Posts Tagged ‘FED’

Inflation for certain … hyperinflation?

In the past, before the Clinton years, we had an inflation valuation that included such things as food and fuel.

Not so now, the Consumer Price Index has been so manipulated and had core items like food and fuel taken out of it that it has become a useless measure.

Unless you are living in a cave or under a rock or do not have any need for gasoline you will have noticed an ongoing upward trend in gasoline prices.  Nothing so amply shows this than the graph here.

The trend line is unmistakeable, keep in mind this is a GROWTH, year over year.  Since this time last year there has NEVER been a time without a price INCREASE.  Moreover since the start of the year the rate of INCREASE has been INCREASING.

Even the core CPI is calling for an inflation rate of a modest 1.33%, however when taken for the whole year, this increase will exceed the target 2%.  When food and fuel are counted, the rate is more like 3.2% and has a year end projected figure close to 6%.  This means a definite inflation trend.

Hyperinflation becomes visible when there is an unchecked increase in the money supply (see hyperinflation in Zimbabwe) usually accompanied by a widespread unwillingness on the part of the local population to hold the hyperinflationary money for more than the time needed to trade it for something non-monetary to avoid further loss of real value. Hyperinflation is often associated with wars (or their aftermath), currency meltdowns, political or social upheavals, or aggressive bidding on currency exchanges.

Lets quickly examine the associations:

  • Wars – yes at least two that the US is actively engaged in: Iraq & Afghanistan
  • Currency Meltdowns: the world is still struggling with the meltdown of 2008
  • Political or Social upheavals: the Arab spring certainly fits that notion, moreover there have been signs of ongoing division withing the US electorate since the Supreme Court decided who was to be President in 2000.
  • Aggressive Bidding on Currency Exchanges: less clear here, as the T-Bills of the FED are basically being purchased by the FED or proxy of the FED by banks associated to the FED

So most of the trend points needed to have hyperinflation exist, what remains to be seen is if the powers that be in Washington can overcome the force of history and the K-wave Winter that is overdue.

No Comments »

Ben Bernanke has a secret.

And it’s a secret that very likely terrifies him and his policymaking brethren at the U.S. Federal Reserve.

That secret has to do with his latest round of “quantitative easing,” a liquidity-push known as “QE2.”

What Bernanke & Co. don’t want Americans to know is that painfully slow growth – or even a double-dip recession – isn’t their greatest fear. Bernanke’s greatest fear is that without this liquidity, one or more of the massive, already-bailed-out U.S. banks could stumble and once again undermine the global financial system.

And this time around, the outcome would be much, much uglier.

Raising Questions

If you think about it, the proof of what I’m saying is right in front of each of us. You just have to take a step back and look at it objectively.

Last Sunday, in an appearance on CBS News’ “60 Minutes,” Bernanke said he could raise interest rates in 15 minutes if inflation ever became a problem. Not to worry, there’s no sign of inflation, at least according to him.

Well, there’s no sign of deflation either, and thanks to Fed policies, interest rates are at historic lows. So why embark upon “Round Two” of quantitative easing (known as “QE2”) and state on one of the nation’s most-watched television news programs that additional rounds might follow?

I’m going to break the magician’s code and tell you what the trick is and how it works.

Financial Sleight of Hand

The “outward” trick the Fed is pulling off is adding massive liquidity to the U.S. banking system to tide the big banks over in case they face insolvency issues in the near future.

Remember, most of these big banks were in the “too-big-to-fail” category. That’s why back in 2008-09 they got all that bailout money: Given their size and influence, the worry was that should one or more of these fail, the whole financial system could come crashing down.

But here’s the problem. Since that time, many of those big banks have gotten bigger. And their risks have been steadily increasing: Many of them now face litigation, as well as the balance-sheet, credit and liquidity risks that could cause any one of them to fail – which could take the financial system down with them.

What the Fed is hiding under its cloak is the inside knowledge of:

  • What the banks still have on their balance sheets in the way of so-called “toxic assets” – for starters, $2.4 trillion in mortgages and more than $1 trillion in mortgage-backed-securities.
  • How the banks have been able to juggle accounting rules to make their books look better.
  • How they’ve made their recent profitability look robust by moving loan-loss reserves back over into the revenue columns of their income statements – booking that as top-line growth.
  • And the onslaught of litigation banks now face that could force them to mark down their assets at the same time that they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized.

Banks are subject to “put-backs” or “buybacks” of the mortgages they place into securities if it can be proven that the quality of the mortgages weren’t what they were represented to be when the securities contracts were originated. That’s not hard to prove.

Regulators are very worried about the size of the put-back problem. In an attempt to assess the put-back risk faced by individual banks, the Fed has embarked on internal investigations.

When asked in recent testimony about the depth of the problem, Fed Governor Dan Tarullo, while not willing to quantify banks’ put-back risk, termed it “substantial.”

Put-back risk is one key reason the Fed will be conducting another round of stress tests on the country’s 19 biggest banks. Only this time they’re keeping the results to themselves.

That’s frightening.

But, that’s only the beginning.

Toxic Mess

The U.S. Securities and Exchange Commission (SEC) is investigating the banks for their part in falsely – if not fraudulently – spreading their toxic financial Kool-Aid around to other institutions.

Hints that a settlement was in the works last week quickly got squashed. Besides costing the banks penalties in settling charges, by settling and admitting any kind of guilt, they would be subject to lawsuits for decades to come. And since the litigation costs and the damages themselves could reach into the hundreds of billions of dollars, banks would have to set aside capital and reserves against future liabilities.

Now that this cat is out of the bag, it’s doubtful that the SEC can let the banks off that easily.

Additionally, new Basel III international capital standards are being imposed on banks, which will mean changes in how they classify the risk profile of various assets over time and how much capital will have to be held in reserve. (A recent report in The Financial Times suggested that U.S. banks – related to Basel III alone – face a $100 billion shortfall.)

And while all this is happening, the U.S. Treasury Department sold its Citigroup Inc. (NYSE: C) stake for a tidy little profit (thanks to the Fed’s easy money-inflating equity prices) and banks are saying they’re planning on raising dividend payouts in 2011.

The Ultimate Objective

It’s a high-stakes poker game. The Fed is bluffing and the banks are playing their hands – and will be big beneficiaries if the central bank pulls this off.

Just this Tuesday, at the Goldman Sachs Group Inc. (NYSE: GS) financial services conference in New York, Bank of America Corp. (NYSE: BAC) Chief Executive Officer Brian Moynihan said the big bank has fixed its balance sheet and is planning to raise its dividend next year.

And, Wells Fargo’s CEO John Stumpf projected confidence about growing market share in 2011 and said the bank “was optimistic it can steal loan customers from community banks that are retrenching after overextending themselves before the downturn,” according to an American Banker story on the meeting.

That brings us to the trick behind the trick. What QE2 and any subsequent quantitative easing actions (as well as the original quantitative easing move that was worth $1.7 trillion) really does is create a direct liquidity lifeline into the big banks.

The big banks got to stuff themselves with liquidity to enhance their capital ratios and balance sheets. And when that money had no place to go (it wasn’t being lent out), it found its way into the stock and bond markets, giving them a very nice run.

But small U.S. community banks got nothing.

In fact, they got less than nothing.

Community banks got overly cautious regulators from the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC). Those OCC and FDIC visits sucked the life out of the community banks because, after missing all the banking problems that led to the credit crisis in the first place, bank examiners are now erring on the other side of caution.

There’s no question that things are bad at community banks. But while big banks reap the benefits of the Fed’s direct triage efforts, community banks are being left for dead. That works out fine for the big U.S. banks. They want to grab market share, and can do so in a big way when these community workhorses are put out to pasture.

The difference between big banks and community banks comes down to economies of scale and size. Big banks want to serve big clients with big loans and capital markets services. They don’t want little-guy loans, they’re too small to be profitable relative to the allocation of resources.

Now, more than ever, that’s especially true. With all the problems inherent in the securitization market, big banks aren’t interested in small loans because they can’t package them into big loans and offload them to investors.

It’s going to be a long time before securitization of small loans from disparate originations makes sense again to investors.

Community banks could be facing planned extermination. Of course, the big banks will say that community banks did it to themselves. Without the necessary support to backstop their shaky balance sheets and with capital so difficult to raise because of their weak future prospects, community banks are in great jeopardy.

Since all real estate is “local” and job growth comes from small businesses, who better than community banks to take back the high ground of personal-relationship banking to serve local banking needs that can be better assessed by local bankers?

If we want to empower small businesses to take chances, they need a more-direct access to capital. Since that capital isn’t coming from the big banks, we better take another look at whom quantitative easing is benefiting and whom it is hurting.

If the Fed really wanted to shore up community banks, it could backstop most of the “local” commercial real estate and local commercial and industrial loans at community banks with less than $100 billion in assets.

That would give the community banks room to breathe and money to lend to local small business start-ups. Some of the 18 million unemployed folks in America could sure use that kind of backstopping.

If you couldn’t initially see the ultimate objective in the QE2 trick, you could be forgiven. But now you know. The fact is that banks are being made to look healthy by means of massive liquidity thrown at them. To foster that “illusion,” the U.S. Treasury is cutting them free, and the banks themselves are talking about a future bright with dividends and buyouts.

But they’re doing this without really knowing what their liabilities, capital requirements and future revenue will actually be.

And that says it all.

source:

http://moneymorning.com/2010/12/10/quantitative-easing-the-real-reason-the-fed-may-go-for-qe3/

Raising Questions

If you think about it, the proof of what I’m saying is right in front of each of us. You just have to take a step back and look at it objectively.

Last Sunday, in an appearance on CBS News’ “60 Minutes,” Bernanke said he could raise interest rates in 15 minutes if inflation ever became a problem. Not to worry, there’s no sign of inflation, at least according to him.

Well, there’s no sign of deflation either, and thanks to Fed policies, interest rates are at historic lows. So why embark upon “Round Two” of quantitative easing (known as “QE2”) and state on one of the nation’s most-watched television news programs that additional rounds might follow?

I’m going to break the magician’s code and tell you what the trick is and how it works.

No Comments »

S&P downgrade of US debt is more about next failure!

The S&P downgrade of the US debt is more about a pending failure or another ‘bailout’ than any shot at the stability of the US economy.

One Trillion dollars more may be needed to bail out the ‘too big to fail’ crowd in the next round.

Most interesting is the closeness of S&P to the situation and their understanding of the internal operations, given those factors these revelations are illuminating!

View the interview from the Real News:

No Comments »

Proposal to examine FED books

Ron Paul’s efforts to examine the FED books are continuing, see his interview with Forbes here.

The proposal is very populist, however I suspect that little in the important arena of money policy will be changed even if the FED were to be “audited”.

The important connection between the Congress and the FED will not be upset by this, unless the contents of the ‘books’ are accurately represented to the populace and explained completely.  Should the details of the transactions from the TARP funds completed during the end of the Bush and start of the Obama administrations be openly discussed then a shift in awareness regarding the FED ~ Congress partnership will likely result.

Such an open presentation is not likely as the privacy of the FED and its dealings is vital to the Corporate survival of the ‘quasi-governmental’ body.

No Comments »

WP Login