ETF Products and Incompetent Fed

Last year (2019), before there was any news of "COVID-19" some large real estate funds in the UK has to stop withdraws.  Most of this was continued spillover going back to Britain's Exit from the EU which has been a slow train wreck for the commercial property market now for years.  These halts on withdraws started a conversation about the elephant in the room: ETF's in the US that hold long dated corporate debt of all kinds yet advertise themselves as "liquid".  Well so much for that.  Not only is advertising "liquid" totally misleading and should be illegal outright. Many found out that in reality these products should not be in existence at all. Yet they are and now the Fed is endorsing these misleading funds that should be banned.

ETF products are as the acronym states: Exchange Traded Funds.  Now, why on earth would the SEC have ever allowed, especially after the lessons learned during the last financial crises in the Money Market Industry (where those idiots managing money market accounts were buying long dated securities that became illiquid during the "crises") ETF's that hold long dated securities to advertise themselves as "liquid"?  The Money Markets had to be bailed out even though the Money Market Industry was SPECIFICALLY NOT INSURED and was clearly stated as so.  But then WTF?  Every Tom, Dick and Harry back then could get a quick banking license so they could put the US Taxpayer and the Fed on the hook for their survival... I could go on about that BS but you all know that history.

Here today we have an entire "industry" run by the largest "grey" banking organizations in the US, uninsured, speculating, monoliths. They are uninsured custodians to Trillions of Dollars.  They create ETF products, many of which "invest" or buy long dated debt with short term money given tho them by "investors" who want access to markets they have no business being into in the first place. These criminals, I mean grey monoliths, claim (and pay lots of money to PR organizations that promote them) to show, they "provide liquidity" to an industry that previously was not traded on exchanges at all. Yea, well when the market is expanding / rising and money is flowing in they rake in huge profits and grow their ETF's exponentially. Then when people want to "sell" these supposedly "liquid" Funds during a market correction, they cry "liquidity crises" and run to the Fed.  WTF?  And the Fed has been all to accommodating for OVER 10 YEARS NOW to these idiots.  The Fed IS the entire credit market now.  I don't give a damn if they are buying fractions or just a billion here and there, it adds up to tens of billions of "created" dollars chasing otherwise illiquid "assets" where the money simply flows to the only "liquid" place left in the ENTIRE UNIVERSE of our supposedly capitalistic "markets", the stock market.  Buying ETF products by the Fed is a crime against the American People, Period.  They are buying these "products" with money given them by the Criminal Assh)L@ running the Treasury right now and the dweebs who shut down the country and created the bill that allocated the money in the first place.  But that is another topic of discussion.

How these ETF products can continue to perpetuate in the market is beyond belief.  They should be frozen to new investors and be wound down immediately then closed and no "fund" or "money market" or any other "product" should every be allowed to exist that advertises itself as liquid when everybody in the damn universe knows this is not the case.  In addition, the Fed needs to stop buying indiscriminately any and all credit products in the name of "providing liquidity" again!  The Market is a Market and "liquidity" has been stressed for some time now DUE TO THE FED's distorting crises based policies that have continued for over 10 years that CREATED an environment that so encouraged leverage that without a complete and total "reset" of the entire financial system, we are in serious trouble of the likes that humanity has never seen.

Participants Will Emerge... as Fed Withdraws From Mortgage Securities?

I love to read quotes by Fed Officials... Here is one I just read here on Bloomberg:

“Our capital markets are deep enough that I’m not as worried about the ability to be able to fund those mortgages,” he told an audience Tuesday at a commercial real estate conference in New York. “Price will change, and I think market participants will step up as the price changes.”

So Mr. Rosengren, why has it taken 8 years for you to think markets are deep enough to not be worried about the ability to fund mortgages?  And what rate / price change will be necessary for them to do so?  And when do you think this will be possible?

The thing is, you and your comrades over at the Fed should have allowed this adjustment to start happening 5 or 6 years ago.  Instead you have artificially propped up mortgages, holding unrealistically low rates for far to long now, so long in fact that you have allowed the creation of bubble housing prices in at least a dozen, maybe as many as 20 markets in the US.  These are not irrelevant markets, they are huge metropolitan areas where prices have already surpassed the bubble peaks of just a decade ago.  This time, YOU are the MBS market!  YOU have allowed / created the bubble and NOW you state you are confidant the "market" will pick up the slack at "adjusted prices"...

Well Mr. Rosengren, what is that price?  My guess is the highest quality mortgages in non-bubble market cities would need to yield north of 6.5% in TODAY'S interest rate environment to bring back private investors with bubble markets. Less then true AAA mortgages will need to be north of 8% for the same.

Now, lets fast forward to 2019 when YOU bubble creating Fed officials have managed to back interest rates to "normal", say long bond 6%+ and short end 2%+ where do you think mortgages need to be then to bring in participants, cause my dear Mr. Rosengren they will not be in the market before then.  How many people will have serious mortgage servicing issues then, with average auto loans at $38,000+ with 7 year terms, average college debts $100k with lifetime payoff terms, and an increasing number of mortgages going under water as the bubble you created starts to correct as interest rates jack up?  How many folks will purchase those $1 million dollar houses at 7% or 8%?

You are in a catch 22 sir.  I suggest you go very slowly and steadily now as you suggest and push congress to stop sitting on the sidelines about Fannie / Freddie and find a way to provide serious liquidity to the mortgage industry as you wonderful Fed officials start to retreat from the market.

OH, but maybe I am wrong... Maybe those "bubble" prices are actually reflecting the global loss of purchasing power of all "major currencies" as the money printing machines across the globe find the wealthiest people parking it in hard assets because bricks and mortar will not vanish like the purchasing power of soon to be highly irrelevant fiat currencies. The most reckless policies in human history, from the ponzi-scheme government debts, over extended private citizens to the reckless money printing of central banks all come crashing down...

Fed's Bull$h!t, I mean Bullard, is Thick in His Own Version of Reality

Just as I wrote after Janet Yellen's FOMC minutes from a couple weeks ago made me hysterical with their circular logic and "new normal" ideology, which is essentially impossible when every major central bank on the planet is still in "panic" mode with respect to supporting low/negative interest rates irrespective of every economic fundamental staring them in the face, Mr. Bullard come out quoted in this article as saying:

Low rates are likely over the next two or three years because the rate of return on safe assets when adjusted for inflation, has been 200 basis points lower in recent years as compared with the 2001-2007 expansion

First please help me out, now the Fed is using language like "safe assets" and comparing recent returns to the last 6 year period in history driven by market forces (albeit highly skewed, paper driven, derivative heavy, corrupted, recently deregulated debauchery of a market)... and stating that:

the U.S. is in a “high-liquidity-premium regime, in which investors are willing to pay premium prices for safe assets like government debt,”

Well duh!  The US is in a "high-liquidity-premium" game BECAUSE OF FED POLICY and the Fed's (including ECB, Japan and partly China) policies of driving and holding rates at artificially low levels, providing "ample liquidity" as they so often state, by buying all kinds of assets, hence completely distorting the "natural rate" of interest for so damn long now nobody even knows what the hell the "natural rate" is or would be if the Fed would do something as simple as start winding down their balance sheet!!!

It absolutely kills me that every few months the Fed comes up with new "buzz words" to describe what they insist are market forces at play without looking in the mirror!  Now it's the "natural rate on 'safe assets'".  WTF?  When will they get their heads out of panic mode and start to allow the market to function?

I actually thought after reading this short excerpt of Mr. Bullard's speech I should look it up in it's entirety and see if the tabloid, nearly worthless on-line rag of a "market" website actually covered what he said accurately.  Then I paused.  Do I really want to beat myself in the head with more pointless circular speak from a bunch of idiots that have completely lost track of reality?  No.  I want try and stay on this side of sanity as long as humanly possible.

Banks Offloading Risk to Who?

Here is another rant inspired by a Bloomberg article I read a couple weeks ago.  Those folks at Bloomberg do some very informative reporting.

Everything in the article is fascinating.  To imagine for an instant, after the absolute crash we had in credit markets such a short time ago and the reality that technically, as I write this post, dozens of very large banks around the globe are insolvent if they were required to be honest about the current market value of the "assets" on their balance sheets, that the monetary "authorities" around the world would even entertain the idea that banks could "buy" credit protection against default of loans on their books is ludicrous, insane, archaic, incomprehensible and absolute madness, yet it is happening!!!

The only question one has to ask is, "Who are these people providing "insurance" on these portfolios of loans banks are buying and what capital do they employ to show that in a crises they could actually provide the "protection" they are offering?"  We are just living Credit Crises 2.0 in the making.  There are still tens of trillions of dollars of "credit protection" out there being bought, sold, securitized, traded, passed off, derivativeized etc. by a completely unregulated global financial "industry" for crying out loud, with no rational capital requirements or other oversight by anyone and being backstopped by governments, who are already ill equipped to do anything to prevent another disaster!!

The fact that institutions still functioning as "banks" with the backing of their activities by "taxpayers" through "insurance" still go about gambling on a global scale is insane to say the least and downright financially apoplectic to put it in real terms.

Now we have the largest "money manager" in the US, Blackstone, orchestrating "insurance" against losses on pools of loans on the books of international financial institutions.  Since when is Blackstone an insurance company?  And what assurances do we have that those who have provided the "insurance" actually have the capability of delivering on this insurance? Are we really going to let a government insured global institution hold less capital against their loan book because they have purchased "insurance" from an unregulated industry?

From what I see of this deal between Blackstone and Citigroup it looks like the same financial engineering that Greece used to hide liabilities and underreport the amount of debt they had on their books when lying to the ECB and European Governments.  It may be a different way going about it, but the effect is the same, and where did it get Greece?

From the article:

“It’s a form of financial engineering,” said Philippe Bodereau, London-based head of European credit research at Pacific Investment Management Co., the world’s largest bond investor.

According to the article, Blackstone was able to do this because of how "regulators are viewing loan exposures".  Hmmm, so regulators are now thinking banks can financially engineer their balance sheets to offload exposure to loans on their books. 

I will never forget when back in 2006 when Bernanke actually said that banks had become sophisticated enough to manage risk and that implied regulation and oversight was not as needed in the past.  This mind think from the Fed, Treasury and our congress (who passed the deregulation at the encouragement of Wall Street firms and the Fed) was the most ignorant and destructive thinking that ever perpetuated our collective attitude towards the financial industry.  These people were all seduced by the same greed that drives the industry and to think for a minute the financial industry in a capitalist system has ANY objective but to create ways to scrape as much cash from the national (now global) till as humanly possible until there simply is no more, is to have a lobotomy!

Without strong and active regulation in a capitalist system is to turn all humanity into slaves.  You might as well just put everyone in a meat grinder and feed them to those who know how to best exploit the system.

Back to the article.  This is a notable quote:

The Blackstone deal is one of the first examples involving a private-equity firm, which traditionally look to take a more active role in managing assets. It demonstrates the extent to which banks are prepared to pay up for capital when other sources, such as issuing shares or unsecured bonds, are closed.

What does this say?  1) Private equity, traditionally having a history of actually managing the firms (assets) they take an interest in (though mostly they find cash rich companies, rape them, load them with debt, then float them again), now are interested in filling a role of "financial engineering" to the banking industry because no real investor will buy the bank's "shares, unsecured bonds" or whatever other shit they can come up with to raise money, cause any real investor knows they are INSOLVENT!!  But it does seem that a bunch of investors in the world of "unregulated finance" are more than willing to take millions of dollars of the bank's money to help the banks further understate their liabilities.  Why not?  There is absolutely NO RISK in doing so because the next time the "shit hits the fan" the unregulated pigs can just go out of business.  They have already banked their millions in fees providing this "service" to the industry and as we all know, NOBODY anywhere in the world was held accountable for anything that happened in 2008-09, NOBODY. So why the hell not take the banks money while they have it.

Thinking this quote though will almost make you laugh:

Private-equity firms have struggled to achieve returns exceeding 10 percent after banks cut off credit in the aftermath of the financial crisis, starving the industry of the leverage required to match previous returns. 

So poor private equity has been cut off from loose credit because the banks are insolvent.  So what to do.  Hmmm, why don't we find a way to make the banks look solvent. Then they can go back to reckless lending to us again.  Genius!

So what is the debt?  Part of a $500 billion book of loans out the "shipping industry", an industry that if you read anything now, is floating on borrowed time.   Commerzbank, an institution everyone knows is technically insolvent, made some risk adjustments to their books and wallah, lowered their reserve requirements by over $9 billion. This is significant. Citi is trying to offload it's reserve requirements to the same industry.  We all know where this is going.

I like this quote to:

Blackstone spent five months to develop a structure that the Financial Services Authority, the U.K.’s financial regulator, would accept, one of the people said.

You know, if it took five months to "develop a structure" that there was another year prior to that with a bunch of computer programs and mathematicians creating "models" and other "engineered" outcomes to ultimately approach regulators with the proposal.  And we all know, the smart people are NOT the regulators.

And how does the article end?

“The government is jumping up and down asking banks to lend more to small and medium-sized businesses at the same time as stricter capital rules come in,” Walsh said. “The banks can either say: ’I’m sorry, we’ll have to wait until people pay off their loans,’ or the regulators could look at sensible ways of releasing those assets from their banks’ balance sheets so as to free-up capital to allow them to lend to more businesses.” 

"The government", yea the same government that deregulated the financial industry while allowing taxpayers to stay on the hook to their activities, and has, in the case of the US, failed to even pass it's own budget for three years; the same government that bought into the idea that they did not need to be involved in the rapidly globalizing financial industry that has become way to large and unwieldy for ANY central bank to bail out; the same government that does not even understand how to manage a balance sheet; that government is now looking for ways to allow their insolvent banking industry to "lend more".  Go figure. 

Wash, Rince, Repeat

I read this article in Bloomberg the other day about the new Private Equity entities buying

thousands of single family homes with bundles of money lent to them for the purpose.   

Since there are no individuals that can get a loan on the massive numbers of foreclosed houses 

sitting on the market regardless of interest rates or valuations (One of the main culprits is 

still trying to figure out the value of the property), the loose fed money floating into the 
banking system has yielded another result; The banks and their gambling clients who STILL 

borrow from them for their casino games just as they did before the crash, take the loose 

Fed cash sitting on the books, lend it to private equity et al, who in turn will buy tens 

of thousands of the houses and convert them to rentals. Then these mega loans can be securitize 

in the same way they used to securitize the sub-prime garbage lent out to individuals during the

real estate bubble, and sell the debt in tranches to "investors" and make a bundle. Then of 

course there are derivatives and other kinds of fun financial "products" you can create from 

the debt instruments. And the beat goes on...

Meanwhile the poor suckers who will never be able to buy a house again (the vanishing home owing 

class, I refuse to call them "middle class" just because they could buy a mass produced, cookie 

cutter poorly built, low quality slap it up stick and press board built plastic siding suburban 

"house"), will rent from these new mega house owning faceless corporations, who will inevitably 

hire "nationally owned" McDonald's quality contractors to do everything from service the HVAC to 

take care of the lawns, turning what is left of the independent trade business owner who makes 

his money (and decent money at that) servicing individual home owners, into a low wage earning 
employee of some mega national home servicing company. This is when the last vestiges of "middle 

class" opportunity vanish from the landscape forever.  Think "Brazil" the movie. 

I gave this "party" we are having with entirely reckless monetary policies until April 2013 about

18 months ago.  Perhaps I was a bit ahead of the curve?  Time will tell.  But either way one looks

at the situation; the continued overly broad and dysfunctional influence of the financial "industry"

over our economy without productive investment happening, along with our ineffectual government, 

over influence by monetary "authorities" over the direction of our economy (to the extent of 

obsession), and lack of wealth creation on the part of individuals or industry, this slow motion

train wreck is likely to stop moving forward soon in a tangle of nearly impossible wreckage to clean

up. 

Greenspan's Perception 1

I just started reading "The Age of Turbulence" by Alan Greenspan. I only got to page 14 of the introduction when I could not believe what I was reading. He says, and I quote, "The decline of real (inflation-adjusted) long-term interest rates that has occurred in the past two decades has been associated with rising price-to-earnings rations for stocks, real estate and in fact all income-earning assets. The market value of assets worldwide between 1985 and 2006 as a consequence rose at a faster than that of nominal world GDP... This created a Major increase in world liquidity. Stock and bond prices, homes, commercial real estate, paintings, and most everything else joined in the boom. Homeowners in many developed nations were able to dip into their growing home equity to finance purchases beyond what their incomes could finance." and he goes on to glow about the annual rate of growth of the world economy from 2000-2006 of 3.2% per head adding that "Market capitalism, the engine that runs most of the world economy, seems to be doing it's job well."

Now I get it. Greenspan gloats for pages in his introduction, not about the American economy, which in my eyes from 1985-2006 had about 6 years of real growth (from 1994-2000 roughly), with the rest of the period either in recession, stagnation or outright "borrowed money asset inflation" just as he says, with NO REAL UNDERLYING GROWTH OR PROSPERITY, just a wholesale transfer of what wealth there was to the hands of those who orchestrated that transfer, but about the "global economy". It does not matter that we in the US had a serious and deep recession in the early 80's that did irreparable harm to our economy, that this recession was followed by a debt fueled asset bubble not unlike we just experienced that collapsed fantastically in the late 1980's resulting in the near melt-down of the US financial system, followed by a stagnant period of about 5 years with anemic growth (remember "It's the economy stupid" in 1992), declining standards of living, an implosion of our cities with drugs, crime and exodus, and the whole sale moving of our "productive" capacity out of the nation (accompanied with the gutting of the American education system creating a couple generations of useless ignorant graduates who were slaves to carbon and isolated from any means of economic advancement).

Greenspan is a complete globalist. He should be tried and convicted of NOT PERFORMING HIS DUTY AS HEAD OF THE FED ACCORDING TO THE OATH HE TOOK. It is obvious as hell his perceptions are global, not national. What do you do when the guy who runs the Fed in the US runs it as if he is running the "world economy" and makes no attempt to hide the fact that he measures his success at the Fed based on the success of the "world economy" not the US economy.

I get it now, I really get it now. The powerful multinational corporations and the success of their ability to exploit the rest of the planet for their profits is and has for some time WAY trumped the Fed's priorities of real growth, low inflation and full employment in the US. I have known since my undergraduate days at the University of Maryland that some 85% or more of the US "currency" in circulation was outside of the US. Now I understand, when we have a Fed Chairman like Greenspan running the Fed, this is how he sees his role, the US is about 15% of the economy he controls monetary policy over. What ignorant fool would think the Fed cares more than that about the American economy.

If you think I am off base, just read Greenspan's own introduction to his own book. You will get it. I need not say more.

Banks Paying Back What?

I have been reading about the banks "paying back TARP" and "regaining their freedom" from the Government reigns for some days now with disdain for what is being "sold" to us by the media as a "payback" of money injected into the banks during the "crises" in 2008.

There is still a major crisis. The pittances the banks are paying back are only part of the total sum of what the Fed / Government has done and is still doing to back these institutions. They should remain under supervision for everything they do and their management should be under salary caps. If they don't like it they should all go to work with hedge funds, the unwieldy banking institutions they run broken apart with their retail, banking, insurance operations etc. regulated and their trading arms closed or spun off to the pigs in the Hedge Fund industry (which should be regulated or shut down as well but for now this is highly unlikely).

I would like to remind you that besides the deregulation of banking in 1999 which was done to rubber stamp the mega Citycorp merger with Travelers our legislative body also deregulated leverage rules for leverage "not using bank deposits" as stated in a January 2009 Time Magazine article:

Regulators have long had a lower capital requirement on loans that are not backed by deposits. But in 2004, the Securities and Exchange Commission (SEC) removed rules that capped leverage at 15 to 1 for investment-banking firms like Goldman Sachs. That allowed the firms to vastly expand their lending activities without raising a single new dollar of capital. One big backer of the rule change was reportedly former Treasury Secretary Henry Paulson, who was then Goldman's CEO. By that time, the regulatory separation between investment banks and traditional banks had long since been removed, so traditional banks such as Citigroup and Bank of America shifted more and more of their lending operations to their investment-banking divisions, and leverage took off. By the end of 2007, many banks were lending $30 for every dollar they had in the vault. "Changing the net-capital rule was an unfortunate misjudgment by the SEC," says former SEC official Lee Pickard. "It's one of the leading contributors to the current financial crisis." (See who else is to blame.)

Now what is interesting is the "not raising a single dollar of capital" part. They could just go about doubling down on leverage. The "banking" industry had convinced our impotent and incompetent legislators as well as the idiot running the Fed at the time, Greenspan, that banks had installed sophisticated "risk management" tools that would allow them to manage this escalated leverage. I remember reading with amazement the monthly or quarterly updates by "investment banks" on Wall Street on how much capital they could "loose" or was “at risk” in a single day given information they had on hand and risk management practices in place. The numbers had grown to the hundreds of millions of dollars in some cases. These were "day" trading risks.

Back to the point, the Fed agreed not only to the injection of cash into the large money center banks in 2008 (agreed with the Treasury) but also to accept all kinds of before unheard of collateral against borrowings from the Fed. In addition the Fed, in bailing out some institutions like City, Bear Sterns, BoA and AIG agreed to assume hundreds of billions of dollars in losses on "assets" removed from their books that were "locked up" in the credit crises. These institutions alone account for nearly $500 Billion in "guarantees" against bad debts / assets on their books (well off books as well for technical / accounting purposes). Plus there is another $300 Billion PLUS that has been borrowed by financial institutions from the markets with implicit guarantees under the Temporary Liquidity Guarantee Program.

In addition the Fed just started it's $1.8 Trillion program to "become" the commercial paper industry, a Trillion and a half has been allocated to buy mortgages from the banks and GSE's, another Trillion program to buy consumer loan-backed securities called TALF, and $300 Billion in outright "injections" by the fed done through bond purchases from the banks.

As I write this, Goldman still has about $20 Billion on it's books it borrowed under TLGP so as far as I am concerned any PIG Institution that still has guaranteed money on it's books is the same as having the money injected directly. They were able to borrow at ridiculously low rates by having the direct guarantee of the government, hence they should be highly regulated until they are COMPLETELY CLEAN of any support by the government.

Oh, well that is not really possible now is it? The government "being" the mortgage market, consumer credit market, commercial backed mortgage market, commercial paper market etc. In other words, none of these intuitions could even continue to function under anything like "normal" market conditions without the FED putting about $7 Trillion in support out there. You can see some of the numbers here.

So, basically, I can say “The Hell with them all”. They so totally ruined the financial system they should not be “free” to do anything without heavy government regulation until this entire mess is cleaned up. So where are the Chiefs going to go if the entire finance industry is heavily regulated? Guess they will just have to accept “government” salaries like doctors in a government health plan until they can learn to “walk” on their own again. Alternatively they could all go to the hedge fund industry until some government with a spine shuts that worthless unregulated industry down completely.

For a little comedy check out this 12 part short video series on the Fed.

For very extensive analysis of Fed workings through the crises check this out.

The Financial "Crises" is Not Over

I have been reading my weekend section of the FT this afternoon and came across two unrelated articles that struck a chord with me with respect to the financial markets. Some items that are notable, 1) Treasuries, since the credit crises, have been the only acceptable collateral in the "repo market" 2) There are still non financial companies out there that are writing off huge losses in derivative "investments" that are way out of proportion to the revenues they had as functioning companies, making me think more non-financial companies than I originally thought got hood-winked by Wall Street into derivative positions way out of line with the regular functioning of their business.

So what does this mean?

First, the huge demand for US Government debt over the last year, despite a normal economic view that any nation running the kinds of reckless borrowing and printing of money the US has been would make rational investors run the other way, is a direct response to the fact that only treasures are being accepted as collateral in the global credit markets and the US Dollar is "reserve currency" by default. Hence, there is a very large demand component to treasuries that is unrealistic, unsustainable, unhealthy and explainable only within the context of the crash of the credit markets. Low US interest rates cannot be sustained much longer without GREAT cost to our financial system, as we know it. The Trillions of dollars in subsidies being offered by the Fed to the credit markets make the billions of dollars of reckless subsidies to say gasoline in Iran or bread in Egypt look like paltry handouts, yet those subsidies are often referred to as dangerous to those countries balance of payments and government debt ratios. Go figure.

Second, after seeing companies like chicken producer Pilgrims Pride go bankrupt largely due to derivative contracts in corn which went bad costing them millions, I realized that real companies that produced real products were pulled into the derivative markets (along with investment funds like Harvard University's Endowment) with promises from Wall Street Firms to "hedge" their operations at levels that were completely out of context with the needs to do so in their every day operations. So when I read that GM, the Bankrupt now Government owned US Automaker, just pumped $413 Million (Won 491 Billion) into it's Korean joint venture with Daewoo, called GM Daewoo, after GM Daewoo had it's "entire equity base (cash) wiped out by Won 2.3 Trillion of currency derivatives losses", I realized this problem has not gone away.

So how do these two seemingly unrelated articles jog my brain? Well, first, I have presumed for some time that the increasingly oligopolistic nature of American business does some things well. They become extremely inefficient and difficult to manage but hugely profitable due to their purchasing power with very large scale orders(evident by the ability of these companies to lay huge amounts of their work force and turn out higher profits with lower revenues); they are entirely responsible for driving manufacturing out of the US with their desire to constantly lower the cost of inputs to meet needs for quarterly profits; they become faceless, unwieldy and largely wrapped up in getting as large as possible by squeezing out any and all competitive elements while colluding with the other oligopoly members on pricing; the collective "tax" these companies call "profits" begin to look like a tax because no longer are these companies benefiting their many individual owners and pools of investors like when there are many players of all sizes in an industry, but these companies start to look like mini socialist governments, taxing their "customers" with fixed prices, lying to, cheating and outright stealing from their customers (at least 1 out of every 3 grocery store visits I make I have to return and get a refund on an item that was overcharged at the register); paying exorbitant salaries to the "apparatchik" (crony insiders) selected to run the organizations; paying their "workers" lower and lower wages and most importantly, generating HUGE amounts of cash which then must be "invested"; the cash generated is so large only Wall Street firms have the wherewithal to handle the money.

This is where Wall Street and Hedge Funds come in. Where does all the cash generated by these oligopoly companies go? It appears much of it found it's way into the same esoteric products that financial and insurance companies were buying and selling which means huge losses on the books of some companies. This is truly where Wall Street hits Main Street and it is only possible when Main Street has become an oligopolistic town with profits large enough to play with the big boys in New York and Off Shore. Now even these huge companies, which have shown a great penchant for halting internal "investment" and "growth plans", cutting dramatically their "inventory levels", laying off huge numbers of employees and hence creating very large cash balances, need to "play it safe" and buy treasuries as there is uncertainty in the economy and lack of any other "instrument" to invest in due to the collapse in the credit markets. The lack of liquidity from “productive industry” (those who make and sell tangible products) in the US is further exasborating the crises and forcing the Fed to offer more support then would otherwise have been needed.

I sense a great deal of resentment building towards the dollar and treasury markets by countries forced to continue to hold both when they know it is no longer economically wise to do so.

I sense companies are going to continue to accumulate cash and hence buy treasuries as a cushion to a potential continued decline in the economy.

I assume there are still huge amounts of esoteric derivative products on the books of many a financial institution (and otherwise) that are basically worthless but being recorded as having value to avoid a collapse in the institutions.

I assume everyone knows these worthless assets are worthless but have stopped pressing for more collateral because there is no more collateral so nobody sees any benefit in continuing to bleed a turnip dry since losses on one party's books simply reverberate into losses in everyone else’s as well.

I figure, there is no near term end to the financial crises because it will take years for all of the worthless paper to be "wound down" so to speak while companies try to "earn" their way out of the financial mess.

What does all this mean? Is somebody going to blink? The markets now only have to drop 100 points for every man in Washington to find a podium and announce a new "program" or "reinforce their support" of the credit markets or "ensure no change in liquidity or interest rates" or whatever to "calm" the markets so they can continue their rise straight out of the stratosphere. It used to take Paulson 300 points to do the same. One needs little more evidence that the smoke screen being sold the public by the media conglomerates and PR spinsters in Washington is a total lie.

The global financial system is still a complete mess. Wall Street is celebrating every time a company "beats" some arbitrary analyst "prediction" of how much earnings and profits would drop over last year. Yes "drop" over last year. So if my profits are only down 18% and revenues down 10% when the street was looking for profits down 20% and revenues down 12% then my stock is going to a 52 week high! Yes I can celebrate that my stock is worth as much as in early 2008 even though my company is doing 30% or so less business than January 2008.

This is all liquidity driven. I love seeing the CNBC pundits all acting like everything is normal again. They talk stocks and earnings like the credit crises never happened. There is no need to discuss the fact that the Fed IS the Residential Mortgage Market, Commercial Mortgage Market, Consumer Credit Market, Student Loan Market, Auto Finance Market not to mention the other myriad of "support systems" in place to keep other markets from crumbling. The interest rates we are all paying on our credit cards, mortgages, and auto loans are all massively subsidized right now by the Fed and FDIC. The rates are COMPLETELY divorced from "market reality" which to an economic minded person like me no longer resembles "reality" at all.

Companies still being brought to their knees by bad derivative bets; trillions of dollars in "assets" on the books of thousands of banks, companies and hedge funds that are in the best case scenario worth $.30 on the dollar; hundreds of billions of dollars in government debt being sold every couple weeks by the Fed to finance the massive stimulus and deficit spending by the government being soaked up by institutions with no where else to turn to put their dollars; commodity prices completely divorced from economic demand realities; stock market valuations 20-40% elevated from fundamental realities, what does this mean?

Simple, we are seeing global inflation of ALL dollar-based assets, which is reflecting as we speak the massive loss in purchasing power of the dollar. Yet the dollar itself is only marginally off against a basket of currencies from last year's dramatic fall then rise again and the Fed is telling us that consumer prices in the US are stable to falling. How much longer can the relative value of the US Dollar maintain stability while the amount of dollars needed to purchase all commodities priced in dollar continues to rise?

If the US economy faces a second dip and other countries economies follow, especially the few developing nations that have held up relatively well during this latest recession, the underlying demand for commodities priced in dollars would drop further putting downward pressure on the price, but will this result in an actual drop in the dollar price of these assets or will the dollar price for commodities simply continue to rise as institutions increasingly seek to get out of their dollars by buying other assets?

This is the big money question. How far will the equity markets rise before someone decides to take his or her cash out in a big way? With all these dollars floating around now and the obvious inflation in the price of every global asset priced in dollars, the absolute dire state of the credit markets has held the Fed's hand in removing liquidity and getting interest rates back to normal levels. Where is the break point?

Removing liquidity will force reckoning by all those firms with worthless assets on their books and could put credit markets back in crises mode. Not removing liquidity is causing the inflation of all dollar-based assets globally. We are paying a huge, unrecognizably destructive price for being both the global reserve currency and the source of the global financial crises. We screwed ourselves and everyone else and there is no turning back. By not allowing the markets to work out the derivative driven credit crises, not matter how immediately painful it would have been, we have simply delayed the inevitable market correction while simultaneously created a new asset bubble fed by to many dollars floating around. The next move will be a double whammy. I cannot wait.

Interest Rate Rise NOW!

I have been doing some thinking lately and analyzing the Fed's rate action since 2000 and have decided the biggest problem created by the Fed was not bring rates to historic lows after the 9/11 terrorist attacks. The problem began when the jacked up rates in early 2000. Then after realizing they “goofed” dramatically reversed course in 2001 only to overshoot to the down side where they left rates to low for to long. When realizing this, the Fed followed with a draconian attempt to return the rates back to "normal" beginning in 2004, which wrecked havoc with the credit markets and economy.

It takes a while for the markets (and the economy) to react to both lower interest rates and higher interest rates. This is Econ 101 stuff. If rates are set at an abnormal level either on the high side or low side, the market will adapt, create all kinds of products and strategies to "deal" with the rates as they are and make money. The financial markets will make money, lots of it, any time official rates are out of sync with market realities, unfortunately with sometimes disastrous effect. This happened when rates were kept artificially low for to long. The markets were then shocked when rates were raised so quickly. The real question is, "Why does it seem the Fed is always lagging the markets so much, failing to see obvious signs of bubbles or crises?"

Rates were raised 17 (yes 17) consecutive times beginning June 2004. The rates had remained at 1% (fed funds rate) for the prior year and were 1.25% from November 2002.

Part of the reason the Fed had to lower rates so much in 2001 were the Fed's mistaken rate rises in 2000 of a full 1%. In only four months (Feb - May) rates were raised from 5.5% to 6.5%. The Fed then had unnecessarily choked the financial system and exaggerated the stock market bubble burst with this draconian rise. It is as if the Fed was (late to the party as usual) trying to "pop the Dotcom Bubble" right at the wrong time. The bubble was already deflating. Then, within 9 months of it's last rate increase, the Fed reversed course in dramatic fashion lowering rates a whopping 4.76% inside of 12 months so by the end of 2001 rates stood at 1.75%.

The reason the batch of rate increases in early 2000 were unnecessary was obvious at the time and is more so looking back. The Dotcom rally in the markets had begun to play itself out. Moreover, the overall economy at that time had not experienced any real underlying inflation in the consumer sector. Commodity prices were tame and Oil had bottomed out only two years earlier. There were hints of inflation in housing at the time but after the housing and real estate bust of the late 1980's which lasted well into the mid 1990's the revival in the housing and commercial real estate prices were welcome and at that time not over heated.

Note: I will paraphrase the comment about housing in 2000 by saying, there were some exceptional housing price increases around 1999-2001 fueled mostly by Dotcom employees and executives cashing out options and buying "trophy" real estate; basically real estate in resort oriented areas or "desirable" urban centers. However the overall economy did not participate in the Dotcom surge in wealth. There were some sorely needed rises in average wages and incomes, which had stagnated for some 30 years. In fact, as we can see in hindsight, the crazy options grants to executives, exploding pay and bonuses to CEO's of NON-Dotcom companies were nothing more than attempts for those guys to play the same game financially as Dotcom companies were. For boards of companies they bought in with the excuse they had to in order to "keep their CEO's from bolting to the hot Dotcom sector". Legacy industries in the US were not growing or profiting anywhere near the level of the Dotcom startups. Yes, the dramatic disparity in wages between executives and salary earners was exasperated by these phenomena. For example when you look back on deals like AOL buying Time Warner and the churning of assets in telecom and energy where executives were trying to get as much cash from these cash generating companies as possible to play the Dotcom "I want mine to" game, it is obvious the influence the Dotcom bubble had on legacy companies and the economy. Hence there was some spill over in "luxury" and "resort" real estate areas but like I said, there was no overheating of the general economy or real estate assets in general by early 2000. In fact it was obvious the Dotcom phenomena had been played out.

So the Fed drops rates in dramatic fashion throughout 2001 (not just after 9/11 as many remember, by then rates had already been slashed by 3%). The Fed obviously did not grasp the state of the markets in 2000 and was "shocked" at the dramatic drop in stocks and subsequent affect on the economy after their 2000 rate rise.

My guess looking back is had the Fed kept rates at 5.5% through 2000 we would have had a softer landing of the Dotcom bubble. Easing rates would not have had to be so dramatic in 2001. The 9/11 effect would have only had to be short lived (lowering rates and adding liquidity only in the months after the terrorist attacks). Rates should have averaged around 3.5% from late 2001 forward before being raised again beginning around mid 2003 to closer to the 5.5-6% range (nearer a historical average).

If one looks at the European lending rates this is exactly what one would find. The EU started in the fall of 1999 at 5.5% raising them only to 5.75% in late 1999 before beginning to actually LOWER them again by May 2000. Their rates reached a low point of 3% not until June 2003 before they began to raise them slowly to peak in July 2007, just before markets reached an all time high in October of the same year.

Basically, the EU Central Bank was “Right on the Money” with monetary rates from 2000 forward. So why was the US so drastic in it’s moves? Why did the US find it necessary to jack up rates in 2000? Why did the US find it necessary to drop rates to 1% so quickly through 2001? Why did the US find it necessary to keep rates so low for so long? Why is it that the entire credit crises had its roots in the US and the “financial shenanigans” undertaken by Wall Street?

What had already started happening years earlier in the US was a consolidation of the financial sector. This began in the mid 1990's and was formalized in 1999 by financial deregulation legislation. I hold the position that Washington simply bent over after the Fed had turned a blind eye to banking sector consolidation and movement into alternative areas of finance and signed off on a deregulation bill largely written by the financial industry and celebrated as a nearly ¾ century battle to undue the regulations put in place in the early 1930’s. Hedge funds, debt backed securities, off balance sheet finance (made legend by the collapse of Enron) all had gotten off the ground in style. Deregulation was all that was needed to get the wheels of pre-depression risky finance and leverage going again. Cheap money was icing on the cake.

I don't know if the Fed has an office where folks simply follow the markets day in and day out, watch for what new financing schemes have been created, keep a finger on the emergence of new money flows and "emerging" companies and markets. Is there a team of people who attend the seminars and investment strategy sessions hosted by the big money center banks and investment firms? Does the fed have a bunch of folks who watch unregulated players in unregulated markets, stay on top of their strategies, see what "products" they are trading, study the leverage they employ, find out who is lending them the capital they need for this leverage? I wonder.

Anyway, from the outside it seems the answer would be "no" because the Fed obviously was hit blind sided again by the credit bubble that emerged very rapidly from the end of 2001 to 2004 and continued as long as through the end of 2006. Either way, the Fed is making the same mistake right now as it is obvious to anyone here on the "outside" that a bubble is being created on the back of cheap money and liquidity that they are pouring into the financial system.

Right now it does not matter if unemployment rises to 10%, 12% or 14%, and sales at major companies shrink by 5-30% from 2008 because for anyone reading the daily and quarterly reports of companies that function on a national and international level in industries dominated by a hand full of players knows, these guys are still scraping out profits and decent cash flows albeit on the backs of firing as many workers as feasible and shutting down excess capacity as fast as they can. They see no reason to "invest" this money in their businesses and are dramatically scaling back growth plans to conserve even more cash. While it is obvious the economic outlook is pale, they are either 1) paying down debt 2) starting to employ it in buyouts of their nearest competitors or in other areas 3) putting it to conservative "investment" use like treasuries or 4) hedging the value of their "assets" buy "investing" in commodities. I think the smartest thing they can do is "spend" it whether it be by buying another company or buying overseas growth because there is whole other potential problem with all this cash and "debt issuance" going around, the future of the dollar.

Time and time again this theme is played out, "The dollar is going to crash". Well whether or not the dollar really looses it's international attractiveness as a "store of wealth" is not the issue. The issue is the Fed needs to stop the cheap money wheel now and begin to allow the markets to price debt. In the US the Fed IS the mortgage securities market, consumer credit market, commercial mortgage backed debt market, funder of cheap money to banks so they can play the same old "borrow cheap lend long, keep the difference and leverage as much as you can doing it" game. The rest of the money is going right into the stock market, where an interesting article in January 2009 stated, "with the credit markets frozen the only place to put money is where liquidity is king". Well stock markets and treasuries are those 2 places and both have seen booms since early 2009, all liquidity driven by cheap money and Fed buying back its debt while allowing companies recently converted into "bank holding companies" to tap markets with Fed guarantees at abnormally low rates. Basically a stew of stimulating practices that is for the time being delaying the credit write downs that are sagging the books of many financial firms and buying time for companies to refinance short term debt, raise money from the cash driven markets and otherwise pad their books with stock market increases (esp. insurance companies).

The problem with all this stimulation is it was too much and to soon. It was a very dramatic knee jerk reaction by the Treasury and Fed when all hell broke loose in late 2008. Once again the Fed was "taken off guard" by the severity of the financial melt down. It was obvious by 2006 to people like me that a house of cards was being created, a pyramid scheme not unlike the Milken days of the 1980's. I wrote a long letter to Secretary Paulson, fairly new on the job, in early 2006 warning him to stop bashing Sarbanes-Oxley and start doing his job. There was a credit bubble out there and at that time about $50 Trillion worth of “insurance” that nobody would be able to pay off if the credit market crashed. There was no way the party could continue and unlike the 1980's the introduction of credit derivatives had driven the credit markets beyond anything imaginable in the history of capital markets. Tens of trillions of dollars in "insurance" products were being sold on every type of credit imaginable combined with off balance sheet entities and leverage and vast sums of money in unregulated markets being administered and financed by regulated banking entities... I mean one had to live in a closet not to see this thing happening. Well, the fed doesn't have enough windows I guess.

Anyway, the stimulation was way out of whack. I remember the markets in late 2008. A 300-point move in the DOW sent Paulson and Bernanke to their respective podiums to announce more stimulating efforts. This was almost a daily occurrence. For a pure economic minded person such as myself, I was in total disbelief. I was loosing money left and right because any decision I made to buy or sell securities was being whip-sawed by draconian government attempts to "correct" a market that was obviously "correcting itself". Once again, the Fed was late to the party, came with huge ammunition beyond what was required and blew everything to pieces. Now we are experiencing a dramatic run right to the edge of a cliff. The stock markets are reaching elevated levels with no cause, the corporate bond market has nearly completely recovered, commodities are priced way out of context with respect to underlying demand while the fundamental consumer driven economy is not nearing a recovery. So the basic message to the Fed is, STOP STIMULATING NOW! You are causing asset bubbles that are inconsistent with underlying economic fundamentals, creating liquidity that is only chasing these assets indiscriminately, risking the future value of the US Dollar with a potential hyper inflationary scenario unrelated to classic inflation causes in the economy but related to pure debt and liquidity creation by an IRRESPONSIBLE FED.

The time is now to bring up rates .25%. NOW. This will signal to the markets that they need to start thinking about functioning without $11 Trillion in Fed guarantees. Raise again in .25% in January / February, another .25% in May / June and another .25% in September / October and a further .25% in November / December 2010. These rate increases will only bring us to 1-1.25% Fed funds rate, still extremely low. These rate rises will NOT have ANY major effect on the economy today but are absolutely essential. They will need to be combined with a removal of the Fed from the Mortgage market, the termination of the TALF program the end of the Fed Reserve buybacks scheduled this month, the adjustment of interest paid on deposits held on reserve by banks etc. The market DESPERATELY needs to begin pricing credit again the sooner we get Fed lending rates back to the 3-3.5% range the better.

I have expressed concern many times until now that the Fed extending all this credit directly and indirectly at artificially low interest rates is doing more harm than good. The longer they do this the more harm it will do to the long term credit markets and the more time it will take for the massive credit bubble (worthless assets) to "wind down". This mess cannot be "earned" out by the banks. The American taxpayer has already expressed displeasure at the Fed tacitly letting the banks rake the American Consumer's pocketbook to pay for their risky mistakes and besides, there is not enough money there to do so. The longer all of this cheap credit with Fed backing is extended while risking further declines in the dollar and further increases in non-productive asset prices, the more painful the reconciliation will be when market rates take over.

Right now, without Fed backing, I would guess mortgage rates would be in the high single digits to around 10%, credit card rates would be in the high teens to low 20's, auto loans would be in the low to mid teens, highly rated corporate debt anywhere from mid single digits to mid teens etc. If the dollar continues to fall, non-productive asset prices to rise and the economy continue it's lackluster consumer driven flat line; bigger trouble ensues.

Market realities need to be realized soon so the "market" can go about creating new ways to profit from new realities and drive our economy back towards its economic norms NOW.

Fed Urges Secrecy on Banks in Bailout Programs

The out right insult of the title here, the headline in a Reuters article today is indicative of how bad the folks running the Fed are. From their insistence as far back as 2006 that the Trillions of dollars in Insurance Protection floating on unregulated markets would not harm the greater economy to their indiscriminate bail out of multiple unregulated companies while allowing many of them to become banks under accelerated application processes to their obvious ignorance of market mechanisms whereby allowing savvy institutions to rake in Billions in profits from the various Fed programs to float debt and buy back debt (print money) to the absolutely unconscionable allowing of financial and non-financial firms to float Private Debt with direct Public Backing through the FDIC to the complete take over of the consumer and mortgage credit markets to the tune of a couple Trillion Dollars...

Now they want total secrecy. The Fed is paranoid and incompetent and they are "spending" taxpayer money with abandon (flooding the banks with cash through buybacks of debt) while supporting without oversight firms they deem "to big to fail" at the same time they and the FDIC continue to encourage the building of more institutions that are "to big to fail" all the while inviting "private equity" and other unregulated non "financial" firms to buy into their tottering financial system.

Where does this end??? I have had it with these guys and our legislators are complete incompetent, impotent wimps with no backbone to deal with the Fed. Where are they in all this discussion?

From the Article

* Fed urges judge not to enforce order pending appeal
* Banks say disclosure could cause loss of confidence
By Jonathan Stempel

NEW YORK, Aug 27 (Reuters) - The U.S. Federal Reserve asked a federal judge not to enforce her order that it reveal the names of the banks that have participated in its emergency lending programs and the sums they received, saying such disclosure would threaten the companies and the economy....

Preska (Chief Justice Loretta Preska) said the Fed failed to show that revealing the names would stigmatize the banks and result in "imminent competitive harm." The Fed asked the judge not to require disclosure while it readies an appeal.
"Immediate release of these documents will cause irreparable harm to these institutions and to the board's ability to effectively manage the current, and any future, financial crisis," the central bank argued.

It added that the public interest favors a delay, citing a potential for "significant harms that could befall not only private companies, but the economy as a whole" if the information were disclosed.

Give me a break. At this point does it matter? We all know the firms that almost went under, the ones that are technically insolvent and only operating because of the accounting changes instituted early this year. There is no "news" to be revealed in disclosing this other then for the Citizens of this Nation to have the right to see how the Washington Financial Elite bailed out the Wall Street Financial Elite after their House of Cards came crumbling down.

Give me a BREAK!!

Mr. William Poole's Comment on Goldman

Funny, the former president of the St. Louis Fed, William Poole, makes comment about Goldman's raking AIG over the coals before their collapse. His comment:

It’s not the responsibility of any private firm to determine what the public interest is -- that’s why we have a government.

Strange when someone who basically resigned because of his interest in Goldman was seen as a complete contradiction to his job "protecting" the financial system, hence the citizenry, would make such a comment.

I have been arguing for years now that the reason the credit markets and the hugely profitable unregulated, opaque derivative markets have not been regulated is because those that have a hand in regulating were just making to much money off the same markets they supposedly regulated to do anything about it. Look at the impotent SEC, Fed, Treasury, Legislative bodies and White House over last 8 years and you get the picture.

Now, for someone who is no longer in their highly powerful and influential position to come out and say, "Hey, I know I was in government when all this was happening and I know we did not do shit about it, but that is tough cause it's nobody else's responsibility either." is kind of a joke.

Bailout Goldman

The more I think about the bail out of firms like Goldman Sachs I really get fired up. Goldman is / was a gambling firm, nothing more, nothing less. They did business with the biggest gamblers out there, hedge funds, private equity, off balance sheet firms of banks and individual investor / speculators.

We bailed them out. They were not a regulated bank / financial firm. The Treasury had no right to bail them out with taxpayer money, or Morgan Stanley or any other unregulated entity.

The fact that the Treasury and Fed rushed through applications to make these firms "regulated banks" infuriates me. This was a complete hijack of sensible regulations and laws in place to define what firm is a regulated entity that has to conform to routine inspections and a certain legal framework and those that can gamble at will with money from people who wish to be involved in their conduct.

As far as I am concerned, the folks in Washington who orchestrated the bail out of unregulated financial institutions and who are now making over a trillion dollars of taxpayer money available to unregulated industries to buy debt should all be indicted and tried for wrong doing.

I am very firm on this opinion. In addition, I read yesterday in the WSJ about the way banks are treating business lines of credit. It appears no only have hedge funds and unregulated (now regulated) gambling institutions have figured out how to make a killing on CDS products but now the banks are using the CDS market pricing of institutional debt as a guide on pricing that debt. From article:

Now, lenders are cutting the length of many commitments to less than a year. They are charging higher fees for the lines of credit, known as revolvers. And instead of promising an interest rate determined mainly by the company's credit rating, banks will now charge more if the cost of insuring the company's debt against default is higher.

I feel this is very dangerous. Although the traditional credit rating agencies completely failed to do their job correctly for the last 5+ years with respect to the secondary market for various types of debt and companies who engaged in selling various secondary products, to resort to making credit available and at what price based on what speculators are paying and or charging for credit default products is very dangerous and will lead to very distorted pricing and benefit money lenders and speculators at the cost to real companies that create real products and employ people in industries that ad real economic output to our GDP (unlike the financial products / debt "industry")

The time has come to fire the Washington insiders, tell congress to get a spine and regulate the CDS and other derivative markets, pull the cash out from the unregulated firms who were fast tracked into becoming "regulated" entities and force them to fend for themselves. All this BS about "to big to fail" is baloney. The sooner these financial companies who have come to dominate our economy through debt products are gone the better for the long term health of our economy.

Good little post by Adrian Salbuchi

http://www.youtube.com/watch?v=xnnajAVspWU

This summary deserves merit because of a couple good points. One being the idea that the "derivative" market has become so huge no government has the resources to bail out the system. I have mentioned this many times. The other value is his analysis of the global financial situation based on four parts, as the four sides of a pyramid.

However, he should technically have a pentagon since his rant about the derivative markets are really a 5th side but he obviously would loose his theses title of the pyramid in global financial markets. To bad, the guy is smart bout could not figure out a catchy way to use a 5 sided analysis.

There are also 2 areas he is weak in presentation (first part of video):

1) Ponzi analysis flaw 1 second side of pyramid: "Private money exercises control over central banks." Actually, in the US the "central bank" is a "private bank" so this analysis does not work. However, he could have said the "private banks" (including the central bank or fed reserve bank in US) exercises control over the "government" through the insufficient supply of money, hence forcing not only private industry to borrow but also the government to borrow (since the government no longer issues money directly) and thus the "central bank" has the power to control interest rates and the cost of money to both private industry and the government and ultimately it's populace since they pay for government through taxes.

2) After analysis of privatising profits but socializing losses he mentions the Fed Reserve issuing "fake money" which "we all" pay for. Actually the rest of the world does not pay for this unless the issuance of money causes a collapse in the dollar which much of the rest of the world holds as a reserve currency. If in fact the dollar is highly devalued then his statement holds up. The world will indeed pay for the recklessness of the Fed's actions.

Secondly, the Fed is buying back it's debt with "new money" not necessarily "fake money". The "new money" is "real money" and is not being "borrowed" by the government. Instead it is being "printed" new. Now "printed" is also a term to be not misunderstood. This money is actually not being "printed" in the way we all think of $20's rolling off a printing press. The money is being lets say "injected" into the accounts of those who purchased the government debt in exchange for that debt. So even though the institution holding the debt could have simply "sold" the debt to the open market, this action would have resulted in no net gain in "money" in circulation. By the Fed "issuing new" money to buy this debt they are adding "money" to the financial system the institution can then use to expand lending to others or more likely as banks hoard money, simply buy more government debt at the next offering. All these actions are quite unprecedented and these actions have also been taken in Japan and the UK from what I know.

I will not critique the second part of his video as it is all speculation and offers no tangible solutions (Idea about the "good gold vs bad gold" is interesting). To bad, the guy has lived through so many of these crises and still does not tell us what the hell to do but "citizens hold your leaders to account". Like who knows what in the hell to hold them account to? Why does he not say, create a new model of economic / financial regulation and rules of the game so this cannot happen again not unlike what they tried in the 30's before all was reversed in the last 15 years?

Once again, this is a good summary but offers nothing else.

Credit Default Swaps on US Government Debt

OK, correct me if I am wrong but the US currently has over $7 Trillion in debt floating around out there. Now, those are no small potatoes.

Correct me also if I am wrong, but our current financial mess, including the bailout of AIG, greatly owes it’s thanks to the CDS market.

A quick Wikipedia definition is in order here:

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. Credit Default Swaps can be bought by any (relatively sophisticated) investor; it is not necessary for the buyer to own the underlying credit instrument.

Now can someone explain to me exactly WHO has the ability to guarantee or pay off $10 Million in US Government debt (the usual denomination for a CDS) multiplied by millions if the US Government actually defaulted on it’s debt?

Isn’t this what got us into much of the mess we are in? Idiots actually sold Credit Default Swap contracts on debt securities backed by garbage mortgages, car loans, credit card loans, personal loans, loans for leveraged buyout firms, loans to hedge funds and others taken out to buy yet more debt securities in a kind of vicious circle / pyramid scheme, loans issues by banks to firms they created to buy their own garbage securities so they would not exist on their over-leveraged balance sheets…

Come on now. Help me out. Why in the Hell hasn’t the CDS market been shut down? I am completely baffled by the fact that anyone is crazy enough to issue, buy or trade CDS’s right now since it has become painfully clear that the sellers of the shit have for years not had the collateral to back their issuance and this has been proven over and over again. These are “insurance” products that require no regulated capital to guarantee payment in case the debt they are written against actually defaults.

So why is this stuff floating around guaranteeing US Government debt? And why in the HELL is Geithner calling on the unregulated Hedge Fund industry to take $1 Trillion in new government money to buy more garbage debt from the defunct credit markets? Help me out here? I read an article this week that claimed the price of insuring $10 Million in US Debt had risen to $90,000 per year. Brilliant. Now who in the hell is going to pay the $10 Million if or when the US Government defaults? Isn’t the idea that there ended up layers of these “insurance” products valued at something like $70 Trillion that contributed greatly to the “credit crises” we now face? The idiots who originated the “insurance” products bankrupt their companies and to this day, the US Government is bailing out institutions like AIG with tax payer money so they can continue shoveling the cash to the counterparties of these instruments.

On top of that, the firms and the government agencies involved in the bailouts refuse to tell us who those counterparties are or why they don’t just force a settlement of these contracts and for all parties to take their losses and walk. Instead, our future tax dollars (cause none of this is today’s money, it is all being borrowed for us to pay tomorrow) are going directly into the coffers of God knows whose buddies and they are getting downright rich off of it.

I have completely had it. Our legislators are ignorant impotent pushovers. The people running the treasury are bailing out their buddies and the Fed is going to go bankrupt trying to “be” the credit market. The dollar, or the confidence in it, is in real long-term trouble. What in the hell is going on here?

If the Chinese were worried about US Government debt a year ago they should have bought ALL the CDS’s people were ignorant enough to write. Hell they could have bought US Government protection for $40,000 per $10 Million and be cashing out here at over 100% profit on the CDS contracts alone not to mention still collecting interest on the underlying debt.

Have I said enough? Shut down the CDS markets. Force settlements of all outstanding contracts and regulate the hedge fund industry TODAY.