Federal Reserve

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.

Looks like Tom Hoenig's dissension at the recent FOMC vote is starting to generate some serious traction. A paper just released by V.V. Chari of the Minneapolis Fed, "Thoughts on the Federal Reserve's exit strategy" goes so far as blasting the Fed for demonstrating Goldman Sachs-like "hubris" courtesy of the persistent lowest common denominator resolution to every crisis, namely Bernanke's redux of MLK "I have a dream" speech for the 21st century, in the Chairman's "we have a printing press" thesis. "...The Fed differs from private firms and emerging markets in that it can “create” money to finance its debts. And indeed, that ability may well lead to hubris on the part of policymakers—similar to that seen among financial managers in the current crisis who were clearly overconfident in their ability to obtain financing. Regardless of such self- assurance on the part of policymakers, if market participants lose confidence in the Fed’s ability to obtain funds from lenders, the Fed would have to pay very high interest rates to obtain short-term debt. A self-fulfilling, high-inflation equilibrium in which expectations that the Fed will pursue lax monetary policy because banks demand a high-inflation premium will lead banks to demand that high-inflation premium." - Minneapolis Fed

The fed has completed $169.1 billion of $175 billion in the agency MBS program: there is just 3% of Agency dry powder remaining (no new purchases in the week ending March 3). The Fed has completed $1.22 trillion of its $1.25 trillion MBS debt purchase program, or 98%, through March 3 (including the $10 billion announced today). There is now just $35 billion left in Quantitative Easing capacity.

Other than that how did you like the play, Mrs. Lincoln?

The following just released video from the Cleveland Fed, in which the Fed explains the workings of the Fed, does not need much commentary, suffice to say that it likely came to you courtesy of the production and direction talents of Goldman's PR group. It appears the video is supposed to be some form of user friendly PR approach created by the same people that gave you Enron. Alas, some of the biggest roles of the Fed are sadly unaccounted for. We leave it up to you, dear readers, to uncover just what these are but here are some suggestions: buying everything in perpetuity, keeping Goldman solvent in perpetuity, keeping the Fed's shady dealings with other Central banks and primary dealers hidden from the public's eye in perpetuity, keeping fed funds rate at (or below?) zero or below in perpetuity, etc, you get the picture.