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Guest Post: QE3 And Bernanke's Folly - Part I

Tyler Durden's picture


Submitted by Lance Roberts of StreetTalk Live,

Earlier this year, as the markets were expecting QE3 from one Fed meeting to the next, I was stating another program would not come until September after data for Q2 GDP could be analyzed.  However, as we moved into August, and the markets were rallying strongly on "hope" of further balance sheet expansion programs, I moved my estimates out until the end of the year.  The reasoning, as I stated, was under the assumption that Bernanke would save his limited ammo for a weaker market/economic environment.  Clearly I was wrong.

Much to my surprise, and against all of what seemed logical, Bernanke launched an open ended mortgage backed securities bond buying program for $40 billion a month "until employment begins to show recovery."   That key statement is what this entire program hinges on.  The focus of the Fed has now shifted away from a concern on inflation to an all out war on employment and ultimately the economy.  However, will buying mortgage backed bonds promote real employment, and ultimately economic, growth.  Furthermore, will this program continue to support the nascent housing recovery?

Employment - Where's The Demand?

During the Fed's announcement today Bernanke repeated several times that the primary concern of the Fed is now employment.  One of the Federal Reserves primary legal mandates is to foster full employment in the economy.  However, after two previous Large Scale Asset Purchase programs (QE), and a Maturity Extension Program (Operation Twist - OT), has employment meaningfully recovered.  

The chart below shows the net gains in employment since the beginning of 2009 as compared to the number of individuals that have moved into the "No Longer In Labor Force" category where they are no longer counted.  There has been an increase of 3.4 million jobs since the lows of mass firings and layoffs post the last recession.  That increase is far lower than would have been expected in any normal economic recovery.  At the same time, however, more that 8.4 million individuals have just "given up looking for work" or "retired." during the same period.  There is NO evidence that bond buying programs have any effect on fostering employment.  However, at the current rate of individuals leaving the work force Bernanke could likely get his wish of "full employment" in the next couple of years.  Of course, economic prosperity will have deteriorated much further as the rise of the "welfare state" continues.


The next chart shows the number of individuals, since 2009, who are now claiming disability and food stamps.


The point here is the manipulating the bond market, and inflating reserves for the major banks, does not create end demand for businesses.  In our recent report on the NFIB survey we stated: "While there has been some improvement since the peak of the "Great Recession" - poor sales still provide an overriding concern for U.S. businesses when it comes to making decisions to increase employment or expand operations.  While the concern over 'poor sales' remained stagnant last month the number of businesses saying this is a "good time to expand" fell from 5 to 4 and remains near the lowest levels since the end of the last recession."  QE programs do not address the problem aggregate end demand on businesses.  In fact, it makes it worse.  

Diane Swonk tweeted after Bernanke's comments that:  "Fed move to stimulate with open-ended MBS purchases 'unprecedented.' Focus on unemployment over inflation marks new era"  While the move may be unprecendented by the Fed to focus on employment over inflation - the chart below shows you that he should be focused on the latter.


From a consumer's perspective the effect of food and gasoline as a percentage of wages and salaries is crucially important.  As food and energy consume more of wages and salaries it leaves less available for consumption within other areas of the economy. It is evident that not only do balance sheet programs create inflationary pressures on the aggregate but more specifically in commodity related areas.  The chart below shows the consumer conundrum where declining wages meet up with rising costs of food and energy. 


It is notable that during the Maturity Extension Program (Operation Twist or OT) the inflationary pressures subsided for the consumer.  This is due to the fact that OT did not increase excess reserves at the banks which were then funneled into risk assets.  Apart from the recent spike in food prices due to the drought in the U.S. commodities have languished post the last QE program easing consumer pressures in many areas.

The important point, however, is that for businesses to hire employees it will require an increase in aggregate end demand.  As the concern over "poor sales" diminish - hiring will pick up.  Unfortunately, history shows that balance sheet expansion programs create the opposite effect of that intended by Bernanke.  Rising inflationary pressures in food and energy only act as retardants to consumption thereby reducing the need for employers to add to payrolls.  With corporate earnings and revenue weakening, rising healthcare costs and taxes on the horizon, and exports slowing - it is unlikely that the Fed's purchases of mortgage back securities will spur businesses to hire.

Housing - Set For A Fall

Bernanke's also stated that by buying mortgage backed bonds he hoped to support the nascent housing recovery.  There are two major problems with his thought process that a simplistic look at the data would have revealed.  First, and most importantly, is that interest rates have already been at historically low rates and very little housing activity has occurred.  The chart below shows our housing activity index which measures the housing components that are most sensitive to the creation economic throughput.


Despite trillions of dollars of liquidity, support programs and "forgiveness" for every criminal act in the book, there has yet to be a real recovery in housing.  The most recent upticks, primarily due to speculative investor demand for rental properties, will rapidly dry up as rising interest rates makes buying much less attractive.  It is important to remember that people buy payments - not houses.  The lack of employment, lower incomes, excess debt and poor credit history will keep a large chunk of the remaining population from qualifying to buy for quite some time.  If you couldn't spur a massive house buying binge with the lowest mortgage rates in recorded history - what will another quarter point, or so, actually accomplish? 

However, Bernanke's folly is in believing that QE programs lower interest rates.  There is no historical evidence that yields fall during balance sheet expansion programs.  It is evident, in the chart below, that during liquidity driven programs such as QE, money flows from bonds and into stocks chasing market performance.  As a function of this rotation yields have risen sharply during past programs.  Only during OT did yields remain suppressed along with inflationary pressures.  


Putting It All Together

While the most recent bond buying program will push liquidity into the equity markets pushing asset prices higher - it will do little to help the economy, employment or housing.  The evidence is abundant that the only beneficiary of these balance sheet programs is Wall Street. As shown in the chart below the average level of excess reserves for banks was roughly $19 billion from 1984 to 2008.  Since 2008 excess reserves held at banks has swelled to more than $1.5 trillion currently.


With the consumer weak, unemployment high, foreclosures and deliquencies still burdensome, and businesses constrained by lack of demand - there is little desire, or need, for credit.  This is unlikely to change anytime soon as businesses are forced to pullback even more as demand is further reduced by rising inflationary pressures.

Bernanke was correct about one point - monetary policy has a very limited reach economically and, while up to Congress, it is fiscal policy measures that are needed to promote economic growth. The recent program by the Fed has all but ensured two things from a political perspective: 1) The incumbent President is likely to win the next election, and; 2) that the current gridlock will continue on the fiscal front for another four years.

Clearly, the Fed's actions, and statement, signify that the economy is substantially weaker than previously thought. While Bernanke's latest program of bond buying was done under the guise of providing an additional support to the "recovery," the question now is becoming whether he has any ammo left to offset the next recession when it comes.


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Fri, 09/14/2012 - 15:23 | 2796513 greased up deaf guy
greased up deaf guy's picture

insanity defined. moar moar moar qe!

Fri, 09/14/2012 - 15:25 | 2796538 redpill
redpill's picture

Wait, are you trying to say credit is not growth?

Fri, 09/14/2012 - 16:34 | 2796763 Fleecer
Fleecer's picture

So, Fed creates $40B/mo... say, for the next year...  Fed uses the new bucks to buy MBS from banks.  Banks get to continually de-risk their bal sheet at market (OK, above-market pricing)... and the Fed slowly stockpiles the collateral right to every home, apt bld, skyscraper, shopping mall, retail space in the USA-- Which means China and Japan ultimately do-- another discussion).  Banks turn around and give proceeds from selling MBS to their trading desks to gamble in S&P (and sure, dabble some in commodoties).  Continual flow of new money to trading desks sends S&P up up up.  Smart sideline money sees the inevitable fund flow coming, so time to take a ride-- more inflows to equities (and drain from bonds-- seeing that already)... and eventually even the sheeple see the trend... and they finally (reluctantly) come off the sidelines... more upward price pressure on stocks. 

Seems (at least short/med term) bullish for banks, financial ETFs, and S&P in general.   

Back of envelope math...

S&P worth appx $13T... add $40Bx12mo is a ~3.7% increase in 1 yr.  So if ALL the new money went to the S&P (of course it won't-- there are bank bonuses to pay) there's significant "inflation" pressure on equity values... maybe Tyler / others can weigh in on how much "smart" sideline money is out there (and how much "dumb" money still on sidelines).  If they know there's 3% of guaranteed/automatic upward pressure on prices, how can the mob resist riding the train?

Fri, 09/14/2012 - 17:27 | 2797067 WarriorClass
WarriorClass's picture

This is nothing but another Bankster Bailout.  Nothing QE about it.  Now we are all MBS suckers.

Fri, 09/14/2012 - 23:18 | 2797956 DeadFred
DeadFred's picture

You give a good description of the best case scenario. His problem is that he just went all-in and it has to work right. Every downturn in recent years stopped because people became convinced that the Fed would step in an save them. Now they committed themselves and there will be nothing to cause buyers to hop back in.  He'd better hope there are no corrections. I still have my short positions (for a bit longer) because I suspect this is not as long lasting as we're led to believe. I'll find out soon.

Fri, 09/14/2012 - 15:34 | 2796607 LMAOLORI
LMAOLORI's picture



The first thing that should be understood is this isn't about Employment that's just propaganda this is about giving money to the banks/investors

Fri, 09/14/2012 - 15:45 | 2796667 vast-dom
vast-dom's picture

because knowing FULL WELL that buying up MBS's to infinity WILL DO NOTHING TO REDUCE UNEMPLOYMENT is simply another way of saying WE WILL RIG THESE MARKETS INDEFINITELY 



Fri, 09/14/2012 - 16:05 | 2796772 NotApplicable
NotApplicable's picture

But surely they'll have to hire a couple of people to track it all, no?

Fri, 09/14/2012 - 23:22 | 2797968 DeadFred
DeadFred's picture

Think of it from the business's point of view "I get free money and low rates as long as employment is down. If we hire people the goodies go away. Hmmm should I hire someone or not?"

What a stupid setup. What a braindead way of structuring this thing.

Fri, 09/14/2012 - 21:41 | 2797814 Tommy Gunner
Tommy Gunner's picture

Or perhaps Stupidity defined?

Fri, 09/14/2012 - 15:22 | 2796520 Sam Clemons
Sam Clemons's picture

Great charts, but people always have two reasons for doing things:  one they tell people, the other they don't.  

The true reason is to enable perpetual government and bank bailouts at the expense of everyone else.  

Fri, 09/14/2012 - 15:24 | 2796523 khakuda
khakuda's picture

Let's face it, this latest round of infinite money printing is designed to take bad mortgages off the balance sheet of the banks and put them on the U.S. taxpayer.  The mortgages will not be sold ever, but held to maturity.  All the while earning "interest" which Bernanke says reduces the deficit!  What a joke.  They won't be able to reduce the balance sheet and are basically setting us up for that by telling us now that they are going to stay accomodative long past the time the economy recovers.

They think we are all idiots.  Sadly, many are not financially not astute and can't grasp the point that paper money has no value with an irresponsible money printer in charge.

Fri, 09/14/2012 - 16:36 | 2796909 techstrategy
techstrategy's picture

Hopefully, the Fed will buy my mortgages so I can stop paying all of them and get my own QE for the people!  

Fri, 09/14/2012 - 15:24 | 2796530 LongSoupLine
LongSoupLine's picture

The "next recession"?!?

We're still trying to get out of the current depression!

Fri, 09/14/2012 - 15:25 | 2796543 boogerbently
boogerbently's picture

I just heard Santelli tell all the bobbing heads that Bernanke doesn't intend QE(all) to help unemployment, it's intended to help the bankers.....they all acted like he told their kid there's no Santa !

Let's all write-in, for Prez/VP, Santelli and Farage.

Fri, 09/14/2012 - 15:34 | 2796603 e-man
e-man's picture

With all the money they've printed, it looks like the Fed could have paid off every mortgage and credit card in America.  But the Fed doesn't work on behalf of Main Street.

Fri, 09/14/2012 - 15:45 | 2796671 KidHorn
KidHorn's picture

There's about 10 trillion in mortgage debt and another trillion in credit card debt. The FEDs balance sheet is at about 3 trillion.

Fri, 09/14/2012 - 16:24 | 2796797 e-man
e-man's picture

True...should have said "has printed and will print."  Like the song says, We've only just begun....

My point being that giving the money to Main Street which would in turn give it to the banks is still a helping hand to the banks.  Except people get to keep their homes and businesses.

Fri, 09/14/2012 - 16:13 | 2796816 NotApplicable
NotApplicable's picture

Since when does that matter? Are you forgetting about the $16T in bailouts they handed out to the banks from 2007-10?

Balance sheets don't mean much when one has magic checkbooks.

Fri, 09/14/2012 - 16:19 | 2796826 e-man
e-man's picture

That $16T is what I was initially thinking of, but then those were just good quality loans that were all paid back! Right?

I could almost guarantee that if the Fed backstopped me in Vegas to the tune of $16T, I could pay back every penny and still have a cool $1 T to spare.

Fri, 09/14/2012 - 15:26 | 2796548 fonzannoon
fonzannoon's picture

What the hell is everyone so confused about? I wonder if someone thrown overboard in the middle of the ocean writes an article on the way down...The guest posts on here trying to disprove the effectiveness of the fed are more delusional than the fed. At least the fed is deliberate, while these moron's keep taking the bait and keep thinking this is just ineffective policy. Like Samuel L Jackson is going to tell you on TV tomorrow...WAKE THE FUCK UP! It's over. Somewhere George Carlin is rolling over in his grave.

Fri, 09/14/2012 - 15:26 | 2796555 Randall Cabot
Randall Cabot's picture

I suspect Bernanke is lying about his concern for unemployment and there is something else going on behind the scenes.

Fri, 09/14/2012 - 15:47 | 2796678 KidHorn
KidHorn's picture

Yes. I think he's trying to get the ECB to join the club and start printing.

Fri, 09/14/2012 - 16:09 | 2796741 Randall Cabot
Randall Cabot's picture

I'm thinking something more ominous-like a big bank is in trouble or he is seeing that the derivatives house of cards is swaying.

Fri, 09/14/2012 - 16:29 | 2796876 e-man
e-man's picture

That's exactly what I've been thinking.  There is some piece of information that is not being shared with us.  It scared him enough to pull the trigger what appears to be prematurely.  Not unheard of but certainly noteworthy.

Fri, 09/14/2012 - 16:31 | 2796891 Winston Churchill
Winston Churchill's picture

Your damened right there is,heres my guess.

Last month the NY fed reopened Fed repo operations.

Stopped reporting them after 6 days.

I think the shadow banking system is frozen again,that why the Fed had to restart repo's.

Then the NY fed decided they didnt like used condom wrappers as collateral,anymore than the SBS

as the repo basis.

There is a MASSIVE liquidy crunch in TBTF banks,why ,I do not know.

Zimbabwe Ben rides to the rescue of the banks by buying assets outright, that are

worth less than used condom wrappers.

Fri, 09/14/2012 - 16:43 | 2796939 e-man
e-man's picture

You mean like when the Fed stopped reporting M3 because it was just too cumbersome?  Nothing to see here...

Fri, 09/14/2012 - 16:52 | 2796966 e-man
e-man's picture

You know, a liquidity crunch in the TBTF banks sounds to me like impaired European assets.  Perhaps the ECB wasn't moving quickly enough?

Fri, 09/14/2012 - 15:27 | 2796557 lolmao500
lolmao500's picture

I'm sure China is gonna LOVE all the inflation that is gonna be exported.

Remember what help cause the Arab Spring.. QE1 and QE2 which created massive inflation in the middle-east. Now that people are even more pissed and Ben is back at it, the riots/terrorism ain't gonna calm down, it's gonna INCREASE.

Bernanke causes more revolts and terrorism than CIA's friend Bin Laden ever did.

Fri, 09/14/2012 - 16:19 | 2796832 valkyrie99
valkyrie99's picture

I've been wondering if this might have been a large part of the point of this.  It certainly isn't to help employment or the larger economy against all evidence; it probably does have a good deal to do with perpetually bailing out banks and raising stock prices for wealthy investors. But those reasons were still there but weren't enough to cause this mass money printing a few months ago.  So what's changed? 

The main factor is China is starting to collapse, the soft landing is coming way too hard, corruption is being exposed and social tensions are rising - all while food prices are already rising mainly due to the drought so China is withholding stimulus measures. Food prices are likely to rise more in China and other developing nations then the US because of this Fed action, making stimulus directed at specific sectors of their economy impossible for China no matter how much they suffer.  We have now pumped out the new money as China's economic bubbles grew, withheld funds as they started to collapse, but are now pouring money in like crazy as soon as its' assured the hot money will affect food prices more then re-flating old Chinese bubbles that have already been exposed. All Fed actions have been the absolutely worst possible moves for China - coincidence? 

In looking at how much this really affects our decision making, note these elites are very used to sending many of their own countrymen into die in battles and its' still counted as a 'win' as long as more of the other guys' die. We could be shooting ourselves in the foot in belief that we might be able to get China in the head with the same bullet, as this is the best way to maintain US hegemony in the medium term.

Fri, 09/14/2012 - 15:27 | 2796561 Oh regional Indian
Oh regional Indian's picture

It's not a folly FFS, it's the PLAN.

Econometrics, it's a science with a very high degree of predictive accuracy. Extremely high.

PLAN, no fools on the bridge here. It's planned to be inflated till it explodes. And it will explode exactly when they are good and ready.

Our primary out from the PonziPrizon are force majeure and deep personal preperation.


Fri, 09/14/2012 - 15:34 | 2796601 Strider52
Strider52's picture

There are millions of Joe Six-Packs all over America wondering "How does this get me a job?? I don't even know what an MBS is, unless it's More Bull Shit"

Fri, 09/14/2012 - 16:21 | 2796841 NotApplicable
NotApplicable's picture

An MBS is an asset with it's value derived from the distillation of unicorn farts. It also violates all laws of physics, since mortgages exist multiple places simultaneously, while the MBSes they are assembled into are sliced and diced to an infinite degree, making it impossible to know exactly where it is, even though it is "legally" bound to the trust underlying it. Yet the trust likely doesn't own it, due to failure to file transfers in order to keep the chain of title intact.

It's kinda like the Heisenberg Uncertainty Principle, but applied to mortgages.

Hope I've been of some help.

Fri, 09/14/2012 - 17:16 | 2797044 The Navigator
The Navigator's picture

Ahhhhh........ the smell of unicorn farts in the morning

Fri, 09/14/2012 - 15:29 | 2796572 barliman
barliman's picture


The ChairSatan's syphillitic mind has snapped.

He has triggered the economic collapse.

When the Asian and European markets open on Monday, the euphoria will have worn off and the reality of currency appreciation and exported inflation will take hold.


Wheeeeeeeeeeeee !!!


Fri, 09/14/2012 - 15:33 | 2796597 youngman
youngman's picture

What does he have left.....well his 40 billion a month will turn to 80 billion a month..then to 160 billion a month....and so forth......and I agree..he sees something that he is not talking ended is the tell all....

Sat, 09/15/2012 - 10:41 | 2798467 hedgehog9999
hedgehog9999's picture

This is certainly a big possibility, I don't think he will buy assests that are part of the derivatives implosion that may be already unfolding, but funelling huge amounts of cash to the banks will mitigate that implosion. The good news there is that the extra money the banks get would not go towards commodities and the stock market, it would go soak up the losses in the derivative space, in other words all that extra MBS cash would go to heaven.

If you all recall QEI was huge, it started in late October 2008 and the market still tanked into 666 by early March of 2009.

If what is happpenning right now is a derivative implosion as it did in 2008, that extra cash will go to heaven just as it did in 2008 and the talked about hyper-inflation did not happen................

Two of the areas in derivatives where is the most risk of losses is in interest rate derivatives and Credit default swaps, both are showing bullish signs, if you can call it that as long dated bond rates are going up in spite of all the twisting and jerking he's been doing.

We shall see very soon.

Fri, 09/14/2012 - 15:38 | 2796633 Yen Cross
Yen Cross's picture

 " Ho-Ho-Ho", I can't get you a X-mas gift, as my gas tank is empty, and I need to go to da " SNAP" factory!

Fri, 09/14/2012 - 15:43 | 2796652 lemonobrien
lemonobrien's picture

release the Kracken, niggas...

Fri, 09/14/2012 - 15:46 | 2796676 Budd aka Sidewinder
Budd aka Sidewinder's picture

The majority of Americans have no concept of what happened yesterday or even what the Fed is or who Bernanke is.  When his ponzi scheme unravels the majority of Americans will be sucker punched and will have never even seen it coming. 

Since the timing of the collapse is impossible to determine it will be very severe and even very swifter.

Fri, 09/14/2012 - 15:50 | 2796697 KidHorn
KidHorn's picture

I agree that most americans don't understand what happened, but it's not Bernanke's ponzi scheme. It's worldwide and started when Nixon took us off the gold standard in, I think, 1971.

Fri, 09/14/2012 - 16:47 | 2796951 Vince Clortho
Vince Clortho's picture

Nixon and removing the Gold Standard was just one step in the process.  The roots of this scheme go back much farther.

Fri, 09/14/2012 - 15:52 | 2796702 divedivedive
divedivedive's picture

I'm trying to understand better what really happened yesterday. The Fed is going to purchase up to 40 billion a month on MBS's. They are going to purchase them on the secondary market and these securities are implicitly guarenteed with the full faith and credit of the US. 

My reading says that half of the Pimco Total return fund (272 bn) are these MBS's and that fund was only up a nickel last night. Why's that ? Is it that the Fed hasn't started its purchase yet and at this point Gross' profits are on paper ?

I understand a mortgage and I understand a portfolio of mortgages. Then there were all those creative products with traunches and synthetics. Do all of these products fall under the umbrella of the 'full faith and credit' ? or does it stop with simple sub-prime mortgages ?

This thought just occurred to me - could this be a twist on California's idea of using Imminent Domain to acquire mortgages and then forgiving/re-working the principal ? Could the Fed corner the subprime mortgage market ?

Fri, 09/14/2012 - 16:09 | 2796792 ShrNfr
ShrNfr's picture

I thought Twist was the last program Bubbles tried that didn't work out.

Fri, 09/14/2012 - 16:15 | 2796820 A82EBA
A82EBA's picture

maybe Gross threatened to dump his MBS?

Fri, 09/14/2012 - 15:56 | 2796730 Ricky Bobby
Ricky Bobby's picture

Oligarchs -- You  Muppets are on a need to know basis, meantime STFU.

Fri, 09/14/2012 - 15:57 | 2796731 cdude
cdude's picture

"...the assumption that Bernanke would save his limited ammo for a weaker market/economic environment."


The last time I looked, the Fed's "ammo" was derived from "thin air". No shortage there!

Fri, 09/14/2012 - 15:59 | 2796751 q99x2
q99x2's picture

Occupy Fort Knox

Fri, 09/14/2012 - 16:04 | 2796768 jplotinus
jplotinus's picture

A clearer, more detailed analysis is needed of what exactly takes place when the Fed buys $40billion/mo of MBS.

For starters, it is assumed the Fed does not have $40billion/mo OTHER than by ctrl-p, i.e. printing new $$.

Secondly what MBSs are purchased? Are they the toxic, subprime ones; and, who will then collect whatever payments result and/or carry out the foreclosures arising under the non paying components of the MBS packages bought by the Fed?

Thirdly, who has the right to receive notice that the Fed is the new owner of this, that or the other MBS?

And, fourthly, how much are JPM and GS going to pocket in all of this?

We urgently need a ZH expose on this.

Just say-in...

Fri, 09/14/2012 - 16:26 | 2796864 davepowers
davepowers's picture

I don't believe they hit ctrl-p as in 'print. They hit ctrl-t as in 'type.' As in typing up the bank's reserves to pay for the MBS (or Treasuries) they 'buy' from the banks.

Typing is much easier than printing. No ink required. :)

Fri, 09/14/2012 - 16:06 | 2796775 Pejorative Requiem
Pejorative Requiem's picture

Just wondering what mortgages will be the backing of the securities that the Fed buys. Nothing but the best for the Fed, right?

Fri, 09/14/2012 - 16:08 | 2796783 ShrNfr
ShrNfr's picture

"The beatings will continue until moral improves." comes to mind.

Fri, 09/14/2012 - 16:16 | 2796822 Meesohaawnee
Meesohaawnee's picture

to state the reason "its about employment" is a complete utter deliberate lie just so they can fool and con the sheeple into not rioting. I could get a two year old that knows its not about creating jobs. This is a backdoor bank/buddies bonus bailout. Call it anything else. If you wanted "jobs" the exact opposite would have been done. We keep focusing on what it means to us. Just wait till it effects a family of four in southeast asia or basically other countries where the living cost creep up to total income. We have a better ability in the states to absorb that unless your keeping score with Ishit.

Fri, 09/14/2012 - 16:32 | 2796846 davepowers
davepowers's picture

Bernanke may not have much ammo to 'help the economy,' but probably plenty to reelect Obama. And what did Rumney expect by making clear that he wouldn't reappoint Bernanke?

Much the same thing happened when Gore was first preparing to run for Pres and wanted to have Rubin (sheesh) or a Rubin clone as his Fed chair. Greenspan started lifting interest rates. The Dems quickly realized this was 'not good' politically and Clinton reappointed Greenspan. but the damage to the then internet bubble was done. It didn't take a big needle to pop that bubble, only a sharp one. 

Job preservation should go to the top of the list of why Bernanke did what he did.

Fri, 09/14/2012 - 16:27 | 2796866 dadichris
dadichris's picture

Why does the Fed print like there's no tomorrow?

Bernanke knows the Mayan calendar is real...

Fri, 09/14/2012 - 16:30 | 2796878 Meesohaawnee
Meesohaawnee's picture

i just hope it backfires on obummer/bernake. thats why 120 oil in oct would ,now, sweet. but remember the margin hiker in chief can just get on the bat phone

Fri, 09/14/2012 - 16:39 | 2796927 Hedgetard55
Hedgetard55's picture

This is not going to help Obama, he is toast. This will hurt him as gas hits $5 around November.

Fri, 09/14/2012 - 17:09 | 2797015 jplotinus
jplotinus's picture

I foresee strategic oil reserve release coming as way to lower fuel prices in short term. OPEC too weak and divided at present to do anything except complain.

Fri, 09/14/2012 - 17:09 | 2797019 Bagbalm
Bagbalm's picture

"-when it comes."  HAHAHAHAHAHA  Never left dude.

Fri, 09/14/2012 - 17:17 | 2797046 analyzer_66
analyzer_66's picture

This is becoming a complete replay of Japan in the 1990s.  The central bank of Japan continued to eject money into the banks in this same manner from 1995-2005 and then suffered a 70% drop in their stock market. 

Fri, 09/14/2012 - 17:26 | 2797063 KingTut
KingTut's picture

Simply ask yourself: "Who owns the private corporation we call the Federal Reserve?"  The banks.

Now "Who owns the banks?".  Not managers like Jamie Dimon.  The real owners are hidden behind multiple shell and investment companies.  It is likely that the same people own all of the banks.

Similarly you can ask who "owns the BIS?"  All the member central banks.  Again, the mysterious owners of banks own the Bank of Central Bankers. 

The faliure of the banking system would impoverish these owners of the banks, So the banks WILL NOT FAIL, period.  This is the ONLY mandate of the Fed and every other central bank in the world.


Fri, 09/14/2012 - 17:33 | 2797098 bunnyswanson
bunnyswanson's picture

Banks make money off the interest the make off loans. 


Who are the people really running
the IMF and World Bank? How do they get their money? And what's the difference
between the two institutions? Dollars and Sense magazine July/August 1999, p41

The International Monetary Fund (IMF) and World Bank are run by their member governments, but not on the basis of one-country-one-vote. Instead, governments have votes based on the amount of money they pay in to the organizations. In this sense, they operate much like private corporations, except that the owners of shares are governments instead of individuals. The U.S. government has by far the largest share of votes in both the IMF and World Bank and, along with its closest allies, effectively controls their operations. In 1998, the U.S. held 18% of the votes in the IMF and 15% in the World Bank. Together, the United States, Germany, Japan, the U.K. and France control about 40% of the shares in both institutions. With the rest of the shares spread among 175 other member governments, some holding a tiny number of votes, the United States is effectively in charge. So the people running the IMF and the World Bank are the same folks who run the U.S. government and the governments of its closest allies. Since the institutions were founded at the end of World War II, the president of the World Bank has always been a U.S. citizen, and the head of the IMF has always been a European. These are all men, generally coming from the top of the financial industry. While the IMF and the Bank operate as extensions of the U.S. government's foreign policy, they are well insulated from democratic accountability. Congress, to say nothing of the populace in general, has no role overseeing their operations, and they operate largely outside the public eye (though Congressional ire sometimes appears in response to a request for more funds). What the IMF and the World Bank do is lend money to governments. Because many governments, especially governments of poor countries, are often in dire need of loans and cannot readily obtain funds through financial markets, they turn to these institutions. And if the IMF and World Bank will not loan to a country, international banks certainly won't. As a result, the IMF and the World Bank have great power, and are able to insist that governments adopt certain policies as a condition for receiving funds. The IMF and the Bank make sure that U.S. allies get the financial support they need to stay in power, abuses of human rights, labor, and the environment notwithstanding; that big banks get paid back, no matter how irresponsible their loans may have been; and that other governments continually reduce barriers to the operations of U.S. business in their countries, whether or not this conflicts with the economic needs of their own people. In the division of functions between the IMF and the World Bank, the IMF provides funds to governments in immediate financial emergencies and the Bank provides funds for long-term development projects. For example, when the financial crisis that developed in 1997 spread through several Asian countries, capital fled to safer havens. The values of local currencies fell drastically relative to the dollar. Governments (and private firms) whose revenues were in their own local currencies could not meet their dollar obligations to international bankers. This forced governments to turn to the IMF for funds to maintain the values of their currencies and meet their obligations to international banks. Along with the loans, however, came conditions: the IMF's program for economic stability. The World Bank may receive fewer headlines, not being on the spot in crises, but over the long run it shapes the economies of countries where it makes loans. Its loans cover a wide spectrum of projects, from large hydro-electric dams to local business training programs. Many of the Bank's programs appear desirable in themselves-who would object to dean water facilities, education in animal husbandry, or better roads? Yet the particular projects promote a development strategy that minimizes the role of the public sector, and demands the privatization of communal lands and other public property. As to the source of their funds, the IMF gets most of its money as subscriptions from member governments-the amount determining the number of votes each government has in running the operation. When, in extreme circumstances, the IMF needs an especially large amount of funds, it can activate a line of credit it has established with governments and large banks. The World Bank raises its money by taking loans from the private sector, operating through financial markets as would private firms or governments. Because the Bank is backed by funds from member governments, it can obtain private funds at relatively low interest rates. It then turns around and loans this money to the governments of poor countries to support development projects. In effect, the Bank allows governments of poor countries to borrow, through it, on the international capital markets and at lower rates than they could borrow were they to seek funds on their own. IMF, World Bank, Structural Adjustment
Sat, 09/15/2012 - 13:49 | 2798846 steve from virginia
steve from virginia's picture


... Enter the Giant Paragraph!

Fri, 09/14/2012 - 17:27 | 2797066 dbTX
dbTX's picture

The beatings will continue until moral improves.

Fri, 09/14/2012 - 17:30 | 2797085 Waterfallsparkles
Waterfallsparkles's picture

My guess is that too many People have paid off their loans and caused a Money contraction.  Which would lead to a down ward spiral.

Many have paid off their Credit Cards and Mortgages.  With every Credit Card or Mortgage pay off it creates a reverse of the Money multiplier.   Where Money has to be pulled in.

Almost funny with all of the 0% interest rates and everyone is paying off their debt.  Yet, why not.  You do not get anything in the Bank for your savings.  So, paying off debt for any interest higher than .03% makes sense.

Fri, 09/14/2012 - 17:33 | 2797101 Waterfallsparkles
Waterfallsparkles's picture

P.S. The FED wants People to borrow Money but the Banks will not lend it unless you have Stellar Credit.  Which these days is few and far between.  Especially, with lost jobs and under employment.  Going from a full time jop to a part time job paying less.

Fri, 09/14/2012 - 18:31 | 2797288 Racer
Racer's picture

and if you fail to pay off all your credit card on the due date... you could be stung with 45% or more APR!

So pay it off, sensible and cut the card up as well... take your money out of the bank and only use cash

STARVE the beast and KILL it

Fri, 09/14/2012 - 18:08 | 2797222 huckman
huckman's picture

paging kyle bass please.  come in kyle.

Fri, 09/14/2012 - 18:26 | 2797274 Elmer Fudd
Elmer Fudd's picture

This is a bank bailout, this is not about employment.

Fri, 09/14/2012 - 18:28 | 2797278 Racer
Racer's picture

The ChairSatan used employment as an excuse to continue to fund his bwankster pals because unemployment will stay high and thus he can point to it and say... must do more...

... robbing from the poor to give to the rich, nice one niboR

Fri, 09/14/2012 - 18:53 | 2797354 zippy-day
zippy-day's picture

uncle benny is very clever lad,,,   he knows full well that qe to the nth degree props up asset prices,,   he said so many times,,   rising prices means happier people , happier people vote for good times,, , obumer,,  after election he can say oppps   ,,  maybe not great idea in real world close shop and do twist 3.0 iinstead,,   lots of tools in the tool kit,,,   i think there are 12 ,!!!   haha

Fri, 09/14/2012 - 18:56 | 2797372 zippy-day
zippy-day's picture

or plan b,, there is something really nasty shite ,,, they know about and are promising to flood the mrkt with cold cash,,,,,,    u have  europe unimited,,,,,,,US open ended,,   same thing different day,,,,,,,,   unprecedented,,,,,,,, why know,,   things are improving so nicely,,,  millions of new job,  housing prices rising,,,,,,,    why throw gas on a fire, ,,,      hummm

Fri, 09/14/2012 - 19:24 | 2797457 arkady
arkady's picture

yeah, we are fucked.

Fri, 09/14/2012 - 20:02 | 2797558 Bear
Bear's picture

"Fed to focus on employment over inflation" ... The last time the FED's focus was on inflation was 1980 with Volcker ... Their only focus is how do we make our member banks whole. If it were on unemployment, they would have done something that would have actually improved employment

Fri, 09/14/2012 - 21:38 | 2797803 Element
Element's picture

Great article and summary, the last graph cut through nicely.

Fri, 09/14/2012 - 23:54 | 2798010 luckylongshot
luckylongshot's picture

The parasite of debt is killing the dog and according to the Fed the answer is to grow the parasite...not.

Sat, 09/15/2012 - 12:25 | 2798629 gann1212
gann1212's picture

gas prices just outside of nyc are around 4.25 a gallon. will be heading towards 5 bucks no doubt. inflation i would say followed by a deflationary collapse. early october perhaps to start the slide ?

Sat, 09/15/2012 - 13:45 | 2798836 steve from virginia
steve from virginia's picture


I keep going over this and the 'analysts' just don't get it:

"This is due to the fact that Operation Twist did not increase excess reserves at the banks which were then funneled into risk assets."


The excess reserves are still on the Fed's balance sheet, see for yourself:


These reserves haven't gone anywhere they haven't been 'lent out' into risk assets or anything else. The lending of reserves is the main thesis of inflationists and it does not align with reality.


Reserve amounts never go anywhere, because they are ledger entries not currency. It is as if the Fed credits $1 million dollars to your checking account ... you cannot access that money! It sits there ... unless/until there is a run on the bank. In that instance the $1 million is posted against actual amounts you have on deposit.


What Bernanke has done is guarantee all bank deposits by promising unlimited reserves. Good grief! Isn't that shocking enough? WHY is Bernanke guaranteeing all bank deposits? Why is such a thing necessary?


Whether reserves can be collateral is irrelevant b/c risk assets are funded in money/repo markets and shadow banking using alternative forms of collateral ... or none at all. Risk market players do not need funds from the Federal Reserve they can lend into existence whatever funds they need, re-hypothecating collateral they already possess. This is not news or rocket science: see Joseph Schumpeter.


The real problem besides the Fed's unlimited liability guarantee is the accumulating liabilities in Europe's TARGET2 system. Both of these risks are under the radar, both are likely to bite folks on the ass sooner rather than later. They need to be paid attention to rather than the phantom inflation risks.



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