RAHN: Fixing the Federal Reserve - Washington Times

There is a growing consensus that the Federal Reserve is broken - because it is. The Fed was established to provide price stability and prevent periodic banking crises. It has accomplished neither.

The wholesale price level in the United States was at almost the same level when the Fed was established in 1913 as it was in 1793, 120 years earlier. Now it takes about 22 dollars to equal the 1913 dollar. There have been far more bank failures post-Fed than pre-Fed, and we seem to be in an almost permanent state of banking crises with “too big to fail.”

The Fed’s near-zero interest policy is a growing disaster. With inflation near 4 percent and interest on various types of savings accounts less than 1 percent, those who have been prudent and saved are being punished - forced to accept what is, in effect, a negative rate of interest. Credit is no longer being allocated by the market but to classesof borrowers as determined by politicians. Homeowners are being given money at a near-zero rate (the interest rate they are being charged is about equal to inflation) and the interest expense is tax-deductible. Many small-business people are not able to get loans because they are “risky,” and the banks can borrow from the Fed at lower rates than they can get on government bonds, so there is no incentive for them to take on the risk. Unless the banks become more willing to lend to businesses that create real jobs and innovations, the economy will continue to stagnate.

 
RAHN: Fixing the Federal Reserve - Washington Times

Fed secretly bailing out Europe?

Shenandoah: Liquidity Swap Announcement: A Repeat of 2008

Can you say deja vu all over again........................
 

From the Federal Reserve website, Press Release on Monetary Policy release from September 18, 2008:

Press Release

Release Date: September 18, 2008

For release at 3:00 a.m. EDT

Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

Federal Reserve Actions

The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks. 

The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion. 

In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada. 

All of these reciprocal currency arrangements have been authorized through January 30, 2009. 

Sound familiar to this morning’s announcement? Here it is from the Federal Reserve’s website this morning (link to press release here):

Press Release

Release Date: November 30, 2011

For release at 8:00 a.m. EST

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. 

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.  This pricing will be applied to all operations conducted from December 5, 2011.  The authorization of these swap arrangements has been extended to February 1, 2013.  In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.  At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.  These swap lines are authorized through February 1, 2013. 

Federal Reserve Actions

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013.  The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points.  In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.  Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

The last time the world’s central banks agreed to this type of intervention, the S&P reacted positively, as expected on September 18th and 19th of 2008:

(click to enlarge/reduce size of chart)

Meanwhile, reality set in shortly thereafter:

 

11.30 Liquidity Swap Announcement: A Repeat of 2008

The Fed, Other Central Banks Prepare for the Firestorm

The Fed has shocked us once again, and it’s probably right. There’s a firestorm on the horizon. It starts in Europe, but it threatens the U.S. economy just as surely, and the Fed is getting ready.

The most fundamental role of any central bank is to deal with a financial market crisis, to ensure markets operate as normally as circumstances permit. A central bank does this primarily by ensuring an adequate flow of liquidity to market participants, whether banks, other financial institutions, or other central banks. It is in this light one should view the coordinated announcement by the Federal Reserve along with the European Central Bank and four other central banks across Europe and Asia.

Specifically, the Fed cut the price of emergency dollar funding from 1 percent to a half a percent. The Fed has arrangements with other central banks that allow it to swap dollars for other currencies on an overnight basis. The Fed cut the price of these swapline arrangements and extended the life of the swapline by 6 months to February 1, 2013.

As the global reserve currency, much of the world’s commerce takes place in dollars. Foreign central banks often source dollars to their own banking systems, which use the dollars to fund internal commerce as well as export purchases. Inadequate dollar liquidity abroad can upend financial markets abroad and also in the United States. Three years ago, these same financial markets hemorrhaged during a financial crisis, and the U.S. unemployment rate is still around 9 percent.

To be clear, the Fed is not bailing out Europe or the euro. There has been some musing about the Fed bailing out the euro—an idea so preposterous it doesn’t rise past the level of cocktail party speculation. But what the Fed is doing is something quite different. It’s not putting taxpayer money at risk. It’s not buying foreign sovereign debt. It’s not increasing the bailout capacity of the International Monetary Fund or any of the tools Europe has constructed to paper over its troubles. The Fed is just beefing up its own tools for lending dollars on a short-term basis to foreign central banks.

Why now? Europe, of course, is going through a terrible time financially and economically, but where’s the crisis that would trigger such an action by the Fed? And why is the market reacting so positively? Just wait.

A good way to think about this is to imagine that every fire engine in and around New York City were to converge on Manhattan. Every fire truck would lay out every bit of hose and tap every fire hydrant they could find. Every post is manned and ready, but there’s no fire, only a little smoke. Just wait.

The market’s reaction is analogous to a real estate buyer who sees all this fire equipment, decides the neighborhood must be really safe, and bids up the nearest townhouse. Today’s 400-point initial rally in the Dow is proof positive that markets are either irrational, perfectly myopic, or both.

What’s going on here? The Fed and its counterparts in Europe and Asia are getting ready for utter calamity. The crisis in Europe is reaching a crescendo. Bank credit in Europe is collapsing; interest rates, even in Germany, are rising; recession and worse is at the doorstep in southern Europe and threatens to engulf the entire continent; even the euro technocrats are now talking about having only a matter of days to save themselves and their beloved monetary union.

There’s no real fire yet. But there will be. A big one. It’s heading this way, and the Fed is doing what it can to get ready.

  
The Fed, Other Central Banks Prepare for the Firestorm

FT.com / US / Economy & Fed - Utah raises standard in anti-Fed campaign

By Robin Harding and James Politi in Washington

Published: March 23 2011 18:41 | Last updated: March 23 2011 18:41

Shops in Salt Lake City will soon be able to accept gold Buffalo and Eagle coins (no foreign minted Napoleons or Krugerrands allowed), after a bill to make gold and silver legal tender passed Utah’s House and Senate.

The state does not trust the US Federal Reserve. However, visitors need not weigh down their pockets just yet.

The bill, which is under review by the governor, ends state taxes on the transfer of gold – they currently treat it as an asset and not as money – but until the federal government does the same, its green paper will have the edge.

This proto-gold standard in the American west is a rebuke and challenge to the Fed, and a reminder that easy monetary policy since 2007 has won the central bank many more enemies than friends.

“They’ve been a disaster,” says Jeff Bell, policy director of the American Principles Project, a conservative lobby group that has helped the Utah legislators and favours a return to the gold standard. “Mr [Ben] Bernanke, ever since he got on to the Fed, has been a force for fighting deflation and bringing interest rates down to the disappearing point.” 

Some conservatives believe this has devalued the dollar. 

The Fed is unpopular with the US public, and several other states have recently been considering – with varying degrees of seriousness – similar legislation to Utah’s.

From 2003 to 2009 the percentage of people saying the Fed does a “good” or “excellent” job fell from 53 to 30 per cent, according to Gallup. A Bloomberg opinion poll last year found that 16 per cent of Americans want to abolish the central bank outright – although it did ask a leading question.

Read more here: FT.com / US / Economy & Fed - Utah raises standard in anti-Fed campaign

FT.com / Capital Markets - Pimco stirs up debate over US Treasury bonds

Who will buy Treasuries when the Federal Reserve stops? Pimco’s Bill Gross thinks he knows the answer. The manager of the world’s biggest bond fund has cut its holdings of US government-related debt, including Treasuries, to zero.

The reason for this is Mr Gross’s belief that Treasury prices will fall when the Fed ends its huge bond-buying programme, known as quantitative easing and designed to avoid a deflationary trap. 

Not illogically, Pimco is betting that, with the Fed out of the picture, yields on Treasury bonds will rise – hitting the prices of bonds which move in the opposite direction. Investors loaded with debt will see the value of their holdings fall.

Pimco is not the only bond bear. Other investors are wary of the risks once the Fed stops buying, which it is expected to do in June. They have poured $500m of new money into exchange-traded funds that should profit when US yields rise.

Indeed, this debate has been brewing for months. The longer-term threat of inflation, assuming the US recovery gathers pace, is another well-flagged risk for bond investors.

Still, Mr Gross’s move is a big statement and follows recent comments by Fed officials suggesting QE2 would not be extended beyond June.

The central bank, buying about $100bn of bonds a month, has accumulated $419bn of government debt since November, taking its Treasury holdings to $1,230bn. Already the biggest holder of Treasuries, it is expected to own $1,600bn by the end of June.

Read more: FT.com / Capital Markets - Pimco stirs up debate over US Treasury bonds

Faber Says New Crisis on Horizon Once Fed Support Ends

FT.com / Capital Markets - Fed passes China in Treasury holdings

The time to buy gold or silver is now. It is only a matter of time before the masses realize that Madoff's ponzi scheme was petty theft compared to the ponzi scheme being run by Bernanke at the Federal Reserve.

The Federal Reserve has surpassed China as the leading holder of US Treasury securities even though it has yet to reach the halfway mark in its latest round of quantitative easing, according to official figures.

Based on weekly data released on Thursday, the New York Fed’s holdings of Treasuries in its System Open Market Account, known as Soma, total $1,108bn, made up of bills, notes, bonds and Treasury Inflation Protected Securities, or Tips.

According to the most recent US Treasury data on foreign holders of US government paper, China holds $896bn and Japan owns $877bn. 

“By June [the Fed] will have accumulated some $1,600bn of Treasury securities, likely to be in the vicinity of China and Japan’s combined holdings,” said Richard Gilhooly, a strategist at TD Securities. “The New York Fed surpassed China in the past month as the largest holder of US Treasury securities,” he noted.

The Fed is buying Treasury debt under two programmes. The largest is QE2, which began in November and is scheduled to involve $600bn of purchases by June. 

It is also buying $30bn of Treasuries a month as it reinvests principal payments from its large holdings of mortgage debt and debt issued by government housing agencies – a programme dubbed QE lite.

Read more: FT.com / Capital Markets - Fed passes China in Treasury holdings

Click here

Accounting tweak could save Fed from losses

(Reuters) - Concerns that the Federal Reserve could suffer losses on its massive bond holdings may have driven the central bank to adopt a little-noticed accounting change with huge implications: it makes insolvency much less likely.

The significant shift was tucked quietly into the Fed's weekly report on its balance sheet and phrased in such technical terms that it was not even reported by financial media when originally announced on January 6.

But the new rules have slowly begun to catch the attention of market analysts. Many are at once surprised that the Fed can set its own guidelines, and also relieved that the remote but dangerous possibility that the world's most powerful central bank might need to ask the U.S. Treasury or its member banks for money is now more likely to be averted.

"Could the Fed go broke? The answer to this question was 'Yes,' but is now 'No,'" said Raymond Stone, managing director at Stone & McCarthy in Princeton, New Jersey. "An accounting methodology change at the central bank will allow the Fed to incur losses, even substantial losses, without eroding its capital."

The change essentially allows the Fed to denote losses by the various regional reserve banks that make up the Fed system as a liability to the Treasury rather than a hit to its capital. It would then simply direct future profits from Fed operations toward that liability.

Read more: Accounting tweak could save Fed from losses | Reuters

Is the Federal Reserve buying equities?

A massive shift in fund flows is currently underway among investors. Charles Biderman, CEO of TrimTabs Investment Research, has the details.

Financial Guru Jim Rogers covers Fed Funny Money on Freedom Watch 12/21/10

Who was right about the euro?

Sounds like the Europeans had the same person in charge of their economy over the past few years as we had in the United States.

Lets not forget all the great things Greenspan said about our economy:

Then we got Helicopter Ben:

Aren't we just the luckiest country on earth to have had these two guys in charge of our economy.

Zero Hedge- Three Horrifying Facts About the US Debt “Situation”

Some very scary facts about the National Debt from Zero Hedge.

Three Horrifying Facts About the US Debt “Situation”
Submitted by Phoenix Capital Research on 10/07/2010

#1: The US Fed is now the second largest owner of US Treasuries.

That’s right, this week we overtook Japan, leaving China as the only country with greater ownership of US Debt. And we’re printing money to buy it. Setting aside the fact that this is abject lunacy, this policy is trashing our currency which has fallen 13% since June… as in four months ago. Want an explanation for why stocks, commodities, and Gold are exploding higher? Here it is.

#2: “There are only about $550 billion of Treasuries outstanding with a remaining maturity of greater than 10 years.”

This horrifying fact comes courtesy of Morgan Stanley analyst David Greenlaw. And it confirms what I’ve been saying since the end of 2009, that the US has entered a debt spiral: a time in which fewer and fewer investors are willing to lend to us for any long period of time… at the exact same time that we must roll over trillions in old debt and issue an additional $100-150 billion in NEW debt per month in order to finance our massive deficit.

And only $550 billion of the debt we’ve got to roll over has a maturity greater than 10 years!?!?

So we’re talking about TRILLIONS of old debt coming due in the next decade. The below chart depicting the debt coming due between 2009 and 2039 comes courtesy of the US Treasury itself. In plain terms, we’ve got some much debt that needs to be rolled over that you can’t even fit it on one page and still read it.

#3: The US will Default on its Debt

… either that or experience hyperinflation. There is simply no other option. We can NEVER pay off our debts. To do so would require every US family to pay $31,000 a year for 75 years.

Bear in mind, I’m completely ignoring the debt we took on with the nationalization of Fannie and Freddie, AIG, and the slew of other garbage we nationalized or shifted onto the Fed’s balance sheet. And yet we’re STILL talking about every US family making $31,000 in debt payments per year for 75 years to pay off our national debt.

Obviously that ain’t going to happen.

So default is in the cards. Either that or hyperinflation (which occurs when investors flee a currency). Either of these will be massively US Dollar negative and horrible for the quality of life in the US. But they’re our only options, so get ready.

Good Investing!

Graham Summers

UK Telegraph - Gold is the final refuge against universal currency debasement

The value of the dollar is dying but our government is doing nothing productive to prevent this from occuring.

Gold is the final refuge against universal currency debasement

States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

“We live in an amazing world. Everybody has big budget deficits and big easy money but somehow the world as a whole cannot fully employ itself,” said former Fed chair Paul Volcker in Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.

“It is a serious question. We are no longer talking about a single country having a big depression but the entire world.”

The US and Britain are debasing coinage to alleviate the pain of debt-busts, and to revive their export industries: China is debasing to off-load its manufacturing overcapacity on to the rest of the world, though it has a trade surplus with the US of $20bn (£12.6bn) a month.

Premier Wen Jiabao confesses that China’s ability to maintain social order depends on a suppressed currency. A 20pc revaluation would be unbearable. “I can’t imagine how many Chinese factories will go bankrupt, how many Chinese workers will lose their jobs,” he said.

Plead he might, but tempers in Washington are rising. Congress will vote next week on the Currency Reform for Fair Trade Act, intended to make it much harder for the Commerce Department to avoid imposing “remedial tariffs” on Chinese goods deemed to be receiving “benefit” from an unduly weak currency.

Japan has intervened to stop the strong yen tipping the country into a deflation death spiral, though it too has a trade surplus. There is suspicion in Tokyo that Beijing’s record purchase of Japanese debt in June, July, and August was not entirely friendly, intended to secure yuan-yen advantage and perhaps to damage Japan’s industry at a time of escalating strategic tensions in the Pacific region.

Brazil dived into the markets on Friday to weaken the real. The Swiss have been doing it for months, accumulating reserves equal to 40pc of GDP in a forlorn attempt to stem capital flight from Euroland. Like the Chinese and Japanese, they too are battling to stop the rest of the world taking away their structural surplus.

John Paulson's scary speech: Double digit inflation by 2012, gold at US $4,000

If you have the means it is time to get out of the bond market and buy some gold or silver. When Billionaires are investing 80% of their personal wealth in precious metals you would be foolishess not to heed the warning.

John Paulson: Sell Bonds; Buy Stocks; Double Digit Inflation Coming


By ROBERT LENZNER

It could be time to sell your low-yielding bonds and replace them with higher-yielding common stocks.

Multibillionaire hedge fund operator John Paulson, the investment genius who made a killing going short subprime mortgages a few years ago, told a standing room only crowd at New York’s University Club that double-digit inflation is about to rear its ugly head by 2012, killing the bond market, and restoring strength to equities and gold.

Paulson’s warning to sell U.S. government bonds is one of the latest signs that the most successful investors of this generation believe the run up in bonds is over. Paulson especially underscored the attraction of equities with earnings yields of 7%-8% compared to the 2.6% pittance available on 10-year Treasuries.

Paulson listed his favorite blue-chip stocks; JNJ (Johnson& Johnson) at a 3.8% yield; KO(Coca Cola);PFE, 4% yield., as well as C (Citigroup), BAC (BankofAmerica) and STI (Suntrust Banks) and RF (Regions Financial).

Paulson is a pro at buying the distressed bonds of bankrupt companies, and then converting the debt to equity in reorganization and benefiting from the potential run up. He mentioned one of his greatest plays — K-Mart, which emerged from bankruptcy at $10 a share and then skyrocketed to $190 a share.

His crystal ball is for 2% GDP growth for 2011 and 2012 and he warns that the Fed’s promise of quantitative easing should contribute to double-digit inflation over the next few years.

As this is the best time in 50 years to buy homes, Paulson advised his listeners, crowded into 3 separate dining rooms, to issue 30 year mortgages to buy a home as “your debt and interest payments get locked in at record lows, while the price of your home will rise.”

“If you don’t own a home buy one,” Paulson recommended; ” if you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home.”

What is the Federal Reserve trying to hide?

On November 7, 2008, Bloomberg filed a lawsuit seeking access to documents detailing, which banks borrowed money from the Federal Reserve. Since that time both the Fed and the banks have fought releasing this information. Why? Well some have argued that the amount of money loaned exceeds the reported $2 Trillion acknowledged by the Federal Reserve by Tens of Trillions of dollars.

This argument is completely unfounded but it does make you think when you hear the Federal Reserve's argument against the release of this information. The Fed argued in the case that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help.

Why would these banks be stigmatized by borrowing a measly $2 Trillion? We know for a fact that Bank of America according to its 2009 10K borrowed a total of $45 Billion of TARP money. At the time BOA had assets totalling $2.2 Trillion. Ladies and gentlemen that means that the loan was only for 2% of BOA's total assets. Personally I wish my student loans only totaled 2% of my assets. If that were true I would be worth $3.3 Million. 

Something is rotten on Maiden lane and I smell a cover-up.   

Fed Seeks Delay of Bank Data Release While Considering Appeal

Aug. 26 (Bloomberg) -- The Federal Reserve Board sought to delay the court-ordered release of documents identifying banks that might have failed without the U.S. government bailout while it considers an appeal to the U.S. Supreme Court.

The Fed asked the U.S. Court of Appeals in New York yesterday to delay implementation of a ruling that compels the central bank to release the documents.

“The stay is necessary to permit the board to consult with the Department of Justice regarding an appeal to the Supreme Court,” Fed spokesman David Skidmore said.

The appeals court on Aug. 20 denied the Fed’s request to reconsider its decision requiring it to release records of the $2 trillion U.S. loan program.

"The Secret of Oz"

Interesting video regarding the debt cycle and the eventual implosion of fiat currency.

The economy of the U.S. is in a deflationary spiral. Nothing can stop it -- except monetary reform.

1. No more national debt. Nations should not be allowed to borrow. If they want to spend, they have to take the political heat right away by taxing.

2. No more fractional reserve lending. Banks can only lend money they actually have.

3. Gold money is NOT the answer. Historically gold ALWAYS works against a thriving middle class and ALWAYS works to create a plutocracy.

4. The total quantity of money + credit in a national system must be fixed, varying only with the population.

Rick Santelli goes nuts again- time to get him nominated as the Fed Chairman

Rick Santelli went a little nuts this morning, in a rant (at the 5:40 mark) that easily qualifies in his Top 3 of all time. Rick gets wound up based on earlier disclosure by Bill Gross that if the government guarantee of the GSEs were removed, he would only participate in the mortgage market if there was 30% down payments by first time homebuyers (oh, and, tee hee, guess who will be present and providing "eye of the monopolist beholder" advice at next Tuesday's panel). As Rick summarizes: "the people holding, the Treasury or institutions, are locked up in this place where the subsidies can't come out; extrication is going to be difficult much less getting out of the way of anything they may do in the future." Yet what sets Rick off is the debate over why the Fed should not let housing crash to its fair value bottom, instead of artificially pushing rates lower and lower, which benefits nobody except those serial refinanciers who hope to lock in a 30 Year at 0.001%.

Ben Bernanke was Wrong

If Helicopter Ben was this wrong in the past, why should we believe anything that comes out of the little weasel's mouth now, when he says the economy is turning around.