn't love to chill with Cheeky? I think of him as an intellectual, that loves to party hard, and is in to Formula One racing. I never met anyone like that. Awesome right?

http://www.youtube.com/watch?v=1IuCu1dmSNs&feature=related

[agrotera]

I love a man who isn't afraid to be honest, so i love you Careless Whisper!  Cheeky is like a work of art, and really, anyone who doesn't love him is just lacking in the ability to appreciate beauty...so that is that, period!  Hey and thank you for sticking up for us girls, the occasional shirtless men posts definitely brighten my day! 

[RockyR]

"agrotera".  I'm guessing this is CB's other moniker on here...

;-)

[agrotera]

Nope RockyR, but I will accept your thought as an honor, so thank you!

(just don't know what CB might think of your assessment )

[Johnny G.]

Okay.  Good on you.    No judgement, just figured with the shirtless guy from Nebraska or wherever he was taking his shirt off.  Whatever floats your boat is way less relevant than your opinion.  Are you so certain that Robo is misogynistic?  I kind of feel there might be a touch of xx there.

[Careless Whisper]

Sometimes I wonder if I'm pansexual. 

http://en.wikipedia.org/wiki/Pansexual

[Anonymous]

I am an interloper on the Zero Hedge blog. My husband is the one who regularly reads what is on this blog and is far more conversant about economics and the state of US financial affairs than I am. I am replying to you because my spouse says you are intelligent and on top of things and have a keen grasp of logic.

After scanning a few of these postings I am struck by a few thoughts: clearly many of the contributors to this blog have a good deal of knowledge and information the general public does not have. If the average "knowledge" score of the contributors to this blog is an "8" on a scale of 1 to 10, with 10 being Kenneth Galbraith or some other famous and well-respected economist, then the American Public is less than 0, and I am a sad example of this hypothesis.

You stated that the amount of energy required to "keep this Ponzi afloat is surely sufficient to wean the world of its addiction to oil." Sadly, this hopeful thought will never see the light of day. The general public, that is the majority of the American population, has absolutely NO IDEA what is going on even at the most basic level. Most Americans just barely understand the concept of a variable APR. Really. I am involved in local politics and believe me when I say that there is NO ONE in my precinct with even the slightest handle on the American economy. We believe whatever our favorite radio/TV station tells us is true.

Given that, I would say this about Obama: we need to understand that although the economy is probably the most important thing in our lives right now, we are merely spectators on the shores of the Cahulawassee River (did you see the movie "Deliverance"?) with absolutely no understanding of and no experience with the category 5 rapids just ahead, never mind the wild and dangerous, poorly charted back country that accompanies such a wild and tumultuous river. Obama must answer to the guides that know the river and how dangerous it can be, as well as to the tourists who have no understanding of the challenge they are about to undertake. Obama is a politician and it would do well for us to remember that he is subject to the same forces that the rest of us are. While it is true that he is at the helm, we must always remember that he is just a man - he is not a superhero and he may not be able to save us, and that does not mean that he is a failure as President. He has not been in office even a year and already we are ready to jump ship. And why? Because he does not address our particular concerns? Because he has to be mindful of voter concerns (however trivial they might seem by comparison)? Because he has to satisfy the greatest number of people to achieve the greatest good? This is our system and who we are right now - it's a negotiating game and Obama is doing what he has to do, not necessarily what WE think he should do. Obama will have to learn to be his own guide down this treacherous river. Maybe that will mean taking on BB and LS. In the meantime, maybe we can retreat a bit and give him the space to be the captain we asked him to be and then concentrate on ways we can help re-direct this ship and our interests in it (our dependence on oil)...

Just thoughts.

[Anonymous]

I am an interloper on the Zero Hedge blog. My husband is the one who regularly reads what is on this blog and is far more conversant about economics and the state of US financial affairs than I am. I am replying to you because my spouse says you are intelligent and on top of things and have a keen grasp of logic.

After scanning a few of these postings I am struck by a few thoughts: clearly many of the contributors to this blog have a good deal of knowledge and information the general public does not have. If the average "knowledge" score of the contributors to this blog is an "8" on a scale of 1 to 10, with 10 being Kenneth Galbraith or some other famous and well-respected economist, then the American Public is less than 0, and I am a sad example of this hypothesis.

You stated that the amount of energy required to "keep this Ponzi afloat is surely sufficient to wean the world of its addiction to oil." Sadly, this hopeful thought will never see the light of day. The general public, that is the majority of the American population, has absolutely NO IDEA what is going on even at the most basic level. Most Americans just barely understand the concept of a variable APR. Really. I am involved in local politics and believe me when I say that there is NO ONE in my precinct with even the slightest handle on the American economy. We believe whatever our favorite radio/TV station tells us is true.

Given that, I would say this about Obama: we need to understand that although the economy is probably the most important thing in our lives right now, we are merely spectators on the shores of the Cahulawassee River (did you see the movie "Deliverance"?) with absolutely no understanding of and no experience with the category 5 rapids just ahead, never mind the wild and dangerous, poorly charted back country that accompanies such a wild and tumultuous river. Obama must answer to the guides that know the river and how dangerous it can be, as well as to the tourists who have no understanding of the challenge they are about to undertake. Obama is a politician and it would do well for us to remember that he is subject to the same forces that the rest of us are. While it is true that he is at the helm, we must always remember that he is just a man - he is not a superhero and he may not be able to save us, and that does not mean that he is a failure as President. He has not been in office even a year and already we are ready to jump ship. And why? Because he does not address our particular concerns? Because he has to be mindful of voter concerns (however trivial they might seem by comparison)? Because he has to satisfy the greatest number of people to achieve the greatest good? This is our system and who we are right now - it's a negotiating game and Obama is doing what he has to do, not necessarily what WE think he should do. Obama will have to learn to be his own guide down this treacherous river. Maybe that will mean taking on BB and LS. In the meantime, maybe we can retreat a bit and give him the space to be the captain we asked him to be and then concentrate on ways we can help re-direct this ship and our interests in it (our dependence on oil)...

Just thoughts.

[deadhead]

Geoffrey and Marla....beautiful article, thanks for connecting dots and bringing into play the previous thinking of Bernanke.

I'll bet the Fed's balance sheet mirrors the FAS basket lol!

I sincerely hope that I am wrong on this one, but I do not think for a minute we will see a comprehensive audit of the Fed for a long time. 

[Harbourcity]

On that point, what is the Bloomberg freedom of information suit at right now?

[deadhead]

last I saw was that the Solicitor General approved the appeal by the Fed (as certainly to be expected).  I can only imagine that the Fed will delay and stall as long as humanly possible. Perhaps an atty friend of ZH can post a PACER reference to give some specifics.....

[agrotera]

EXACTLY WHAT I WAS THINKING Harbourcity!!!

Does the FOIC apply to the minutes for the President's Working Group?  (With the criminality that seems to be executed in Washington, probably most actions are "off the record" and sent by courier, with explicit instructions to destroy after execution--or like on Mission Impossible, the tape self destructs a few seconds after the executor hears the instructions--you know, i know that sounds kookoo, but sorry, anything is possible, criminals work hard not to get caught.)

Unless we get S604 passed, we can forget about knowing what is going on--and if there is enough stalling, all records will be removed and replaced wtih a lilly white untarnished set anyhow...GOD I HATE WHAT IS GOING ON!!!!!!!

[deadhead]

i don't think for a minute that FOIA could even get close to the working group (executive order 12631).  easily a national security issue and if anybody wanted to litigate it, it would take years and billions of dollars to work it up to the supremes.

[agrotera]

hi Deadhead!

I am sure you are right, but, I just don't know how far the FOIC can reach, I know there are 7 exemptions and of course as you say, national security issues are exempt. 

But, it seems fair enough to ask to see the notes for the last year.  I would be particularly interested in exactly what was ordered for March of this year...as i have said before, i watched all DOW components for two weeks and saw a complete disconnect, the average price of the components was going down, but the index was going up, each day. I finally wrote it off to the PPT.  But i do think the public deserves to know about the actions of the Presidents Working Group which was established by Regan under executive order 12631.  Anyone who wants to have a nice read on the matter should go to www.sprott.com, and look under "special reports" to find "Move Over Adam Smith: the Invisible Hand of Uncle Sam" .

The Frontline report on PBS the other night mentioned the President's Working Group so it is not a secret, it is just that no one (except for folks in finance) knows much about this group. 

I just think that all American's need to know about the functions of the group because they need to know that our government via the President's working group, does intervene in the markets, and in my opinion, they basically drove the current market turnaround. 

[deadhead]

agree with you!  I wish we had much greater transparency.  it's the old "don't treat me like a child" issue.  i think americans can handle the truth but leaders seem to disagree.

the good news is that there are too many smart people out there (here) that can figure out what is going on and share the info.  we need to continue to rinse and repeat this strategy.

[JR]

It was said earlier this week that “the SEC does have rules regarding insider trading (or at least used to) that may have been violated during multiple occasions over the last few years.”

To which I add, how can there be fair play rules on trading when the US government legitimizes a Plunge Protection Team (PPT) for "enhancing the integrity, efficiency, orderliness, and competitiveness of financial markets and maintaining investor confidence”?  Investor confidence?  If ever there were reasons for legitimacy of The President’s Working Group on Financial Markets (PPT), they are long dead, IMO.

Take a look at the PPT inside players:

• The Secretary of the Treasury or his designee, i.e. TIMOTHY GEITHNER --  CHAIRMAN  (succeeding Hank Paulson)
• The Chairman of the Board of Governors of the Federal Reserve System or his designee, i.e. BEN BERNANKE
• The Chairman of the Securities and Exchange Commission or her designee, i.e. MARY SHAPIRO, and
• The Chairman of the Commodity Futures Trading Commission or his designee, i.e,. GARY GENSLER.

Paulson as past CEO of Goldman Sachs was involved in massive securitization fraud; his replacement at the Treasury, Rubin/Summers protege Timothy Geithner, worked under former Treasury Secretaries Robert Rubin 01-95 to 07-99 (Goldmam/Citi) and Larry Summers 07-99 to 01-01 (Goldman consultant) and for the NY Fed--the heart of the Federal Reserve System, controlled by Goldman Sachs.  As for Gary Gensler, this hair raiser from Wikipedia:

Gensler, as Obama’s selection for CFTC, has jurisdiction over $5 trillion in trades, including regulation of the environmental futures markets (carbon trading/Goldman Sachs). He spent 18 years at Goldman Sachs, making partner when he was 30, becoming head of the company’s fixed income and currency trading operations in Tokyo by the mid-’90s, and eventually the company’s co-head of finance.

Gensler was Undersecretary of the Treasury (1999-2001) and Assistant Secretary of the Treasury (1997-1999) in the United States—all Rubin/Summers years.

As the Treasury Department’s undersecretary for domestic finance in the last two years of the Clinton administration, Gensler found himself in the position of overseeing policies in the areas of U.S. financial markets, debt management, financial services, and community development. He advocated the passage of the Commodity Futures Modernization Act of 2000, which exempted credit default swaps and other derivatives from regulation.

In March 2009, Senator Bernie Sanders (I-VT) attempted to block his nomination to head the CFTC. A statement from Sanders’ office said that Gensler “had worked with Sen. Phil Gramm and Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.”

He also accused Gensler of working to deregulate electronic energy trading, which led to the downfall of Enron, and supporting the Gramm-Leach-Bliley Act (led by Rubin) which allowed American banks to become “too big to fail.”

As for Mary, Jim McTague asks this question in this week’s Barron’s: “Did Securities and Exchange Chairman Mary Schapiro, in her former role as head of the National Association of Securities Dealers, approve a misleading proxy that helped boost her pay (up 57% to $3,140,826 a year) and those of other NASD executives?”

[agrotera]

Awesome post JR!

I wish you would contribute a more lengthy piece to ZH...there really is no good reason for the PPT--completely unchecked insider trading tickets for all primary dealers and all the firms or agencies of the people that participate in the group.  I complained about this somewhere in this comment section a long time ago, and someone said that there was no way that the "orders' could get out and that there had to be safeguards in place.  I was shocked by this answer because it totally overlooked the fact that the participants in the President's Working Group weren't in positions that clearly made it impossible NOT to act on their knowledge.

[Anonymous]

Uncle Ben is in the process of having the last lingering doubts removed as far as the cause of the Great Depression is concerned. Soon he will only have to look in the mirror to know the cause of the second Great Depression.

[IE]

If this is truly the case ... think of the money they are making ... 

;-)

[Careless Whisper]

Brilliant article. Props.

From GoldmanSachs: The Fed could target mortgages, bonds, equities, "and potentially a whole host of more exotic securities."

Heehee. But of course; why wouldn't they?

[buzzsaw99]

Bennie's books stink, no doubt.

[Anonymous]

No doubt this cocksucker has been up to this...Infact when Obammy does his daily campain sspeaches when markets are trading, there is always a mysterious buyer of the SnP futures. What a joke things have become!!

[deadhead]

i miss the patented obama short in early 09...what a great trade that was for awhile....

[OldCodger]

Ya Fritz I know. I'm finding out "good guys finish last" applies to more than sex it seems.

[Anonymous]

This is only the second act. "He who laughs last" is
worth focusing on I think.

[GoldmanSux]

Very good questions. Did the Fed break the law(again) by buying equities?

[Careless Whisper]

Probably not. They got a brainiac at Goldman that devised a way to buy equities without really buying them. Reverse repo 10 year T-bill wraped around S&P futures contract.

[Anonymous]

Agree. I'm sure they structured it so that even the most carefully crafted question from Congress about buying equities could be answered no.

(And just coincidentally, at the same time GS magically finds a way to make $100M a day in trading profits and never have a losing day. Seriously, GS probably does way more front-running of the Fed than they do of their clients.)

[jm]

There is a mystery about Fed equity holdings, but Deadhead posted a few days ago that the Fed owns a shopping mall in Oklahoma.

http://news.yahoo.com/s/nm/20091021/us_nm/us_usa_fed_bailout

To me, the idea of the Fed owning such an illiquid tangible asset (and foreclosed homes) is more politburo-ish than a portfolio of exchange traded equities. 

Pretty disturbing.

[deadhead]

i think it came about because of a foreclosure filing as i recall....i forget if it was bear or lehman, though it really doesn't make any difference which one.

they have equity holdings, there can be no doubt about that. 

[jm]

These real estate holdings should be disturbing precisely because of their illiquidity and tangibility. 

They don't own shares in these assets. Shares you can sell easily and anonymously, if at a loss.

The Fed has no intention of liquidating these assets at auction, because the ultimate price discovery would daisy chain the whole financial system.  So they'll hold them and try to generate income streams with them.

The idea of people getting used to leasing a house or office space from the Fed is the same thing as getting used to government control over the means of production.     

[deadhead]

i hope to live to see the day where all of the maiden lane spe's spill out....

[cbxer55]

Funny thing about that mall. Some articles say it is located in a poor area. It is located at the junction of I-35 and I-240 (article said 244, ha!). That is a very heavily travelled part of Oklahoma City, it is not a poor area at all. Heck a brand new Texas Road House recently opened right next door.

Crossroads Malls problem is the same as a lot of malls that are featured on the Deadmalls website. Lost all of its main attractions in the last few years. Without them traffic goes down considerably, others move out, voila high vacancy.

You want to see a poor mall, you should see Heritage Park Mall in Midwest City, OK! It's vacancy rate has to be around 85%. There is hardly anything left, but it still soldiers on. And there is an abandoned Pep Boys and Popeyes Chicken right across the street. And two empty strip malls .125 mile away. Thats a poor area.

[A Man without Q...]

If you assume the Fed is involved in all markets - fixed income (which we know), currencies including gold (ditto), commodities and equities, the way the markets have been behaving makes a lot more sense.

And frankly, buying equities vs buying MBS and other toxic crap gives you a lot more bang for your buck in the effort to reflate the economy especially getting Americans feeling secure enough to start spending again- Minsky for the middle classes?

[time123]

Well, if they purchased equities, they are part of what has helped the market move up. But the question is for how long? And will the market sustain itself when such presumed intervention stops?

That is why it is important to use timing signals to trade the market.

[bonddude]

And still all the puzzle pieces haven't been fitted in...

unemployment - you can't just run up equities and expect to create jobs.

what about swaps - hundreds of trillions in contracts (remember China threatening to not honor theirs?) Check the Frontline story at PBS called "The Warning."

Another Black Swan event like h1n1 flu killing or just scaring people and dragging down the economy.

Not to be Debbie Downer but nothing goes straight up or down forever. H/T Art Cashin

It always seems something unexpected is the trigger.

Just blabbin' - gotta go drink some vino. Ciao

[Anonymous]

Would certainly explain the aversion to being audited.

[Anonymous]

If so then any graph using dollars as an axis term becomes completely irrelevent. The dollar of a few months ago is nothing compared to the dollar of today, or of a few months hence. Only in puchase power parity can evaluation in $ terms be understood.

QE and CE of scale will destroy the currency while making all indicators look good. Result is the same. General impoverishment as purchasing power is stripped away.

The USA is style over substance, or in this case "appear prosperous on the way to pennilessness."

No matter the path the losses must be taken. As ever, the foolish, trusting, simple folk of a nation will have their moral core swindled away by malevolent conspiratorial liars and thieves.

We're all going to the poor house; its just whether gravity pulls us there, or the Fed drives us there more slowly. Common people will come to believe that lifting a hand in attempting to improve their condition is a foregone failure. The future and work will be generationally perceived as bleak and only to be survived.

[Anonymous]

Fed's gone rogue, left the reservation, and acting only in the interest of a select inside group. Acknowledgement of the end of capitalism. Crash the market, ramp the market, steer it to your advantage always repatriating profits to Gold.

Winner take all. Since Fed sets interest rates and controls printing press, they always win. Even when they produce or contribute nothing to human creative endeavors.

[FischerBlack]

Is the Fed bidding on Kindles on ebay? The bidder of last resort?

There is a bid under everything, and it's name is Ben.

[spanish inquisition]

So was Hatzuis tasked with floating ideas to test the waters or is GS using the Fed and Treasury as a front. Either conclusion is borne out by the GS profit numbers. Will big government with Big Ben win the day, or as I fear, we may be witnessing the reincarnation of Elphy Bey.

edit http://flashmansretreat.blogspot.com/2008/05/elphy-bey-still-not-fan.html

[Anonymous]

Thats all we need now is to connect dots where "the Bernanke plan" all makes sense. Won't that kill the bigger picture plan to expose the system and the greedy asses attitude of "fuck the world as long as i get" mine? Look Im a golfer and sure I could hit a ball a long way over a creek into the woods where it hits a tree bounces on the green and goes in the hole while a nucler weapon explodes anyone can.
But when I say "just like I planned it" .... Well those dots don't connect for me.

[Ruth]

AUDIT THE FED!  Do we need anymore reason?

Great Article Geoffrey and Marla!

[Anonymous]

Hi!
Let me send you my 2 cents.
SPX 500 - Monthly - " Follow Trend "
I use some indicators that I created, but I like to follow the traditional indicators.
Important to follow market and follow trend.
Follow the trend is have the opportunity to make money more easily. And that's what all the trades want.
This chart is one of my preferred to see the long term.
With a week over a monthly closing, we have only 50% of bullish signal.
For a bull market I need to see:
1 - Close > Moving Average;
2 - RTS Indicator -> Black line > yellow zone.

http://followmarketrend.blogspot.com/2009/10/spx-500-monthly-follow-tren...

SPX - Road Map " Bullish Scenario"
http://followmarketrend.blogspot.com/2009/10/spx-road-map-bullish-scenar... - Weekly Update

**************** Advise ********************
Build short positions > 1080
Fisrt Target [1005,1020] 70%
Secound Target [975,980] 30%
********************************************
Indicator didn`t follow price.
Testing this week again trend Medium vs Long Term.
Market Losing Momentum.
Possible bearish divergence but need confirmation.
http://followmarketrend.blogspot.com/2009/10/spx500-weekly-bearish-diver...
Nice weekend for all

[Anonymous]

Yes, Mr. Hatzius is in charge.
I'm just his beard.

BB

[Anonymous]

Marla, gettin down and dirty. I like it. Appears she's starting to beat the drum, tin foil hat cast aside.

[SloSquez]

Marla gettin down and dirty, I like it.  Also ramping on the frequency.  The game was up, they had no choice.  They only hope you are buyin and obviously you're not.  BTW, Bernanke was disgusting Friday morning with the arrogance.

[Anonymous]

i am surprised FED employee has not leaked information about the balance sheet at this point. i never really understood why everyone is so concerned about getting Bernanke under oath. why couldnt the information be leaked like all other information is in thsi country?

[deadhead]

now would be a good time to remind those kind of folks that all it takes is an email to tips at zerohedge dot com

[agrotera]

Of course greenspan and bernake are global macro guys, they also serve as front men, so they have to put on a good show.  And for all the economists and others writing reports, etc, maybe they are so overtasked and hopeful for a promotion, that they can't see beyond their next project.  Then think about the inspector general that we saw quized by the (previously fabulous) Al Grayson--that woman is so clueless, it makes you think that clueless is the key word--either you are a clueless person flattered by the offer of your position, or you are an overworked task doer blinded by the importance of your work, or you are a real player--and if you are a real player, it is you (on behalf of your boss) against the rest of the country so there aint no way they will be sending tips.

[Anonymous]

Has the Fed pumped up the stock market with money they printed (monetarized) out of nowhere?

A: Absolutely.

Did they do it directly or via working with Goldman Sachs and other so called "banks"?

A: Via Goldman and other so called "banks" - that way the proceeds could be distributed to Wall Street crooks instead of the taxpayers.

[Lux Fiat]

Surprised there was no reference to former Fed Reserve member Robert Heller's Oct. 1989 article in the WSJ indicating that the Fed was capable of manipulating the market during a crisis.

Or to the following Mar 2007 article by Mike Whitney that was amazingly prescient, and that I archived when looking into the issue a while back - http://www.marketoracle.co.uk/Article464.html. 

A few excerpts that are of interest:

"As the NY Post's John Crudele said, “Over the next few years, people like me suspected that Heller's plan was indeed in effect. Whenever the stock market was in trouble someone seemed to ride to the rescue.”

Crudele is right; the market is being manipulated.

This may explain why the Federal Reserve mysteriously decided to stop publishing its M-3 report. Since the Fed is the “main resource” for buying averages in the futures market “the money is injected into markets via the New York Fed's Repo desk, which easily showed up in the M-3…. Without the useful resource of M-3”, Robert McHugh, Ph.D.says, “we need to find other tools to monitor when the PPT is likely to intervene, and kill shorts”.

  What? So by abolishing the M-3, the Federal Reserve has removed its greasy fingerprints from the smoking gun of market meddling?

  It appears so."

"Risk, over-exposure, cheap money, shaky loans, a falling dollar, low reserves and a confidence deficit; these are the crumbling cinder-blocks upon which America's Empire of Debt currently rests. The possibility of a major disruption grows more likely by the day. Consider the world's 8,000 unregulated hedge funds with $1.3trillion at their disposal or the wobbly derivatives market and the effects that a sudden downturn might have. Kenneth J. Gerbino put it like this in his recent article “The Big Sell Off” on kitco.com:

“With a global market panic starting in a low interest rate and, so far, low inflation environment, one has to be wonder about the real reason for (Tuesday's) sell-off. Easy money almost everywhere leads to leverage and speculation. No where is this more prevalent than in the global derivatives market. It is not out of the question that third party defaults and risk aversion designed instruments that collapse and go sour may someday overwhelm the financial markets. Latest figures from the Bank of International Settlements: $8.3 trillion of real money is controlling $313 trillion in derivatives. That's 38 to 1 leverage. These figures are just for the over - the - counter derivatives and do not include the global exchange traded derivatives in currencies, stocks and commodities which are another $75 trillion.”  "

[deadhead]

George Stephanopolus has commented about Heller and futures contracts

[agrotera]

thank you Lux Fiat!

[Anonymous]

very good...the fed had the arrogance and gall
to justify the elimination of m-3 reports because
it was not cost effective....

you have to be a complete imbecile to buy that...
and the cia-fed hacks will come out of the wood work to
defend the fed here.

on the other hand john williams publishes estimated
m-3 with his small staff....so let me try to
make sense of this: the world's richest and
biggest and most evil central bank cannot afford
to produce m-3 yet john williams can??

bernanke - go fuck yourself you lying piece of
shit...

[Fish Gone Bad]

For those interested, here is M3: http://www.nowandfutures.com/images/m3b_with_taf_etc.png

[agrotera]

It totally seemed bogus and a bad sign that around the time that China became a 60% owner of all US Treasuries, M3 suddenly isn't important to report anymore--the two seemed not coincidental to me.

But, i am really confused and hope you Fish Gone Bad, or someone will answer a few questions:

When we look at SGS or the nowandfuture chart that you published and see the M3 extrapolations or calculations growth of M3 is basically ZIP, ZERO ZILCH NADA.  So, if you look at the 9 trillion missing at the Fed that is in SPV's, and then consider the expanded balance sheet of the Fed, where the money has gone?  Knowing that the Fed has no one to answer to, it would seem clear that they are using money beyond their legal rights, to buy into the market via PPT orders, but, without getting an audit, how can we know? And wouldn't the use of the M3 chart with a side by side indication of the money that is "known" to have been printed by the fed over the last year, create quite a show?  Most people get visuals.

I am hoping that Marla, and Tyler decide to publish such an article so i can print it, and send it to my shameful puppet senators who aren't as of yet supporting S604.  That would be good if we all did that, and hey Marla and Tyler, i know you can do it, so, please? (sorry for the pressure, but i get the feeling pressure is like a vitamin pill for you two!!!)

Thank you in advance for any comments...

[anynonmous]

here is the text of Hellers WSJ OP-ED from 1989

Have Fed Support Stock Market, Too
By Robert Heller
10/27/89
The Wall Street Journal
"The stock market correction of Oct. 13, 1989, was a grim reminder of the
Oct. 19, 1987 market collapse. Since, like earthquakes, stock market
disturbances will always be with us, it is prudent to take all possible
precautions against another such market collapse.

In general, markets function well and adjust smoothly to changing economic
and financial circumstances. But there are times when they seize up, and
panicky sellers cannot find buyers. That's just what happened in the October
1987 crash. As the market tumbled, disorderly market conditions prevailed.
The margins between buying bids and selling bids widened; trading in many
stocks was suspended; orders took unduly long to be executed; and many
specialists stopped trading altogether.

These failures in turn contributed to the fall in the market averages;
Uncertainty extracted an extra risk premium and margin-calls triggered
additional selling pressures.

The situation was like that of a skier who is thrown slightly off balance by
an unexpected bump on the slope. His skis spread farther and farther apart--
just as buy-sell spreads widen during a financial panic--and soon he is out
of control. Unable to stop his accelerating descent, he crashes.

After the 1987 crash, and as a result of the recommendations of many
studies, "circuit breakers" were devised to allow market participants to
regroup and restore orderly market conditions. It's doubtful, though,
whether circuit breakers do any real good. In the additional time they
provide even more order imbalances might pile up, as would-be sellers
finally get their broker on the phone.

Instead, an appropriate institution should be charged with the job of
preventing chaos in the market: the Federal Reserve. The availability of
timely assistance--of a backstop--can help markets retain their resilience.
The Fed already buys and sells foreign exchange to prevent disorderly
conditions in foreign-exchange markets. The Fed has assumed a similar
responsibility in the market for government securities. The stock market is
the only market without a market-maker of unchallenged liquidity of last
resort.

This does not mean that the Federal Reserve does not already play an
important indirect role in the stock market. In 1987, it pumped billions
into the markets through open market operations and the discount window. It
lent money to banks and encouraged them to make funds available to brokerage
houses. They, in turn, lent money to their customers--who were supposed to
recognize the opportunity to make a profit in the turmoil and buy shares.
The Fed also has the power to set margin requirements. But wouldn't it be
more efficient and effective to supply such support to the stock market
directly? Instead of flooding the entire economy with liquidity, and thereby
increasing the danger of inflation, the Fed could support the stock market
directly by buying averages in the futures markets, thus stabilizing the
market as a whole.

The stock market is certainly not too big for the Fed to handle. The
foreign-exchange and government securities markets are vastly larger. Daily
trading volume in the New York foreign exchange market is $130 billion. The
daily volume for Treasury Securities is about $110 billion.

The combined value of daily trading on the New York Exchange, the American
Stock Exchange and the NASDAQ over-the-counter market ranges between $7 and
$10 billion. The $13 billion the Fed injected into the money markets after
the 1987 crash is more than enough to buy all the stocks traded on a typical
day. More carefully targeted intervention might actually reduce the need for
government action. And taking more direct action has the advantage of
avoiding sharp increases in the money supply, such as happened in October
1987.

The Fed's stock market role ought not to be very ambitious. It should seek
only to maintain the functioning of markets--not to prop up the Dow Jones or
New York Stock Exchange averages at a particular level.

The Fed should guard against systemic risk, but not against the risks
inherent in individual stocks. It would be inappropriate for the government
or the central bank to buy or sell IBM or General Motors shares. Instead,
the Fed could buy the broad market composites in the futures markets. The
increased demand would normalize trading and stabilize prices. Stabilizing
the derivative markets would tend to stabilize the primary market. The Fed
would eliminate the cause of the potential panic rather than attempting to
treat the symptom--the liquidity of the banks.

Disorderly market conditions could be observed quite frequently in foreign
exchange markets in the 1960's and 1970's. But since the member countries of
the International Monetary Fund agreed in the "Guidelines to Floating" in
1974, such difficulties have been avoided. I cannot recall any disorder in
currency markets since the 1974 guidelines were adopted. Thus, the mere
existence of a market-stabilizing agency helps to avoid panic in
emergencies.

The old saying advises: " If it ain't broke, don't fix it." But this could
be a case where we all might go broke if it isn't fixed."

http://pqasb.pqarchiver.com/wsj/access/860233682.html?dids=860233682:860...

H. Robert Heller Federal Reserve Governor 1986-1989

http://www.nndb.com/people/247/000177713/

[Sisyphus]

Helicopter Bernanke's/TTT's/Twisted Finger Paulson's/Asleep Summers'/All wall street crooks' wet dream.

http://vimeo.com/3738607

[Anonymous]

Marla:

You have been tipped off to the awful truth. The Federal Reserve is operating outside of the law. Ron Paul was the first to figure it out (no I am not a Ron Paul voter, but he is correct about the Federal Reserve). The Fed will never be audited precisely because revelation these revelations and their unwinding would bring down a Ponzi 300-1000x as big as big as the last collapse.

[Mark Beck]

I guess I would ask, is the recent rise in bank reserves, in short term instruments, like equities? and my quick estimate is that this would be about a 1T portfolio of added investment. Could the 1T be the market prop? Is it large enough?

OK lets follow this line of thinking, what happens if there is a large correction in equities? When these few big players need to exit? What happens then? It could be an uncontrolled mess with only the Dow circuit breakers to stop the bleeding. Is this the setup, is this the FED stabilizing plan for equities? does this reduce banking systemic risk?

Lets move on shall we. To the MBS buy.

What is the FED plan for dealing with investments that obviously were not collateralized properly? What does the FED say to Congress about meeting collateral requirements, when the FDIC has real estate losses and writeoffs in some cases over 50% on similar types of paper? We took our best guess?

It is getting so goofy that Bernanke will not be able to hide behind any plausible economic theory in justifying his actions.

[Howard_Beale]

The answer is in your 1st paragraph. 1 trillion is not large enough. Period. Nothing can stop the breathing organism that is the market. Manipulation is a short term play but the market is always bigger than that. Frankly, it just gives the bears a better starting point on my best short of all that I wait patiently for--when JPM gets to $52 or above. It's the trade of the century buying long dated puts. The expanding diagonal is the trade. And JPM is it.

[deadhead]

as one who follows banks closely and for quite some time, i find this interesting howard.  saw you mention it the other day, caught my eye.

i clearly notice how most speak of jpm in a reverential fashion, but there is a minority in your camp.  perhaps the armaggedon derivatives.......

[Howard_Beale]

Summer 08 when the financial short ban was implemented, JPM went up to $51 and change, many loud screams were heard throughout my house that I couldn't short it!....because it went back down to $14.98. Since 2006, this expanding diagonal/triangle gets better and better. If it tops the summer 08 high, $52-$55, it is the perfect opportunity to buy Jan 11 puts on the toxic waste dump that it is. At some point, I will take my money off the table and lay more on for Jan 12. Jamie is no idiot--but he has a mess on his hands. Reggie Middleton has been on it, as have many other serious bank analysts, including one I truly respect, Martin Weiss. He doesn't get much credit here on ZH but he is one the best balance sheet analyst I know of.  

Personally, I'm watching the chart. I feel it is the best trade out there because it is the most bearish formation. Target--$10 by late 2011, early 2012. You can short any financial you want to when the time is right--they are all toxic--but this is the most bang for the buck. When Dimon is the Man Who Saved Wall Street this year--it's just like the book Maestro in 2000 about Greenspan. He's gonna fall. JPM may well be the last bank standing but they won't be worth much in terms of equity.

[deadhead]

thank you very much Howard....i will continue to watch, maybe grab some puts.

I've had a thought about dimon in my head and when i read your 2nd paragraph, it became clearer (though i am most likely in space here). if dimon is smart, he goes out on top, hence the out of the blue recent succession plan.  my further thought is that he very well could be the next treasury secy. i think geithner is close to out and my feel is that obama likes dimon, or at least has respect for him.  also, obama doesn't dare grab a squid.

[nhsadika]

JPM is the lynchpin bank of the Fed.  The deathstar.  Betting against it is the reason you buy gold?

Thoughts?

[Howard_Beale]

The Fed's actions won't matter in 2 years, nor will JPM's balance sheet since it will be exposed or just fucked with no earnings when the consumer/MBS/CC/CRE debt bubble collapse comes to fruition.Lets not even get into the problems with the FHA/FDIC/FRE/FNM, etc. The Fed will lose all credibility in the endgame. Go ahead BB, I dare you, print $20 trillion more. Won't do any good when our TSY auctions don't even have a 100% bid to cover. Can't monetize that because the tails will be waggging those dogs!  

Gold is our hedge against the buck. Betting against JPM will yield much more in terms of leverage over the next few years. Always good to diversify. If you are only long gold in a depressed state, it may take a hit (sorry GG). But in the long run, gold is a pure play against the printing press and when the Fed has to pump $1 trillion into JPM to save it, well, just look at Citicrap to know that it won't help the equity holders. In the words of Dick Bove, C was the buy of the century at $20--just love that guy. Hope he talks JPM up all the way down to the abyss. I'm sure Ms. Whitney (who is not captured in my opinion) will be back on the bandwagon in the not so distant future. 

" Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry."

Hey, it's all among friends--or is it these days? The Fed, MS, JPM, other PD's back to the Fed. A friendly crowd indeed. One day they will wake up to the massive hangover when negative bill auctions are the fruit of the month. Hello Japan--once again.

[bulldung]

If the Fed continues to print do the prices ever go down without a currency cofiscation and devaluation. History gives examples, Madness of Crowds and Popular Delusions by Mckay and more recently by Roosevelt with gold. Is the mind of BB to reverse course from QE, unless sufficient political pressure or legal action takes place I think inflation is the goal. JPM at 52 or 5200 may not be a good short.Thoughts?

[Howard_Beale]

Hi Bulldung--(name almost as good as Dr. Horace Manure)

You assume stock market inflation with the printing press. So if the dollar goes into serious collapse, how does that help JPM or any bank for that matter? Because in that case, a dollar today is worth more than a dollar tomorrow.They lend dollars today and get negative returns instantly in a hyperinflationary environment. They aren't gaining money from a commodity inflation standpoint--they are a bank. So be it--they aren't lending now and are making money trading--but the toxic waste will come to the forefront and there will be no way out. Writedowns will be severe--especially after the next wave of consumer mortgage defaults and CRE/CMBS. And lets not forget all the other derivatives they hold that are off balance sheet.

The argument that printing press inflation will inflate the U.S. stock market has yet to be proven as a real possibility. Taking the last 7 months into consideration is fallacious in my opinion due to the basic tenants of a bear market rally.  Argentina's stock market collapsed in hyperinflation. The US market bottomed in 1982 (after a 12 year nowhereville) after Volker ramped rates to over 18% to combat inflation after two oil shocks.  Businesses failed continuously in Argentina because of intraday price resettlements. Zimbawe is not a good example due to a multitude of reasons. So if you think the Dow can go to 50000 because of the printing press, please share your logic. I welcome all insights. 

[bulldung]

If monetization goes first to banks then the market I am supposing that the market may be the first place to see high inflation.Is stock price inflation/reflation not what what is described in the post? Thanks for adding Zimbabwee, did they not have stock price inflation? What were the temporal relationships and interventions in the market fall and hyperinflation in Argentina, this may be very instructional.Any articles or books on this that you can recommend? My name is as good as my opinion, thanks.BD

[Anonymous]

if zimbabwe had a stock market it probably could
have been purchased on most people's credit card.....

[Fish Gone Bad]

I agree that money would first chase stocks. When a currency starts to die, money leaves a country. From Wikipedia:

Capital flight, in economics, occurs when assets and/or money rapidly flow out of a country, due to an economic event that disturbs investors and causes them to lower their valuation of the assets in that country, or otherwise to lose confidence in its economic strength. This leads to a disappearance of wealth and is usually accompanied by a sharp drop in the exchange rate of the affected country (depreciation in a variable exchange rate regime, or a forced devaluation in a fixed exchange rate regime).

This fall is particularly damaging when the capital belongs to the people of the affected country, because not only are the citizens now burdened by the loss of faith in the economy and devaluation of their currency, but probably also their assets have lost much of their nominal value. This leads to dramatic decreases in the purchasing power of the country's assets and makes it increasingly expensive to import goods.

[Howard_Beale]

My knowledge of Argentina is from a friend that lived there through 6 years of the crisis and our various conversations over the years. He was paid in US dollars when he was there--which at the time was the hedge of choice. Every day the stores closed at 1 and reopened at 3 with prices doubled or tripled. Small businesses collapsed. There were numerous interventions (which can be found on Wiki). I wish I had a comprehensive book to recommend but alas, I don't. Maybe someone else does?

[anynonmous]

check out the headline on Drudge

[deadhead]

they just changed that in the last hour or so.....quite remarkable. drudge likes to push.

[Marge N Call]

Swine flu is a National Emergency??

Seems like he squirted in his pants, heeeeeere we go.....

[Howard_Beale]

Are you being facecious? My daughter and son have both lived through it--my 10 year old had to endure hospitalization for 2 days-- my son is just emerging now after 12 days in living hell--and he is in his 20's. It's out there and it is rampant. 

[Marge N Call]

Sorry to hear about your children. I have no doubt it is bad and I am not belittling the effects of the illness, but is it a national emergency? There seems to be consensus that this is a "preemptive" declaration of a national emergency. To a layperson like myself it appears premature.

http://www.cdc.gov/flu/weekly/weeklyarchives2009-2010/IPD41.htm

I tend to distrust anything the government does, and since Obama that mistrust has gone up about 1000% (which is incredible given the GWB administration). SO call me cynical.

FWIW, my significant other is in the medical field and feels that this is overboard. But they are not CDC experts, so who knows.

[deadhead]

didn't know about the 20's son howard (i got one of them critters too lol!). i am shocked that a 20 yr old got whacked for 12 days....wife and I keep reminding all of them about sanitizers, etc.  hope the young man is back to normal now.

[Howard_Beale]

Hi DH-My son is up and around as of Friday night. Geez it's been a rough month for my kids. For the older one, the first week was pure hell--the muscle pain and fevers were beyond belief--and nothing took away the pain. He called on Thursday so upset that he wasn't getting better and I was starting to lose it. He is on the West Coast and two people died in his area of southern Oregon in the last week from it. It seems to have really hit the Midwest and the West Coast very hard. Check out state websites instead of the CDC--it's far more interesting on cases, deaths, school closures, etc. Here's the Oregon data:

http://www.flu.oregon.gov/DHS/ph/acd/swineflu_investigation.shtml

[deadhead]

glad to hear he is improving.....you must be a basket case.

i can see why we have a national emergency declared now....i'm in upper NY and some schools are getting hit but it's not at the panic stage...... yet.

[Fish Gone Bad]

Sorry to hear about your children Howard.  The good news is that they are now immune.  A few years ago, I made a poorly written, poorly drawn, poorly animated cartoon about the worst flu ever: http://www.fishgonebad.com/Stories/The_Flu/Flu0.htm .  I thought it was a scream.

[Howard_Beale]

Thanks Fish...and that immunity factor is truly a relief now. 2 down, none to go! As for your cartoon...the Southpark creators would be proud.

[Anonymous]

1952 - world pop 3.2 B
2008 - world pop 6.7 B

When rational people act in an irrational manner it means they have more information than you.

Why, exsctly, does the FED/T spend like there is no tomorrow?

[Anonymous]

CB,

Apparently I'm late to the Cheeky Bastard "to be or not to be" question...LOL.
Though you are not a "true" rebel...(eye of the beholder...I'm American)...your thoughts on capture the flag would be missed by this reader.

Never let the bastards beat you down CB...whatever you decide ;-)
nmewn

[spekulatn]

This piece is eye-opening. Thanks for sharing, Geoffrey and Marla. Well done you twoz.

"MARK IT ZERO, DUDE"

[Anonymous]

the majority of americans would say there was no smoking gun of obama fucking bernanke in the ass on the white house lawn even if cnbc broadcast it live without commercial interruption....and thus it is impossible to reason with such folks....

yet the article provided all of the foundational evidence to demonstrate that this financial crisis was premeditated years in advance....the oligarchs use academic journals and think tank exercises to vet their plans and to anticipate reactions and objections as well as to get feedback for fine tuning the plans....

john judge told a very interesting anecdote about his mom who worked in the pentagon as a manpower planner during the 1960s...she had been planning troop withdrawals in viet nam all through 1963 with a completion date of 2q 1964...

on 11/25/1963 she got orders to begin planning a massive build-up in troops....because of the long lead times in planning and the nature of planning cycles she knew that the usa would be in viet nam for at least 10 years....she was horrified by the implications but she knew that a massive sea change in usa policy had occurred....

the point is that the oligarchs are extremely sophisticated and methodical about their plans....these things do not happen by accident or random acts of stupidity....

i certainly believe that bernanke has bought equities because he believes that he is above the elected government - he answers to no one except the rockefellers as does obama....most people simply deny the hubris and arrogance of the elite for whom the law is not even remotely a concern to them other than a challenge to circumvent...

an audit would surely resolve the issue of whether bernanke bought equities....i suspect that he did as the crisis of 2008 was designed as a reichstag fire to precipitate the consolidation of power in the hands of the elite...

can't remember if the anecdote is told in part 1 or part 2 of the interview:
http://www.youtube.com/watch?v=FpDUG2tYE9E

tin and proud......

[Howard_Beale]

on 11/25/1963 she got orders to begin planning a massive build-up in troops..

So she got the orders 3 days after Kennedy was shot. That's very interesting, isn't it.

[Hephasteus]

The laws not something the Powers that Be try to circumvent. They don't follow the laws at all. To them laws are simply restrictions of actions to impose on other people. They DO NOT FOLLOW them they only try to avoid letting people find out that the limitations are only for the masses and not for them.

[Anonymous]

sure, not news. Equity is the cushion that creditors, and specially banks, absolutely require to even begin to think about extending credit so... what's the big deal? the time for talking shit was 30 years ago when Congress under aRepublican president began spending more than it brought in just as we entered our prime working years. We asked for it and now we have it.

[Anonymous]

"the time for talking shit was 30 years ago when Congress under aRepublican president began spending more than it brought in just as we entered our prime working years."

Maybe you're thinking more like 75 years ago when the entitlement culture took over with the "new deal" (later bolstered by the "great society" corruption of LBJ, or perhaps even further back to nearly 95 years ago when all corruption first began with the Federal Reserve Act and creation of the IRS...all under the auspices of the DEMOCRAT vote laundering machine. Bray about military spending all you want but don't hide behind the fact that military spending is NOTHING compared to the government giveaway corruption that has suceeded in destroying this nation (contemporary example:community reinvestment act)

You can say we are republicrats too if you want, but leave no doubt that democrats are the worst of the lot by an unmeasurable degree...there's not been a good one since the days of Andy Jackson.

Get off your rocking horse...to hell for all the arrogant delinquents who refer to themselves as "progressive".

[Greenbacks]

Repubs and Dems; two horses with the same corporate owners.

[Anonymous]

Ay like everybody knows you know that this here is how it is? eh? Seez, if it's criminal and someone can do it, it's getting done, eh? C'mon don't be a fazool, you grew up in Brooklyn right? Fuggedabout it. It's just business.

Grow the f*** up already.

Signed,
Ben 'Phony Baloney' Bernanke

[loup garou]

Besides the curious timing, what’s interesting is that the 2004 treatise implies that the Fed had not yet made purchases of equities, at least directly.  

Did the Fed purchase equities directly this time? Probably not. No need.

Did they facilitate the purchase of equities by other means? Absolutely; the same way they facilitated the purchase of BSC by JPM. (Paul Volcker:  “To meet the challenge, the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long-embedded central banking principles and practices.”)

Keep in mind that these ‘gents’ believe it is essential to keep secret from the public, any facts or events which may have the effect of undermining public confidence in the financial system. (In other words, they ain’t gonna tell us shit on their own.)

To me, the questions are:

How much would public confidence in the financial system be undermined, if it was learned that the Fed had indeed intervened in equity markets, directly or indirectly, especially considering that such beliefs are already so widely held?  (Hell, they intervene in everything else.)

Does it really make much difference if the intervention is direct, or indirect?

Why have so many Fed officials (like Greenspan, Heller, Bernanke/Reinhart, and others who have done so in anonymity), so often and for so long, contemplated undertaking such actions which they are not authorized to take? It’s like saying, “At some point, we might decide to break the law.” Or is it just their way of seeking congressional authorization to do so? I don’t get it...

On the other hand…after experiencing two of the three worst bear markets in history in the past decade (IMO, soon to be three out of four), what makes anyone think that the PPT is any more competent than any other part of the government? (Or is it that they’ve finally “gotten it right”?  lol)

Art Cashin aside…

http://www.gamingthemarket.com/where-the-new-ppt-hides.html