Yves Smith and Junior on TARP

Yves Smith (YS) has a 23 June 2010 post at her Naked Capitalism blasting "Timmy Boy" Geithner's recent comments about TARP's "success". YS's got this knocked. Here's a link: http://www.nakedcapitalism.com/2010/06/geithner-yet-again-misrepresents-tarp-performance.html. YS notes that to make TARP look successful the Fed and Treasury sanctioned accounting fraud. What else is new? Remember, the SEC, part of the Treasury, controls the PCAOB. Doesn't that give you the "warm and fuzzies"? The supposed "police force" of the CPA profession must ignore banks' accounting fraud. Think about it.

Junior at Junior Deputy Accountant delivers a Sonny Liston-like left hook on 23 June 2010 to Timmy Boy, here:

http://www.jrdeputyaccountant.com/2010/06/tim-geithner-has-completely-forgotten.html. Go Junior!

Fed Newspeak

"The Federal Reserve Bank of New York [FRBNY] has come under pressure from Fed officials in Washington to improve the performance of its supervisors overseeing the nation's biggest banks, new documents show. ... 'Our review found some examples where supervisory products were not fully completed, and supervisory processes were not fully performed,' the review said, adding it also found 'that supervisory ratings were not always updated on an ongoing basis to reflect the evolving risk profile and financial condition of the organization.' ... As the Fed has emphasized, we need to learn lessons from the crisis. We recognized that improvements can and should be made. ... Despite the criticisms, Washington officials were also sympathetic to the [FRBNY], lauding it for the 'exceptional work' in responding to the financial crisis 'in an extraordiarily challenging and stressful environment.' ... The government's efforts to stem the crisis 'were, in the end, fundamentally inadequate,' Mr. Geithner said. ... Like Mr. Geithner, Mr. Paulson cited 'huge gaping holes in the regulator system' that made it difficult for regulators to address the financial crisis", Jon Hilsenrath & Fawn Johnson at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052748704370704575228010828622910.html.

Wasn't Timmy Boy at the FRBNY a few years ago? Why believe he knows any more now than he did then? What would have been an adequate response? Giving the FRBNY the right to control monetary policy and print dollars?

Einhorn on Truth

Greenlight Capital's David Einhorn (DE) has an interesting 27 May 2010 post at the NYT:

http://www.nytimes.com/2010/05/27/opinion/27einhorn.html. DE asks, "how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms. And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts--that is, by the printing of money? ... Despite the promises by the [Fed] chairman, Ben Bernanke, not to print money or 'monetize' the debt, when push comes to shove, there is a good chance the Fed will do so, at least to the point where significant inflation shows up even in government statistics. ... " DE raises other issues I have. My bottom line: eventually all will see the emperor is naked.

Three-Card Monte Central Bankers

"After all the massive bailouts, the federal debt is exploding. ... The US now has a heavier debt burden than several of the overleveraged countries that have been branded with the scornful nickname 'the PIIGS.' ... Yes, in recent months, there's been a lot of bullish talk about how the American balance sheet has been cleaned up. ... And banks and other financial institutions owe $1.4 trillion less than they did in late 2008. Those debts haven't disappeared. They have merely been shifted onto the books of the federal government--in what may be the highest-stakes shell game ever. ... There's no sign of a slowdown in debt growth. 'These processes are not linear,' warns [Carmen] Reinhart. 'You can increase debt for a while and nothing happens. Then you hit the wall, and--bang!--what seem to be minor shocks that the markets would shrug off in other circumstances suddenly become big.' ... 'If you flood the markets with more and more debt, its value is going to go down. We are silly to fool ourselves into believing otherwise.' ... In 1989, the great investor Sir John Templeton told me something that has rung in my ears ever since, this week more than ever: Those who spend too much will eventually be owned by those who are thrify.' ... But in my view, the obvious tools--gold and other commodities, emerging-markets stocks, inflation-protected bonds--are already so popular that they are likely overpriced", my emphasis, Jason Zweig at the WSJ, 8 May 2010, link: http://online.wsj.com/article/SB10001424052748704292004575230601932486166.html.

I disagree with Templeton, remembering something Brazil's finance minster said about 25 years ago, "If I owe the bank a million dollars and I can't pay, I'm in trouble. If I owe the bank a billion dollars and I can't pay, the bank is in trouble". Who is in trouble if Uncle Sam owes trillions? I think $1,225 gold is cheap.

Mark Faber's Positions

"Central banks will never tighten monetary policy again, merely, print, print, print. ... Americans must re-think what constitutes a safe asset. ... '[T]he Federal Reserve will keep interest rates at 0 precisely 0. ... in real terms.' ... Contrary to what the talking heads are saying, markets are not out of control, central banks are out of control printing money. ... Eventually there will be war and one will want physical commodities 'not paper from UBS or JP Morgan.' ... 'Mugabe is the economic mentor of Ben Bernanke.' ... Sovereign credits in the Western world are all bankrupt, but before bankruptcy governments will print money. ... If deficits didn't matter as many like the Economist James Galbraith argue today, why should citizens even pay taxes?," my emphasis, Andrew Mellon at Big Government, 23 May 2010, link:

http://biggovernment.com/amellon/2010/05/23/faber-nations-will-print-money-go-bust-go-to-war-we-are-doomed/

I agree with Faber. Apparently the notion that he's Zimbabwe Ben is getting around. Why pay taxes indeed?

Left and Right vs. The Center

"Sen. Bernie Sanders can seem like a character from another era with his rumpled suits and oratory about economic justice. But his anger at bankers and Wall Street runs high, Congress's only self-declared socialist is moving to center stage. ... Mr. Sander's amendment, which is likely to be voted on within days, is worrying White House officials, who say it would violate the central bank's independence and cripple its ability to protect the economy. ... The amendment has drawn an unusally broad alliance of backers. Mr. Sanders's 19 co-sponsors include such liberals as Sen. Patrick Leahy (D., Vt.) and conservatives like Sen. Jim DeMint (R., SC). The measure is supported with equal fervor by the AFL-CIO labor union and the conservative lobby group Americans for Tax Reform. ... 'Nobody in America, or very few people, think that makes any sense at all,' he said. 'Putting trillions of dollars at risk, and you don't know who got it, who made the decisions, the possible conflicts of interests, what they did with it?' ... Critics say the auditors would be able to interview Fed policy makers and staffers and monetary-policy decisions, a scenario they say would weaken investors' confidence that decisions are free from politicial influence. ... 'One of the great strengths of our financial structure is that we keep monetary policy separate from the political winds of the day,' Sen. Judd Gregg (R., NH) said in an interview. 'That was the whole idea in setting up the Fed'," my emphasis, Naftali Bendavid at the WSJ, 5 May 2010, link: http://online.wsj.com/article/SB10001424052748704866204575224591171078912.html.

Amazing. I agree with Sanders. Kill this monster. Is Gregg crazy? I now have 2012's winning ticket: Putin-Sanders!

That Four-Letter Word Again

"Washington's elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama's domestic spending agenda with huge tax increases. ... But there is an alternative. The US could return to a gold standard, a system that would not only prevent the government from running chronic budget deficits but would also curb attempts to manipulate the value of the dollar for political reasons. ... The value of a gold standard was proven in the 19th century. ... Countries that adopted to international gold standard prospered. This remarkably successful monetary system only blew apart with the outbreak of World War I in 1914. The reason it came apart then--and not at other times when countries abandoned the gold standard to finance wars with deficit spending--was that World War I was the first conflict to affect every major economically advanced country in the world. ... This might not have mattered, and the major economic powers might have re-established a monetary system similar to what existed before the war if not for the central reason why political elites dislike the gold standard: It leaves them little room to run the economy and claim credit for its successes. ... But their deeper reason is that they prefer to retain power over the economy that they would not have under a gold standard. ... But foreign central banks don't stack their greenbacks in vaults. They maintain monetary reserves mainly as interest-bearing US government-backed debt securities--in effect, as unsolicited loans to the US government. ... That increase in borrowing capacity creates liquidity that is unrelated to any need of Americans involved in economic transactions. ... The government of Charles DeGaulle, president of France from 1958 to 1969 and a supporter of returning to the gold standard, once assailed this American liquidity advantage as as 'exorbitant privilege.' ... Now Ben Bernanke's Fed is repeating recent patterns of keeping interest rates too low for too long, creating new bubbles and risking a whack-a-mole encore: 1970s-style stagflation. ... The first step in cutting off the addictive flow of foreign central-bank capital to Washington is an American commitment to a dollar convertible to gold on a date certain. The second step is allowing the market, in the run-up to that date, to find and fix a dollar price of gold that would encourage other nations to replace their dollar reserves with gold holdings as their new monetary base, whether or not they choose initially to join the new international gold standard. ... Legislation restoring dollar-gold convertibility should be accompanied by passage of a constitutional amendment guaranteeing the American people a right to conduct their economic affairs in gold, regardless of the future status of gold as the official money of the [US]", my emphasis, Sean Fieler and Jeffrey Bell (F&B) at the WSJ, 7 May 2010, link:

http://online.wsj.com/article/SB10001424052702303695604575181693906532202.html.

Absent repealing the Federal Reserve Act any US gold remonitization will be another scam to be reversed at Uncle Sam's whim. F&B work at the American Principles Project. See my 8 January 2009 post:

http://skepticaltexascpa.blogspot.com/2009/01/galbraiths-dialectic.html.

Unleash the Logan Act

"The [Fed] sought to pre-empt criticism of its decision to reopen a controversial lending pprogram, in which it funnels US dollars to the European Central Bank and other central banks overseas, by arguing that the move was necessary to prevent Europe's crisis from reaching US shores. ... Some Republicans immediately assailed any US involvement in Europe's big bailout. ... Fed officials say the US faces little financial risk in the program because central banks are on the hook to repay, not commercial banks. ... 'Our view from here is that we don't want the financial spillover effects of what's going on in Europe to put at risk our incipient recovery here in the [US],' Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in an interview. ... In addition to accusing the Fed of bailing out foreigners, some congressional critics say the Fed is too tight with details about its rescue programs, a concern that is prompting lawmakers to demand more Fed disclosures", my emphasis, Jon Hilsenrath & Corey Boles at the WSJ, 11 May 2010: http://online.wsj.com/article/SB10001424052748703880304575236290266862342.html.

This is preposterous. Instead of letting Greece stew in its own juices, the Fed prints up tons of US dollars then claims it wants to "prevent Europe's crisis from reaching US shores". Nuts. What is it the foreign central banks will repay with? Wampum? Eric Holder, attorney general, here's an idea: indict some Fed Heads for a Logan Act violation. Come on. You're creative. Squeeze it in!

More WSJ Propaganda

"The [Fed] has acquired more than $1 trillion of mortgage-backed securities in the past 15 months. At their policy meeting next week, Fed officials will decide how and when to get rid of them without jarring financial markets and the nascent economic recovery. ... The more challenging issue will be agreeing on a long-term plan to shrink a balance sheet of $2.38 trillion, or more than double the pre-crisis levels, according to Fed insiders. ... It is also possible that the Fed won't signal its intentions on the matter in its post-meeting statement on Wednesday. But markets are on edge because its mortgage-bond holdings are so large. ... Fed staff next week will present models to forecast how different approaches to reducing the portfolio might play in markets. ... But Fed Chairman Ben Bernanke made his preferences clear. 'I currently do not anticipate that the [Fed] will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery,' he said in February testimony before Congress", Jon Hilsenrath at the WSJ, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748704388304575202413074193720.html.

When will Zimbabwe Ben (ZB) sell these fine securities? Try 2110! This is just more Fed smoke screening. If ZB sells this crap, it's true value might be exposed along with the Fed's insolvency.

Gold and Conservatives

"Within the American conservative movement, opponents of the gold standard--any form of gold standard--have always dominated the leadership. Newcomers may be unaware of this. ... Debates are usually limited to whether the FED is wise in holding to, or changing, the federal funds rate. Few readers of the '[WSJ]' or viewers of CNBC could tell you exactly what the federal funds rate is, why it is important, or how the [Fed] controls it. ... No one raises the fundamental issue of why and how it posses the legal authority to set the federal funds rate, enforce banking rules, and control the money supply--sort of. No one argues that the [Fed] is the most powerful private agency that is covered by a veneeer of public accountability. ... Ron Paul for the first time in American history made the [Fed] an issue in a Presidential campaign. He called for the re-establishment of the gold standard. ... The early years of the Great Depression were a time of monetary deflation. ... One economist who predicted this was Ludwig von Mises. he warned in the late 1920's about the coming contraction. He was opposed by an American economist, Irving Fisher of Yale, who announced a plateau for the American stock market in September 1929. ... Mises argued that the gold standard has arisen as a market phenomenon becasue gold is the most marketable commodity. ... In sharp contrast, Fisher in Chapter XII dismissed the gold standard as an historical accident. he said the gold standard would be difficult to dislodge, but someday people would abandon it. Why? Because gold 'is a substance, of which the supply is excessive.' The most famous advocate of Fisher's monetary theory was Milton Friedman. Through Friedman, the academic free market economics community became committed to fiat money after 1950. Friedman was the dominant free market spokesman after 1960. He held a position at the University of Chicago There was not a single gold standard proponent in the economics department in 1950 or later. ... Critics of the FED have long been segregated out of the movement by the leadership. ... Only in the last decade have pro-gold standard economists appeared on the scene through http://www.mises.org/. ... Friedman viewed gold as just another commodity. ... in 1986 ... [Freidman] admitted that his advocacy of a fixed rules for the expansion of central bank-created money had been a waste of time. Such restraint was not in the self-interest of central-banking officals. ... The [Fed] has been the problem ever since 1914", Gary North at Lew Rockwell, 25 February 2010, link:

http://www.lewrockwell.com/north/north817.html.

Chicago had no gold standard advocates when I was there in the early 1970s. If I recollect correctly, Uncle Miltie's gestalt was when he realized the Fed must lie to the public to influence the economy.

Banks and CPAs

"With all the attention to banking regulation, it seems strange that something called Basel III has escaped widespread notice, even though its various new rules have been up for public discussion since January and the window closed on that opportunity on Friday, April 16. Maybe it's because the Basel Accords, a set of rules agreed to by bank regulators around the world, have been something of an embarrasment to the authors. ... The idea was to give an increasingly globalized financial-services industry a common set of rules so that bankers could have more confidence in the solidity of their global counterparties. ... In an unsuprisingly generous gesture toward national treasuries, banks were allowed to regard government-issued securities as zero risk, meaning they would require not offsetting capital. ... Japanese banks were boasting that they were over-compliant with Basel standards right before they tanked in 1990. ... But the Basel standards proved to be largely irrelevant to the factors that caused the fall 2008 near-meltdown of global finance. For example, Lehman Brothers had close to triple the core capital required by the Basel standards when it crashed. ... The 2008 crisis resulted when the Fed-created credit bubble collapsed and soaring housing prices deflated as well. ... One of the great ironies of our times is that the two strongest defenders of the Fannie-Freddie shell game, Chris Dodd and Barney Frank, are now in charge of reforming banking regulation. ... Aside from giving Washington an even tighter grip on the banking industry, the Dodd bill partly institutionalizes what Ben Bernanke at the Fed and Henry Paulson at Treasury, and Timothy Geithner at the New York Fed did ad hoc in the fall of 2008. It permits backdoor bailouts and gives enormous powers to the same Fed that crafted the housing bubble", my emphasis, George Melloan at the WSJ, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192534100550538.html.

The Dodd bill stinks. It's more of the same and more TBTF bailout. I agree with Melloan. There is virtually no rule that banks can't "engineer" around. Irony? Or as Yves Smith says, "Feature, not bug".

Bailout Bargain?

"It's way too early to tally the costs of the government's various efforts to help out our nation's financial institutions survive the credit debacle. But that hasn't stopped anonymous Treasury officials from claiming in recent days that their Armageddon-avoidance will wind up costing far less than many feared. One Treasury estimate, leaked to the [WSJ] last week, put a price tag on $89 billion on the financial bailout. That's far below the $250 billion the Congression Budget Office estimated last year or other analyses that put the all-in-number at $1 trillion or more. ... And given that the Treasury is run by Timothy F. Geithner, the man who doled out billions as president of the Federal Reserve Bank of New York, his current minions certainly have an interest in peddling the view that the price of those rescues has become less onerous. ... But if the Treasury wants to provde a full assessment of the costs of this financial debacle, it will have to add some more beads to its abacus. ... A major factor missing from the Treasury's math is the vast transfer of wealth to bank firm investors resulting from the Fed's near-zero interest-rate policy", Gretchen Morgenson at the NYT, 18 April 2010, link:

http://www.nytimes.com/2010/04/18/business/economy/18gret.html.

By George, Gretchen's got it!

Financial Reform, Chicago-Style

"A 'trilemma' is like a dilemma, only there are three things to choose from and you can have just two. The current debate over post-crisis financial regulation suggests we face such a trilemma: We can choose any two of the following: but not all three: 1) efficient capital markets 2) no bailouts to big banks and 3) a depression-free economy. ... But the idea that big banks might be able to get new capital from the Treasury was scarcely even contemplated. Choosing one and two resulted in a global financial and economic crisis worthy of the name depression. ... Either the bill does not imply future bailouts, as Republicans argue. Or, as seems more plausible to us, it is going to introduce such a wide range of new financial regulations that the efficiency of our capital markets will be significantly diminshed. ... Whether or not there is any basis for the SEC's claim that [Goldman] misled investors, the key point is that the collateralized debt obligation (CDO) at issue was nothing more than an elaborate wager on the future price of some mortgage-backed securities--a wager with as much economic utility as a gigantic bet on a roulette wheeel or a horse race. ... But [derivatives] increased the instability of the global financial system. And taxpayers have paid a heavy price since the system all but collapsed in late 2008. ... There was never a good reason for treating credit default swaps and their ilk differently from commodity futures, which are standardized and traded on exchanges. ... The nightmare possibility arises: Could the proposed cure turn out to be just another symptom of the same disease? As the rules become ever so more convoluted, so the opportunities for the unscrupulous increase--and the efficency of the financial system as a whole decreases. ... First, in the more controlled capital markets of the 1970s, borrowers generally paid more for their loans because there was less competition. ... Second, it is not at all clear that our crisis was exclusively caused by a failure of regulation as opposed to a failure of monetary policy. ... Third, the crisis of 2007-2009 originated in one of the most highly regulated sectors of the financial system: the US residential mortgage market", my emphasis, Niall Ferguson & Ted Forstmann (F&F) at the WSJ, 23 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200104219993576.html.

I only disagree with F&F over this: we cannot have a "depression-free economy". Apparently F&F don't favor the Dodd bill either.

Crony Capitalism's Foundation

"Free markets depend on truth telling. Prices must reflect the valuations of consumers; interest rates must be reliable guides to entrepeneurs allocating capital across time; and a firm's accounts must reflect the true value of the business. Rather than truth telling, we are becoming an economy of liars. The cause is straightforward: crony capitalism. ... Classical liberals, whose modern counterparts are libertarians and small-government conservatives, believed that the state's duties should be limited to (1) to provide for the national defense; (2) to protect persons and property against force and fraud; and (3) to provide public goods that markets cannot. ... Why has this happened? Financial services regulators failed to enforce laws and regulations against fraud. Bernie Madoff is the paradigmatic case and the [SEC] the paradigmatic failed regulator. Fraud is famously difficult to uncover, but as we now know, not Madoff's. ... Are we to believe that regualtors were unaware? ... The idea that multiplying rules and statutes can protect consumers and investors is surely one of the great intellectual failures of the 20th century. Any static rule will be circumvented or manipulated to evade its application. ... Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated... In a paper for [Fed's] Jackson Hole Conference in 2008, economist William Buiter described 'cognitive capture,' by which regulators become incapable of thinking in terms other than that of the industry. ... Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. ... We call that system not the free market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith. ... Hayek's mentor, Ludwig von Mises, predicted in the 1930s that communism would eventually fail because it did not rely on prices to allocate resources. He predicted that the wrong goods would be produced: too many of some, too few of others. He was proven correct. ... Low interest rates particularly impact housing because a home is a pre-eminent long-lived asset whose value is enhanced by low interest rates. ... If we want to restore our economic freedom and recover the wonderfully productive free market, we must restore truth-telling on markets", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 20 April 2010, link:

http://online.wsj.com/article/SB10001424052748704508904575192430373566758.html.

I have said things like GO for decades.

The Fed's Bad Loans

"The Federal Reserve Bank of New York [FRBNY] doesn't have to look far to understand the woes of banks and investors that hold loans and securities underpinned by real estate. It can look at its own books. ... In an unexpected twist, the takeover of the Bear assets effectively leaves the [FRNBY] as holder of credit-default swaps on bonds issued by the states of Nevada, California and Florida, That protection rises in value when the bonds decrease in value. ... Fair values are based on observable market proces, data points that can underpin as asset, and cash flow. ... Maiden Lane II's holdings include oddly named securities like a $29 million piece of New Century Home Equity Loan Trust 2005-3, which was stuffed with subprime loans originated by failed mortgage lender New Century Mortgage Corp. ... Among the residential mortgage loans and securities, about half were secured by homes in California and Florida. ... As a result, the Maiden Lane fund inherited about $4 billion of Bear's old Hilton debt. Blackstone is close to finalizing a deal to reduce its $20 billion loan by about 20%, according to people familiar with the matter", Carrick Mollencamp, Lingling Wei & Serena Ng at the WSJ, 2 April 2010, link:

http://online.wsj.com/article/SB10001424052702303395904575158331936921388.html.

The Fed is no better at buying subprime assets than anyone else. It exists to be "worse". Others had to lose on these assets had the Fed not bailed them out. Why unexpected? To whom?

Obama, Corporatist

"Socialists believe that the way to paradise is for governments to own 'the means of production'. ... Today's neosocialists are smarter than their ancestors. Instead of outright takeovers, they are achieving much the same goal through rigid regulations. ... Entitlements go hand in hand with sweeping, overbearing regulations. President Obama wants higher education in this country to be free of charge, which is why his Administration is pushing for a government takeover of student lending. ... Senator Chris Dodd's (D-Conn.) recently unveiled package of financial regulatory reforms is a neosocialist's dream. It is also destructively stupid. The bill doesn't address the key causes of the recent economic crisis: the Fed's too loose monetary policy, the behavior of Fannie Mae and Freddie Mac in buying or guaranteeing almost $1.5 trillion in junk mortgages and the failure to properly regulate credit default swaps and other derivatives. ... In the name of fighting Washington's too-big-to-fail doctrine for major financial institutions, Dodd's bill is a de facto institutionalization of them. ... Thus these biggies, like Fannie and Freddie, will have lower costs of borrowing--debt is by far the biggest component of their capital--which will put their smaller competition at a crippling disadvantage. ... Thus the paradox of today: bargain-basement rates of interest for larger firms and higher costs--or no credit at all--for smaller borrowers. ... Chief among its tasks would be assessing the risk of banks and their products and activities, yet Washington has demonstrated that it is incapable of judging risk. ... Sensible debt-to-equity ratios, including stiffer equity requirements for volatile short-term debt, and clearinghouses for almost all derivatives would effectively accomplish what Dodd's monstrosity purports to do and manifestly does not", Steve Forbes (SF) at Forbes, 12 April 2010, link:

http://www.forbes.com/forbes/2010/0412/fact-comment-steve-forbes-neosocialists-obama-obamacare-marx-impressed_print.html.

Amazing. I agree with SF. The Dodd bill will not reform the TBTF banks. Feature or bug?

No Fed Exit-2

"Meltzer is writing a two-volume history of the [Fed]. Few people know more about its operations. ... He is an old-timer. He will turn 82 this week. It is quite impressive that he is still writing major books. ... His article is significant because he writes from the perspective of decades of FED-watching. There are few if any FED-watchers with superior credentials, both academic and practical. When he says that the FED policies will eventually produce price inflation, we would be wise to give careful consideration to his views. ... He began by observing that Chairman Bernanke has explained his exit strategy. ... Bernanke has repeatedly said that the FED will unwind, but I am unaware of any explanation of how, exactly, the FED will accomplish this feat. It is the absence of such an explanation that leads me to believe that there is no such plan, and that the FED is unlikely to deflate the monetary base for long. ... An economist normally begins with the concept of supply and demand. In monetary affairs, as in all others, the free market clears by means of prices. The supply of loanable funds and the demand for such funds are balanced in the free market by means of a rate of interest. ... All of the FED's press announcements about setting the fed funds rate is nothing but PR flak. There is no rate to set. Banks are not borrowing, because they are not lending. They are holding excess resrves. ... In the 1970's, the FED's policies produced the worst of both worlds; high unemployment and high price inlfation. Meltzer does not say this, but this unwanted pair of outcomes were what brought Keynesianism into question. ... Meltzer sees that the FED's present policy is not credible. It will produce monetary inflation when banks start lending", Gary North at Lew Rockwell, 2 February 2010, link:

http://www.lewrockwell.com/north/north807.html.

I agree. Zimbabwe Ben is trying to confuse matters as to the inflationary implications of the Fed's actions over the last 18 months.

Pravda Gets It!

"But unlike the perpetrators of the Watergate scandal, who wound up looking at jail time, Geithner evidently has a golden parachute waiting at Goldman Sachs [GS], not coincidentally the largest recipient of the AIG bailout. ... Hank Paulson, Geithner's predecessor, was CEO of [GS] before coming to the Treasury. Geithner, who has come up through the ranks of government, could be walking through the revolving door in the other direction. ... Critics are calling the New York Fed's [FRBNY] decision a back-door bailout for the banks, which received 100 cents on the dollar for contract that would have been worth far less had AIG been put through bankruptcy proceedings in the normal way. ... The [FRBNY] is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the [Fed]. This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout progrqams. It's as though the [FRBNY] was a black-ops outfit for nation's central bank. ... Eevn after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, [Geithner] still had the audacity to claim the 'sanctity of contracts' in the dealings with these companies like AIG. ... The contention that the Fed had no choice is also belied by a recent holding in the Lehman Brothers bankruptcy, in which New York Bankruptcy Judge James Peck set aside the same type of onvestment contracts that Secretaries Paulson and Geithner repeatedly swore under oath had to be paid in full in the case of AIG", my emphasis, Ellen Brown (EB) at Pravda, 8 February 2010, link: http://english.pravda.ru/business/finance/112085-aig_gate-0.

EB is a Los Angeles attorney. Why is this in Pravda? Is the American press afraid of the Vampire Squid (VS)? I disagree with one thing EB wrote. Timmy Boy will not leave Treasury for a VS position, but more likely BlackRock or Pimco. Timmy's joining VS would be too obvious.

The Coming Currency Firestorm

"Already, the euro is counted as the dollar's dominant challenger, while China's central bank governor, among others, has suggested establishing an alternative (some might say, rival) 'super-sovereign reserve currency.' ... Will we witness a rapid coup (in currency time) occurring over the next ten years, as some commentators believe (see Chin and Frankel, 2008)? Or will we see a much more gradual process owing to the built-in inertia of the dollar's prominent role? ... We report new cross-country evidence of the determinants of substitution to dollar banknotes and find that in developing countries substitution hinges more on historical than an recent experience. ... While there is considerable interest in the determinants of currency substitution--defined as the use of multiple currencies in a given country--there are few established empirical results. The primary reason is that the amount of hard cash in circulation is often unkown. ... Our data come from the [Fed's] international cash distribution operations and include all wholesale shipments of dollars to and from the US between 1990 and 2007. ... We find that the demand for dollars is, above all, about memory. The highest inflation rate recorded over the past 30 years has significant explanatory power in our model--the demand for dollar banknotes goes up for a generation after an inflation shock--while the recent inflation rate has none. ... Assessing the country-level determinants of the use of dollar banknotes may also have important implications for the [Fed's] balance sheet going forward, as the seignorage it earns from currency in circulation is a major source of its revenue", my emphasis, Rebecca Hellerstein (RH) at Voxeu, 6 February 2010, link: http://voxeu.org/index.php?q=node/4565.

RH, Fed economist, welcome aboard. About 1830 Lord Overstone said it takes about two generations for all traces of financial folly to be wiped from the market's memory. That's about 50 years. Keep looking. RH's seignorage comment is a fancy way of saying the Fed's cost of capital is zero, my 31 January 2010 post:

http://skepticaltexascpa.blogspot.com/2010/01/junior-on-fed-profit.html. As long as the dollar is seen to hold its value better than other paper currencies, it will continue in use. When it and all other paper currencies are seen as no better than Venezuela's bolivar, worldwide hyperinflation will result. RH, we salute your exposing the source of Fed "profit". The coming inflationary storm will sweep away the euro too. The Fed has an opportunity here, i.e., to encourage other countries to increase their inflation rates, so more people overseas will hold "wealth" in the form of dollars.

Bust 'em UP!

"But this year's bonus season has morphed into days of whine and poses. The Street, tin-eared, in whining about the people who are enraged by multibillion-dollar bonus pools are a time of 10% unemployment and public angst. It's trying to solve its problem by posing as a public-spirited operation (rather than Greedhead Central) by showing off charitable contributions and small-business-loan programs. That maneuver can't possibly work. ... Had the [Fed] and other central bankers not flooded the world with cheap cash, Goldman's and Morgan's counterparties--the ones on the other side of their market bets--would have failed. ... In an ideal world, this year the Street would acknowledge the public largesse by having the sense not to pay bonuses of more than six digits--hey, its worker bees need money in order to survive in the high-cost New York City area--and would like to make a nice voluntary contribution to the government that saved it. ... Washington ... whines about Wall Street and adopts symbolic poses--denunciations of 'obscene' bonuses and 'fat-cat bankers' by President Obama, for example--but doesn't do the substantive thing: breaking up those institutions so that they're not too big to be allowed to fail", Allan Sloan (AS) at Fortune, 8 February 2010.

I agree with AS and have advocated breaking up the TBTFs for years.