Guest Post: Another Empty Obama Promise

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Submitted by Azizonomics

Another Empty Obama Promise

The extent of Obama’s duplicity continues to grow apace. And yes — it’s duplicity. If you can’t or won’t fulfil a promise, don’t make it.

From Bloomberg:

Two years after President Barack Obama vowed to eliminate the danger of financial institutions becoming “too big to fail,” the nation’s largest banks are bigger than they were before the credit crisis.

 

Five banks — JPMorgan Chase & Co. (JPM), Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Goldman Sachs Group Inc. — held $8.5 trillion in assets at the end of 2011, equal to 56 percent of the U.S. economy, according to the Federal Reserve.

 

Five years earlier, before the financial crisis, the largest banks’ assets amounted to 43 percent of U.S. output. The Big Five today are about twice as large as they were a decade ago relative to the economy, sparking concern that trouble at a major bank would rock the financial system and force the government to step in as it did during the 2008 crunch.

 

“Market participants believe that nothing has changed, that too-big-to-fail is fully intact,” said Gary Stern, former president of the Federal Reserve Bank of Minneapolis.

And the hilarious (or perhaps soul-destroying) thing?

The size of the banks isn’t even the major issue. AIG didn’t have to be bailed out because of its size; AIG was bailed out because of its interconnectivity. If AIG went down, it would have taken down assets on balance sheets of a great deal more firms, thus perhaps triggering even more failures. So the issue is not size, but systemic interconnectivity.

And yes — that too is rising, measured in terms of gross OTC derivatives exposure, as well as the size of the shadow banking system (i.e. pseudo-money created not by lending but by securitisation) — which sits, slumbering, a $35 trillion wall of inflationary liquidity ready to crash down on the global dollar economy.

On the other hand, Keynesians — and Obama (in spite of his supporters’ best protestations) is certainly one — are insistent that the easiest and best way to reduce systemic indebtedness is by unleashing additional inflation, and thus reducing the real value of debt.

From Paul Krugman:

To be sure, more aggressive Fed policies to fight unemployment might lead to inflation above that 2 percent target. But remember that dual mandate: If the Fed refuses to take even the slightest risk on the inflation front, despite a disastrous performance on the employment front, it’s violating its own charter. And, beyond that, would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

Such simplistic reasoning. Given the sizeable deflationary impact we know that deleveraging in the shadow banking system can have — even in spite of a tripling of the monetary base — we should surely understand by now that the global financial system no longer works by the old rules.   We are living in the fat tail of history. 

As I wrote in January:

Simply, the Fed’s huge expansion of the monetary base has still failed to prevent the contraction of this strange and exotic part of the “money” supply. It has failed to prevent the sector from deflating and sucking down the wider economy.

 

In the years preceding 2008 the definition of “money” became extremely loose. When securities made up of sub-prime mortgages which are in arrears comes to pass for “money” — and came to stand on balance sheets as debt — it should have been painfully obvious that modern finance had mutated into an uncontrollable monster, and that no amount of quantitative easing could prevent prevent the inevitable credit contraction from blown-up asset prices tanking.

 

The shadow banking sector was never “too big to fail”; it was too monstrous to succeed.

Working toward a “mild” inflationary uptick would certainly debase the real value of debt, but there is a clusterflock of black swans circling above that road, not least the impact on U.S. relations with creditor nations who also happen to produce a huge portion of the goods we consume. What would we do if the Chinese central planners decided to slash exports to America (e.g. by imposing heavy tariffs) and instead recycle their $3 trillion dollar hoard on domestic consumption (after all, they hardly need any more of our dollars)? America would be faced with a painful transition.

Today it struck me that Franklin D. Roosevelt’s famous aphorism that “all we have to fear is fear itself” — at least applied to the present situation — is possibly one of the most dangerous and foolish ideas in history. We have plenty of things to fear; real and present dangers to our civilisation.

Living with a fundamentally broken, fundamentally monstrous economic and financial paradigm is a recipe for future disasters. Here is something for Obama and Bernanke to think about:

One should never stand in a place of danger and say that a miracle will be wrought for them, lest it is not. And if a miracle is wrought for them, it is deducted from their merits.

 

Shabbat 32a

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Mon, 04/16/2012 - 11:11 | 2348569 battle axe
battle axe's picture

Hope  and  Change!! Catch the spirit!! sarc

Mon, 04/16/2012 - 11:18 | 2348584 nope-1004
nope-1004's picture

Yup, Change you can bereave in!

The only requisite for becoming Commander in Chief is to be full of shit.  The 2 party system is the headfake to making you think you are choosing, when really both are corrupt.

 

Mon, 04/16/2012 - 11:17 | 2348599 LowProfile
LowProfile's picture

 

as well as the size of the shadow banking system (i.e. pseudo-money created not by lending but by securitisation) — which sits, slumbering, a $35 trillion wall of inflationary liquidity ready to crash down on the global dollar economy.

Someone correct me if I'm wrong, but if those derivatives implode, isn't that DE-flationary?

The reaction if it does implode will be for the CBs to inflate, but still.  Deflation->Inflation->Currency Crisis-Hyperinflation, right?

Mon, 04/16/2012 - 11:26 | 2348625 pods
pods's picture

That is always how I have viewed it.  The cause is deflation (credit collapse) and the solution is hyper inflation.

Those 35 trillion of derivatives are never going to be paid out.  And they are someone's asset.

Is this wrong?

Oh, and you have to add one more step to your flowchart:  >zombie apocalypse.

pods

Mon, 04/16/2012 - 11:30 | 2348646 Buckaroo Banzai
Buckaroo Banzai's picture

Phony paper assets will be made whole with printed cash. That is the whole reason the Federal Reserve was invented! It has no reason to exist except to inflate the currency as necessary.

I believe the term they used in 1913 was "elastic currency".

Mon, 04/16/2012 - 11:45 | 2348709 LowProfile
LowProfile's picture

That's how I see it.

Question is, how much are they going to have to make good on?

I have a feeling $35T is just a START...

Mon, 04/16/2012 - 12:22 | 2348825 Richard Chesler
Richard Chesler's picture

Mickey-Mouse promise from a Mickey-Mouse POTUS with a Mickey-Mouse birth certificate.

Yes we can't!

 

Mon, 04/16/2012 - 12:30 | 2348843 LowProfile
LowProfile's picture

Thank you for that scintillating and completely fucking unrelated and pointless response, Richard.

 

The question I asked was how much debt out there is going to HAVE to be covered by freshly printed cash?

Some debt will doubtless be given a haircut (those TPTB figure they can screw), but a lot of it (most?) will be made whole via the CBs.

Any takers on that guess?

Mon, 04/16/2012 - 13:02 | 2348930 iDealMeat
iDealMeat's picture

The derivatives market is in the Quadrillions (some guess).. Those assets are someones debt.. real, synthetic, and reHypothecated.. But no one knows.. Then you have shadow banking. Elimination of mark to market.. Literally every single number out there that should be used as a gauge for risk or budget is exaggerated or falsified with fuzzy math..

No one knows...  Its all total bullshit..

I just stopped caring and saved myself the stress and lost life points..

 

Mon, 04/16/2012 - 13:19 | 2348979 TuesdayBen
TuesdayBen's picture

Was Obama dealt a tough hand? Yes.

Has Obama played that hand well?  No.

He has screwed the pooch raw for 3 years.

Mon, 04/16/2012 - 22:13 | 2350355 StychoKiller
StychoKiller's picture

During the crisis in Oct. 2008, he could have just dropped out of the race and said:  "It's ALL yours, Hillary!"

Mon, 04/16/2012 - 11:49 | 2348720 Darth..Putter
Darth..Putter's picture

A confidence game, or "Con Game" only fails when the confidence is gone.  The idea of getting something out of the digital world of accounts is what's keeping people putting the results of their labors into those accounts. 

 

Don't follow the money.  Follow the Gold!!

Mon, 04/16/2012 - 12:02 | 2348768 eddiebe
eddiebe's picture

'Phony paper assets will be made whole with printed cash. That is the whole reason the Federal Reserve was invented! It has no reason to exist except to inflate the currency as necessary.'

Actually it was created to make the banksters richer; as in wealth transfer.

Mon, 04/16/2012 - 12:07 | 2348776 Hippocratic Oaf
Hippocratic Oaf's picture

MARK TO MARKET, MUTHA' FUCKERS!!!

Mon, 04/16/2012 - 12:51 | 2348895 battle axe
battle axe's picture

And how much do you want to bet that Citi and Bank of America are on the bad side of that trade? Any takers? I will give you 100-1 odds. 

Mon, 04/16/2012 - 19:36 | 2350081 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

 

 

Those 35 trillion of derivatives are never going to be paid out.  And they are someone's asset.

Is this wrong?

Not exactly.

Suppose you have a 250K fire insurance policy on your house, is that an asset?  Yes in the sense that it's worth something, but you wouldn't say holding such a policy increases your net worth by 250k.

Or suppose you bought 10 AAPL puts at $600 strike price.  That would be a derivative with a face value of 600K, but it would only be worth the full face value if AAPL goes all the way to 0 before it expires.

Mon, 04/16/2012 - 11:33 | 2348666 tarsubil
tarsubil's picture

Yes, but what if 2008 was the deflationary event with housing and now is the time of printing and inflation? Or maybe it goes through several cycles of deflation and inflation as wings of the credit house collapse and are monetized until the perception management and monopoly of force of the government is eroded to the point a currency crisis occurs?

Mon, 04/16/2012 - 11:58 | 2348759 pods
pods's picture

That is how I see it.  The end game is currency crisis.  We probably have several waves of gyratory deflation-inflation before things get out of hand.  The oscillations will become more pronounced until it finally lets go.

pods

Mon, 04/16/2012 - 12:16 | 2348794 Don Keot
Don Keot's picture

This is what I have feared the most, a deinflationary enviornment.

Mon, 04/16/2012 - 12:35 | 2348845 francis_sawyer
francis_sawyer's picture

IMO... If you know what you're looking 4, you'll know the deflationary environment when you see it...

In 2008, Crude & PM's took a precipitous fall, but paper gold & silver bottomed long before the S&P (PM's in November 2008, S&P in March 2009)...

Since... & despite many attempts to crash the PM markets by margin hikes & naked shorting, there still remains a constant bid for PM's (because it is well known now that if paper gold or especially silver prices drop too far, physical inventory is gobbled up quickly)...

This game can only be played for so long (& I believe it is only still possible because general economic hardship is forcing physical onto the market on the margin [weak hands to strong hands])... Everytime I go into a coin shop, the ratios of 'sellers' (desperate for cash) to buyers of gold & silver is about 5-1... This, too, will only last so long (until there is no more of grandma's silver to sell)...

Thus, the 'deflationary environment' has already passed... Hyperinflation cometh... The only thing is, it might not end up being 'called' a hyperinflationary event... IOW... It's not going to be like it takes a wheelbarrow full of dollars to buy a loaf of bread... Instead, they'll probably invent some clever way to 'market' the dollar collapse by creating some sort of other monetary unit... Within 6 months after its implementation, all the things you used to buy for 'x' units of currency, now cost 5x units of the new currency... It's still hyperinflation, but it isn't marketed that way...

Stock up on things you NEED (while they are still relatively cheap) while you can...

Mon, 04/16/2012 - 15:46 | 2349497 House of Ronin
House of Ronin's picture

 

How did they get to that 56% of the u.s. economy. The way the article phrases that number is a bit awkward and leads the quick reader to believe that banks control that amount. Upon closer look, I believe the author is stating that is –equal--- or ‘equivalent to’ which is drastically different. I think a blend between increased reserve requirements, cheap Fed money, and a more hostile economy leads to larger banks which is the FED not Berry.

 

Mon, 04/16/2012 - 11:22 | 2348612 Problem Is
Problem Is's picture

The Change is in your pocket...

Mon, 04/16/2012 - 11:46 | 2348713 Lord Blankcheck
Lord Blankcheck's picture

the "chains" will be on your arms and legs

Mon, 04/16/2012 - 12:05 | 2348769 RafterManFMJ
RafterManFMJ's picture

The only requisite for becoming Commander in Chief is to be full of shit.

 

 

And be a CIA/Globalist/NWO stooge.  And you gotta be tall. And read reasonably well.  I'm thinking about 2 election cycles out they'll have to find a half-black Eurasian Jewish woman with a cojoined twin who is a White Hispanic(TM) Marxist gay.

It's no wonder all the circuses died; all you have to do is go outside and see as many clowns and freakshows as you can stomache.  Reality TV? Just watching the antics oozing from DC is enough reality for me.

Mon, 04/16/2012 - 12:17 | 2348805 Debeachesand Je...
Debeachesand Jerseyshores's picture

"Change you can breave in!".

That just about sums up the Obama Administration in a nut shell.

Mon, 04/16/2012 - 23:00 | 2350413 Pitchman
Pitchman's picture

The power to invade countries, indefinite imprisonment American of citizens and the claimed right to assassinate Americans, right here in the good old USA.  Are these offenses and the Abdication of His Sworn Oath to Defend the Constitution from enemies both foreign and domestic grounds for Impeachment?

Are President Obama's Offenses Grounds For Impeachment?

 

Also: President Obama; BRICked Over U.S. Monetary Policy

Mon, 04/16/2012 - 14:11 | 2349138 krispkritter
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()

Mon, 04/16/2012 - 11:14 | 2348578 rosiescenario
rosiescenario's picture

"Another empty Obama promise, but I repeat myself..."

Mon, 04/16/2012 - 11:34 | 2348664 Buckaroo Banzai
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Calling Obama a lying sack of shit is an insult to lying sacks of shit everywhere.

Tue, 04/17/2012 - 00:15 | 2350531 Pitchman
Pitchman's picture

Buckaroo; You are far to kind!

To admire the gift of oratory without regard to the moral quality behind the gift is to do wrong to the republic. - Theodore Roosevelt, from: “Citizenship in a Republic”

My contempt lies with Brand Obama (see: Word of the Day: TREACHEROUS - See: "LIFTING THE VEIL ) .  The package that attracted loyal followers is devoid of substance and was so from the start.  Promises made and supporters were tossed aside to serve the king makers at the expense of the people.  Sans a soul the President has no heart.  Self interest and reputation among the leading cabal is valued above the well being of the people and honor which comes from a higher power.  - MR. PRESIDENT: LEAD OR BE REMOVED FROM OFFICE

 

Mon, 04/16/2012 - 11:15 | 2348581 bugs_
bugs_'s picture

suckers

Mon, 04/16/2012 - 11:15 | 2348582 mayhem_korner
mayhem_korner's picture

So the issue is not size, but systemic interconnectivity.

 

Dominoes, muppets.

Correlation is the catalyst to revealing the fractal nature of risk. 

Mon, 04/16/2012 - 11:14 | 2348586 Papasmurf
Papasmurf's picture

Redundant

Mon, 04/16/2012 - 11:16 | 2348588 taniquetil
taniquetil's picture

"That's why today, I'm pledging to CUT the deficit we inherited by half by the end of my first term in office."

 

Barack Obama, Feb 2009

 

But hey, let's give the guy a break. He only missed by a few hundreds billion dollars per year.

Mon, 04/16/2012 - 11:33 | 2348660 Buckaroo Banzai
Buckaroo Banzai's picture

He only missed by a few trillion dollars per year.

Fixed it for ya.

Mon, 04/16/2012 - 11:39 | 2348690 jayman21
jayman21's picture

"That's why today, I'm pledging to CUT the deficit we inherited by half by the end of my first term in office."

 

Barack Obama, Feb 2009

Further proof that we have two parties that offer more of the same, otherwise, we would see him called out on this.

Mon, 04/16/2012 - 13:07 | 2348948 johansen
johansen's picture

What he actually said was divide the deficit, the government journalists didn't know what that meant so they corrected it to cut.

Mon, 04/16/2012 - 11:17 | 2348590 beaker
beaker's picture

you'd think the Republican Party would point this out to highlight Obummer's profound lack of understanding of today's markets.  ....but frankly, I don't think anyone in DC understands the sea of shit we are in.

Mon, 04/16/2012 - 11:20 | 2348603 LFMayor
LFMayor's picture

Two wings, same shit bird.

Mon, 04/16/2012 - 11:31 | 2348639 Problem Is
Problem Is's picture

"Birds of a shitfeather flock together."
J. Lahey

Mon, 04/16/2012 - 12:33 | 2348854 gjp
gjp's picture

Nice avian anaology, and a complement to the poster's "clusterflock of black swans", which is great.

Mon, 04/16/2012 - 11:52 | 2348733 Vince Clortho
Vince Clortho's picture

They don't understand jack and they don't want to.  

They do what they are told by the bank cartel, and they get nice compensation and benefits for doing exactly that.

Mon, 04/16/2012 - 19:45 | 2350101 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

If they actually understood what they were doing that would make them culpable.  Much better to be ignorant than malicious.

Mon, 04/16/2012 - 12:09 | 2348783 WonderDawg
WonderDawg's picture

Or, possibly, there are some who do understand, and either: 1. They're busy preparing their own plan for the post collapse, or 2. They've been instructed to keep their fucking mouths shut or else, or 3. Some combination of 1 and 2.

Mon, 04/16/2012 - 22:34 | 2350384 nmewn
nmewn's picture

Number one here...you know me, I never listen to anyone else ;-)

Mon, 04/16/2012 - 11:15 | 2348591 rosiescenario
rosiescenario's picture

We need a pie chart showing just who owns what % of Obama. We know Monsanto owns a goodly chunk, ditto GS, etc.

 

Maybe WB could provide this much needed visual data???????

Mon, 04/16/2012 - 11:36 | 2348681 Jena
Jena's picture

And another pie chart to show who owns what % of Holder.

Mon, 04/16/2012 - 11:53 | 2348737 Problem Is
Problem Is's picture

Eric "Empty Suit" Holder?????

Wait, has that moron shown up for his first day of work yet?

Some one tell that idiot his office is at 950 Pennsylvania Avenue Washington DC..

Mon, 04/16/2012 - 11:17 | 2348593 mayhem_korner
mayhem_korner's picture

 

 

That Paul Krugman is employed and paid for his opinions is proof positive that the IQ distribution is left-skewed.

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