Federal Reserve

There is much debate over whether the Federal Reserve should tighten or further ease monetary policy. This dichotomous framing overlooks another possibility, which is whether the Fed should change the mix of its stance, tightening in some areas and further easing in others. In particular, there are strong grounds for the Fed to abandon its support of the Treasury bond market and to raise gradually the federal funds rate (to say one per cent), while simultaneously increasing its purchases of mortgage backed securities. If permissible, the Fed should also purchase state government bonds according to a per capita formula. Such a recalibration of policy could have positive effects. Increased purchases of MBS will help the housing market, which remains at the heart of the US economy's problems. Declining house prices continue to inflict financial losses on banks and consumers, and the prospect of further price declines deters buyers and undermines new construction. Increased MBS purchases could help stem this problem by further lowering mortgage rates. That would help households by facilitating more mortgage refinancing, help banks by reducing foreclosures and help the construction industry by making home ownership cheaper.

Excerpt from the much anticipated letter of what will soon be a hedge fund even bigger than Goldman Sachs: "As our mortgage investments mature, we will use the cash proceeds to seed FRC. FRC will then go out and buy S&P 500 futures, wheat, etf’s, leaps, reit paper, speculative biotech stocks, BRIC assets, and anything else you can think of. The Fund’s mandate is to be long only-everything- anywhere on earth." The fund is also rumored to have a lock-up period of 1 milisecond to allow HFT frontrunners to park their securities at FRC LLC, while the traditional 2/20 payment structure will be inverted, with Bernanke paying out 2% on all AUM, and will also pay out an additional 20% to any profit (or loss) generated by the fund for its LPs.

A not very long time ago, in a galaxy known as the Milky Way, the member of an occult group of sinister individuals warned that should this group ever get to a point where it believed it could fix fiscal problems through printing money, this would present "a paramount risk to the long-term welfare of the U.S. economy." The group is better known as the Federal Reserve and the individual was Dallas Fed president Richard Fisher. The same Richard Fisher, who recently wrote about the FinReg unaddressed concept of how Too Big To Fail will lead to another massive systemic crash, went as far as saying that "even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens" would be disastrous, and that "the Federal Reserve will never let this happen. It is not an option. Ever. Period." Boy, was he wrong. Nonetheless, Fisher's speech from May 28, 2008 before the Commonwealth Club of California, should be read by all Keynesian fanatics as it is without doubt one of the most lucid presentations of rational thought from the ranks of the Fed. With observations such as that "we know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on", one may only hope that all those who advocate even more rampant spending and irresponsible money printing to "fix" the economy, will finally see the light. Alas, mired in their own stupidity, they won't. And Fisher's words, so prescient in 2008, yet so ignored, will suffer the same fate today, and the Fed will continue on its way to singlehandedly destroying this once great country.

BlackRock continues to churn Maiden Lane LLC into its second anniversary, which turns out to be an important date. If it can mark to model the portfolio high enough, JPM could get cashed out ahead of Uncle Sam.

If you don't give us what we want, we'll shoot ourselves ...

When we disclosed that the Fed was getting crammed down last week on Red Roof Inn foreclosures, little did we know that Alan Grayson was going to take the material and make pure comedic poetry out of it. One more reason to applaud the brilliance of our corrupt and moronic Senators for preventing the much needed and long-overdue audit of the Fed.Enjoy.

No ...

Why audit the Fed? Let me count the ways ...

These nominees are prominent members of the Washington-Wall Street-Academia Economics Complex, whose members shift between government, Wall Street, and academia. All of the nominees are Keynesian economists. They are known as regulators, technocrats, and inflationists.

Remember that bit about how the Fed only holds the highest quality debt (we forget if it was Tweedledum or Tweedledee who said it)? It appears that's just the latest lie in the Fed's endless catalog of misrepresentations. According to TREPP, 11 properties held by Red Roof Inn hotels saw foreclosure actions initiated on them by CMBS special servicers, and are now being sent to the auction block. Guess who is most impacted by this action? Why, the Federal Reserve of course.

Enough with the Federal Reserve mafia syndicate and its endless array of bailouts, under the table deals, cronyism, politicized monetary decisions, and rampant theft of America's wealth already. We endorse the Sanders-Feingold-DeMint-Leahy-McCain-Vitter-Brownback Federal Reserve Transparency Amendment to the Financial Reform Bill. If the Fed's clowns won't end their endless rape of America, it should at least be fully transparent for all to see.

This decision will rank only second after his selection of the new Supreme Court justice in importance for the country, the economy, and your portfolio. The betting is that he will pick three monetary doves who will keep interest rates lower for longer, continuing the steroid injections of free money for the economy. The ghost of libertarian Ayn Rand will no longer be welcome on this board. Setting up a layup for the 2012 election.

Bill Fleckenstein has kept a hawk’s eye on what the government does to our economy. Most recently, Bill wrote an excellent article describing the new health care law as “the great health care bailout.”

I caught up with Bill to discuss three hot topics:

1) How the new health care law will affect our economy;

2) Whether the Fed has painted itself into a corner of low interest rates; and,

3) Whether the foreign debt crisis are an omen for what’s coming to the US.

As part of yesterday's hearing with Ben Bernanke before the House Financial Services Committee, Ron Paul provided the following statement in which he blasts the Fed's ever-increasing cluelessness over monetary policy and its disastrous Catch 22 implications: "the Fed only sees what is seen, the superficial results of its policies, and not what is unseen, the effects of its monetary intervention throughout the economy. Monetary inflation leads to malinvestment and causes the boom phase of the business cycle. Once the malinvestment is realized the bust phase occurs, and these malinvested resources need to be liquidated in order for the economy to recover. But the Fed actively works to prevent this liquidation and does everything in its power to continue inflating in order to prolong the boom. The first act of intervention begets the second and subsequent interventions, each bigger than the first, as each economic bust gets larger and more severe." As the only thing that currently matters for the economy, for LBO rumors, and for stock picking in general is the overabundance of liquidity, one wonders to what rabbit holes the Fed's push for central planning of the US economy will eventually lead us: "The Soviet Union's economy failed because of its central planning, and the United States economy will suffer the same fate if we continue down the path toward more centralized control."

The ongoing troubles at the GSEs are no secret: it is public knowledge that Fannie had a 5.38% delinquency rate at December, while Freddie just passed the 4% threshold in January; both continue to rise rapidly each month. The fact that the mortgage-bond spread has just hit a record tight is merely an ongoing artifact of the Fed's endless meddling in the mortgage market, with the sole purpose of keeping rates artificially low, and preventing banks from being forced to take massive writedowns on their entire loan book. This is all well known. What, however, seems to have escaped public attention is what the impact of these delinquencies is on the one largest holder of Mortgage Backed Securities, the Federal Reserve. What also seems to have escaped the public is that the Fed is now the world's largest bank, with total assets near $2.3 trillion. We provide a weekly update of the Fed's balance sheet and while we briefly note the liability side, our, and everyone else's, attention, is traditionally focused on the asset side. Yet a more detailed look at the liability side reveals something very troubling, specifically that the Fed's capital, i.e. equity buffer, which as of most recently was $53.3 billion (a comparable metric for plain vanilla banks is their equity buffer, or Tier 1 Capital, or however the FASB wants to define it on any given day when it is covering up massive capital shortfalls) is in fact negligible and could well be substantially negative, if the Fed were to account for the rapidly rising level of delinquencies in its one largest asset holdings: the $1.027 trillion in settled MBS. And while there is no possibility of a run on the Fed, the reality is that the Fed now likely runs with a negative real capital balance, meaning that the US Federal Reserve is now essentially insolvent.