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A Stern Opponent Of Funding The FDIC's Depleted Deposit Insurance Fund, And Monetization Is... Alan Greenspan?

Tyler Durden's picture




 

What a difference twenty years makes. The man whose actions basically lead to the eradication of the American middle class in its aspirational pursuit of buying massive SUVs, Prada bags, and 3rd investment properties, compliments of cheap credit, in order to appear ever so much like the upper class yet ultimately drowning itself in debt, Alan Greenspan, is probably the most critical reason why America's debt service will be nearly 90% of GDP within several decades. The adoption of his actions by the current deranged operator of the reserve currency printing press, is merely a continuation of a multiple decade long process of keeping inflation contained at the expense of devaluing the US currency, as the global liquidity pyramid recently hit one quadrillion, and continues to grow exponentially, yet pair by an ever-moderating increase (read flatline) in global GDP (Zero Hedge will discuss the topic of disappearing marginal utility of debt in depth soon).

In the meantime, as we are one bank away from 100 bank failures for 2009, while the FDIC is now insolvent and any incremental bank failure could prompt the much-dreaded terminal run on the bank, yet as Congress and the Fed have no problems with pumping billions more into yet another failed government enterprise, taking a trip back in time to 1991 reveals some curious facts. In that year, it was none other than then-Chairman Greenspan warning that funding not just the Treasury's, but specifically the FDIC's DIF obligations directly would be a bad diea. The below excerpt is taken from a Greenspan address to the Bush Administration's early 1991 proposal, with which some members of Congress seemed sympathetic, to have the Reserve Banks lend up to $25 billion directly to the FDIC's Bank Insurance Fund (BIF):

[A]n element of the Treasury's proposal that has troubled the Board is the use of the Federal Reserve Banks as the source of these loans. To prevent such loans from affecting monetary policy, the loans would need to be matched by sales from the Federal Reserve's portfolio of Treasury securities.... Not only would use of the Reserve Banks for funding the BIF [ZH: Bank Insurance Fund, the DIF's parent] serve no apparent economic purpose, it could create potential problems of precedent and perception for the Federal Reserve. In particular, the proposal involves the Federal Reserve directly funding the government. The Congress has always severely limited and, more recently, has forbidden the direct placement ol Treasury debt with the Federal Reserve, apparently out of concern that such a practice could compromise the independent conduct of monetary policy and would allow the Treasury to escape the discipline of selling its debt directly to the market. Implementation of the proposal could create perceptions, both in the United States and abroad, that the nature or function of our central bank had been altered. In addition, if implementation of the proposal created a precedent for further loans to the BIF or to other entities, the liquidity of the Federal Reserve's portfolio could be reduced sufficiently to create concerns about the ability of the Federal Reserve to control the supply of reserves and, thereby, to achieve its monetary policy objectives.

How is it that Alan Greenspan was so objective and prudent 18 years ago, yet his successor is so careless when it comes to where the tentacles of monetary policy reach (or, as the case is these days, do not). Ironically, these days, Bernanke has threatened the independence of monetary policy only in the context of increased transparency of the Fed: should HR 1207 pass, the Chairman claims, inflation pressures will grow, and Spengler and Venkman will inevtiably cross the streams, leading to the anihilation of everything we know. Well of course inflation will grow: the one quadrillion in excess liquidity (10x world GDP) will cause not inflation but massive, unprecedented hyperinflation, if there is no reserve currency to moderate the impact of all this "money" hitting global markets without a devaluation buffer. The dollar is and has always been fiat banking's and excess liquidity's punching bag.

Yet what do we have now: 18 years after Greenspan's statement - a condition where the Fed, and the Treasury are both considered to be next in line to subsidize a bankrupt FDIC. The proposal to collect special assessments with the hope that these will plug the upcomign $100 billion hole, is as ludicrious as it is naive. One wonders: what is more dangerous to the Fed's "independent conduct of monetary policy" - the FDIC bailout threat as Greenspan foretold, or the danger of actually understanding how many bankrupt companies' equities the Fed is willing to accept in its discount window when dealing with even worse financial organizations (not too many out there, but see Lehman Brothers).

And while we are on the topic of the Central Bank, we would like to present a paper by the Cleveland Fed from 1992, which in addition to discussing the RFC, has a very intereting analysis of what the true role of a Central Bank should be.

A tendency to use central bank resources to fund a bailout increasingly politicizes the bank's monetary policy functions, which risks causing it to resemble the way in which national development agencies are used and often abused in developing countries (providing assistance from public funds to the most powerful and politically well-connected entities in the state). [How can this have been obvious in 1992 yet nobody is willing to acknowledge it today???] Generally, industrial-economy central banks are somewhat insulated from political requests to fund specific rescue operations. For example, during 1992, Sweden, Norway, and Finland, all industrial economies, decided to bail out their banking systems, but they established new governmental agencies outside their central banks (RFC analogues) to do so. Some industrial-economy nations, however, do use their central banks to fund rescue operations. The French bankers' association has officially asked the French government for assistance with about $15 billion of nonperforming property loans on the books of the nation's banks, including "one option proposed ... for cheap refinancing of troubled loans through the Bank of France" (Dawkins [1992a, b]). Japan also has been studying methods for relieving its banking system of nonperforming real estate loans without using taxpayers' funds but has not yet settled upon a final plan (Chandler [1992]). Some Japanese bankers have requested central bank assistance in this plan, but the government has not yet committed such resources to the effort. In the case of the Federal Reserve Banks, it is official Federal Reserve policy that Reserve Banks' advances should not be used to substitute for the capital of depository institutions and that Federal Reserve resources should not be used so as to enable the Treasury to avoid the discipline of selling its debt instruments into the open market.

Mark those words, as they are a disappearing breed: "the discipline of selling debt instrument into the open market." One wonders: just how much such discipline is left these days, as Primary Brokers, who get their funding to purchase bonds from the Fed courtesy of a vertical yield curve, are the market. In other words, monetization and Fed-backed bailouts are a very bad thing. Yet what Fed apologists can't get enough of, is "explaining" day after day why the Fed is in fact doing us all a favor and how QE is so, so, so very different from monetizing, and it really is all just semantics, and, after all, just how does one define "is." Because "is" makes it so very clear that announcing the repurchase of an Agency Security 30 minutes after its auction, is one of the most expected things in a normal (banana) economy.

Full Cleveland Fed paper below:

 


h/t Richard

 

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Sat, 10/17/2009 - 23:47 | 102470 Crab Cake
Crab Cake's picture

At this point I've stopped listening to the lying spirits who so demand our attentions, hawking their wares from the filthy shadows and feces strewn altars.  I've listened all this while, I've listened until my ears bled, all along with the assumption that there was a reason.  There is no reason.  THERE IS NO REASON. They are siren legion, fucking my mind and senses, raping my quest for understanding, common sense, and decency.  Now I hear the wind, and nothing more.  Their illusion is hollow to what I find before me.  The wind blows, the only constant change, all things hollow, and the leaves scatter on before the fall.

Sun, 10/18/2009 - 00:14 | 102500 Anonymous
Anonymous's picture

is this original or borrowed poetry?

Sun, 10/18/2009 - 12:36 | 102679 Crab Cake
Crab Cake's picture

I'm not sure if it is a positive or a negative to admit whether I did in fact write this about three beers in last evening?

Sun, 10/18/2009 - 18:11 | 102861 DrPsycho
DrPsycho's picture

Crab Cake, a beautiful expression of what many of us are feeling at this time.

 

And BTW, expressing authentic hopelessness is "manning up".....when others still only have false optimism......

Sat, 10/17/2009 - 23:53 | 102482 Anonymous
Anonymous's picture

So basically Crab Cake you just want to bury your head in the sand. Thats what got us into this mess. Take some responsibility, man up.

Sun, 10/18/2009 - 12:53 | 102686 Crab Cake
Crab Cake's picture

No.  What I'm saying, if one must reduce poetry and creative writing to reduction,  is that Alan Greenspan is one of the shadows on the cavern wall demanding we believe that they are "the news" or "real". What I'm saying is that I have, realized, turned around to perceive the truth, that, reality is.

It is what it is, it is as it is.  Not Alan Greenspan, nor CNBC (not even Zero Hedge as evidenced by the success of full documentation intra story) can affect truth.  I need not, anylonger, for their opinion they deem important, purposeful, and actionable.  My dream, that I dream, is a dream that is apart from them and the almighty dollar.  I love America, this country of as many fathers as I can remember, and I am emigrating to a new nation, a better nation, somewhere within my beloved's very own borders, within my own being. In this nation state of mind, the truth is, not left nor right, exactly what it is.

Does anyone wonder if truth is a wave function, falsity introduced upon the finding of a point of mind or view, the finding of condition for Schrodinger's poor cat? Why is it that truth must be phrased as a question?  Why is the question mark half a sine wave abrupted by a point?

This has been fun. 

Sun, 10/18/2009 - 00:00 | 102489 Crab Cake
Crab Cake's picture

While I'm feeling philisophical, a koan.

in order to win one must lose

Sun, 10/18/2009 - 19:36 | 102928 Careless Whisper
Careless Whisper's picture

CC do you live in Woodstock?

Sun, 10/18/2009 - 00:04 | 102491 deadhead
deadhead's picture

The content just keeps getting better and better. Thank you for an important historical reflection. 

There is nothing like pretending that past history doesn't exist....except the high probability that it will be repeated.

 

"...you ain't gonna learn what you don't want to know..."

 

Sun, 10/18/2009 - 00:07 | 102495 Hansel
Hansel's picture

Wow, it's almost like bankers will say whatever is convenient for them at any given time.  Now that they have made arguments for both sides, no matter what happens they will be right!

Sun, 10/18/2009 - 00:20 | 102507 Anonymous
Anonymous's picture

yes....this is orwell speak and a very powerful
psychological tool to disarm opponents....

does anyone remember a few months ago when obama
said that we were out of money and had to stop
spending so much? he was attempting to give
the impression that he was going to impose discipline
on the spending machine....

the reality is always to be found in actions....instead
the kenyan born indonesian citizen proceeded to
pass massive stimulus spending as well as generate
a 1.4-1.8 trillion usd deficit and that only counts
what is on the books....

so talk is cheap - it is meant to confuse, berate,
conquer and destroy.....this is why guillotines
are needed to flush the filth out of washington
wall street and other dens of iniquity such as the
cia-fed controlled press...

Sun, 10/18/2009 - 07:34 | 102566 Emmanuel Goldstein
Emmanuel Goldstein's picture

There is a post here about telling political and economic lies and how easy they are to debunk. You should go read it.

http://www.zerohedge.com/article/stern-opponent-funding-fdics-depleted-d...

You don't like Obama? Cool, not everyone does (me included). Don't lie about him because if you are willing to spread what are widely known to be lies (that Kenyan/Indonesian/Muslim thing is a well known and completely debunked lie) then we will have to assume that you are untrustworthy and willing to lie on just about any subject no matter how obvious the lie is.

Do you understand?

Sun, 10/18/2009 - 14:48 | 102759 Anonymous
Anonymous's picture

Not really.

How is it that you're the only one able to read between the pages in "The Book" and see the truth, eh Winston?

Mon, 11/23/2009 - 11:15 | 139313 Emmanuel Goldstein
Emmanuel Goldstein's picture

Just because you aren't capable of understanding such simple and obvious concepts does not mean that others are as obtuse as you seem to be.

Sun, 10/18/2009 - 06:40 | 102558 Anonymous
Anonymous's picture

HARD TO BE RIGHT WHEN YOU ARE HANGING FROM A LAMP POST!

Sun, 10/18/2009 - 15:17 | 102780 TumblingDice
TumblingDice's picture

if I may try and summarize crab cake above (and one cannot summarize poetry but I'll try anyways), there is no way to hedge the truth.

Sun, 10/18/2009 - 07:17 | 102564 Cognitive Dissonance
Cognitive Dissonance's picture

This all reminds me of the lessons of my youth. In particular the one regarding lying and the difficulties of maintaining the lie with more lies. You must remember your prior lies, create new lies to support past lies, construct fantasy worlds where your lies are believable and so on.

This is why the Internet is so terrifying to the corporate and political liar. It's all waiting to be discovered with a few clicks of the mouse and a download here and there. Any wonder then that Obama and company acquired the power to shut it all down during a "national emergency"? 

Shh, the spirits are about to speak...... again.

Sun, 10/18/2009 - 13:33 | 102712 Anonymous
Anonymous's picture

Exactly right.

I've often commented that it's when the internet goes down, for one reason or another (likely terrorism or other type threat) that we should all get concerned.

The internet has truly opened my eyes to a reality that I would have never known, and I'm just getting started.

Note: First time posting on this, truly the best of all sites, site. ZH and TD, keep up the great work. And the awesome comments are as good as it gets.

Thanks.

Sun, 10/18/2009 - 15:29 | 102790 Cognitive Dissonance
Cognitive Dissonance's picture

Anon #102712,

Welcome. Sign up, pick a smart and whitty name and icon and join in. And most importantly pass the word to your friends, neighbors and passers by.

They might not listen to you but it's hard to ignore ZH. Don't waste your time on the deeply indoctrinated. Instead, grab the undecided or recently-disturbed-by-current-events fence sitters by the collar and let ZH do the talking for you.

Viva la Zero Hedge.

Sun, 10/18/2009 - 10:30 | 102617 Fritz
Fritz's picture

The Treasury and Fed are like a cornered animal...there is no reasoning with it.

 

Sun, 10/18/2009 - 13:22 | 102704 Jendrzejczyk
Jendrzejczyk's picture

I feel like I've been walking around upside down since I started reading ZH. The world still looks the same but my perspective is totally skewed (screwed). Trying to have a conversation with anyone without looking like a whacked out tin head is nearly impossible lately. I seriously considered making a "THE END IS NEAR" sign and parading around DC this weekend.

Sun, 10/18/2009 - 13:35 | 102713 Cognitive Dissonance
Cognitive Dissonance's picture

To feel better, you must re-boot your indoctrination and programming.

First, immediately cease reading ZH.

Second, begin a regiment of 60 hours a week of network TV viewing (20 of the 60 hours must be of network news broadcasts) and continue for the rest of the year.

Third, take Ex-Lax twice a day for 2 weeks to clean out all residual ZH factoids. Please follow up with an office visit in two months.

Works every time.

Sun, 10/18/2009 - 13:52 | 102725 Jendrzejczyk
Jendrzejczyk's picture

Don't make me go "cold turkey" Doc! Ya gotta slip me a little something to ease the pain..... 

Maybe someone could e-mail Cheeky's best insult of the day, or a Robo pic.

Sun, 10/18/2009 - 14:07 | 102741 Cognitive Dissonance
Cognitive Dissonance's picture

LOL

Actually I live and practice within 30 miles of DC myself (used to work in DC) so I'm fully aware of your situation. Please remember that you're living within the heart of the empire, where the "force" is strongest.

I read a few years back that 68% of the work force living within 50 miles of the White House either works directly for the government or military (call it the 1st derivative) or for a contractor for the government or military (call it the 2nd derivative). The rest of the work force serves the people who work for the government (the 3rd derivative).

I always remind myself that it's nearly impossible to convince someone to believe one thing when they are paid to believe another.

On the other hand, the condition begins to clear up west of the Mississippi and once you pass the Rockies, sensible thinking actually returns for extended periods of time.

Of course, Hawaii is fully infected, being the last conquest of the military industrial complex, though I hear some sanity exists deep in the jungle of the island of Hawaii. Oahu, with its huge military base, was assimilated in the 30's with all resistance mopped up by WW2. 

Sun, 10/18/2009 - 20:12 | 102935 Jendrzejczyk
Jendrzejczyk's picture

Unfortunately,I fit into all three derivatives. The realization that I have been a tiny cog in this massive machine for many years is just dawning on me.

I've helped renovate the army war college @ Ft. McNair, protected the computer rooms at the State Department and Defense Mapping Agency and MCI (Worldcom), kept Lockheed Martin headquarters running, helped spy on foreign governments and Islamic mosques. 

LOL, I've even worked on the printing presses at the US Mint . I have spent the last few years helping people flip houses and inflate the bubble. I have not voted since Reagan.

I now realize it's all my fault.

Mon, 10/19/2009 - 10:48 | 103304 Cognitive Dissonance
Cognitive Dissonance's picture

I now realize it's all my fault.  

LOL

Wow, what a burden to carry, to know that because of you the world's military industrial complex has gone off the rails. :>))

The world is full of the reformed (or reforming) and the path to health is forward.

Sun, 10/18/2009 - 16:53 | 102811 Anonymous
Anonymous's picture

Greenspan says we have bankrupted ourselves bailing out wall street. Therefore "let the people eat cake"

http://dailybail.com/home/greenspan-says-no-new-stimulus-issues-warning-...

Sun, 10/18/2009 - 17:50 | 102846 Anonymous
Anonymous's picture

Tyler,

those excerpts remind me of Greenspan's parting speech he gave in 1997 in Belgium:

http://www.federalreserve.gov/Boarddocs/Speeches/1997/19970114.htm

Reading it felt surreal... parts of what he wrote (warned) about are happening right now.

Sun, 10/18/2009 - 17:51 | 102848 wejn
wejn's picture

Tyler,

those excerpts remind me of Greenspan's parting speech he gave in 1997 in Belgium:

http://www.federalreserve.gov/Boarddocs/Speeches/1997/19970114.htm

Reading it felt surreal... parts of what he wrote (warned) about are happening right now.

Sun, 10/18/2009 - 17:54 | 102850 wejn
wejn's picture

Just to mention one example:

 

To be sure, we should recognize that if we choose to have the advantages of a leveraged system of financial intermediaries, the burden of managing risk in the financial system will not lie with the private sector alone. With leveraging there will always exist a remote possibility of a chain reaction, a cascading sequence of defaults that will culminate in financial implosion if it proceeds unchecked. Only a central bank, with its unlimited power to create money, can with a high probability thwart such a process before it becomes destructive. Hence, central banks will of necessity be drawn into becoming lenders of last resort. But implicit in the existence of such a role is that there will be some sort of allocation between the public and private sectors of the burden of risk of extreme outcomes. Thus, central banks are led to provide what essentially amounts to catastrophic financial insurance coverage. Such a public subsidy should be reserved for only the rarest of disasters. If the owners or managers of private financial institutions were to anticipate being propped up frequently by government support, it would only encourage reckless and irresponsible practices.

In theory, the allocation of responsibility for risk-bearing between the private sector and the central bank depends upon an evaluation of the private cost of capital. In order to attract, or at least retain, capital, a private financial institution must earn at minimum the overall economy's rate of return, adjusted for risk. In competitive financial markets, the greater the leverage, the higher the rate of return, before adjustment for risk. If private financial institutions have to absorb all financial risk, then the degree to which they can leverage will be limited, the financial sector smaller, and its contribution to the economy more limited. On the other hand, if central banks effectively insulate private institutions from the largest potential losses, however incurred, increased laxity could threaten a major drain on taxpayers or produce inflationary instability as a consequence of excess money creation.

Sun, 10/18/2009 - 20:24 | 102963 deadhead
deadhead's picture

wejn...thank you for printing this. 

ding a ling:

AG...hello

BB...I can't believe that old speech got out!

AG...well, looks like i was right about what i said but didn't do.

BB...no worry, A.  It's different this time. We have it all under control

Sun, 10/18/2009 - 19:43 | 102934 Careless Whisper
Careless Whisper's picture

Greenspan had his chance. For whatever the reasons, he blew it. I'm not interested in anything he has to say. Just go away.

Do NOT follow this link or you will be banned from the site!