David Stockman On 'The QE Follies': Bernanke's Swell Gift To The Big Four Banks

Tyler Durden's picture

Submitted by David Stockman via Contra Corner blog,

I recently pointed out that the Fed’s 5-year campaign to drive the 30-year mortgage rate from 6.5% to 3.3% had accomplished nothing except to touch off another of those pointless “refi” booms which enable homeowners to swap an existing mortgage for a new one carrying a significantly lower interest rate and monthly service cost. Such debt churning exercises have been sponsored repeatedly by the Fed since the S&L debacle of the late 1980s.

I further noted that this time the Fed had really outdone itself:

During some periods upwards of 80% of new originations were not money purchase mortgages to finance a new home, the declared purpose of interest rate repression, but just refis of existing debt. By resorting to this maneuver to leave more money in the pocket of borrowers each month, our monetary central planners undoubtedly hoped that America’s flagging consumers would buy another flat screen TV, dinner at Red Lobster or new pair of shoes.

The choice of a flat screen TV or mortgage payment ought to be up to the  American people, not the monetary politburo in the Eccles Building. But even within its own terms, the Fed’s massive refi party made no sense. That’s because unless the Fed intended to peg the mortgage rate at artificial, sub-economic levels for all time to come, its refi maneuver could only shift consumer choices and their mix of spending between quarterly GDP reports; it could not generate permanent gains in national output and real wealth.

In fact, the Fed’s interest rate pegging policies amount to an arbitrary transfer of wealth from mortgage investors to mortgage borrowers—and even that is ultimately temporary. Capital markets do eventually, and often violently, reject central bank imposed financial repression—- as they did during the Great Inflation of the 1970s when bond prices plummeted.

So it was evident all along that even the mighty Fed would have to eventually take its thumb off the scales in the treasury market, thereby permitting benchmark interest rates to “normalize”. In that event, mortgage rates would rise and new homebuyers would find themselves spending more on their mortgage and less at the Red Lobster. And on the margin, a higher so-called “cap rate” for residential real estate would mean that housing prices would tend to weaken, not rise. The whole exercise was ultimately a circular delusion.

Even though this cash flow shuffle is perfectly silly, it has been stubbornly pursued by our paint-by-the-numbers Keynesian central bankers because they refuse to acknowledge the reality of “peak debt”—especially in the household sector. Yet only a permanent gain in leverage can cause consumer spending to remain elevated in response to monetary stimulus.

The overwhelming evidence, however, is that America’s shop-till-they-drop consumers have finally dropped. After a forty-year cycle of soaring household leverage ratios, “peak debt” ratios were finally encountered in 2007-2008— and now retrenchment has set in. Accordingly, consumer spending will now have to come solely out of income, not income plus incremental credit drawdowns which fueled the spending party for decades.

Household Leverage Ratio - Click to enlarge

Household Leverage Ratio – Click to enlarge

But while peak debt means that the Fed’s entire 5-year money printing spree was destined to fail, it nevertheless has produced massive impacts—–all of them bad or stupid. One of the most crucial is that it generated an artificial refi windfall to the Big Banks which now dominate the home mortgage business. And the profit windfall was a doozy.

Now that financial results for Q1 2014 have been posted, the impact on Big Four financial results can actually be quantified. The four charts below on mortgage originations per quarter during the course of the Fed’s balance sheet expansion binge are the smoking gun.

They show that during the most recent quarter the four banks only originated about $67 billion in new mortgages on a combined basis. That figure is a reasonable proxy for the steady-state condition that would have existed had the Fed not been engaged in a monetary cattle drive to get mortgage rates to the bottom of the valley. That is, had mortgage rates remained at their not unreasonable 2008 levels or oscillated randomly owing to the interaction of supply and demand for mortgage funds on the free market, there would have been no thundering stampede by American homeowners to refi their housing debts.

Accordingly, activity rates in the mortgage operations of the Big Four would have reflected mainly purchase money borrowing by households who were buying a new or existing home. So the difference between the peak mortgage origination rates shown in the graphs and Q1 results roughly measures Bernanke’s gift to the big banks.

On a combined basis, the Big Four originated mortgages at a peak rate of nearly $300 billion per quarter—or $1.2 trillion annually during the period between 2010 and early 2013. So the refi maneuver resulted in up to a 5X gain in the rate of mortgage originations—a process that gave rise to a triple dip of profits, as previously described:

As summarized in the Fortune article below, the mortgage originators were booking up to $3,300 of up front profit per refi.

And that was just the fee on the transaction—before booking the embedded “gain-on-sale” (often thousands more) when most of this booming mortgage volume was subsequently shuffled off to Freddie and Fannie to be packaged and resold as an MBS. Yes, and at that point, such newly minted “mortgage bonds” did flow back to Wall Street where they were doubtless churned many times over by the dealer side of the banking houses in their endless and remunerative chore of supplying “liquidity” to the homeowners of America….So the banking side of the Fed’s refi churn did well too—–enjoying a triple profit dip along the way.

As can be seen in the graphs, the windfall in some quarters was even more stupendous. The peak rate for Bank of America was 10X its Q1 2014 rate and for Citi it was 9X.

Yet the real story is in the Wells Fargo (WFC) data. During the third quarter of 2012 it originated $100 billion more in mortgages than it did in Q1 this year after the Fed’s refi cattle drive had ended. Stated differently, the geniuses who run Warren Buffet’s favorite bank were handed a  giant book of totally artificial businesses by the Fed— and the consequent opportunity to triple dip from mortgage volumes that amounted to nearly one-half trillion at an annualized rate. WFC had indeed learned at the knee of the nation’s master crony capitalist.






It should not take more than a moments reflection to grasp the hidden function of the massive mortgage churning shown in the left side of these graphs compared to the meager (and more market neutral) levels shown for Q1.Triple-dipping through their massive mortgage churn, the Big Four banks were able to book net income of $20-25 billion per quarter from originations, gain-on-sale and mortgage trading during much of this period.

That means that thanks to Bubbles Ben’s largesse they could pretend that their balance sheets were being repaired. Accordingly, raiding their equity accounts in order to fund dividends and stock buybacks was now fully copasetic.

So Uncle Warren along with his fast money trend followers got their reward in a munificent flow of cash out of bank vaults that had been wards of the state only a few months earlier—as did long suffering executives who’s stock options rose 5X in value owing to all the dividends and buybacks.

Indeed, during fiscal years 2009-2013 Wells Fargo disgorged $59 billion in cash to fund dividends and share repurchases and JPMorgan paid out $65 billion during the same 5-year period. Needless to say, $110 billion of cash flowing toward the bank stocks post at the Wall Street casino had the hedge fund speculators who continuously cycle in and out of these names delirious with excitement.

Likewise, their echo boxes in the financial press were quick to pronounce the all clear. The economy is fixed, the banks are back, and their stocks are soaring—surely proof that all is well. Compared to post-crisis lows, WFC’s stock price was recently at 6X (i.e. $60 per share vs. $10), JPM and BAC were at 3X and even the zombie known as Citi was at 2X.

Yes, some of the banks also raised new capital—especially in the early years after the crisis. But that was mainly a smokescreen to give false credibility to the phony “stress tests” concocted by Turbo Tim and Bubbles Ben. But even giving credit to new equity issued—the net cash distribution by WFC and JPM over the five-year period was just short of $80 billion. Adding in BAC, the Big Three distribution of cash for share repurchases and dividends amounted to nearly $35 billion during 2013 alone.

It goes without saying that this all amounted to a lot of “shareholder friendly” action—even if it did constitute horrid public policy. And Washington’s policy of allowing the same big banks—who allegedly brought the financial system to the brink of Armageddon just 66 months ago— out of supervisory lock-up is indeed horrible.

Every dime of big bank profits—honest earnings and windfall gains like these from the refi contraption alike—should have been sequestered on their balance sheets for years and years to come. Or at least until one of two conditions pertained.

One option would have been for some of them to grow up and become real free enterprises. But that would require  giving up the Fed’s discount window privilege, deposit insurance and undertaking an irrevocable renunciation of any future bailout claims on any agency of the state.

In the alternative, their balance sheets could have stayed in sequester during the entire five years since the crisis. This would have permitted retained earnings and capital to pile-up so deep that even the weak-kneed pettifoggers of the beltway would not be panicked into throwing the banks a life line next time they blow themselves up.

Neither option was chosen, obviously. Instead, while the Fed’s entire mortgage refi gambit did nothing for Main Street–except to confer cash flow windfalls on the less than 15% of  households that  actually did the refi— it did accomplish wonders on the Wall Street side.

Not only did it confer massive capital gains on speculators like Warren Buffet and the bank management teams who brought us the financial crisis, but it also amounted to a regulatory get out of jail free card.

Yet what was the all-fired hurry in Washington to open the flood gates to bank dividends and stock buybacks. Supposedly, that was to pepper the market for bank stock—so that they would raise new capital on their own.

Really? In our financialized economy and crony capitalist policy regime there is apparently no need for more bank capital. As was well demonstrated in 2008-2009, when push comes to shove the state treasury will be raided.

In the interim, its all about the secondary market. That is, goosing the price of existing stock certificates held by gamblers who scooped them up at the bottom and management teams who got themselves issued more options after Bubbles Ben pronounced the all clear.

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Dubaibanker's picture


The US Govt is taking insider trading to the next level, straight to the President.

White House invited a select group of money managers discussing forthcoming Russian sanctions. You have been warned and may proceed to trade with insider information - that was the message!

U.S. Warns Money Managers of More Russia Sanctions

Their comments sent a message that more sanctions are on the way and that investors, if they were concerned about the impact, should manage that risk, said the person, who asked not to be identified because the discussions weren’t public.

MEANWHILE, AMERICAN TAX DOLLARS ARE AT WORK. http://www.dw.de/us-drone-strike-in-yemen-kills-suspected-militants-and-...

9 'suspected' Al Qaeda militants (they were having stamps on their forehead readable by satellites stating that they were militants) and 3 civilians dead, in today's news.

Some American call it barbaric and some call it a day's work. http://www.presstv.ir/detail/2014/04/06/357389/us-drone-attacks-are-huge...

Since when did it become legal to kill 'suspected' people?

Crony capitalism, anyone?

DoChenRollingBearing's picture

ZIRP and the alarming decline of the velocity of money tell an ugly tale of capital destruction.  Yesterday I read two articles that had the St. Louis Fed graph showing the slowest money velocity in 50 years!  The hair stood up on the back of my neck...  Capital destruction is not talked about very much, but is a real killer of economies.

EDIT: That graph & those articles is the first time I had EVER seen a good piece on the current low velocity of money, that had never been in my thinking before...

Here is Darryl Robert Schoon's article (Jim Willie wrote another):


Give it some time to load, maybe the URL being so long and all...  


knukles's picture

Oh come on, DCRB, nothing wrong with 3% down no credit checks on new money mortgages when there's so much free money out there.  Let the masses enjoy the fruits of their labors.  Well, their subsidies.  Quit being such as stickler for common sense.

socalbeach's picture

The statements that author made based on the velocity of M2 money are not justified:

V(M2) = GDP / M2

and GDP = consumer spending + business spending + government spending + exports - imports.

Purchases of existing housing doesn't even affect GDP (maybe a tiny amt from sales commissions) and therefore doesn't affect velocity.  The Fed was interested in inflating housing to bail out the banks' and others' mortgages. And money spent on consumer imports, for example, increases the consumer spending term but increases the import term also, so it would have only a small effect on velocity. We could still have price inflation with low velocity as money spent on say oil imports doesn't affect velocity much but would increase demand and therefore prices.

Also he quotes Richard Koo as stating the monetary base (MB) has increased by a factor of 19, "According to Koo, QE has increased the US monetary base by a factor of 19". But it's "only" gone from 0.875 trillion to 4+ trillion, a factor of 4.6.  What Koo actually said is that the money supply (M2 for example) could increase by a factor of 19 based on the increase in the MB, not that the MB had increased by that amount.  Listen for yourself:


DoChenRollingBearing's picture

Thanks, socalbeach, let me throw all of that into my mental hopper...


But, what about the velocity of money falling?  OK, I do understand that figure needs to be kept in context of other monetary figures (more money flowing in MIGHT slow down the overall velocity under some circumstances)?

ThroxxOfVron's picture

Hello, DoChenRollingBearing,

There used to be a long thread on Monetary Velocity -amongst some other interesting topics- in the Monetary Policy section of the Market Ticker site.  I haven't seen what has been going on inside Market Ticker since being banned by Denninger last year, so I don't know the status of that thread/information may be and cannot give any comment on the amount or accuracy of the data and associated discource presently being exhibited on that site...

IMHO, there simply isn't enough dicussion of monetary phenomena, history, policy or mechanics presently.  IF You or Anyone Else reading this post know of a place where monetary issues are being discussed I'd very much appreciate being informed.

I make no secret of the fact that I consider Mosler and the rest of the MMT/Chartalist camp to be dangeously idealistic and naive; -specifically concerning notions of equating statist 'full employment' economic/financial policies with ( remedial and/ ? /or radical monetary ) policies.  

That said; I believe there are few discussions worthy of greater urgency and broader public assesment than Monetary Policy; and I intend to be a part of those discussions.  I would much rather be respectfully invited than impose Myself uninvited and implicitly unwelcome.


John Ralston - Throxx Of Vron

StupidEarthlings's picture

Lets just make it in easy to understand laymans terms. . Were f'd.. and they've done an awesome job of hidin the truth from the layman.


If you told me 100 years ago ..that a scheme like this would work..fooling the public..id say you were nuts. 

We gotta face facts..these guys are the cleverest bunch to ever walk the planet. I would never even imagine that humanity as a whole could be this gullible. .and here we are.


So between ignorance and their genius. ..the plan could NOT have worked any better..no way..no how. 

And here we are.



socalbeach's picture

You're correct that the velocity needs to be kept in context of other monetary figures.  Since QE started about 9-8-2008, M2 has gone up at a compounded annual rate of about 7%/year.  So if GDP has averaged 3% nominal (not inflation adjusted) growth, then the velocity of M2 has been dropping at almost 4% annually.  So all the money printing hasn't had much effect in stuff that goes into GDP like domestic manufacturing (think ball bearings).  But there's been huge speculative appreciation in stocks and real estate (at least in coastal CA) which helps the banks (fewer underwater mortgages for example), but most of that doesn't show up in monetary velocity since that appreciation doesn't increase GDP much.  Actually the price inflation rate has been higher than the nominal GDP growth rate, so the economy has been contracting in inflation adjusted terms as measured by GDP.

prains's picture

refi debt churn was put in place by capitol to hide from labor their steep declining purchasing power because capitol has refused to share with labor the benefits and have hoarded it all for themselves


american economy 1971-2014

ArkansasAngie's picture

These guys don't have any capital.  That's the problem.  They are insolvent.  This has been to create income for these yahoos who should all be bankrupt.  They wasted it however.

The declining purchasing power is caused by inflation ... the conventional means of theif from the masses.


prains's picture

when you can print whatever you want and deliver it to whom ever you want, you're never insolvent......just corrupt

Yen Cross's picture

     I'm starting to see alot of refi. commercials on the TV again...It's obvious that lending is slowing down again.

  This story made my w/e. Twelve gold bars removed from Indian man s stomach - Yahoo!7


DoChenRollingBearing's picture

It will help make my weekend if they let him keep his gold bars...

ebworthen's picture

I've noticed those too; and advertising rates well below prime; you know there are shenanigans involved there.  Also seeing a lot of HARP commercials, along with law firms on helping you file for S.S. Disability.

Not to mention the Fred Thomas/Henry Winkler (Fonz)/Robert Wagner reverse mortgage commercials non-stop.  The kids won't be left with anything.  No farm, no homestead, no house - just a bill.

hobopants's picture

That may be a blessing considering the potential for property taxes to soar to the moon when this farce comes to a close. Owning property of any kind in the current enviroment is asking for it. Gold and Silver are the only things that make sense "investment" wise anymore.

ArkansasAngie's picture

Mortgage origination is down ... across the board.  Untaper is removing bond sale commissions.  US corporation buying back stock at peak?  WTF.

Then you hear that the US has told Japan to stop printing more money.  And ... then you have Goldman in Utah?

Something is afoot.  You can bet it isn't in our collective best interests.

I'm afraid there will be a domestic false flag event that will be used by the arseholes to clamp down on us ... you and I.

Leave no incumbant in office.


daveO's picture

They are so desparate, that they are now sending offers to surviving relatives. I received one about a month ago, after my mom died in January. The letter expressed sympathy, then offered a HELOC. I kid you not. I'd rather burn my house first.   

tony bonn's picture

thank god for david stockman - truth in a universe of lies.

Greenskeeper_Carl's picture

Yep, and just wait til they come crashing down, and people go from being 'wealthy' in their McMansions, to being 100k of negative equity in the hole. A bunch of my friends are buying too. 'Now is the time to buy'. And they are convinced that even if the transfer, they can rent it out for more than the mortgage, and then sell it for twice what they paid for it when they retire. This won't end well. People are going to see their 50% of their net worth evaporate twice in less than a decade. People never learn.

Winston Churchill's picture

The house flipper seminars have been advertizing for about a year down here.Always a sign the top is in.
I think my cat has a longer memory than these fools.
We aren't even talking history, it the very recent past
for Dog's sake.
The gene pool needs an acid shock.

subqtaneous's picture


Who is Hawthorne's 'Gray Champion.'

ebworthen's picture

Generational Theft of the Citizenry and Nation - pure and simple.

Treasonous - and a hanging offense for a great many in Washington and on Wall Street.

This is why they are raping the Constitution and deploying combat brigades domestically while militarizing police forces; the Kleptoligarchy is being cemented.

ArmyofOne's picture

Nobody cares about facts.  The fiction, the illusion, is reality.   It will continue to work until it doesn't and then it will be replaced by another fiction.


 Wash, rinse, repeat. 






CrashisOptimistic's picture

You are 3/4 correct.

Money issues can be fictionalized.

Oil can't be.

ebworthen's picture

Yup, and food and potable water.

stopthejunk1's picture

Oil *is* fictionalized.  The mechanism of its fictionalization is the petrodollar.  The hyperreal geopolitics of American military power + American magic money is nothing if it is not one giant fiction.

daveO's picture

Which reminds me that 'Peak Oil' is driven by 'Peak Credit'. 

eatthebanksters's picture

Obama's mantra has always been to 'do no harm'.  The problem with this thinking is that it will never lead to solutions for problems, only more kicking the can down the road.  No one wants to destroy the economy, but as Volcker showed us in the early 80's, sometimes some nasty tasting medicine solves big problems sooner and better.  Obama is timid in everything he does except his bullshit self promotion.  Time to unload him and his group of knuckleheads and replace them with some intelligent people that will take action.  On that note Mitt Romney would have been such a huge improvement yet Christian voters would not turn out to vote for him.  Fucking idiots, look what we got instead.  Time to get smart and vote for the right person for the job and put aside the smaller petty diffrences.

EconomicGenocide's picture

Mitt Romney would have made Obama look like George Washington. A complete corporatist shill who would have had us in 2 world wars and would have had the poor and elderly in lines at soylent green factories.


Religion is the cancer that will destroy mankind.


Voting and protest is meaningless!!


Dems want to enslave the poor and middle class, the repubs want to kill them off!!

ArkansasAngie's picture

Both parties have sold us down the river.

Both parties need to be ejected from office.

Neither party is the lesser of two evils.  They are both evil.  And evil needs to be stamped out.


Aussiekiwi's picture

Agree, vote red, blue or orange, completely pointless, you might get one or two more wars with one party than the other, thats about the only difference, the future is all planned out, corporations will control everything while assuring you how much better of you are, as for wars, well, we call them wars, but since the US has enough force to eliminate the entire rest of the world ten times over with just conventional forces, massacre would be a more apt description. 

Cant wait to try some yummy Soylent green, I hear its very good for you, vitamin fortified.  


Just as well we are the good guys and don't rampage around the world killing innocent woman and children and arming terrorists.

ebworthen's picture

Politics is the distraction.

Two headed hydra of the same deadly monster.

U.S. has crossed the Rubicon; politics will never ever solve this problem.

House of Medici's picture

Yea. Fucking Christians and their petty principles. Wish we had more atheists. Those people are the smart ones.

Happy Easter!

damicol's picture

Hahahahaha Great stuff David,

Bu then I heard  news ,, ONE in SIX  1 in 6) American Morons think the fucking Kenyan monkey NEVER lies.

 Never Ever, One in 6  , Jesus fucking christ, look around you,  count the dumb fucks as they waddle past  one out every 6 still thinks that the greatest asshole, the most incompetent degenerate corrupt lying piece of shit on the planet does not lie.

Just what chance  does that give you that these fuckwits could even add two and two together let alone the complexities of a mortgage or its refinancing.

No wonder the banks take the piss,  a fucking retarded monkey can take the piss, A fucking retarded monkey is doing.



House of Medici's picture

Kenyan monkey?


May I recommend http://www.niggermania.net for you?

Aussiekiwi's picture

WOW!, chill out, you are not doing your case any good, you just look like a total lunatic. :)

kchrisc's picture

I will say it again: "The pols and crats could have chosen to bailout the American people directly, and the banksters indirectly, but they chose to bailout the banksters only."

Not that any bailout would have been a good thing, but their choice reveals their ownership and corruption.

The banksters and their associated pols and crats will have no quarter with me.


"Be fruitful and multiply your guillotines."

pupdog1's picture

Eric Holder prosecuted nobody for the trillion dollar crime of rigging the LIBOR.

I still can't get my head around that.

stopthejunk1's picture

LIBOR is set in London, by London banks. HTF could Holder prosecute British bankers who operate in London?

There's plenty wrong with Holder, but LIBOR is out of his jurisdiction.

blindman's picture

but the crime was committed and executed in the usa.
"Changing the Focus to Fraud
Suits to recover damages for collusion, antitrust violations and racketeering (RICO), however, have so far failed. In March 2013, SDNY Judge Naomi Reece Buchwald dismissed antitrust and RICO claims brought by investors and traders in actions consolidated in her court, on the ground that the plaintiffs lacked standing to bring the claims. She held that the rate-setting banks’ actions did not affect competition, because those banks were not in competition with one another with respect to LIBOR rate-setting; and that “the alleged collusion occurred in an arena in which defendants never did and never were intended to compete.”
Okay, the defendants weren’t competing with each other. They were colluding with each other, in order to unfairly compete with the rest of the financial world – local banks, credit unions, and the state and local governments they lured into being counterparties to their rigged swaps. The SDNY ruling is on appeal to the Second Circuit."

blindman's picture

to wit...
"...Why would keeping interest rates low enrich the rate-setting banks? Don’t they make more money if interest rates are high?
The answer is no. Unlike most banks, they make most of their money not from ordinary commercial loans but from interest rate swaps. The FDIC suit seeks to recover losses caused to 38 US banking institutions that did make their profits from ordinary business and consumer loans – banks that failed during the financial crisis and were taken over by the FDIC." ..e.b.

blindman's picture

Wall Street's latest sucker: Your hometown
By Stephen Gandel, senior editor July 11, 2012