No Wonder the Outlook for the Economy is "Unusually Uncertain" ... the Fed is Killing It

George Washington's picture


Fed Chairman Ben Bernanke testified
today that the outlook for the economy is "unusually uncertain".

not surprising.

Nothing has changed since I made
the following points last December.

Fed Officials Slam Bernanke

Vice Chairman Donald Kohn conceded
that the government's actions "will reduce [companies'] incentive to
be careful in the future." In other words, he's admitting that the
government's actions will encourage financial companies to make even riskier gambles in the future.

City Fed President and veteran Fed official Thomas Hoenig said:

Too big has failed....

sequence of [the government's] actions, unfortunately, has added to
market uncertainty. Investors are understandably watching to see which
institutions will receive public money and survive as wards of the

Any financial crisis leaves a stream of losses among the
various participants, and these losses must ultimately be borne by
someone. To start the resolution process, management responsible for the
problems must be replaced and the losses identified and taken. Until these actions are taken, there is
little chance to restore market confidence and get credit markets
flowing. It is not a question of avoiding these losses, but one of how
soon we will take them and get on to the process of recovery

Many of the [government's current policy
revolves around the idea of] "too big to fail" .... History, however,
may show us a different experience
. When examining previous
financial crises, both in other countries as well as the United States,
large institutions have been allowed to fail. Banking authorities have
been successful in placing new and more responsible managers and
directions in charge and then reprivatizing them. There is also evidence suggesting that
countries that have tried to avoid taking such steps have been much
slower to recover, and the ultimate cost to taxpayers has been larger

The current head of the Philadelphia fed bank, Charles Plosser, disagrees
with Bernanke's strategy of the endless printing-press and
ever-increasing fed balance sheet:

urged the Fed to "proceed with caution" with the new policy. Others
outside the Fed are much more strident and want plans in place
immediately to reverse it. They believe an inflation storm is already in

Bernanke argued
that focusing on the size of the balance sheet misses the point,
arguing the Fed's various asset purchase programs are not easily
summarized in a single number.

But Plosser said that the growth of the Fed's
balance sheet was a key metric.
"It is not appropriate to ignore quantitative
metrics in this new policy environment," Plosser said...

Plosser is bringing the spotlight right back to the Fed's
balance sheet.

"The size of the balance sheet does offer a possible nominal
anchor for monitoring the volume of our liquidity provisions," Plosser

former head of the Fed's Open Market Operations says the bailout might
make things worse. Specifically, the former head of the Fed's open
market operation - the key Fed agency which has been loaning hundreds
of billions of dollars to Wall Street companies and banks - was quoted
in Bloomberg as saying:

"Every time you tinker
with this delicate system even small changes can create big ripples,''
said Dino Kos, former head of the New York Fed's open-market operations
. . . "This is the impossible situation they are in. The risks
are that the government's $700 billion purchase of assets
markets even more

And William Poole, who
recently left his post as president of the St. Louis Fed, is essentially
Bernanke a communist:

Poole said he was very concerned that the Fed could simply
lend money to anyone, without constraint.
In the
Soviet Union and Eastern Europe during the Cold War era, economies were
inefficient because they had a soft-budget constraint. If a firm got
into trouble, the banking system would give them more money, Poole said.
The current situation at the
Fed seems eerily similar, he said.

"What is
discipline - where are the hard choices - when does Fed say our
resources are exhausted?" Poole asked.

But the strongest
criticism may be from the former Vice President of Dallas Federal
Reserve, who said that the failure of the government to provide more
information about the bailout could signal corruption. As ABC writes:

O'Driscoll, a former vice president at the Federal Reserve Bank of
Dallas and a senior fellow at the Cato Institute, a libertarian think
tank, said he worried that the failure of the government to provide more
information about its rescue spending could signal corruption.

in government programs is always associated with corruption in other
countries, so I don't see why it wouldn't be here," he said.

Of course, former Fed chairman Paul Volcker has also strongly
current Fed policies.

Agencies Slam Bernanke

The Bank of
International Settlements (BIS) - called "the central banks' central
bank" - has slammed the Fed for blowing bubbles and then "using gimmicks
and palliatives" which "will only make things worse".

As the
Telegraph wrote
in June 2007:

The Bank for International
Settlements, the world's most prestigious financial body, has warned
that years of loose monetary policy has fuelled a dangerous credit
bubble, leaving the global economy more vulnerable to another
1930s-style slump than generally understood...


The BIS, the
ultimate bank of central bankers, pointed to a confluence a worrying
signs, citing mass issuance of new-fangled credit instruments, soaring
levels of household debt, extreme appetite for risk shown by investors,
and entrenched imbalances in the world currency system...


bank said it was far from clear whether the US would be able to shrug
off the consequences of its latest imbalances ...


or later the credit cycle will turn and default rates will begin to
rise," said the bank.

A year later, in June 2008,
the Telegraph wrote:


A year ago, the Bank for
International Settlements startled the financial world by warning that
we might soon face challenges last seen during the onset of the Great
Depression. This has proved frighteningly accurate...


economist] Dr White says the US sub-prime crisis was the "trigger", not
the cause of the disaster.

Indeed, BIS
slammed the Fed and other central banks for blowing the bubble, failing
to regulate the shadow banking system, and then using gimmicks which
will only make things worse. As the 2008 Telegraph article notes:

a pointed attack on the US Federal Reserve, it said central banks
would not find it easy to "clean up" once property bubbles have


Nor does it exonerate the watchdogs. "How could such a
huge shadow banking system emerge without provoking clear statements of
official concern?"


"The fundamental cause of today's emerging
problems was excessive and imprudent credit growth over a long period.
Policy interest rates in the advanced industrial countries have been
unusually low," he said.


The Fed and fellow central
banks instinctively cut rates lower with each cycle to avoid facing the
pain. The effect has been to put off the day of reckoning...


governments feel it necessary to take direct actions to alleviate debt
burdens, it is crucial that they understand one thing beforehand. If
asset prices are unrealistically high, they must fall. If savings rates
are unrealistically low, they must rise. If debts cannot be serviced,
they must be written off.


"To deny this through the use
of gimmicks and palliatives will only make things worse in the end,"
he said.

In other words, BIS slammed the easy credit
policy of the Fed and other central banks, and the failure to regulate
the shadow banking system.

More dramatically, BIS slammed
"the use of gimmicks and palliatives", and said that anything other
than (1) letting asset prices fall to their true market value, (2)
increasing savings rates, and (3) forcing companies to write off bad
debts "will only make things worse".

But Bernanke and the
other central bankers (as well as Treasury and the Council of Economic
Advisors and Barney Frank and Chris Dodd and the others in control of
American and British and French and Japanese and German and virtually
every other country's economic policy) ignored BIS' advice in 2007 and
2008, and they are still ignoring
it today.

Instead, they are doing everything they can to (2)
prop up asset prices by trying to blow a new bubble by giving banks
trillions, (2) re-write accounting and reporting rules to let the big
banks and other giants keep bad debts on their books (or in sivs or
other "second sets of books") and to hide the fact that they are bad debts, and (3) encourage
consumers to spend spend spend!

"The world's most prestigious
financial body", "the ultimate bank of central bankers" has condemned
Bernanke and all of the other G-8 central banks, and stripped bare their
false claims that the crash wasn't their fault or that they are now doing the right thing to turn the
economy around.

As Spiegel wrote
in July of this year:


and his team of experts observed the real estate bubble developing in
the United States. They criticized the increasingly impenetrable
securitization business, vehemently pointed out the perils of risky
loans and provided evidence of the lack of credibility of the rating
agencies. In their view, the reason for the lack of restraint in the
financial markets was that there was simply too much cheap money
available on the market...

As far back as 2003, White implored
central bankers to rethink their strategies, noting that instability in
the financial markets had triggered inflation, the "villain" in the
global economy...

In the restrained world of central bankers, it
would have been difficult for White to express himself more clearly...

was probably the biggest failure of the world's central bankers since
the founding of the BIS in 1930. They knew everything and did nothing.
Their gigantic machinery of analysis kept spitting out new scenarios of
doom, but they might as well have been transmitted directly into


In their report, the BIS experts derisively described the
techniques of rating agencies like Moody's and Standard & Poor's as
"relatively crude" and noted that "some caution is in order in relation
to the reliability of the results."...


In January 2005, the
BIS's Committee on the Global Financial System sounded the alarm once
again, noting that the risks associated with structured financial
products were not being "fully appreciated by market participants."
Extreme market events, the experts argued, could "have unanticipated
systemic consequences."


They also cautioned against putting too
much faith in the rating agencies, which suffered from a fatal flaw.
Because the rating agencies were being paid by the companies they
rated, the committee argued, there was a risk that they might rate some
companies too highly and be reluctant to lower the ratings of others
that should have been downgraded.


These comments show that the central bankers knew exactly what was
going on, a full two-and-a-half years before the big bang. All the
ingredients of the looming disaster had been neatly laid out on the
table in front of them: defective rating agencies, loans repackaged to
the point of being unrecognizable, dubious practices of American
mortgage lenders, the risks of low-interest policies. But no action was
taken. Meanwhile, the Fed continued to raise interest rates in nothing
more than tiny increments...


The Fed chairman was not even
impressed by a letter the Mortgage Insurance Companies of America
(MICA), a trade association of US mortgage providers, sent to the Fed on
Sept. 23, 2005. In the letter, MICA warned that it was "very
concerned" about some of the risky lending practices being applied in
the US real estate market. The experts even speculated that the Fed
might be operating on the basis of incorrect data. Despite a sharp
increase in mortgages being approved for low-income borrowers, most
banks were reporting to the Fed that they had not lowered their lending
standards. According to a study MICA cited entitled "This Powder Keg
Is Going to Blow," there was no secondary market for these "nuclear


William White and his Basel team were dumbstruck. The central bankers were simply ignoring
their warnings. Didn't they understand what they were being told? Or
was it that they simply didn't want to understand?


The head of the World Bank also says:

Central banks [including the Fed] failed to address risks
building in the new economy. They seemingly mastered product price
inflation in the 1980s, but most decided
that asset price bubbles were difficult to identify and to restrain
with monetary policy
. They argued
that damage to the 'real economy'
of jobs, production, savings,
and consumption could be contained
once bubbles burst, through aggressive easing of interest rates
They turned out to be wrong.

Slam Bernanke

Roach (former chief economist for Morgan Stanley, and now director of
Morgan Stanley Asia) is one of the most influential and respected
American economists. Roach told Charlie Rose recently that we have had
terrible Federal Reserve policy for the past 12 years under Greenspan
and Bernanke, that they concocted hair-brained theories (for example,
that we should let the boom and bust cycle occur, but then "clean up the
mess" once things fall apart), and that we really need to reform the

Specifically, here's the must-read portion of
the interview:

STEPHEN ROACH: And what’s missing in the
debate that drives me nuts is going back to the very function of
central banking that’s at the core of our financial system. Do we have
the right model for the Fed to go forward? And, you know, I think we’ve
minimized the role that the custodians, the stewards of our financial
the Federal Reserve, played in leading to this crisis and in making
sure that we will never have this again. I think we’ve had horrible
central banking in the United States for the past dozen of years. I
mean, we elevate our central bankers, we probably .

From Greenspan to Bernanke.


ROSE: Both.

STEPHEN ROACH: We call them maestro, and, you
know, we make them
sound larger than life. And, you know, and the
fact is, they condoned
policies that took us from one bubble to
another. They failed to live up
to their regulatory responsibility
granted them by law. They concocted new
theories to explain why
these things could go on forever, and they harbored
the belief,
mistakenly in my view, that monetary policy is too big and
blunt an
instrument, and so you just bring it in to clean up the mess
rather than prevent a mess ahead of time. Well, look at the
we’re in right now. We need a different approach here. We really do.

Leading economist Anna Schwartz, co-author of the leading book on the
Great Depression with Milton Friedman, told
the Wall Street journal that the
Fed's entire strategy in dealing with the financial crisis is wrong
Specifically, the Fed is treating it as a liquidity problem, when it is really an insolvency crisis.

prominent Wall Street economist Henry Kaufman says
that the Federal Reserve is primarily to blame for the financial

"I am convinced that the misbehavior of some
would have been much rarer -- and far less damaging to our economy --
if the Federal Reserve and, to a lesser extent, other supervisory
authorities, had measured up to their responsibilities ...


directly criticized former Federal Reserve Chairman Alan Greenspan for
not using his position to dissuade big banks and others from taking
big risks.


Greenspan spoke about irrational exuberance only as a theoretical
concept, not as a warning to the market to curb excessive behavior,"
Kaufman said. "It is difficult to believe that recourse to moral
suasion by a Fed chairman would be ineffective."


Partly because the Fed did not
strongly oppose the repeal in 1999 of the Depression-era Glass-Steagall
Act, more large financial conglomerates that were "too big to fail"
have formed, Kaufman said, citing a factor that has made the global
credit crisis especially acute.


"Financial conglomerates have become more and more opaque,
especially about their massive off-balance-sheet activities," he said.
"The Fed failed to rein in the problem."...


"Much of the recent
extreme financial behavior is rooted in faulty monetary policies," he
said. "Poor policies encourage excessive risk taking."

Economist Marc Faber says
that central bankers are money printers who create bubbles, and that
the system would be much better now if the Fed hadn't intervened.
Specifically, Faber says that - if the Fed hadn't intervened - the
system would be cleaned out, the system would be healthier because debt
load and burden on taxpayers would be reduced.

Economist Jane
D'Arista has shown
that the Fed has failed miserably at its main task: providing a
"counter-cyclical" influence (that is, taking the punch bowl away before
the party gets too wild).

The Fed has also failed
in its role as regulator of banks and their affiliates.
As well-known economist James Galbraith says:

The Federal Reserve has never been an effective regulator
for the straightforward reason that it is dominated by economists and
bankers and not by dedicated skeptics who make bank regulation a
full-time profession.

As PhD economist Steve Keen has pointed
, the Fed (along with Treasury) has also given money to the wrong people to kick-start the


Federal Reserve is mandated by law to maximize employment. The
relevant statute states:

Board of Governors of the Federal Reserve System and the Federal Open
Market Committee shall maintain long run growth of the monetary and
credit aggregates commensurate with the economy's long run potential to
increase production, so as to promote effectively the goals of maximum employment, stable prices,
and moderate long-term interest rates.

However, PhD
economist Dean Baker says:

country now has almost 25 million people who are unemployed or
underemployed as a result of the Fed's disastrous policies. Millions of
people are losing their homes and tens of millions are losing their
life savings. The country is likely to lose more than $6 trillion in
output ($20,000 per person) due to the Fed's inept job performance.

Fed could have stemmed the unemployment crisis by demanding that
banks lend more as a condition to
the various government assistance programs, but Mr. Bernanke failed
to do so

Ryan Grim argues
that the Fed might have broken the law by letting unemployment rise in
order to keep inflation low:

The Fed is mandated by
law to maximize employment, but focuses on inflation -- and "expected
inflation" -- at the expense of job creation. At its most
recent meeting,
board members bluntly stated that they feared
banks might increase lending, which they worried could lead to


Board members expressed concern "that banks might
seek to reduce appreciably their excess reserves as the economy
improves by purchasing securities or by easing credit standards and
expanding their lending substantially. Such a development, if not
offset by Federal Reserve actions, could give additional impetus to
spending and, potentially, to actual and expected inflation." That
summary was spotted
by Naked Capitalism
and is included in a summary of the minutes of
the most recent meeting...


Suffering high unemployment in order to keep inflation low cuts
against the Fed's legal mandate. Or, to put it more bluntly, it may be

In fact, the unemployment situation is getting
, and many leading economists say that - under Mr. Bernanke's
leadership - America is suffering a permanent destruction of jobs.

For example,
JPMorgan Chase’s Chief Economist Bruce Kasman told

[We've had a] permanent
destruction of hundreds of thousands of jobs in industries from housing
to finance

The chief economists for Wells Fargo
Securities, John Silvia, says:

Companies “really have diminished their willingness to hire
labor for any production level,” Silvia said. “It’s really a strategic
change,” where companies will be keeping fewer employees for any
particular level of sales, in good times and bad, he said.

former Merrill Lynch chief economist David Rosenberg writes:

number of people not on temporary layoff surged 220,000 in August and
the level continues to reach new highs, now at 8.1 million. This
accounts for 53.9% of the unemployed — again a record high — and this is
a proxy for permanent job loss, in other words, these jobs are not
coming back. Against that backdrop, the number of people who have been
looking for a job for at least six months with no success rose a further
half-percent in August, to stand at 5 million — the long-term
unemployed now represent a record 33% of the total pool of joblessness.

see this.


The Fed says
that we should reduce leverage, but is doing everything in its power
to increase leverage.

the New York Federal published a report
in July entitled "The Shadow Banking System: Implications for
Financial Regulation".

One of the main conclusions of the report
is that leverage undermines financial stability:

was intended as a way to transfer credit risk to those better able to
absorb losses, but instead it increased the fragility of the entire
financial system by allowing banks and other intermediaries to “leverage
up” by buying one another’s securities. In the new, post-crisis
financial system, the role of securitization will likely be held in
check by more stringent financial regulation and by the recognition that
it is important to prevent excessive leverage and maturity mismatch,
both of which can undermine financial stability.

And as a
former economist at the New York Fed, Richard Alford, wrote

On Friday, William Dudley, President
of FRBNY, gave an
excellent presentation
on the financial crisis. The speech was a
logically-structured, tightly-reasoned, and succinct retrospective of
the crisis. It took one step back from the details and proved a very
useful financial sector-wide perspective. The speech should be read by
everyone with an interest in the crisis. It highlights the often
overlooked role of leverage and maturity mismatches even as its stated
purpose was examining the role of liquidity.

While most analysts
attributed the crisis to either specific instruments, or elements of the
de-regulation, or policy action, Dudley
correctly identified the causes of the crisis as the excessive use of
and maturity mismatches embedded in financial
activities carried out off the balance sheets of the traditional
banking system. The body of the speech opens with: “..this crisis was caused by the rapid growth
of the so-called shadow banking system
over the past few decades
and its remarkable collapse over the past two years.”

fact, every independent economist has said that too much leverage was
one of the main causes of the current economic crisis.

Reserve Bank of San Francisco President Janet Yellen said
recently that it’s “far from clear” whether the Fed should use
interest rates to stem a surge in financial leverage, and urged further
research into the issue.“Higher rates than called for based on purely
macroeconomic conditions may help forestall a potentially damaging
buildup of leverage and an asset-price boom”.

And on September
24th, Congressman Keith Ellison wrote
a letter to Mr. Bernanke and Geithner stating:

As you
know, excessive leverage was a key component of the financial crisis.
Investment banks leveraged their balance sheets to stratospheric levels
by using short-term wholesale financing (like repurchase agreements and
commercial paper). Meanwhile, some entities regulated as bank holding
companies (BHCs) used off-balance-sheet entities to warehouse risky
assets, thereby evading their regulatory capital requirements. These
entities’ reliance on short-term debt to fund the purchase of oftentimes
illiquid and risky assets made them susceptible to a classic bank
panic. The key difference was that this panic wasn’t a run on deposits
by scared individuals, but a run on collateral by sophisticated

The Treasury highlights this very problem in its
policy statement before the recent summit of G-20 finance ministers in
London. To address this problem, the Treasury advocates stronger
capital and liquidity standards for banking firms, including “a simple,
non-risk-based leverage constraint.” The U.S. is one of only a few
countries that already has leverage requirements for banks. Leverage
requirements supplement risk-based capital requirements that federal
banking regulators have in place pursuant to the Basel II Accord, an
international capital agreement. While important features of our system
of financial regulation, leverage requirements only apply to banks and
bank holding companies and therefore have not covered a wide array of
financial institutions, including many that are systemically important.
Moreover, leverage requirements have generally not captured the
considerable risks associated with off-balance-sheet activities.

course, the Administration looks to address the shortcomings in the
existing regulatory system through a proposal to regulate large,
systemically-significant financial institutions as Tier 1 Financial
Holding Companies (FHCs). Building upon its existing authority as the
consolidated supervisor of all BHCs (which includes FHCs), the Federal
Reserve would be responsible for overseeing and regulating the Tier 1
FHCs under the plan. In the legislative draft of the proposal, the
Federal Reserve would have the authority to prescribe capital
requirements and other prudential standards for these institutions that
are stronger than those for all other BHCs. To that point, the text
specifically says, “The prudential standards shall be more stringent
than the standards applicable to bank holding companies to reflect the
potential risk posed to financial stability by United States Tier 1
financial holding companies and shall include, but not be limited to—(A)
risk-based capital requirements; (B) leverage limits; (C) liquidity
requirements; and (D) overall risk management requirements.”

application of leverage limits – as advanced by the Treasury’s G-20
policy statement and by the Administration’s financial regulatory reform
plan – is a simple and elegant way to limit risk at specific financial
institutions (and within the overall financial system). The financial
crisis has underscored the importance of leverage requirements and
manifested the problems associated with relying upon risk-based capital
requirements alone ...

Nevertheless, there are some open
questions regarding exactly how a leverage requirement should be
applied. Some scholars and policy experts have advocated putting in
place a leverage requirement for banks and other financial institutions
that is set in statute. As Congress moves forward on comprehensive
financial regulatory reform, it may consider such a requirement. I would
therefore be interested to hear your views regarding the wisdom of
such an approach.
As you know, setting capital standards requires
decisions regarding what institutions would be covered, how capital
would be defined, and what levels the requirements would be set. In
light of that, what specific difficulties would you anticipate Congress
facing with respect to specifying such a requirement? In addition,
would a statutory requirement be too inflexible and place too many
constraints on regulators with respect to refining regulatory capital
requirements and negotiating with bank regulators from other countries?

November 13th, Mr. Bernanke responded to Ellison (I received a copy of
the letter from a Congressional source):

The Board's
authority and flexibility in establishing capital requirements,
including leverage requirements, have been key to the Board's ability to
require additional capital where needed based on a banking
organization's risk profile. One of the lessons learned in the recent
financial crisis is the need for financial supervisors to have the
ability to react quickly to changing circumstances, as in the capital
assessments conducted in the Supervisory Capital Assessment Program. The
Board and other federal banking agencies initiated this program to
conduct a comprehensive, forward-looking assessment of the capital
positions ofthe nation's 19 largest bank holding companies (BHCs). The
Board's authority to mandate specific levels of capital was critical to
this exercise because each BHC had a unique set of risks and
circumstances that demanded careful supervisory scrutiny and evaluation
in order to identify the amount of capital appropriate for its safe and
sound operation. The Board required corrective actions on a
case-by-case basis and continues to assess the capital positions
ofthese institutions as well as all others under its supervision.

note that in other contexts, statutorily prescribed minimum leverage
ratios have not necessarily served prudential regulators of financial
institutions well. Previously, the minimum capital requirements for the
housing government-sponsored enterprises Fannie Mae and Freddie Mac
(collectively, "GSEs") were fixed in statute; the risk-based capital
requirement for the GSEs was based on a stress test that was also set
forth in statute; and the GSE's regulator, the Director ofthe Office of
Financial Housing Enterprise Oversight (the predecessor agency to the
Federal Housing Finance Authority) did not have the authority to
establish additional capital requirements for the GSEs. This limitation
was different from the authority that the federal banking agencies have
to set the leverage and risk-based capital requirements for banking
organizations. In 2008, Congress enacted the Housing and Economic
Recovery Act of 2008, which created FHFA and empowered it to establish
additional minimum leverage and risk-based capital requirements for the

With regard to the Board and other U.S. banking agencies'
efforts to join with international supervisors to strengthen capital
requirements for internationally active banking organizations, the Basel
Committee is working on proposals for an international supplement to
minimum risk-based capital ratios. While this work is in process, it is
likely that these efforts will take the form of a minimum leverage
ratio. It will be important for the international regulatory community
to carefully calibrate the aggregate effect ofthis initiative, along
with other efforts underway that are intended to strengthen capital
requirements, to ensure that they protect against future financial
crises while not raising capital requirements to such a degree that the
availability of credit to support economic growth is unduly
constrained. The current authority and flexibility the Board has to
establish and modify leverage ratios as a banking organization
regulator is very important to the successful participation of the
Board in the process of establishing and calibrating an international
leverage ratio.

The Supervisory Capital Assessment Program
Mr. Bernanke refers to were the infamous "stress tests".
There's just one little problem: the stress tests were a complete complete

In reality, the Fed has been one the biggest enablers for increased
leverage. As anyone who has looked at Mr. Bernanke and Geithner's
actions will tell you, many of the government's programs are aimed at
trying to re-start securitization
and the "shadow banking system", and to prop up asset prices for
highly-leveraged financial products.

Indeed, Mr. Bernanke said
in February:

In an
effort to restart securitization markets
to support the extension
of credit to consumers and small businesses, we joined with the
Treasury to announce the Term Asset-Backed Securities Loan Facility

And he said
it again in September:

The Term Asset-Backed Securities
Loan Facility, or TALF ... has helped restart the securitization
markets for various types of consumer and small business credit.
Securitization markets are an important source of credit, and their
virtual shutdown during the crisis has reduced credit availability for
many borrowers.

Has the Fed Manipulated any Markets?

There are allegations
that the Fed has manipulated the markets.

in Unnecessary Interest to the American People

Many people - including former analyst for the
Treasury Richard
- argue that credit is too important a function to be left to
the private banks. AFL-CIO president Richard Trumka told
Congress recently:

If the Federal Reserve were made a
fully public body, it would be an acceptable alternative.

News columnist Matthew Lynn writes:

U.K. government needs to start thinking about what it will do with all
the banks it now owns. The answer is simple: Hand them to the

Instead of selling the stakes it acquired in the
financial system to other banks, or listing the shares on the stock
market, it could create mutually owned societies. Royal Bank of
Scotland Group Plc could be a people’s bank, owned by everyone.That
would ensure more diversity, competition and stability, all goals just
as worthy as getting back the money Prime Minister Gordon Brown’s
government spent on bank rescues...

Michael Moore recommends
that the American people demand:

of the 50 states must create a state-owned public bank like they have
in North Dakota.
Then congress MUST reinstate all the strict
pre-Reagan regulations on all commercial banks, investment firms,
insurance companies -- and all the other industries that have been
savaged by deregulation: Airlines, the food industry, pharmaceutical
companies -- you name it. If a company's primary motive to exist is to
make a profit, then it needs a set of stringent rules to live by -- and
the first rule is "Do no harm." The second rule: The question must
always be asked -- "Is this for the common good?" (Click
for some info about the state-owned Bank of North Dakota.)

As Moore notes, the state of North Dakota already has such a bank, and -
because of that - North Dakota is just about the only state which is not
running a huge deficit.

PhD economist and candidate for Florida
governor Farid
wants to create a Bank of the State of Florida,
to create credit without burdening the state and its citizens with
high interest charges by private banks. See this for details.

the power to create credit were taken away from the Federal Reserve
system and its private banks and given back to the government (as the
Constitution envisioned), then American taxpayers would save hundreds
of billions or trillions
of dollars in
unnecessary interest charges in paying off the national debt, as the
government would not have to pay interest to finance its debt
nations such as the U.S. and England have the
power to create credit and money
; see this,

Failure to
Disclose Who Received Bailout Money

The Fed continues to fail to fully disclose who received trillions
in bailout money.  Because the
economy will not recover until trust is restored
, and trust cannot
be restored unless there is transparency, this is a big deal.

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Econophile's picture


Interesting post. The only thing I would disagree with is the state run banks. Any government in control of a bank is THE problem not the solution. The answer is, of course, to allow market-based banking, end or limit fractional reserve banking, and go to the gold standard. A gold standard would reduce the cost of money, end these crazy business cycles, and eliminate inflation. The state bank idea is part of "Modern Monetary Theory," a dusting off of the old Chartalists and the John Law schemes. And, never listen to Michael Moore.


Greyzone's picture

Yesterday in Congress, Bernanke said "The best approach, in my view, is to maintain some fiscal support for the economy in the near term, but to combine that with serious attention to addressing what are very significant fiscal issues for the United States in the medium term. I don't think it's either/or. I think you need to really do both. If the ... See Moredebt continues to accumulate and becomes unsustainable … then the only way that can end is through a crisis or some other very bad outcome."

Note also that Bernanke doesn't think the last 30 months are a "very bad outcome" so try to grasp what he's implying there, even if your elected officials cannot. And once you grasp that, check your ammo, water, and canned good storage.

PhD's picture

BP photoshping official pictures from GoM!


They seriously think we are retarted

wyosteven's picture



kaiserhoff's picture

Too late for an audit.  Where is the special prosecutor for Baldly Ben & Co.  Sovereign immunity won't hold for five minutes when the truth starts to leak.

wyosteven's picture

Where is justice?

Bend over and I'll show you.

Wait, I keep getting justice confused with fudgepacker Frank.

Cindy_Dies_In_The_End's picture

Um George, when don't u think they know all of this? Of course they do. In their minds the alternative of non existence as a sovereign nation is far worse. Things are a lot worse than they seem and have been for years. That is the reality.


When you see this as a Threat to National Security, the extraordinary measures taken all make more sense, oh and BTW, everything they have done is perfectly legal under that guise.

Cognitive Dissonance's picture

You should visit GW's blog. He's discussed the NS issue you brought up quite thoroughly over the years. He's very aware of the "National Security" twist behind the insanity and has beaten the drum of disclosure over the lies, corruption and out right thieving conducted under cover of NS.

AC_Doctor's picture

All the so-called rich bankers will be wiping their asses with all their worthless dollars in a few years.  They should have invested in bandages, beans, bullets and bullion...


Miles Kendig's picture

Hella break from writing there Geo... :)

MarketTruth's picture

Bernanke also admitted the Fed knows that Fred/Fan ARE NOT guaranteed by the US government. Due to that fact alone, the Fed is breaking the law as they can only purchase full faith by US government backed items. Obviously, and admitted by Bernanke today, Fred and Fan does not meet this criteria yet the Fed owns nearly $1.25 trillion of such paper.

Nikki's picture

Fabulous dude. Simply fabulous.

+14 trillion fiat $$..

The beard stroker is facing a conundrum and a collapse.

Time's man of the year, indeed.

RoRoTrader's picture

B Krasting wrote; The two simplest measures will be to (1) stop paying interest on bank reserves, encouraging banks to lend the money out instead, or to (2) start reinvesting capital repayments from the Fed’s portfolio of mortgage-backed securities.


Anyone have a number for the amounts refered to in (1)?.........and views on what impact eliminating the 0.25% risk free rate for banks may have in the context of that money actually being redeployed from risk free deposits into, ie., access to loans for small business which has so far been mostly shut out from credit.

The following is a view which I do not necessarily subscribe too, especially in the context of the current environment, but it is a view which may reflect or partly reflect the BB gambit to float it at the Senate hearing this afternoon (it may be as simple as bs baffles brains)

Eliminating the 0.25% interest for bank reserves may increase the the supply of dollars as the banks no longer recieve risk free return. With the increase of supply the dollar price begins to other words a repeat of the 2009 illusion; print money, devalue the dollar, spark a commodity and equity rally and hope that the public common denominator contimues to remain it is not important what you are that matters but what people think you are that matters.

For what it is worth my take is that this is not 2009 and the 'fool me once' angle is probably off the table as trust is in the competency of the institution is probably collapasing........or at least in serious question.

blindman's picture

"Securitization was intended as a way to transfer credit risk to those better able to absorb losses,.."


no, it was intended as a way to fuck the working poor, some with savings,

predicated on trust in the government, out of their intended savings instruments, ie .

dollars, pensions and other retirement investments.  then to transfer the value

of their labor to confidence men, hailed as geniuses of finance.  pure and simple,

financial rape.  oh goody, just like t.v..


but i speak openly.

ps.  another great post by g.w..

my opinion,  the fed must die as it has destroyed the federal government. 

we must regress in deflation,  it will happen regardless.  "physics", he said.


move on, nothing to see here.........

Thoreau's picture

The Beast is almost backed into the corner; a very dangerous situation for the general populace. Good article, GW.

Cognitive Dissonance's picture

You know GW, it just doesn't seem like one of your posts since the oil and gas trolls aren't hanging around. What gives with these people? I mean they only comment about oil and gas but don't care about health care or financial regulation?

I wonder why they're so narrowly focused on only oil and gas? I suppose this will just be another mystery like the Pyramids and 9/11.

Can I yell at you so that it feels like the old days, meaning yesterday? :>)

RichardP's picture

... they only comment about oil and gas ...

Cog - they weren't commenting about oil and gas.  They were commenting about the wild speculation that couldn't possibly happen because it violated the known laws of math and physics and other sciences.  The violations were pretty obvious and specific.  None of that type of speculation that violates known laws of math and physics is happening in this post, or any other finance post.  Finance does not lend itself to known laws of math and science that cannot be violated.  Seriously - is there any statement that could be made in finance where one could legitimately respond that's physically impossible?

But I think you already knew what I just said.

Cognitive Dissonance's picture

I understand your point of view and it makes sense if they shared it.

At one point or another over the past 2 weeks, I've asked each of them why they don't comment on any other threads on ZH other than the BP/oil & gas threads. And each time I was told that they don't know enough about and/or they don't care enough about financial matters to comment.

I countered that they could learn, that many articles aren't strictly about financial matters and that many commenter's veer off topic to spout stuff that might be of interest to them. Thus they might have something to offer and learn on the other threads. I was either ignored or I was told it didn't matter, they weren't interested.

So their interest is extremely narrow not just for the reasons you give. In fact, they didn't mention your reasons when talking to me about staying only on the BP threads, though they have at other times. And while you're correct that there's wild speculation in the BP threads, there's wild speculation that violates science/math in the threads I've seen about global warming, Israel/Iran conflicts present and future and so on. And there's plenty of off topic discussions that meet this criteria in the financial threads.

If these people only wished to refute bad mathematical and scientific thinking on ZH, there is a Gold mine (pun intended) outside of the BP threads. The fact that most of them ONLY swim in the BP oil refutes the basis of your argument. They are deliberately remaining narrowly focused on the BP threads. You on the other hand do spend time on nearly all the ZH threads and so I would accept your argument if you applied it to yourself.

They are as narrowly focused on BP as the Megaphone rallied commenters are focused on Israel.


Jim_Rockford's picture

At one point or another over the past 2 weeks, I've asked each of them why they don't comment on any other threads on ZH other than the BP/oil & gas threads. And each time I was told that they don't know enough about and/or they don't care enough about financial matters to comment.

You never asked me, so please retract.

My posting history is clearly available to anyone with a sufficient "control issue" that would care to look.  Unlike you, I do not feel the need to impart birthday greetings to other posters or inform other posters of "key terms" or use other methods to stoke my ego.

For the most part, I read and learn from the financial articles, even though they usually contain a large component of logical speculation and hypothetical.  Unfortunately I cannot say the same in regards to the "oil and gas" articles.  Most of the factual details regarding those issues have either been supplied by or by the commenters.

You on the other hand do spend time on nearly all the ZH threads and so I would accept your argument if you applied it to yourself.

So how do you know where I spend my time?  Are you omnicient?  The quoted paragraph above is evidence not only of your delusional state, but also of complete and utter ignorance.

RichardP's picture

In one of the recent BP threads by G.W., someone named a group of 5 folks who were probably oil-industry shills, if not BP shills.  Jim was one of those named.  He could easily have thought you were referring to this group with your post, which would mean that you were indirectly referring to him.  In this context, he did not self-identify himself.

Cognitive Dissonance's picture

Are you stalking me Jimbo? Are you lonely or something? No GW post on BP in over 24 hours must be driving you mad.

"You never asked me, so please retract."

No I never did because it's obvious you have been at ZH for a year. I gave you a girl's birthday cake, remember? I was not referring to you. But now it appears that you're self identifying yourself as a Zero Hedge BP/oil and gas troll. Thank you for the confirmation. This thread is a keeper, don't you think?

Jim_Rockford's picture

As far as "stalking", you are the only one I am aware of who is intimately familiar with when we each became members and which articles where we spend our time.

Delusional state confirmed.  Seek help.  Take meds.

Bartanist's picture

Don't know about 9/11 (other than Silverstein torched building 7 and collected on the insurance after the gold was looted and to destroy all of the records) but maybe a little brush up on Zecharia Sitchen will help with the pyramids.

Don't you get the feeling that there has to be more to the story? Supposedly rational people doing seemingly irrational things for mere greed ... selling out their government, country, people... species?

I find it odd that the BIS is in this case taking the position of rationality and the US and other central banks, that of petulent spoiled children.

Escapeclaws's picture

 It seems obvious that the Fed has aided and abetted Enron style accounting shenanigans for the big banks. Why not believe in a conspiracy? Enron was a conspiracy. If the Fed deliberately turns a blind eye toward the timely and express warnings of the mortgage insurers, it can only mean that it was engineering the present mess.  What better way to transfer all the remaining wealth of the middle class to the elite?

Buck Johnson's picture

We are screwed, and the govt. and the fed knows it.  That phrase he muttered "Unusually Uncertain" is a middle finger to everybody and he knows it.  He essentially said the same thing within both words and also phrase it in such a way that one persons meaning is different than anothers, it's called ambiguity and obfuscation.  He did but didn't say anything, he's a con man and he knows it.  You have to wonder why so many federal central bank managers and others are getting out of the Fed.  It's because everything they have been taught and even taught others over the decades in regard to economies they are saying it's not wrong as long as the US does it.  They know that eventually we will have to take our fiscal medicine and the Fed and Administration is doing everything they can to delay it into the future.

Every state and person is in debt and can't service the debt that they have including the Federal govt..  We keep giving out unemployment over two years know, but still jobs aren't being found.  We will soon be in a Stagflationary Depression.  No country in the world has ever been able to control the beast of Stagflation and Deflation without suffering the consequences.  And thats because the cure for one is the posion for the other and vice-versa.  Threading that line is almost impossible and it hasn't been done yet without paying the consequences.

In America, what I see happening is States and Federal govt. laying off people (making promises that they will be back with back pay, knowing that it will never happen), rampant inflation and the start of hyperinflation, the collapse of the dollar, shortages of everything, demands from the govt. that will go unanswered or obfuscated, the rise of criminality and massive corruption to the point that local govt. leaders will act as if the area is their own fiefdom.  And eventually the breaking up of the US into 5 to 6 areas to be their own "territories" but in reality their own country.



Cognitive Dissonance's picture

"That phrase he muttered "Unusually Uncertain" is a middle finger to everybody and he knows it." 

Just amazing, isn't it? I mean, since he said this ("unusually uncertain") there must be a "usual uncertain(ty)" and of course a "usual certain(ty)". Like working one of those word puzzles in my local newspaper, I'm going to follow all of Ben's speeches from now on to see if he ever utters the other two examples of the verbal middle finger.

Amish Hacker's picture

Thanks, GW. Nice job of wrapping up the whole sordid mess into one article, and what a mess it is! As I was reading, I was thinking that it's going to be a long time before we truly understand how the greed of a few led to the impoverishment of so many. And by then it will be too late to do anything about it.

MichiganMilitiaMan's picture

I don't get it.  Individual States "Central Banks" are a solution.  One of our govenor candidates is currently recommending this.  I realize that North Dakota is doing well but are not centralized solutions part of the problem?

nevadan's picture

Read up on the Bank of North Dakota.  They pay interest on public debt to themselves instead of New York banks.  In a macro view the state bank can be considered local not "centralized"

masterinchancery's picture

What Fed observers have not yet admitted, but is absolute truth, is that the Fed USUALLY gets it wrong, assuming that the welfare of the american public is the objective.

eccitante's picture

"the economy will not recover until trust is restored"

Indeed...and it will not be restored any time soon.  Bernanke has no credibility, the Fed has no credibility, Geithner, Obama, the gov't in general has no credibility...the qualitative aspects are important, and difficult to restore with this framework in place.

Hedge Jobs's picture

Correct ecci's. The last hope the elitist FED had of getting out of the mess they are in was through the propanda and lies of the MSM machine. But even this has now failed as even a five year old now knows there is no recovery despite the MSM reports to the contrary to try to restore confidence in a broken system.

The FED doesnt have a policy lever for confidence so it is now out of their hands. I think Ben Shalom was as truthful as a compulsive liar could be today. my reading of Shalom's speach today is that they (FED) have lost control of the economy and they are starting to realise it.

Its now blatantly obvious the end games is near, confidence and trust are in the gutter for good reason and therefore so is the economy. It looks like they are about to go from the gutter down the drain. I dont where this drain flows out to but im pretty sure it aint the hamptons.

Great post GW love your work.

Rogerwilco's picture

I think Bernanke knows the score, all too well. He makes public statements that seem ridiculous -- because he has to do it. Privately he is preparing the banking system for what he sees coming and is trying to make sure his little fiefdom is the last domino. What else can the man do?

AUD's picture

This must be why gold is down.

Muir's picture


Do not disturb the "precious."

2.86 / 2.87 10y

oil down


blindman's picture

excuse me, but has anyone commented on the loveliness

regarding your tits?  i find it difficult to see past this particular

element. ?  gender predicated i suppose?

BoeingSpaceliner797's picture

I'm busy trying to figure out how you can see those tits/that avatar.

Cognitive Dissonance's picture

blindman moves into and out of blindness. No rhyme or reason. Maybe it's drugs or alcohol. Maybe it's whimsy. But I long ago stopped trying to understand the metaphor s/he's trying to promote because of it's inconsistency.

S/he also has a serious problem with capitalization, punctuation and spelling. But then again, we all have our moments. Just not all the time. But then again, s/he's blind, so what was I thinking?

Jim_Rockford's picture

So using your example above, if I were to make some dumbass comments about someone's writing style in a "financial article", I would somehow have more credibility with you.  Gee, sorry, I never got the memo.  Next time you self-appoint yourself as a blog's hall monitor, please communicate your expectations in advance.

By the way, what is Tim Geithner's home phone number?  Viniers?  Were you too busy being the pedantic rhetoritician emeritus to figure that one out, or were you mesmerized by the bouncing silicone bags?

Howard_Beale's picture

Loveliness? You must love your porn. I find that avatar totally ridiculous. I have never read one of his/her comments because of it. And I love to swear but I won't on this one. That avator takes away the integrity from what he/she has to say--and I am not alone in my thinking from other comments posted.

Rainman's picture

I won't defend the Fed for a minute for their actions. But they pulled out a LTCM/ RTC playbook and ran through the steps to cover cyclical meltdowns. The old tuck-it-away- and-settle-it-up-later routine. A grave error. And much of the error was due to lies, not accurate information.

The deck had more Jokers than they knew. The shitpaper is embedded into the pension funds and insurance companies and other deep pockets that have unbreakable commitments to the regular peeps, and that includes the NAV on MMs. Instead of TARP bailing the banks, they should have let the weakies fail, seized what's left of their assets and backed up the losses of U.S. institutional suckers who bought into the ponzi ( and prosecute, prosecute and prosecute and confiscate for fraud ). Then sort out the commercial survivors and try to rebuild a Glass-Steagall regulated banking system form the ashes. Foreign banks get hosed.

Painful ?? Absolutely.

Now the ammo is almost gone and the bad debt enemy keeps coming. The reflation dream is way dead.

I'm not wed to a conspiracy theory concerning the Fed for its original 2008 intent. They just did not properly guage depth and duration. And now they are certainly guilty of compounding the effects of their original errors .....and that is unforgiveable.

hbjork1's picture

Do you ever see a "tell" that scares you out of a situation because it reveals a high probability of a serious hidden flaw. 

Mine showed up reading about the LTCM affair and looking at the basis for the "mathmatical models" for the first time. 


These guys that we waste our time discussing are FAKING IT.  They don't know.  "The king has no clothes."  The commanders of our ship are warm water sailers in a North Atlantic storm.

And the BP toxic disaster. What I have seen in corporate life more than once.

Group leader says: "Here is our project plan outline composed of steps A, B, C, D and E.

After the review, Mr. Big One  says; "Great plan, fine job Team."  "But the cost is straining our budget.  Could you put togther a plan that pulls E forward."  "Maybe C could be merged with D and E."  "Lets be optomistic and put together a plan for merges C, D and E.  I will be able to get back with you on Monday to see how it looks." 

Ever been there?

tom's picture

LTCM was a private takeover, not a public bailout. The Fed was merely involved in negotiations, and presumably used its powers to threaten/promise things to the private banks to prod them to get it done.

Magua's picture

Leverage - who would have thunk that it might have something to do with the plunge? But, we know they cannot handle the pain that it takes to unwind it. Ironic, no?