Why the “Is QE 3 Coming?” Debate is a Moot Point Pt 2

This is a
continuation of an essay I wrote yesterday concerning the Fed’s moves during
the financial crisis. As a recap, here are those moves again:

• The Federal Reserve cutting interest
  rates from 5.25-0.25% (Sept ’07-today)
• The Bear Stearns deal/ Fed taking on
  $30 billion in junk mortgages (March ’08)
• The Fed opens up various lending
  windows to investment banks (March ’08)
• The SEC proposes banning short-selling
  on financial stocks (July ’08)
• Hank Paulson gets a blank check for
  Fannie/Freddie but promises not to use it (July ’08)
• Hank Paulson uses the blank check with
  Fannie/ Freddie spending $400 billion in the process (Sept ’08).
• The Fed takes over insurance company
  AIG (Sept ’08) for $85 billion.
• The Fed doles out $25 billion for the
  auto makers (Sept ’08)
• The Feds kick off the $700 billion
  Troubled Assets Relief Program (TARP) with the Government taking stakes in
  private banks (Oct ’08)
• The Fed offers to buy commercial paper
  (non-bank debt) from non-financial firms (Oct ’08)
• The Fed offers $540 billion to
  backstop money market funds (Oct ’08)
• The Feds agree to back up to $280
  billion of Citigroup’s liabilities (Oct ’08).
• $40 billion more to AIG (Nov ’08)
• Feds agree to back up $140 billion of
  Bank of America’s liabilities (Jan ’09)
• Obama’s $787 Billion Stimulus (Jan
  ’09)
• QE lite (August ’10)
• QE 2 (November ’10)

I’m sure I
left something out. But the above make it clear just how Ben Bernanke likes to
tackle financial problems: printing money. On that note, we need to keep in
mind just WHY the Fed did all of this: propping up the Big Banks and their
gaping balance sheets.

The global
derivatives market is completely unregulated and frankly no one knows how big
it is. However, we DO know that US commercial banks alone have over $230
TRILLION in notional value derivatives on their balance sheets. Of this $230
trillion, 94%+ sits on just four banks’ balance sheets. They are:

The above
chart reveals the derivatives exposure (in $ TRILLIONS) of the Fed’s darlings:
the four banks that the Fed favored above all others during the 2008 disaster.
As I wrote oin April 2011:

The Fed not only insured that they
didn’t go under during 2008, but in fact allowed these firms to INCREASE their
control of the US financial system.

Consider that JP
Morgan took over Bear Stears. Bank of America took over CountryWide Financial
and Merrill Lynch. Citibank and Bank of America were the only two banks to have
their liabilities directly backed by the Fed ($280 billion for Citi and $180
billion for BofA).

Then there’s
Goldman Sachs which was made whole from all AIG liabilities, received $13
billion in direct funding from the Fed, and was supported while ALL of its
investment bank competitors either went under or were consumed by other
entities, granting Goldman a virtual monopoly over the investment banking
business (the firms that were merged with larger firms all laid off large portions
of their employees and closed down whole segments of their business).

The ENTIRE
2008 episode was the result of the Credit Default Swap (CDS) market imploding
(CDS, a type of derivatives, comprised about $50-60 trillion in value). And to
claim that the Fed didn’t know why the Financial Crisis happened is a lie.

Indeed, as
early as 1998, Ben Bernanke’s predecessor, Alan Greenspan, tol , soon to be chairperson
of the Commodity Futures Trading Commission (CFTC), Brooksley Born, that if she pushed for regulation of the
derivatives market it would implode the financial system.

Again, the
Fed knew for over 10 years (possibly longer) that the derivatives market was a
disaster waiting to happen. So believe me when I tell you than Ben Bernanke
knew exactly what caused 2008.

Indeed, his actions make it clear just what
he was fighting (a derivatives collapse) as 90% of his major moves were meant
to prop up the four banks with the largest derivatives exposure.

Now, as
stated before, 2008 was caused by the CDS market, which was $50-60 trillion in
size. In contrast, the derivative market based on interest rates is $196 TRILLION in size.

In fact,
derivatives based on interest rates represent 84% of ALL derivatives in the US.

So with that in mind, it is clear the Fed
will be engaging in QE 3 and QE 4 and on and on for as long as it can. The
reason? Because if the Fed loses control of the interest rate curve, it could
trigger a systemic collapse that is FOUR TIMES as large as that of 2008.

So more
money printing is coming. There’s no question of that.

On that
note, if you’ve yet to take steps to prepare your portfolio for the coming
inflationary disaster, our FREE Special Report, The Inflationary Disaster explains not only why inflation is here
now, why the Fed is powerless to stop it, and three investments that absolutely
EXPLODE as a result of this.

All in all
its 14 pages contain a literal treasure trove of information on how to take
steps to prepare AND profit from what’s to come. And it’s all 100% FREE.

To pick up
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and click on FREE REPORTS.

Good
Investing!

Graham
Summers.

PS. We also
offer a FREE Special Report specifying exactly how to prepare for the coming
collapse in the US stock market (inflation will NOT be positive for stocks for
much longer).

I call it The
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wealth of information about portfolio protection, which investments to own and
how to take out Catastrophe Insurance on the stock market (this “insurance”
paid out triple digit gains in the Autumn of 2008).

Again, this
is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.com
and click on FREE REPORTS.

Comments

[mogul rider]

I love it when people speculate on speculation which is really just speculation on some speculation of speculation which happened to be speculation of a speculator.

Blah blah blah

Here's a thought screw for ya

What if there isn't QE3?

Boy, wouldn't that screw you up being on the wrong side of that trade just like the last ten trades you made like Silver to 100 for starter.

occam's razer bitchez

the conpsiracy trade is tired people. Cash is king and will be till the Lords says it isn't. If it isn;t then "splain" to us why all corporate insiders are selling for two years and buying government bonds or staying in cash.

And no - the "trillions on the sidelines BS" is not the answer.

[I am Jobe]

NY AG Investigation: Why Haven't Wall Streeters Gone to Jail?

http://news.yahoo.com/s/time/20110520/us_time/httpcuriouscapitalistblogs...

[Herbert_guthrie]

The entire 2008 episode was the result of the largest theft in World History. A "reverse bank robbery" of the highest proportions that continues today.
It doesn't matter the details: CDO, CDS, DOW-DXY-USD-CPI-UE99, PM market manipulation, bail-outs, real-estate bubble, currency devaluation, QE-whatever, debt and austerity, etc. etc. etc.

This is a takeover, and a takedown.

!

[Mach1513]

10+

[Sokhmate]

i.e. usury

[mayhem_korner]

The ENTIRE 2008 episode was the result of the Credit Default Swap (CDS) market imploding (CDS, a type of derivatives, comprised about $50-60 trillion in value).

This is a weak and incomplete oversimplification.  It ignores the role of the CDOs that were derivatives written on pools of mortgages backed by un-creditworty borrowers, repackaged into leveraged options on RE appreciation.  Effectively derivatives on derivatives (get 'em while their hot courtesy of AIG).

It was a micro-burst of the effects of lack of rigor in credit screening.  Bad risk governance always comes back to haunt.  While I agree the next round is going to be a whole lot more painful, these guys' analysis isn't all that insightful. 

[oogs66]

yes, a massive oversimplification at best and wrong at worst to make the claim the it was the CDS market that caused 2008.

[nothing can go wrogn]

Can't those banks just delete that debt from the spreadsheet? Every keyboard comes with a delete key.

[Elmer Fudd]

I am so tired of all this "QE3 is inevitable" talk; when is someone going to say something important as in answering the more relevant question of "WHEN is QE3 coming?"

[Sudden Debt]

And if Futurama will ever come back again with all new episodes!

[mayhem_korner]

wight aftew wabbit season...

[Keri at Bankste...]

"Investment banks"?  What are those?

:)

One thing PCR forgot (but has covered previously) is when the Fed, with a magic stroke of  the pen, re-established the "investment banks" as "bank holding companies" to allow them access to the TARP funds (in Oct 2008, I think), and then subsequently the FDIC-backing on their commerical paper to the tune of hundreds of billions.

But you have to do that to "save the free market!", don't cha know.  I think of Company Flow:

"This is your last f*ing chance!"

"F* you!  This is YOUR last chance!"

[Stuck on Zero]

Hobson's choice.  QE3 means the eventual destruction of the economy.  No QE3 means instant destruction.

[gwar5]

The LTCM meltdown was the warning.  Rubin, Summers, Greenspan are complicit in covering it up all up just one month after they viciously ganged up and ran Brooksley Borne out of the CFTC.

Rubin went on to Citi after Treasury and Citi quickly became the biggest fraud by far in need of the TARP bailout to prevent insolvency. The other banks were forced to take TARP money really just to hide the fact Citi was insolvent, and prevent a run on Citi. Rubin is now co-chair of Council on Foreign Relations and a celebrity at the Bilderberg meetings.  That about sums up how things really work.

The total dark, and unregulated, derivatives market is over 600 Trillion dollars. With derivatives, these clown institutions are able to print another form of currency levering way up on existing debt. If the underlying debt collapses with deflation, look out below.

[tired1]

gwar, do you or anyone else venture to guess how this mess will be dealt with?

[divide_by_zero]

Actually the Obama $787B stimulus (which was more in the mid 800s) got permanently cooked into the budget as it raised the baseline. Which is why "post-stimulus" we now need to borrow ~$1.5T every year instead of the $400-500B prior to it.

[Mach1513]

Talk about conflating!

<$1T does not in itself come close to causing our annual deficits.

[BeerGoggles]

You can keep posting in an attempt to get people to siogn up to your newsletter but they should all be notifed that you made -30% within a month or so and went long oil at 110 recently. ie you suck balls at trading.

[bobola]

 When the Fed uses the word 'economy', are they talking about the big 4, and nothing else...??

Federal Reserve officials signaled they’re unlikely to expand a $600-billion bond purchase plan as the recovery picks up steam and the threat that inflation will fall too low begins to wane.

The economy is on a “firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Federal Open Market Committee said in a statement yesterday after a one-day meeting in Washington. While commodity prices have “risen significantly,” inflation expectations have “remained stable.”

[firefighter302]

Silver and Gold coins will be here long after the paper Ponzei has fallen.

Just as ancient gold coins are here, today.

Unbacked paper is a tool to steal our money, imho. Take the dollar, for another example..

[Sudden Debt]

This is indeed one of the most well know most dangerous brick wall that's going to hit us.

But if you try to explain this one to Joe and Jane Average, they'll give you the zombie look.

[tired1]

This is what got me interested in the financial order in 2008. When I saw numbers of this magnitude I became both alarmed and fascinated. I began for me a study of war and global conflict by another, more understandable, means.

[cdskiller]

Again! The stimulus plan was NOT a step taken by the Fed. I agree with you about the dangers of the derivatives market. Geithner just indicated his desire to exempt FX products from oversight, as Bruce Krasting wrote so eloquently about recently. A disaster is in the works. You are right.

But must we swallow nonsense? The stimulus package and the Fed decision to bailout AIG CDS counterparties, for example, can not be conflated! Keep your misinformation to yourself.

[treemagnet]

4th iteration, nothing to see folks, move along. 

[BeerGoggles]

You can keep posting in an attempt to get people to siogn up to your newsletter but they should all be notifed that you made -30% within a month or so and went long oil at 110 recently. ie you suck balls at trading, talk about buying the top.

edit: oh I forgot the part about sending all your subscribers a "sell everything" panic email recently. hahahah hilarious

[Howard_Beale]

Thanks for not being the only person that detests the continuous posting from Phoenix to hawk their wares. Same drivel all the time.

[NewThor]

Ben Bernanke will turn Water into Dollars.

[Michael]

Alan Greanspan is the greatest American hero that ever lived. Stop dissing him! He is the engineer of the greatest financial catastrophe, I personally charged him with doing for me. The necessary complete and total economic collapse of the USA and the entire world will now happen according to my plan. All oligarchs, kings, and dictators will be made penniless in th process. It will teach all you stupid sheeple dumb fucks how reality really works as well. 

Thank me.