Jul

24

What Doesn’t the FED Want You To Know?

Filed Under Economics | Leave a Comment

Heroic.

Visit msnbc.com for Breaking News, World News, and News about the Economy

The most successful heists are the ones that occur every day that we are not even aware of.  The Federal Reserve, the quasi-governmental agency run by ex-bankers, that controls the money supply, interest rates and manages the economy is an agency very few are familiar with.

Given the trillions of taxpayer dollars on the hook and the delicate state our economy is in, H.R. 1207 aims to audit the ongoing Federal Reserve activities.

For years, the author of this bill, Ron Paul, has spoken up and drawn attention to the importance of sound money (money with tangible value, like gold and silver) and an economy which is not micromanaged by ex-bankers or manipulated in a secretive fashion. Paul has always been a political outsider and it is good to finally see his attempts to uncover the truth finally gain some momentum.

Since politicians, like all of us, are self-interested, we need to exert our influence and let them know we expect this bill to pass.

Since this bill would expose a great deal of financial/governmental/corporate connections, it would not surprise me if there is another financial panic/disaster and this bill is pushed aside to give even more power to the Fed and Executive Branch.

The above video speaks volumes about the shape of our economy and the level of dishonesty that is fraught in our financial and economic system.

Takeaway:  As a man, it is imperative to be ever-inquisitive, curious and non-complacent.  Reading and questioning your beliefs can help you generate an Accurate Model of Reality and prepare better for your future.  Think for yourself and stand up for what you believe in, even if you stand alone.

hat tip:  Zero Hedge

Jun

18

Citigroup Bailout – Taxpayer Losses

Filed Under Intellectual Honesty | 1 Comment

A special guest post from my friend, Matt M.

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My morning bus rides invariably begin with a visit to the Bloomberg app on my iPhone. I find their journalism to be second to none in the financial space, thanks to Bloomberg’s worldwide focus and very informed opinion writers. However, I was taken aback when I came across the following headline and attached article last Thursday:  Citigroup Rescue Earns Three Times as Much as S&P 500

It is important to note the new title was modified from the original title “Citi pays taxpayers 3 times as much as S&P“.

Regardless of the title, this article contains blatant propaganda that is designed to mislead and deceive the Average Joe.  The general tone of the article suggests that the entire Citigroup “situation” is now a complete piece of historical fact to be analyzed as such.

Logic leads the reader to conclude that we (the taxpayers) have locked in some sort of gain, thus proving the Citi bailout was a good idea since we’ve collected a couple billion in dividends.

Nothing could be further from the truth, and there are many examples of how this logic is an inappropriate way to analyze any investment.

First, the author of this article is only talking about one government department, the Treasury.  Let’s review what happened here:  The Fed has purchased some $2-5 trillion in assets (depending on who you ask, and don’t you dare ask the Fed what they’ve purchased) from U.S. banks. This is the most important aspect of the multi-faceted bank bailout, for without these purchases, most major U.S. banks would be out of business.

What’s relevant here is that the Fed and the Treasury are completely separate government entities. The Fed is directly responsible for bidding up toxic assets and exposing taxpayers to massive, unknown, impossible to define amounts of credit risk. This socialization of losses is what saved Citi, but it didn’t cost the Treasury a dime.  To suggest that the taxpayers somehow made out like bandits is untrue, amateur reporting.

By stepping in and literally becoming THE market in many segments of the credit market, the Fed has so far done a fantastic job of propping up the assets on their balance sheet. That’s not to say they’re showing a gain, that’s not to say the Fed is showing a loss. Once again: no one knows.

What we do know is that the eventual value of most of these assets is going to be dependent on cash flows from mortgage payments, rather than current marks. Right now, these cash flows are a monumental risk, a subject which is completely ignored by this Bloomberg article.

Perhaps most important, the Fed is desperate to see these investments work out. Ultimately, this will corrupt what’s left to be corrupted in the political process. No wonder the Fed recently hired Linda Robertson, former lobbyist for Enron. They need to convince Congress to bailout everyone who can’t pay their mortgage.

Finally, this article represents a shift in attitudes towards government intervention since the March lows in the markets.  I have been complaining about this for months and it really bothers me.

When governments around the world intervened and markets still fell off a cliff, I felt like everyday people were finally thinking critically about the futility and backward logic of government.  When S&P went from 1575 to 900, people were really freaking out. When we went from 900 to 666, people got to talking about genuine reform. They expressed anger about how the government incentivizes bad behavior and excessive use of leverage.  Now that markets have bounced from 666 back to 900, people have turned back into mindless cheerleaders.

Talk of genuine reform has stalled as our problems have been bandaged by trillions of borrowed dollars.

The government has declared victory and the media keeps churning out propaganda, as evidenced by the article discussed above.

Aren’t we better than this?

May

13

Mark to Market Your Own Life

Filed Under Economics | 1 Comment

Marking to market involves assigning an accurate, reliable value to a certain security on a daily basis.  As evidenced below, this is being avoided at all costs by our leaders.

It is disconcerting that this incredibly important and relevant information is disseminated from a blogger, rather than a major “news” outlet, or even a financial news outlet.

Tragic.  There are no free lunches and accounting tricks cannot fix a country that is reliant on cheap energy, endless credit, deficit spending and perpetually rising asset prices.

Takeaway:  Mark to market your own life and confront your weaknesses head-on.  This introspection can yield insights on behavioral changes you need to make to avoid a painful crash.

Hat Tip:  Karl Denninger has done an outstanding job diligently reporting on the financial markets and sharing his knowledge on his blog.  If you want honest reporting, please check out his site.

May

10

Lessons to be learned from the Stress Test

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The Stress Test results were revealed last Friday after much anticipation.  The test and broadcast of the results were quite telling and there are several things we can learn from this.

My initial reaction of skepticism was confirmed when many reputable bloggers (with their own capital on the line) expressed similar qualms over the weakness of government’s test.  The two short articles I have quoted are well worth the read.

A former FX trader, “Dude”, suggests that the test is direly lacking real-world stress. He cites much more dire scenarios, which the government has not tested:

1) China didn’t show up at a Treasury Auction and bond rates jumped 3-5%
2) China started dumping US$s on the open market and our exchange rate dropped 10%
3) The Fed, under such conditions, had to raise the Fed Funds rate by 5% quickly
4) An act of war or natural disaster struck one of the big coastal cities, putting it entirely out of commission thus pushing GDP down 6-10% quickly

Admittedly, the Treasury is more interested in a longer view than I was, although given the highly leveraged derivatives positions, they might be well served to also inquire about substantial, discontinuous price changes.

I’m troubled that they don’t test for what the past suggests is possible.

What if Unemployment goes to 30% as it did in the 30s?

What if Inflation falls to -5% or rises to 12%?

What if Fed Funds goes to 17% as it did in the early 80s?

What if we can’t roll-over our foreign held debt, as has happened to most nations which have run up as large an external debt position as ours?

Karl Denninger at Market Ticker mentions:

According to The Fed’s “More Adverse” scenario prime delinquencies will reach 3-4%. Note that the PRESENT serious delinquency rate on Fannie’s credit book for single family homes is at 3.15%.  Nowhere in the “mainstream media” (e.g. CNBC, etc) has this been mentioned but it is literally right in your face while reading the Fannie quarterly report.

If we accept the above as true, we must logically draw one of two conclusions.

  1. The government knows that the stress the system could endure could be much worse.  They have decided to deliberately ignore or discount this data to assuage our fears and not report the full truth to us.  In other words, they are knowingly lying to us.  If this is in fact the case and if the government is trying to deceive us, Geithner, Bernanke and Obama should be held responsible for the misdeeds, regardless of political party.
  2. The government is ignorant of these facts that other individuals have adroitly discovered.  This would mean they are not the most intelligent or conscientious leaders to be running our financial system.  They are not fit to be in charge and should be removed as soon as possible, regardless of political party.

Takeaway:  There is a simple theme we can learn from the stress test and it comes from Buddha.  He says:

“Believe nothing, no matter where you read it or who has said it, not even if I have said it, unless it agrees with your own reason and your own common sense.”

Ben Bernanke has made statements such as:

“It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.”

(Freddie and Fannie) “…will make it through the storm”, “… in no danger of failing.”,”…adequately capitalized”

We’ve had a $700 billion bailout and numerous corporate-welfare financial programs (CPFF, TLGP, PPIP, CPFF, TARP, etc.).  Fannie and Freddie have been nationalized.

Karl Denninger has published his remarkably accurate predictions publicly (2008, 2009) and stood by them.  People might think you’re a fool for believing a blogger, rather than an MIT-educated expert.  Look at the evidence and track-record and decide for yourself. Just because someone is a popular leader (religious, business, political) or has a popular title doesn’t mean they are any more thoughtful, intelligent or honest than someone without popularity.

For more on the crisis, read here.

Feb

25

Separation of Economy and State

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At the heart of this error is the government, not the free market, which has never existed since the creation of the Federal Reserve.  A free-market organization would have gone bankrupt long before it could ever screw up on a scale this large.

The inane setup of our monetary system has led our problems, where government sets short-term interest rates, manipulates its currency, lets overleveraged banks borrow at below market rates via the Discount Window, engages in open-market transactions, and creates money out of thin air to fight wars for no clear reason, et cetera.

That, coupled with government initiatives like “making homes affordable” leads to such ideas like buying subprime mortgages (via Fannie and Freddie) and then having the taxpayer bail out the government entity when it inevitably fails.

The mindset that we will ease out of this crisis in a few years is delusional.  People’s expectations have been warped into believing the last six-seven years of growth have been genuine.  They haven’t.  The credit boom started after the dot-com crash and only when prices of assets (housing, equities) return to those levels will we see the start of a healthy correction.  Yes, house prices need to come down.  This happens by foreclosures and assets moving from those that cannot carry the debt burden to those that can.  Letting people who can’t afford to stay in their home stay there isn’t a solution.  Having the taxpayer buy the mortgage via Freddie Mac, then “renegotiate” the mortgage and take a loss should aggravate anyone with a sense of responsibility.  The hero-worship that President Obama is going to miraculously create compounding wealth by printing up cash and paving roads thereby returning us to the good old days is simply not going to happen.

Only a repudiation of our current banking and monetary system will solve this problem in the long-run.  A free market in money and currency is needed as well as the total separation of Economy and State.

To read more about our economic woes, read here.

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