Federal Reserve Bank

Folks if you’re buying into the whole QE 3 is coming on June 6^th  argument you’re out of your minds. This is an election year. If the Fed announces QE 3 now, Obama is done. Do you really think this is going to happen when even the Fed’s biggest doves are noting that the consequences of QE outweigh the benefits?

All you need to read and some more.

All you need to read.

We have not been shy to point out the potential (and now proven) flaws in the Euro experiment (here, here, and here for example) over the past year or so but UBS reminds us that while most people remain fixated on the absence of a fiscal transfer union in so large a monetary union (to offset incidents of inappropriate monetary policy) as Eurobonds and Federalism come back to the fore; it is the second flaw - the absence of an integrated banking system (backed implicitly by a credible lender of last resort) - that should be getting front-page headlines. As Niall Ferguson noted at Zeitgeist this morning, "Structural reforms will work but will not work this week" and in the meantime, TARGET2 balances grow out of control and the longer the 'problem' remains, the worse it becomes leaving an implicit infinitely supported firewall as the only interim solution. While most who foresaw the Euro as implicitly leading to federalism were right, it seems the link to a German dominance (of ECB rulings and general fiscal and monetary decisions) has been the ultimate outcome. While an integrated banking system would do nothing to change the relative competitiveness or growth issues that plague Europe, the 'essential' internal capital flows would be sustained. Is this sort of integration a realistic prospect? The politics is not especially propitious.

What's $2 Billion for Ben Bernanke's Chosen Son?

Germany's Bundesbank confirmed yesterday that the German gold reserves are held overseas by the Federal Reserve, the Bank of England and the Banque de France. The German parliament, the Bundestag, has been examining the accounting of German gold reserves at the Bundesbank. The parliament's Budget Committee, one of the most powerful committees in the German parliament, had requested a critical report by the Federal Audit Office. "The decision has been unanimous," the paper quoted the Christian Social Union budget expert Herbert Frankenhauser. The newspaper report alleged "account cheating" regarding the German gold reserves. According to a Bild report, the federal auditing office complained of "inadequate diligence of the accounting of the gold reserves, which are stored in some foreign countries. Repatriation of the gold reserves is encouraged.” The Bundesbank confirmed that it, like many central banks, keeps part of its reserves in vaults at foreign central banks and said some of its gold is held at the Federal Reserve Bank of New York, the Banque de France and the Bank of England. It declined to say how much gold in total is held overseas or how much gold is stored with the Federal Reserve, Bank of England and Banque de France. The Bundesbank statement said it had complete confidence in the integrity of the central banks where the gold is held. "From these central banks, the German Bundesbank annually gets confirmation of the gold holdings in troy ounces as a basis for its accounting," the Bundesbank’s statement said.

I have to hand it to the Central Planners.  They are good.  Really, really good.  Of course, they are battling a crippled opponent considering so much of America consists of lobotomized sheeple, but nevertheless to be able to steal so much from many people with such blatant and simplistic methods and not be widely discovered is an act of devious brilliance.  The reason I say this now is because ever since last fall TPTB have changed tactics and totally taken over the markets and with it shoved many people into what is best described as a trance.  The people know something is very wrong.  They know they are getting poorer; that life is getting harder, yet the television and the markets have cloaked a blanket of sedation upon their minds.

We are in the last innings of a very bad ball game. We are coping with the crash of a 30-year–long debt super-cycle and the aftermath of an unsustainable bubble. Quantitative easing is making it worse by facilitating more public-sector borrowing and preventing debt liquidation in the private sector—both erroneous steps in my view. The federal government is not getting its financial house in order. We are on the edge of a crisis in the bond markets. It has already happened in Europe and will be coming to our neighborhood soon. The Fed is destroying the capital market by pegging and manipulating the price of money and debt capital. Interest rates signal nothing anymore because they are zero. Capital markets are at the heart of capitalism and they are not working.

As we suggested yesterday, the Treasury Borrowing Advisory Committee (basically Goldman Sachs and JP Morgan, and the rest of the buy and sell side) did indeed come out with a unanimous decision, having decided to recommend FRNs. This simply means that Wall Street is either desperate to telegraph a surge in short-term rates, or, even worse, if actually anticipating a surge in short-term rates and is doing all it can to hedge before it happens. Nonetheless, "system limitations would prevent any possible issuance of FRNs until 2013" while those wondering what the reference rate will be will have no answer for a while: "In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate." Finally, anyone wondering why the market acted odd yesterday, i.e., experienced a freak sell off in the afternoon, the reason is that Brian Sack was also present at the TBAC meeting, and away from his trusty BBG terminal.

In perhaps the most courageous (and now must-read) speech ever given inside the New York Fed's shallowed hallowed walls, Economic Policy Journal's Robert Wenzel delivered the truth, the whole truth, and nothing but the truth to the monetary priesthood. Gracious from the start, Wenzel takes the Keynesian clap-trappers to task on almost every nonsensical and oblivious decision they have made in recent years. "My views, I suspect, differ from beginning to end... I stand here confused as to how you see the world so differently than I do. I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality." And further..."I scratch my head that somehow your conclusions about unemployment are so different than mine and that you call for the printing of money to boost 'demand'. A call, I add, that since the founding of the Federal Reserve has resulted in an increase of the money supply by 12,230%." But his closing was tremendous: "Let’s have one good meal here. Let’s make it a feast. Then I ask you, I plead with you, I beg you all, walk out of here with me, never to come back. It’s the moral and ethical thing to do. Nothing good goes on in this place. Let’s lock the doors and leave the building to the spiders, moths and four-legged rats."

Better late than never. All you need to read. 

The numeric implications as well as the magnitude of the student loan bubble have been discussed extensively before. Yet just like most people's eyes gloss over when they hear billions, trillions or quadrillions, so seeing the exponential chart of Federal Student debt merely brings up memories of a math lesson from high school, or at best, makes one think of statistics. And as we all know statistics are faceless, nameless and can never apply to anyone else. It is the individual case studies that have the most impact. Which is why we would like to introduce you to Devin and Sarah Stang - student loan debt slaves in perpetuity.

• Fed Holds Rates Steady, But Outlooks Shift (Hilsenrath)
• Has Obama Stacked the Fed? Not Really (Hilsenrath)
• High Court Skeptical of Obama’s Use of Power as Campaign Starts (Bloomberg)
• Europe Seen Adding Growth Terms to Budget Rules as Focus Shifts (Bloomberg)
• China Reaches Out to Its Adversaries Over Rare Earths (WSJ)
• Iran Says It May Halt Nuclear Program Over Sanctions (Bloomberg)
• Europe Shifts Crisis Focus to Growth as Merkel Backs Draghi Call (Bloomberg)
• Merkel Wants Rules for Raw Material Derivative Trade (Reuters)
• Evercore Profit Falls 62% as Investment Banking Expenses Rise (Bloomberg)

In the science of physics, we know that ice freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed.. There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry. And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist. It is as if one were to assume a constant relationship existed between interest rates here and in Russia and throughout the world, and create equations based on this belief and then attempt to trade based on these equations. That was tried and the result was the blow up of the fund Long Term Capital Management, a blow up that resulted in high level meetings in this very building. It is as if traders assumed a given default rate was constant for subprime mortgage paper and traded on that belief. Only to see it blow up in their faces, as it did, again, with intense meetings being held in this very building. Yet, the equations, assuming constants, continue to be published in papers throughout the Fed system. I scratch my head.

All you need to know.