Bernanke at the National Press Club

They turned out big time for Fed Chairman Ben Bernanke's speech before the National Press Club in Washington D.C. I counted television cameras from at least 15 different outlets, and just as many still photographers. The Fed has the full text of his prepared remarks here.

Of note, twice Bernanke mentioned September '08. Once during his prepared remarks and once in the Q&A. I believe I have uncovered a serious government panic in September 2008 and you will soon see my full report on what went on during the period and how the government reacted, so it was very interesting to me that Bernanke mentioned this specific period twice.

Of further note, it continues to amaze that Bernanke thinks he will be able to shrink the monetary base, when banks start loaning again."A significant shrinking of the balance sheet can be accomplished relatively quickly," he said.

He clearly has little concern for inflation right now and reemphasized that the Fed will start buying in conjunction with the Treasury, auto loan paper, student loan paper and consumer credit paper.

Thus, as far as I can see it is full steam ahead with the money printing. I think he is trapped, the minute he stops the printing the economy will crash, if he keeps printing the inflation will eventually be Tsunami like.

Bernanke's Boyhood Home Is Sold After Foreclosure

Bernanke's family sold the property more than a decade ago. It ended up on the block late last year after its former owners fell behind on their mortgage payments.

(Left, Bernanke's boyhood home with new owner Travis Jackson. "It's just a great sense of pride to know that one of the greatest leaders we have in our time period walked the same floors I walk," says Jackson. "It's just sheer excitement." )

Dillon County, where Bernanke grew up, is getting pummeled by the recession, largely because of the capital goods nature of the products made in factories in the area.

According to WSJ, Mohawk Industries in Dillon has shuttered a plant that made yarn for carpeting and employed 137 people. Wix Manufacturing, a unit of Affinia Group Inc., has cut hours and a few jobs at its automotive-filter factory. Smurfit-Stone Container Corp., which makes corrugated-cardboard packaging in nearby Latta, filed for bankruptcy protection last month. Overall Dillon's unemployment rate is at 14.2% -- almost double the national average.

Still in business is Bernanke's 80-year-old uncle, Mort, the only Bernanke still living in Dillon, continues to run his small company selling oxygen tanks, hospital beds and other medical equipment.

"They Are Going to Have to Call on Bernanke"

George Melloan takes a look, in today's WSJ, at the current financial markets and the money that will be needed to fund the "stimulus" package, and he reaches one conclusion:

The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them.

What will happen as a result of this money printing madness? Melloan answers this question:

Well, the product of this sort of thing is called inflation. The Fed's outpouring of dollar liquidity after the September crash replaced the liquidity lost by the financial sector and has so far caused no significant uptick in consumer prices. But the worry lies in what will happen next.

Melloan gets the inflation part correct, but then believes this will automatically lead immediately to stagflation:

Inflation is the product of the demand for money as well as of the supply. And if the Fed finances federal deficits in a moribund economy, it can create more money than the economy can use. The result is "stagflation," a term coined to describe the 1970s experience. As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation

In our book this is a fundamental misunderstanding of stagflation. Stagflation occurs when the Fed prints enough money to fuel inflation, but not enough to force the economy completely in the direction of a distorted consumption/savings ratio. Because the Fed printing ultimately leads to inflation, more and more new money needs to be printed to flood the economic structure in a fashion to distort it in favor of the capital goods sector. If you need 15% money printing to support the distorted structure, but the Fed is only printing 10%, that will result in inflation and recession, i.e., stagflation.

At the present time, the Fed's double digit money printing appears to be more than sufficient to support a distorted capital structure, which will mean inflation and a climbing economy and stock market.

The Nobel Prize winning economist, Friedrich Hayek, who coined the term stagflation, understood this. Inflation itself, when it is powerful enough, will fuel the stock market higher. He said as much in his interview in 1975 on Meet the Press. Equities were the best hedge against inflation, he said. The 1970's, however, did turn into a period of stagflation, as the Fed printed money, but not enough to support the distorted capital structure. Thus, you had recession and inflation. The current period, at least in the short-term, appears to be a period when the Fed printing will be sufficient to support the distorted capital structure and thus, the current period is likely to be a better fit for Hayek's advice, then when he initially gave it in 1975.

Upcoming Fed Chairman Bernanke Public Appearances

February 10:

He appears before the House Financial Services Committee

February 18:

He delivers a speech at the National Press Club.

February 24:

He begins his two-day semiannual monetary policy testimony in front of the Senate Banking Committee.

---
I may be attending the National Press Cub speech. I will publish here in advance the questions I will attempt to ask the Fed chairman during the Q & A.

Zimbabwe Abandons Its Currency

Zimbabweans will be allowed to conduct business in other currencies, alongside the Zimbabwe dollar, in an effort to stem the country's runaway inflation. For all practical purposes this is the end of the Zimbabwean dollar.

The announcement was made by acting Finance Minister Patrick Chinamasa.

Until now only licensed businesses could accept foreign currencies, although it was common practice.

This is a big break for the average impoverished Zimbabwean.

Now I'm wondering, does this make Ben Bernanke the world's top active inflationist?

Gloom In Davos

The BBC's Robert Preston reports

The gloom here from business leaders, private-equity specialists, hedgies, bankers, management consultants and economists is deep and unrelenting.

They are immensely pessimistic about the economic outlook and about the ability of governments to lessen the pain.

I'd be tempted to come home immediately and climb under the duvet, except for one thing: when the herd is charging in a particular direction, the herd is normally wrong.

So on the basis that the best time to buy (metaphorically speaking) is when everyone else is selling, just maybe we're near the darkest hour for the global. economy.

Right you are Robert, things may turn positive short-term, courtesy of Ben Bernanke and the World Wide Money Printers. Extremely destructive inflation may be down the road, but traditional government collected datapoints may show pseudo recovery by the second half of 2009, until the inflation and crashing dollar kick in and expose the fraud.

Proof Most Don't Understand How Screwed Up the Economy Is

According to a recent poll, 79 percent were optimistic about the next four years under an Obama administration, a level of good will that exceeds that measured for any of the past five incoming presidents. And it cuts across party lines: 58 percent of the respondents who said they voted for John McCain in the general election, also said they were optimistic about the country in an Obama administration.

Here's what will really occur. The economy will have an early take off, fueled by Ben Bernanke money printing. Shortly after takeoff, the economy will hit a flock of geese (roaring inflation and a crashing dollar), shutting down all engines. But there will be no water to land on and Chesley B. 'Sully' Sullenberger III will not be at the controls. Instead, Ben "Helicopter" Bernanke will be at the controls.

Money Supply Explosion Madness

M2 nsa three month annualized money supply growth has ticked up another notch, this past week, and is now growing at an incredible 19.3%. This is extremely high money growth, that is somehow being usurped by M1 growth. M1 nsa three month annualized money supply growth is at an astounding 73.2%, which means Fed Chairman Ben Bernanke is doing all he can to ease fears and get the economy going, by a policy of reckless abandoned. That most continue to put their money in the M1 components of currency and checking accounts is an example of the lack of understandng by the man on the street.

At some point this attitude of placing money in M1 will reverse itself and the economy will climb (at least as far as tracked data is concerned)and prices will soar. This is not the time to be in short-term Treasury paper.

As George Reisman has put it (Via an annonymous commenter at Free Advice):

The government today has unlimited powers of money creation. And so it is highly likely, given its evident willingness to use those powers, and the overwhelming public support that exists for using them, that the increase in the supply of money it brings about will ultimately outweigh the present increase in the public’s demand for money for holding. When and to the extent that that happens, and business sales revenues and profits begin to rise and employment and wage rates begin to rise, the public’s demand for money for holding will once again begin to fall.

At that point the massive increase in the quantity of money the government is currently bringing about will fuel sharply rising prices and give birth to a new crisis.

Mugabe Jumps to Lead Over Bernanke in Money Printing Race

Zimbabwe's central bank will issue a 100 trillion Zimbabwe dollar banknote. At current black market rates, it will be worth about $33.

In addition to the Z$100 trillion dollar note, the Reserve Bank of Zimbabwe plans to launch Z$10 trillion, Z$20 trillion and Z$50 trillion notes, the Herald newspaper reported.

Prices are doubling every day.

Bernanke Signals He Will Shrink the Fed's Balance Sheet Before Inflation Hits

Yesterday, Fed Chairman Ben Bernanke delivered the Stamp Lecture at the London School of Economics. As part of his speech, he explained how he envisions the Fed will shrink its balance sheet once banks begin to loan aggressively again:

Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate.

However, at some point, when credit markets and the economy have begun to recover, the Federal Reserve will have to unwind its various lending programs. To some extent, this unwinding will happen automatically, as improvements in credit markets should reduce the need to use Fed facilities. Indeed, where possible we have tried to set lending rates and margins at levels that are likely to be increasingly unattractive to borrowers as financial conditions normalize. In addition, some programs --those authorized under the Federal Reserve's so-called 13(3) authority, which requires a finding that conditions in financial markets are "unusual and exigent"--will by law have to be eliminated once credit market conditions substantially normalize. However, as the unwinding of the Fed's various programs effectively constitutes a tightening of policy, the principal factor determining the timing and pace of that process will be the Committee's assessment of the condition of credit markets and the prospects for the economy.

As lending programs are scaled back, the size of the Federal Reserve's balance sheet will decline, implying a reduction in excess reserves and the monetary base. A significant shrinking of the balance sheet can be accomplished relatively quickly, as a substantial portion of the assets that the Federal Reserve holds--including loans to financial institutions, currency swaps, and purchases of commercial paper--are short-term in nature and can simply be allowed to run off as the various programs and facilities are scaled back or shut down. As the size of the balance sheet and the quantity of excess reserves in the system decline, the Federal Reserve will be able to return to its traditional means of making monetary policy--namely, by setting a target for the federal funds rate.

So now you have the theory. Will Bernanke be able to pull this off by smoothly shrinkng the monetary base without shrnking the money supply so rapidly that it plunges the economy back into recession, or too slowly that inflaton gets out of control? It's unlikely, and the best bet appears he will err on the side of inflation.

Extraordinary Money Supply Growth Continues

The latest Federal Reserve money supply numbers, through December 29, 2008, continue to show huge money supply growth. Three month M1 sa is growing at 30.6% annualized rate. Note: Although we normally use non-seasonally adjusted numbers, during the Christmas season it makes more sense to look at M1 on a seasonally adjusted basis since there is abnormal demands for cash during the holiday season. Further, M1 is our fear indicator, the faster it grows relative to M2, the more fear remains in the system. At current M1 growth, fear is obviously through out the system.

Three month M2 nsa is growing at 18.0% annualized rate.

Clearly, Ben Bernanke is serious about his "quantitative " approach to monetary policy. This will reverse the economy and cause eyeball numbers such as GDP and unemployment to flash that the worst is over, much faster than most expect. However, the price inflationary impact of this money printing will be astounding.

Alert: Bernanke May Testify Wednesday

Federal Reserve Chairman Ben Bernanke and Federal Deposit Insurance Corp. Chair Sheila Bair are tentatively scheduled to appear next Wednesday before a U.S. House panel on the $700 billion rescue plan, WSJ is reporting.

The 2008 EPJ Awards

There are no statues or television events associated with my EPJ Awards, but feel free, if you are so inclined, to don a tuxedo before reading the remainder of this post, to pour yourself a glass of champagne, and to clap, cheer, hiss or boo when appropriate.

Economist of the Year: Peter Schiff

The award of economist of the year should go either to an economist who has made path breaking new discoveries in the science, or who has advanced the general level of economic understanding on the planet. Schiff falls into the latter category. His consistent and clear presentation of sound economics that proved correct in forecasting events over recent months, in the face of laughter and derision, will raise curiosity across the land about the business cycle theory, specifically, Austrian Business Cycle Theory.

Here's a YouTube video of Schiff battling mainstream nonsense. It puts everything into perspective:



Inside Operator of the Year: Treasury Secretary Henry Paulson

In short order, Pauslon was able to convince Congress to give him $350 billion to buy up distressed mortgages. Paulson managed to disperse the entire $350 billion to his crony buddies without buying one distressed mortgage. In a remarkable disrespect for Congress and the public at large, Paulson also changed, on a near daily basis, the reasons he was distributing the funds in the fashion he was.

Inflationist of the Year (Also known as the Robert Mugabe Award): Ben Bernanke

After nearly halting money printing through out the Summer of 2008, Bernanke has reversed engines and tells us that his monetary policy is now one of "quantitative" money supply control, which apparently is Bernanke's attempt to replace "speed of light" with "speed of money printing" in Einsten's equation E=MC2. Over the last three months, Bernanke has increased money supply, as measured by M2 nsa, at an annualized rate in excess of 20%. Bernanke's effort will result in a change by the end of 2009 from the belief that "cash is king" to the knowledge that cash, in the form of paper dollars, is toilet paper.

Ben Bernanke versus the Housing Market

Ben Bernanke continues to print money while home prices continue to drop. According to the S&P/Case-Shiller home-price indexes, As of October, the 10-city index is down 25% from its mid-2006 peak and the 20-city is down 23% with home prices in the Sun Belt continuing to be hit hardest. The drop marks the 10-city index's 13th straight monthly report of a record decline. In 20 major metropolitan areas, home prices dropped 18% from the prior year, also a record, and 2.2% from September.

"The bear market continues; home prices are back to their March 2004 levels," said David M. Blitzer, chairman of S&P's index committee. He added that both composite indexes and 14 of the 20 metropolitan areas are reporting new record declines.

Three of the metro areas have given back, on average, more than 30% of the value of homes since October of last year. Phoenix remains the weakest market, reporting an annual decline of 32.7%, followed by Las Vegas, down 31.7%, and San Francisco down 31.0%. Miami, Los Angeles, and San Diego were close behind with annual declines of 29.0%, 27.9% and 26.7%, respectively.

Bernanke's outrageous money printing will reverse this trend much sooner than most expect, before the end of the first half of 2009.

Bernanke, Paulson, Bush, the Obama Gang and the Dollar

Given the moves and signalled futures moves of Bernanke, Paulson, Bush, and the Obama gang, it is difficult to see how the dollar and economy will survive. Bob Higgs provides a great overview of the current situation, here.

Shop 'Til You Drop: The Retail Sales Picture

The headline retail sales spending number is down 8% in December according to MasterCard's Spending Pulse. However, taking the number apart, gives a slightly different story.

When gasoline sales (gasoline prices are down 40%, year-over-year) are excluded, the decline through Christmas Eve is only 4%. Since the price of oil is influenced, not only by retail gasoline demand, but also commercial and industrial use, this is a much more complicated number.

Now for the retail picture ex-gasoline. Bad weather on both coasts clearly had a negative impact on sales, but a more important factor is that between Thanksgiving and Christmas this year there were just 27 shopping days versus 32 in 2007, a difference of 16%. Unlike 2007, you have a very strong post-Christmas day shopping window Friday-Saturday-Sunday. Thus the number to watch is the number I posted earlier, January 8, when full December numbers are announced.
All this said, it was still a dismal Christmas season for retailers. The demand for cash is obviously very strong--people are very scared about the economy. However, this doesn't mean that the consumption-savings ratio is not readjusting towards consumption. If capital goods sales plummet faster than retail sales, and they are, the ratio is readjusting in favor of consumption. ABCT lives. What's going on is a downward readjustment of the price level at the same time as the consumption savings ratio is readjusted, with the added demand for cash acting as though the money supply is shrinking.

This is a once in a lifetime phenomena, equivalent to a Total Solar Eclipse. What makes this even more amazing is that you now also have the Fed aggressively printing money at record levels. It's almost as though the "Big One" earthquake hits Southern California on the same day as the Total Eclipse of the sun.

At some point the Fed money printing, what Bernanke is calling "quantitative (I'll say) money management", will overtake the desire to hold cash balances. Things will reverse and there will be a flight from cash. Thus, your money right now is worth more than it probably ever will again.

In other words, there are major discounts at most retailers---you will never see these type prices again, if Bernanke succeeds in his money printing--it's not a day to be reading blogs. It is the ultimate shop 'til you drop day. If there is something you need or want, today is the day to buy it. The price is likely never to be as low again.

Cash is king, probably only for about another week.

>

10 Municipal Bankruptcies In 2009?

It's a race. On the one hand you have the Fed pumping money into the bank system at near Zimbabwe rates to re-inflate the system, on the other had, Ben Bernanke's 2008 Summer of Monetary Stinginess is having its latest impact on municipalities.

Will Bernanke's money gusher reach the municipal sector in time? If not, it is going to be another mess.

The accountant who predicted the nation’s largest municipal bankruptcy says as many as 10 insolvencies will roil the $2.7 trillion U.S. market for state, county and city debt next year, according to Bloomberg.

John Moorlach said in 1994 that Orange County, California’s leveraged investing strategy could wreck its finances. The county went bankrupt about six months later after losing $1.6 billion.

As many as four cities in California and six others nationwide may seek court protection from creditors next year under Chapter 9 of the bankruptcy code, the section devoted to municipal governments, Moorlach said in an interview.

Moorlach said many California cities are watching Vallejo, a city of 117,000 on San Francisco Bay that filed under Chapter 9 in May. The city hopes to rewrite its labor contracts with police and firefighters.

“If Vallejo is successful in unwinding pension agreements, you could see Chapter 9 become a whole new industry,” Moorlach said.

Of course, the Fed and Treasury will in some fashion come to the rescue of any big cities that get into trouble, but it still is extremely dangerous to hold this paper. For smaller municipalities where a rescue may not occur at all, holding municipal paper is like playing Russian roulette.

Behind the Fed's Desire to Issue Its Own Debt Obligations

Bob Murphy and I had an excellent discussion via email about the trap the Fed is in, given the huge amount of reserves in the system. Bob explains the trap, here.

The gist of Bob's analysis is that unless Bernanke wants to turn the United States inflation rate into a competitive race with Zimbabwe, the Fed is going to have to sell Fed assets to drain reserves at some point. The problem is that a large chunk of Fed assets are now junk CDO's and the like. Who's going to buy those?

And, then it hit me, the Fed wants to be able to issue debt so that it can drain reserves. Any money the Fed receives via the banking system to pay for newly issued Fed debt will be retired. Viola, extra reserves, poof, pow, gone.

Of course, that's Bernanke's model. Execution will be another story, given the amount of debt the Fed will have to issue to drain enough reserves. Excess reserves are currently over $500 billion.

A word of advice to the intellectually curious, don't die in 2009, it's going to be a very interesting year.

Money Supply Watch and the Real Story for 2009

M1 nsa continues to grow at remarkable rates.

According to the Fed's latest numbers, three month annualized M1 nsa is growing at 52%. This indicates there is still tremendous fear in the system.

Three month annualized M2 nsa is growing at 20.8%. Growth in M2 is indicative of Fed money printing. 20.8% M2 growth is also remarkable. The readjustment period in the economy is going to end much sooner than most expect, given these money injections by Bernanke. Inflation and a collapsing dollar is going to be the real story in 2009, if Bernanke keeps this up.

Jim Grant on the Credit Markets, Zero Yield Treasury Securities, the SEC, and Much More

on Bloomberg TV, here.

(Via LRC)

Bernanke Backlash: Dollar Has Biggest One Day Slide Versus Euro

As the Fed cuts short term rates to near zero, the flight away from the dollar has begun. Forget about the safety of Treasury securties, foreigners want to earn interest. This is the start of a MAJOR backlash against Bernanke's mad money manipulations.

The dollar slid to a 13-year low against the yen today and had its biggest one-day decline versus the euro after the Federal Reserve reduced its target interest rate Tuesday.

The dollar fell to 87.14 yen, the lowest since July 1995 yesterday. It dropped to $1.4437 per euro from $1.4002, the weakest since Sept. 30. The dollar is now down more than 11% versus the euro this month. It is down 8% for the month versus the yen.

The Inflationists Speak: Bernanke Is Great

CNBC's panel of "experts" has named Ben Bernanke "Man of the Year".

This is the same Bernanke, we might add, who stopped printing money all summer, which resulted in the downturn in the economy that began this September.

After crashing the economy, Bernanke has reversed engines and has begun flooding the economy with money that should result in a rebound in price inflation in 2009 to record levels.

On top of this madness, Bernanke has been responsible for creating a number of new "tools" for the Fed whose full impact on the economy are near impossible to determine in advance.

In short, the way to think of Bernanke is as a madman mixing all kinds of potions in his lab, the lab being the economy of the United States.

But CNBC's inflationists think differently:

"I think all of those people who have made fun of Ben by calling him 'Helicopter Ben' owe him a big, big apology," said Paul McCulley, managing director at Pimco, the world's largest bond fund.

McCulley called Tuesday's move "a glorious day in the history of central banking" in which the Fed "went all in, in poker terms, in the fight against deflation and depression."...

In the view of BlackRock vice chairman Bob Doll, Bernanke showed astounding composure in the face of a financial crisis the likes of which the nation has never seen.
"The guy's been on the hot seat nonstop," Doll said. "I can't think of a whole lot better people sitting in that chair."...

And Abby Joseph Cohen, chief US investment strategist at Goldman Sachs, said Bernanke did "a fabulous job" this year, while she also said Treasury Secretary Henry Paulson deserves mention as someone "who has shown tremendous energy and creativity" in addressing the crisis...

Bond fund Pimco, Goldman Sachs and private equity firm, BlackRock, all major beneficiaries of inflation, think Bernanke is great. Interesting. The big question: Who picked these inflationists as "CNBC's panel of experts" and why? It looks like a stacked deck to me. Obviously, there is a new Bernie is Great promotion starting. Watch who writes up the pro Bernie stories and you will discover who the tools of the insiders are.

Fed Sets Target Rate at 0 to 0.25%--Will Buy Huge Quantities of Assets; Major Inflation Ahead

The Federal Open Market Committee announced that it will establish a target range for Federal Funds of 0 to 1/4 percent.

A lot of this is window dressing since the effective Fed Funds rate has already been trading around 0.15% for the last two weeks.

Further, as I have pointed out, since the Fed has started paying interest on reserves on balance at the Fed, the level of the Fed Funds rate is not as significant since the Fed can add as much reserves as it wants at given interest rate levels.

Indeed, it appears that it will add huge amounts of reserves. From today's Fed statement:

The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity.

Unless the Treasury is going to be borrowing funds to put on deposit with the Fed, this means the Fed will be creating additional reserves when they buy these assets. Since the latest money supply numbers show three month annualized M2 money supply growing at 17%, it appears that Bernanke is clearly clueless as to the platform he is building for one of the greatest inflation bursts in the history of the United States.

Whoever is buying T-bills at near zero interest is in for a rude awakening, the inflation ahead is going to be fast and furious. It could start as early as January.

There's No Flight to Cash in Russia

It's a flight away from cash

Bloomberg reports:

Russians are shifting their cash into foreign currencies and buying things they don't need as the economy stalls and the central bank weakens its defense of the ruble, signaling a larger devaluation may be on the way. The currency has fallen 16 percent against the dollar since August, when Russia's invasion of neighboring Georgia helped spur investors to pull almost $200 billion out of the country, according to BNP Paribas SA...

Property is now a protective investment, not just a status symbol, said Sergei Polonsky, founder of real estate developer Mirax Group, which is building Moscow's tallest skyscraper...

For the burgeoning middle class, investments of choice range from electronics to gold jewelry. Evroset, Russia's largest mobile-phone chain, is telling people to buy anything they can.

'It's better to feel happy that you own something than to fear losing the money you have earned,' Chairman Yevgeny Chichvarkin says in a letter posted at 5,200 Evroset stores. 'If you need a car, buy a car! If you need an apartment, buy an apartment! If you need a fur coat, buy a fur coat!'

Take notes, if Bernanke continues to print money the way he has since, September, this will be the U.S. down the road.

UCLA Anderson The Magnificent Says It's Going to be a Nasty Recession

Given that the economy over the next twelve months will be largely determined by activities of Ben Bernanke and the Federal Reserve over the next twelve months, and that it doesn't appear that even Bernanke knows to what degree he will boost the money supply over that period, UCLA Anderson has to be labeled UCLA Anderson the Magnificent, and nothing less than courageous, for making a forecast out to 2010. But they have done just that.

UCLA Anderson Forecast predicts that the current recession will be "nasty" inflicting the national economy with four quarters of negative growth (followed by very tepid growth rates) and rising unemployment rates that last through 2010, according to a press release they issued today.

The UCLA Anderson Forecast now expects that real Growth Domestic Product (GDP) will decline 4.1% in the current quarter, followed by respective declines of 3.4% and 0.8% in the first two quarters of 2009. In addition, the unemployment rate is forecast to rise from October 2008's 6.5% to 8.5% by late 2009/early 2010. Associated with the rising unemployment rate will be the loss of two million jobs over the next 12 months.

For California they forecast negative growth through the middle of next year and unemployment as high as 8.7% until 2010.

UCLA Anderson Senior Economist Jerry Nickelsburg writes that the "Inland Empire, Orange County, the East Bay and Central Valley will be hit hardest as the recession provides a double whammy with a generalized downturn in demand and a postponement of a recovery in residential construction." Coastal regions will be impacted by declining imports coming through California ports, while the global recession weakens demand for manufactured California exports.

The outlook for California calls for a very weak first three quarters of 2009, with the glimmer of a recovery in the fourth quarter. A key to look for will be a recovery in the rest of the country and in Asia, which will create demand for California goods and services. Unemployment is expected to contract by -0.7% in 2008 and -1.4% in 2009, before growing at a more-than-modest 0.3% in 2010. The unemployment rate is forecast to rise as high as 8.7% next year and remain at that level through 2010.

Bernanke's Madman's Toolbox

Yesterday, I commented:

Bernanke better watch out with all these new financial "tools" he is creating. It's possible one of them won't be completely thought out and will result in all sorts of unintended consequences.

Today, my inbox contains two emails containing links to stories detailing how haywire events could develop from Bernanke's toolbox.

Nick sent along this link from NYT's Dealbook which warns about the Bernanke proposal for the Fed to issue their own debt:

The prospect of the Federal Reserve issuing its own bonds now that the United States Treasury has stopped borrowing on its behalf could paradoxically make the world a riskier place, according to Breakingviews. It threatens to reduce the effectiveness of Fed policy moves or, worse, influence them, the publication argues.

The tactic is only at the trial-balloon phase, and Congress may well reject it as an end run around its right to determine government borrowing. But lawmakers have blessed questionable strategies before, it notes.

If the Fed did issue traded debt, the market prices would act as a barometer of how investors viewed its policies, Breakingviews says.

Even if the debt were explicitly backed by the government, prices would probably still reflect market sentiment, it argues. After all, the publication says, bank-issued bonds insured by the Federal Deposit Insurance Corporation and the quasi-guaranteed debt of Fannie Mae and Freddie Mac trade with effective interest yields that exceed Treasury securities by notable, and in some cases volatile, margins.

It’s likely that rates on any Fed-issued bonds would diverge from Treasury bonds too, especially since the central bank lacks the power to raise tax revenue to pay interest, says Breakingviews. The market would probably look to the Fed’s own balance sheet, which has more than doubled in the last year, and weigh that against its ability to raise money by increasing reserves, when determining the risk of the bonds.

If the Fed pursues policies that could result in a loss — like its plan to lend to entities that buy packages of consumer loans — the risk premiums on its bonds should increase, it says.

Such snap judgments on policy moves could undermine the Fed’s effectiveness, Breakingviews says. If the bond market gave a thumbs-down to even a sensible policy, it would throw doubt on the Fed’s willingness to follow through, especially because the higher risk premium would increase the Fed’s future borrowing costs, the publication argues. Since monetary policy has a large psychological element, that could be a big problem.

Of course, there are already indicators of market sentiment about Fed policy, the publication notes. And the devil of any Fed debt would be in its details, it says. But with the Fed’s resources stretched and its mandate expanding, giving the markets another red flag to wave seems foolhardy, Breakingviews concludes.

Also this morning, Jeffrey Rogers Hummel emailed a link to his extensive analysis of the Bernanke decision by the Fed to pay interest on bank reserves. The JRH conclusion:

I predict that future economic historians will look back on this change as a major blunder during the current credit tightening, making traditional monetary policy less effective...Moreover, the paying of interest on reserves was motivated by the misguided focus on interest rates, rather than money supply measures, as an indicator and target of monetary policy...The irony is that the Fed is now less able to hit its interest rate target than ever before. It first adopted the corridor or channel system of the ECB, setting the interest rate on reserves below its Federal funds target, as a lower bound, with the discount rate above the target as an upper bound. But as the effective Federal funds rate fell not only below target but below the interest rate on reserves, the Fed on November 5 moved to the New Zealand system, where the interest rate on both required and excess reserves is set right at the target Federal funds rate. So far, this hasn't worked either.

Toolmaker Bernanke Is At It Again: Fed Wants to Issue Direct Debt

The very strange Ben Bernanke is apparently circulating a very strange proposal that calls for the Fed to directly issue debt.

WSJ reports:

The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets...Fed officials have approached Congress about the concept, which could include issuing bills or some other form of debt, according to people familiar with the matter.

Since the Treasury can borrow money and deposit it at the Fed, and, further, the Fed can print any amount of money it desires, it is not clear exactly what this Bernanke initiative will accomplish other than create some kind of financial masturbation tool for Bernanke.

Bernanke better watch out with all these new financial "tools" he is creating. It's possible one of them won't be completely thought out and will result in all sorts of unintended consequences.

Is the Gold Price Being Manipulated?

Bob Murphy at his blog raises the interesting, and I think important question, with regard to gold price manipulation.

My quick reply to Bob was in the comment section of his post:

Bob,

I think it is a myth that gold goes up during a recession/depression.

What is occurring during these periods is a movement away from goods that benefit from inflation.

I believe the myth came about because of what happened during the Great Depression, when those that held gold stocks [including Keynes and Bernard Baruch] made a fortune, but this was only because FDR pushed the gold price higher and higher, with a floor.

That said, I believe gold will go much higher if Bernanke keeps up his current double digit money printing, which he started in September.

And I continued with a second comment:

As for the shortages, I believe they are of specific coins minted by the Treasury.

A coin dealer telling you he is out just means he can't order anymore from the Treasury.

As you and I both know there is no such thing as a shortage in a free market. You can readily buy or sell gold bullion at the current price, and I would venture to say that if you contacted a numismatic coin dealer, he would be able to find you any coin with any markings you wanted, even the ones that your regular gold dealer is out of, of course it would be "at the market price."

Clearly, the belief that a downturn is good for gold sticks with some, as the gold bullion coins provided by certain governments are out of stock.

For example, the huge online gold dealer, Kitco, is reporting this on its site:

The following products have been temporarily removed from our Precious Metal Store until further notice due to production and delivery delays that retailers are currently facing; Gold Eagle 1 oz, Gold Maple 1 oz, Special Gold Maple 5 X 9 pure 1 oz, Gold Buffalo 1 oz, Gold Krugerrand 1 oz, Gold Bar 10 oz, Gold Bar 1 oz, Kitco Gold Bar 1 oz, Kitco ChipGold 10 g, Kitco ChipGold 20 g Gold Philharmonic 1 oz, Silver Philharmonic 1 oz, Silver Eagle 1 oz, Silver Maple 1 oz, Silver Bar 100 oz, Platinum Eagle 1 oz, Palladium Maple 1 oz, Silver Maple Olympic Coin 1 oz.

These products will be relisted and available for order as soon as fresh inventory is readily available. In the interim, we will focus on completing pending orders as our top priority.

Please note that all remaining products listed in our Precious Metal Store are available for delivery including 1000 oz Silver bars

I can attest that this is highly unusual as I have personally in the past purchased from Kitco significant quantities of some of the coins listed, and have always received them without delay.

However, Kitco does have many other gold and silver products available for sale:

*Gold Bar 400 oz (Bob, I think you should pick up one of these with part of the advance from your forthcoming book)
$304,240.00

Gold Bar 10 oz
(Only shipping to US)
$7,701.00

Gold Bar 1000 g
$24,502.08

Gold Bar 100 g
(Only shipping to US)
$2,472.70

Silver Bar 1000 oz
$9,860.00

Platinum Bar 1 oz
(Only shipping to US)
$880.00

It is clearly an out of stock situation of certain coins rather than a gold "shortage"--not much different to what is going on with Amazon's electronic book reader, Kindle:

Amazon Kindle is a wireless, portable reading device with instant access to more
than 200,000 books, blogs, newspapers and magazines. Whether you're in bed or on
a train, Kindle lets you think of a book and get it in less than a minute.

Due to heavy customer demand, Kindle is sold out. Please order now to
reserve your place in line.

If you are trying to push the demand curve for a product downward, the last thing you want to do is give the impression the product is in short supply. Thus, a conspiracy to push the gold price down by limiting the supply of one ounce gold coins seems quite a stretch.

But, I do have something for conspiracy theorists to chew on. Although all local dealers seem to be out of popular one ounce gold coins, as is Kitco, there is one outfit that does not seem to have problems with supply. Blanchard & Co., which is owned by the ultimate military-industrial complex insider, GE, has no problem getting supplies of the American one ounce gold and the one ounce Canadian Maple Leaf. They are selling both on their site.

Says Blanchard:

Blanchard and Company, Inc. has seen unprecedented investor demand for physical gold in recent weeks, so much so that the U.S. Mint and gold suppliers cannot provide inventory to many retailers. Being the largest and most respected tangible asset investment firm of American rare coins and precious metals in the United States allows Blanchard and Company, Inc. to get first access to gold bullion, even as supplies dwindle.

Hmmm.

Attention Bankers: Bernanke Is Providing You A Profitable Arbitrage On A Silver Platter

During yesterday's speech, Fed chairman Bernanke pointed out an odd occurrence in the Fed Funds market. Despite the fact that the Fed is paying interest on reserves at the target rate of 1%, Fed Funds are trading below 1% (As of yesterday, the effective Fed Funds rate was .52%). Why would banks seemingly loan out money below 1%, when they can get 1% from the Fed. Well they are not. Here is what is going on :

Regarding interest rate policy, although further reductions from the current federal funds rate target of 1 percent are certainly feasible, at this point the scope for using conventional interest rate policies to support the economy is obviously limited. Indeed, the actual federal funds rate has been trading consistently below the Committee's 1 percent target in recent weeks, reflecting the large quantity of reserves that our lending activities have put into the system. In principle, our ability to pay interest on excess reserves at a rate equal to the funds rate target, as we have been doing, should keep the actual rate near the target, because banks should have no incentive to lend overnight funds at a rate lower than what they can receive from the Federal Reserve. In practice, however, several factors have served to depress the market rate below the target. One such factor is the presence in the market of large suppliers of funds, notably the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which are not eligible to receive interest on reserves and are thus willing to lend overnight federal funds at rates below the target.

As of yesterday, the effective Fed Funds rate was .52%, which provided Bernanke the opportunity in a footnote to his speech to point to a riskless arbitrage for bankers:

Banks have an incentive to borrow from the GSEs and then redeposit the funds at the Federal Reserve; as a result, banks earn a sure profit equal to the difference between the rate they pay the GSEs and the rate they receive on excess reserves. However, thus far, this type of arbitrage has not been occurring on a sufficient scale, perhaps because banks have not yet fully adjusted their reserve-management practices to take advantage of this opportunity.

Bernanke: Fed Money Policy Shift to Buying Notes, Bonds and Other Financial Instruments

As the Fed Funds rate trades below 1%, it is clear the Fed is looking at alternative monetary tools to manipulate the economy.

In a speech before the Greater Austin Chamber of Commerce, Austin, Texas, Fed chairman Ben Bernanke said:

Although conventional interest rate policy is constrained by the fact that nominal interest rates cannot fall below zero, the second arrow in the Federal Reserve's quiver--the provision of liquidity--remains effective. Indeed, there are several means by which the Fed could influence financial conditions through the use of its balance sheet, beyond expanding our lending to financial institutions. First, the Fed could purchase longer-term Treasury or agency securities on the open market in substantial quantities. This approach might influence the yields on these securities, thus helping to spur aggregate demand. Indeed, last week the Fed announced plans to purchase up to $100 billion in GSE debt and up to $500 billion in GSE mortgage-backed securities over the next few quarters. It is encouraging that the announcement of that action was met by a fall in mortgage interest rates.

Second, the Federal Reserve can provide backstop liquidity not only to financial institutions but also directly to certain financial markets, as we have recently done for the commercial paper market. Such programs are promising because they sidestep banks and primary dealers to provide liquidity directly to borrowers or investors in key credit markets. In this spirit, the Federal Reserve and the Treasury jointly announced last week a facility that will lend against asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration.

Translation: The Fed is going to pump and pump money into the system every way it can think of, damn the banks.

Speculation Larry Summers May End Up Heading the Fed

It appears Paul Volcker will be one of Barack Obama's key economic advisers. And it should not be forgotten that it has been claimed that Volcker remarked some time ago that Ben Bernanke is a one term Fed chairman.

Which makes speculation by CNBC's Albert Bozzo that Summers will end up at the Fed very interesting.

Alert: Paulson, Bernanke Testimony

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are scheduled to testify today before the House Financial Services Committee.

Is Kashkari A Chump?

Congress beats up on Neel Kashkari. I would be impressed if they treated Ben Bernanke this way.

Dean Baker With the Big Question

Are Ben Bernanke and Henry Paulson crony capitalists?

Federal Reserve Announces It Will Alter Formulas Used to Determine Interest Rates Paid on Required Reserves and Excess Reserves

As I previously indicated, the Fed Funds rate is not as important a factor in money supply growth as it was in the past, now that the Fed is paying interest on bank reserves. But, Bernanke does like to monkey with his "new tools". So we have a bit of Fed monkeying with the new tools, today.

The Fed announced today that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.

Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.

The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC's target federal funds rate.

The Coming Collapse Of Treasury Security Prices

FT has a solid article this morning on the huge Treasury offerings that will be required because of the "bailouts".

Among the points made:

Before the recent upheavals, the US budget deficit for the fiscal 2009 financial year starting this month was estimated between $400bn and $450bn. Some economists now expect that figure to reach $1,000bn, which would be a record. That will push Treasury debt sales sharply higher...

“It is pretty conservative to say that the cost of the bail-out will be $1,000bn and by the time all the programmes have been tallied, it could be $2,500bn,” says Jamie Jackson, portfolio manager at RiverSource Investments...

This is all going to mean greater frequency of issuance and a return of previously discontinued issues such as the three-year note and possibly the seven. At a minimum, dealers expect the return of the three-year note, which was suspended in May 2007. The sale of 10-year notes is expected to move to a monthly schedule from being sold twice every quarter at present. New sales of 30-year bonds are seen occurring every three months...

From a logistical standpoint, the quarterly sale of debt in November and this week’s sales are a major test for the thinning ranks of primary dealers. These are the banks and securities broker-dealers that participate in Treasury auctions.

From 20 primary dealers at the end of 2007, Bear Stearns, Lehman Brothers and Countrywide have fallen by the wayside this year. The list will shrink to 16 once Merrill Lynch is absorbed by Bank of America.

Fewer dealers at a time when banks are preserving their balance sheets before the end of the year has contributed to an erosion in liquidity for buying and selling current and older Treasury securities. That backdrop could lead to poorly received auction sales, with yields for new notes being awarded at much higher levels, driving up the cost for the Treasury and taxpayers...

Tom di Galoma, head of trading at Jefferies & Co says: “No one has any balance sheet room and supply is a concern for the rest of the quarter.”..

Treasury in recent weeks has been selling securities in a buyers market as the flight to quality has caused enormous demand of Treasury securities. This will all change when the market stabilizes. Not only will there be less demand for Treasury securities, but there is likely to be major liquidation of currently held Treasury positions. A flight from Treasury securities is a very real possibility. This will also have negative ramifications for the dollar.

The only way to stem the collapse of the Treasury market would be for the Fed to step in and become an aggressive buyer of Treasury securities. This would be an exceptionally inflationary move. Bernanke has been running an erratic money supply operation since he has taken over, so it is impossible to guess how inflationary he is willing to get to protect Treasury rates. It is likely to result in a combination of some Fed buying coupled with a climb in rates.

The noose on government money operations is tightening again. For savvy traders, it will be a huge money making opportunity. For the average Joe, plumber or not, it will be a lower standard of living as rates climb, inflation climbs and Treasury borrowing crowds out private sector borrowing.

Martin Feldstein On The Money Supply and Current Crisis

Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan and the George F. Baker Professor of Economics at Harvard University, recently penned a WSJ Op-Ed calling for a program to stop a downward overshooting of house prices and the resulting mortgage defaults. A mortgage-replacement loan program may be the best way to achieve that, he wrote.

Since the latest leg of the downturn in the mortgage market, and now the overall economy, seems to be the result of the fact that the Federal Reserve crashed money supply growth over the summer, I have often wondered what Feldstein's take was on the Fed's activities this summer. I got the chance to ask him. Feldstein was a part of a panel that included Wilbur Ross Jr., Juan Williams and Ron Insana, before 4,000 at the AFP conference.

During the panel discussion, Feldstein stated that the Federal Reserve was doing an excellent job providing liquidity to the system but it wasn't working and that is why further measures, such as his "mortgage-replacement loan program" needed to be implemented.

During the Q & A, I asked him how he could say that the Fed was providing liquidity to the system since M2 growth crashed over the summer from a March peak of 12.5% annualized growth to growth of only 1.5% annualized in September. I further stated to him that, in addition, over the summer the Fed was sterilizing the cash infusions they were making by selling off Treasury securities, thus maintaining a net liquidity neutral stance as part of its various rescue operations.

Feldstein did not answer the question about where he saw liquidity coming from the system over the summer( How could he, since there wasn't any net liquidity added to the system?), but he did address the fact that money growth slowed over the summer. He said it likely occurred because of the problems in the economy (which in his view apparently took time for the Fed to adjust too.) He then said that money supply M2 was back growing at an annualized rate of 4.5%, which was correct. He said that this was about the correct growth rate given current GDP growth. This is a hoot, since money supply in September was at 1.5% annualized, and it then jumped to 2.3%, and now is at 4.5%, the Fed clearly has its foot on the monetary accelerator. I don't believe money supply at 4.5% is anything but a very brief transition point. Within weeks money supply growth could be at double digit rates. Indeed, the money supply numbers due out this Thursday could show M2 growth much higher than 4.5%. Feldstein clearly hasn't figured out that Ben Bernanke's Fed is clueless. When he does, I wonder what his prescription for the economy will be?

SIGNIFICANT DEVELOPMENT: Money Supply Climbing, Again

The fuel that sparks the economy, money supply growth, is climbing again.

As recently as September 15, money supply growth was nosediving.

In September, money supply [M2] growth [three month-annualized] bottomed at 1.5% annualized growth.

In the 3 to 4 weeks since then, money supply has shown sustained growth. This week M2 three month annualized money growth is at 4.1%. Money growth has more than doubled. Though, it is still nowhere near the 12.1% growth in March of this year.

But the change in growth to the upside suggests that Ben Bernanke has opened the floodgates to fill the system with money. This will throw off all the forecasts made by economists who are making projections of a deep and long recession. The recession should be short and brief. The true long term threat is likely to be inflation. That said, Bernanke has run one of the most unpredictable erratic Fed operations ever. IF Bernanke slows printing again, all bets are off and we are back into major recession mode.

Cluless Bernanke Speaks

Fed Chairman Ben Bernanke spoke today before the Economic Club of New York and topped previous efforts at displaying the fact that he can often be clueless.

Bernanke said the Fed will consider discarding its long- standing aversion to interfering with asset-price bubbles and warned that the banking business may be concentrated in too few companies, according to Bloomberg.

Of course, as I have pointed out before:

Those who call for regulators to supervise the financial industry fail to get that government is spelled g-o-v-e-r-n-m-e-n-t, not g-o-d.

In 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No".


I issued a reply to their paper:

...the record climb in housing prices is, indeed, a bubble... the Federal Reserve study fails to consider past declining interest rates as a cause of the bubble. The faulty conclusions reached by Federal Reserve economists Jonathan McCarthy and Richard W. Peach may make many potential new home buyers comfortable about a purchase, when, in fact, we are very near the top of a housing market that will experience substantial declines in prices...

Just how does Bernanke square this embarrassing performance with his call to have the Fed identify and somehow "intervene" when asset bubbles occur, when the evidence points to the fact that they completely misssed the housing bubble?

His contention that the banking industry is too concentrated flies completely in the face of what the Treasury is now doing to "battle" the financial crisis. The Treasury just gave $125 billion to the top nine banks in the country. If you are concerned about concentration, you don't give the top nine banks $125 billion,

Further, he continues to contend that he is adding liquidity to the financial system:

The Federal Reserve responded to these developments in two broad ways. First, following classic tenets of central banking, the Fed has provided large amounts of liquidity to the financial system to cushion the effects of tight conditions in short-term funding markets.

In fact, as I have pointed out here, here, here, here, here,here, here and here, money supply growth has been collapsing. Bernanke, for all practical purposes, has not been adding any liquidty to the system.

Does the Chairman have any clue as to what is going on around him?

Ben Bernanke's Confusion

Fed Chairman Ben Bernanke has an Op Ed in today's WSJ which indicates one of two things, he is either very confused about the crisis around him, or he is trying to confuse the rest of us.

Writes Bernanke:

Over the past year, the Federal Reserve has actively used all its powers and authority to try to help our economy through this difficult time.

Absolutely FALSE. As I have consistently stated, this crisis is about the Fed creating an economy dependent on more and more new money pumped into the system, and that the Fed stopped creating new money approximately four months ago. As I warned during the entire period here, here, here, here, here,here, here and here.

Central banks around the world have also consulted closely and cooperated in unprecedented ways to reduce strains in financial markets and to bolster our economies. We will continue to do so. However, clearly the time had come for a more comprehensive and broad-based solution...I also find it heartening that we are seeing not just a national response but a global response to the crisis, commensurate with its global nature

This is code for expanded coordinated global inflation. We are all Zimbabweans now.

History teaches us that government engagement in times of severe financial crisis often arrives very late usually at a point at which most financial institutions are insolvent or nearly so. In these conditions, the consequences and costs of inertia and inaction can be staggering.

What history really teaches and what Robert Higgs has clearly detailed in Crisis and Leviathan is used by the state to expand the state.

The Congress and the administration acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain capable of fulfilling their critical function of providing new credit for our economy. Their prompt passage of the financial rescue legislation made possible the critical measures that will be announced this morning. These steps will allow us to restore more normal market functioning, and encourage private capital to further support the reinvigoration of financial markets.

Oh yeah, Ben, passing out $125 billion (Half the Congress approved first tranche) to the nine largest healthy banks was necessary.

As in all past crises, at the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets.

No Ben, as in all past crises, the root cause has been central bank manipulation of the money supply.

More Details On 'Wall Street' Sequel

As if Henry Paulson and Ben Bernanke are not enough entertainment, FOX is fast tracking a 'Wall Street' sequel.

Michael Douglas will return as Gordon Gekko, according to Variety. Bud Fox is history.

Allan Loeb will write the screenplay. In addition to screenwriting, Loeb is a licensed stockbroker who once worked at the Chicago Board of Trade.

ALERT: Plunge Protection Team Press Briefing Tuesday Morning

The following is a Treasury Press Release on tomorrow's press biefing:

Secretary Henry M. Paulson, Jr., Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair will be joined by the other members of the President's Working Group on Financial Markets to make statements in the Treasury Department Cash Room at 8:30 a.m. (EDT) on October 14, 2008 on a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets. Following the on-camera statement Treasury officials will conduct an off-camera, background briefing in the same room.

Who
Treasury Secretary Henry M. Paulson, Jr.
Federal Reserve Chairman Ben Bernanke
FDIC Chairman Sheila C. Bair
SEC Chairman Christopher Cox
CFTC Chairman Walter Lukken
OCC Comptroller John Dugan
OTS Director John M. Reich

Tape Blows Cover On True Treasury Intentions

The new kid at the Treasury hasn't quite learned you really can't talk in public about what you are really up to at Treasury. New Interim Assitant Secretary of the Office of Stability, Neel Kashkari, has been caught on tape providing the true details of what Treasury is up to. This will get him muzzled pretty fast, but it provides us the opportunity to see the scheming going on at Treasury.

Kashkari's statements were posted on YouTube, and now appear to have been removed.

WSJ reviewed the tapes and reports first on the fact that Kashkari considers the executive pay caps demanded by Congress a joke:

As the biggest market intervention in U.S. history made its way through Congress, Neel Kashkari, the Treasury official named this week to run the program, offered assurances to 800 financial-industry players.

Attempts by Congress to make beneficiaries pay for their mistakes, such as placing caps on executive pay, were "quite reasonable" and "a pretty modest hindrance to you," he told them, according to a recording of the Sept. 28 conference call made public on video-sharing Web site YouTube.

Kashkari told participants in the call that lawmakers' interest in limiting executive compensation was "emotional" and "probably the most difficult part of the negotiation" with Congress.

When one industry participant said the caps might discourage participation, Kashkari noted their limited scope, which he called "a pretty modest hindrance to you coming into the program," WSJ reports.

WSJ also reports that the conference call took place the night before the House rejected the rescue plan, on September 28. The plan passed days later on October 3.

The dates are important because Kashkari, according to WSJ, also reported to the financial insiders that, "Our preference would be to try to help healthy banks become even healthier." (My emphasis.)

Remember, the entire focus, at the time, was on buying up bad mortgages and there was no news out publicly about Treasury helping "healthy banks"?

Indeed, I just did a search of the New York Times database and the first time the words "healthy bank" come up in a search is on October 9, where NYT reports that as Part of a NEW "Plan B" that Treasury may take positions in banks, even healthy ones.

This is how NYT reported the story (My emphasis):

Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials...

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it...including healthy ones.

This new interest in direct investment in banks comes after yet another tumultuous day in which the Federal Reserve and five other central banks marshaled their combined firepower to cut interest rates but failed to stanch the global financial panic.

As Bob Murphy has pointed out, they haven't even bought one mortgage yet, so how could they have failed at attempting to unlock the supposed frozen market?

"New interest"? "New options" "After yet another tumultuous day"? Then why was Kashkari talking about these details to the securities industry, even BEFORE the first House vote?

A database search of WSJ pretty much shows the same thing, the first time "healthy bank" is used with regard to the takeover of banks is October 10. The only other relevant search that comes up is an Op-Ed piece on 9-26 by John Paulson , a respected Wall Street investment manager--not the Treasury Secretary--, who discusses the Treasury's plan to buy mortgages from all banks. And he would certainly be shocked to hear that two days after his Op-Ed that Kashkari said the Treasury's preference was to help healthy banks, given that John Paulson wrote in his Op-Ed:

By allowing all banks to sell their worst assets to Treasury at inflated prices, taxpayers would be subsidizing healthy banks which have access to private capital (Goldman Sachs, J.P. Morgan, Wells Fargo, and Bank of America, for example) as well as banks that don't have a private alternative. But under a Preferred plan, only banks that don't have a private alternative will be given federal assistance. This would reduce the outlay otherwise required to solve the crisis.

Folks, we have a smoking gun here, you would have to be blind not to see that the Bernanke-induced crisis is being used by Paulson to funnel money to Goldman Sachs and his other crony favorites. The plan all along was to help out "healthy banks". It's on tape from the interim Assistant Secretary of Stability. Yeah, crisis and fear alright. Every time they utter those words, they move more of the $700 billion closer towards Goldman Sachs' vault.

UPDATE: There is a poor quality audio tape of the conference call on YouTube. Here is Part 3 where at the 9:00 minute mark the mention is made that healthy banks will be preferred. Thanks, Anthony.

Bowyer On Bernanke’s Pretend Rate Cut

The thing about Fed Chairman Ben Bernanke is that he does things in such a complex convoluted manner that few traders realize what he is or isn't up to. Hell, many economists don't realize what he is up to.

At least, Jerry Bowyer gets that today's Fed Funds rate cut is a fake Fed cut:

Today’s rate cut was late and small. Really, the cut was not actually a cut at all. Bernanke had already been pumping enough money into the system to lower the rate at least to 1.5%. What changed today is that it was made official. We didn’t get more money today – we got an announcement of what had already been happening...

But, notice that even Bowyer doesn't discuss the extraordinary power to pump money that Bernanke now has because of the Fed's new ability to pay interest on reserves left at the Fed.

Bernanke Confirms Ramifications Of Fed's New Ability To Pay Interest On Bank Reserves

In a speech today before the National Association for Business Economics 50th Annual Meeting in Washington, D.C., Fed Chairman Bernanke confirmed my earlier analysis today of the ramifications of the Fed's new ability to pay interest on bank reserves. From Bernanke's speech today:

The Federal Reserve has also been granted a new authority, the ability to pay interest on bank reserves, which will allow us to expand our lending as needed to support the system while better managing the federal funds rate...

The expansion of Federal Reserve lending is helping financial firms cope with reduced access to their usual sources of funding. Recently, however, our liquidity provision had begun to run ahead of our ability to absorb excess reserves held by the banking system, leading the effective funds rate, on many days, to fall below the target set by the Federal Open Market Committee. This problem has largely been addressed by a provision of the legislation the Congress passed last week, which gives the Federal Reserve the authority to pay interest on balances that depository institutions hold in their accounts at the Federal Reserve Banks. The Federal Reserve announced yesterday that it will pay interest on required reserve balances at 10 basis points below the target federal funds rate, and pay interest on excess reserves, initially at 75 basis points below the target. Paying interest on reserves should allow us to better control the federal funds rate, as banks are unlikely to lend overnight balances at a rate lower than they can receive from the Fed; thus, the payment of interest on reserves should set a floor for the funds rate over the day. With this step, our lending facilities may be more easily expanded as necessary.

Bottom line, the ability to pay interest on reserves is a new highly powerful tool for the Fed to use. It will result in the Fed having the ability to increase reserves without necessarily changing the Fed Funds rate. This is not a taser gun, it is a bazooka--and has the potential to be a very inflationary tool.

Alert: Bernanke Speaks This Afternoon

Fed Chairman Ben Bernanke is scheduled to speak this afternoon on the economic outlook and developments in financial markets.

The Very Clueless New York Times

Today's NYT carries a story reported by Andrew Ross Sorkin, Diana B. Henriques, Edmund L. Andrews and Joe Nocera. It was written by Nocera. There was additional reporting by Jenny Anderson, Nelson D. Schwartz, Eric Dash, Louise Story, Michael M. Grynbaum, Carter Dougherty and Vikas Bajaj.

Written in the style of a cheap paperback thriller, it recounts the recent activity by Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke and other government officials in dealing with the current financial crisis. Yet none of these reporters reported on the key elements behind the crisis. For starters, not a word about the poorly structured balance sheets of the firms in trouble. Simply put, the financial incompetents borrowed short-term and lent out long term--a mismatch of assets and liabilities that was an accident waiting to happen. Properly matched assets and liabilities would have gone a long way toward eliminating the runs on most of the investment banks.

Botching this, the NYT reporting gets worse. They report a ridiculous statement made by Bernanke:

That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to severl participants, “we may not have an economy on Monday.

But fail to point out that while Bernanke is begging Congress for $700 billion, he has authority at the Federal Reserve to buy as much of whatever he wants, whenever he wants. Indeed, when the House failed to pass the bill on Monday, the Fed went in and pumped $630 billion into the system.

Ultimately, this crisis is about the Fed creating an economy dependent on more and more new money pumped into the system, and that the Fed stopped creating new money approximately four months ago. As we warned during the entire period here, here, here, here, here, here, here and here.

Am I justified in calling this the VERY CLUELESS NYT? I think so.

NYT put 11 reporters on this story and they all missed the mismatched balance sheets of the institutions in trouble, they failed to point out that while Bernanke is begging for $700 billion, the Fed can print $700 billion everyday if it wants to, and they failed to point out the immediate cause of the crisis--Bernanke's crashing of the money supply over the last four months.

-Robert Wenzel

McCain Would Fire SEC Chair Cox

Republican presidential candidate John McCain, campaigning in Iowa Thursday, is expected to call for the firing of Securities and Exchange Commission (SEC) Chairman Chris Cox.

In his prepared remarks, Sen. McCain (Ariz.), without naming Cox, said the chairman has “betrayed the public’s trust.”

“If I were president today, I would fire him,” McCain will say, according to his prepared remarks.

This is swatting a gnat while a tiger and lion are headed towards you. McCain doesn't have a clue.

This crisis is a Paulson and his lapdog, Bernanke, operation.

Except for his nonsense about short-sellers, Cox has been incompetently benign during this entire crisis. Incompetently benign in a bureaucrat is not a bad thing.

-Robert Wenzel

"Private Sector Solution to AIG's Situation Is Dead"

CNBC is reporting that a private sector solution to AIG's situation is dead. It looks like some type of government bailout will occur.

This should come as no surprise. We called it a dead deal when it was announced. However, what should come as a surprise (and alarm)is the Fed even asking Goldman Sachs and J. P. Morgan to attempt to raise $70 to $75 billion for AIG in this market.

This is scary in that it shows the Fed has no sensitivity to the markets at all. We repeat, Bernanke is C-L-U-E-L-E-S-S.

-Robert Wenzel

The Morning Ahead

The factors to monitor in the morning are near overwhelming.

To start, we have an FOMC meeting. Will the Fed cut rates?

Henry Paulson is scheduled to testify before Congress in the morning, and later in the day he is scheduled to give a speech at the Brookings Institute about the economy and housing. He is likely to be very cautious at both venues about what he says. Will he by accident trigger more downside action?

Lehman has filed for Chapter 11 and other banks have continued to trade with it. Yet, despite being in Chapter 11, and presumably under court supervision, Lehman continues to push for a shotgun sale of its money management firm, among other assets. How will this activity sit with the bankruptcy judge and other bankers?

The Merrill Lynch acquisition by Bank of America looks shaky. Will the deal still be alive by the end of the day? How tight of an acquisition contract was John Thain able to draw up in such an intense, short term period?

What news will develop from the AIG situation?

How will the markets react to the downgrade of WaMu?

Will the panic in the investment bank arena spread to the two remaining major independent players, Morgan Stanley and, the very well connected, Goldman Sachs? 

How bad will things get overnight in overseas trading?

Have a good nights sleep.

-Robert Wenzel

A Positive From The Crisis: Banks Getting Back To Basics

The current financial crisis is the result of aggressive Fed money printing during the Greenspan era and the early Bernanke era, and the faulty econometric equations designed by "quants".

The quants and their econometric equations will be thrown under the bus. That will not be the fate for Fed Chairman Bernanke. Although it is unclear that Bernanke understands he is exacerbating the crisis by his current slow monetary policy, his slowed monetary policy is producing a needed cleansing of malinvestments caused by the previous money printing. This is the exact prescription that proponents of the Austrian School of economics would recommend. It is unlikely that Bernanke is a closet Austrian, it is more likely that he is clueless.

Thus, the crisis atmosphere will continue as the money growth remains tame. As a bonus, the crisis period is doing wonders for clearing out the bad actors in the banking industry. It is much like a dentist drilling a tooth to remove decay. The pain is no fun, but the result is appreciated. All the decay must be removed before the pain stops. It's likewise for the economy.

Bernanke, of course, will not allow the dentist to complete his work, at some point he will jump out of his chair, spit into the nearby sink, smack the drill out of the dentists hand and start printing money again. At such time, the remnants of decay will remain in his teeth, and it will spread further.

But Bernanke has not yet jumped from his chair and the cleansing period continues, as the WSJ points out in an article about bankers getting back to basics, here.

-Robert Wenzel

It's Time The Fed Adopts Volcker Religion

By Robert Wenzel

Federal officials and market players are struggling with the same issues, WSJ reports.Why haven't the steps taken so far calmed the system? What can policy makers do next?

In our book, the answer is simple. The boom was fueled by the Fed's money printing under Alan Greenspan and the early Ben Bernanke.

As we have been emphasizing in lone wolf fashion--with no regulator or other commentator coming close to mentioning this most important event of the current crisis environment--the Fed over the recent months has for all practical purposes stopped printing money. That's why the market continues to struggle.  The Fed has turned this from just a mortgage crisis, to the beginnings of a major full-fledged economic crisis.

Over the last three months M2 money supply has been growing at a 1.8% annualized rate. This can be compared to earlier this year when M2 annualized money growth was over 10%. In fact, as recently as March, three month annualized money growth was at 12.7%. Few seem to recognize the dramatic shift downward.

A lot of headline watching commentators are even reporting that the Fed is adding gobs of liquidity through their bailout operations, when in fact the Fed has been sterilizing its bailout operations, including the Term Auction Facilities, by either liquidating or loaning out the Treasury securities already in their portfolio.

WSJ reflects current beliefs when it reports:

The Federal Reserve has already slashed interest rates to counteract a deepening credit freeze and instituted its broadest expansion of lending facilities since the Great Depression to keep financial markets functioning.

As mentioned the lending facilities have been sterilized so as not to increase money supply. And we should have learned from the Volcker period that you don't target interest rates to impact the economy, you target money supply. The current Bernanke Fed has seemingly, without being completely aware, slipped into interest rate targeting.

At this point we must add that ideally the Fed shouldn't be monkeying and manipulating the money supply at all, but in realworld economik if the Fed is going to be messing with the money supply, they should be good at it. This means reverting back to Volcker's rejection of targeting interest rates, and instead targeting money supply. In Volcker's case, he targeted money supply to fight inflation, in Bernanke's case, money supply targeting is required to battle economic crisis.

This economy isn't going anywhere until Bernanke gets Volcker "Target The Money Supply" Religion. Failure to do so will lead to an enormous economic crisis which in one sense can be viewed as a cleansing of the mal-investments caused by the money manipulations of Greenspan and Bernanke. However, in the land of realworld economik, the crisis is likely to lead to untold suffocating new regulations, restrictions etc., given that the two current presidential candidates, John McCain and Barak Obama, display no knowledge of the fundamental workings of an economy. 

Robert Wenzel is an economic consultant and Editor & Publisher of EconomicPolicyJournal.com. He can be reached at rw@economicpolicyjournal.com.

Hot Buzz: Government Moves On Fannie, Freddie

It appears that the  goverment is about  to pump capital into Fannie Mae and Freddie Mac, in what is sure to be a near takeover of the two agencies. 

A meeting was held this afternoon at the Federal Housing Finance Agency. Richard Syron CEO of Freddie Mac and Daniel Mudd CEO of Fannie Mae were summoned to it, according to Deborah Soloman and Damian Paletta at WSJ.  Also attending were the Fed's Ben Bernanke and Treasury Secretary Henry Paulson.

Reportedly, Mudd and Syron will be axed as part of the Treasury move.

An announcement could come as early as this weekend.

Specific details of Treasury's plan and specifics of the capital infusion are not yet available. The plan is expected to involve "a creative use" of Treasury's authority, according to WSJ. More than likely common stock shareholders will be crushed, with their shares diluted down to near worthlessness.

It looks like a done deal, more details here.

Insiders Are Ready To Start Bank Buying Binge

Randal Quarles, the ultimate insider,--current managing director of Carlyle Group, former Treasury Undersecretary and former Treasury liaison to the Plunge Protection Team, who, since early in the year, has accurately called the play by play developments in the banking crisis (See Carlyle Group's Plan to Takeover the Banking Industry)-- told Reuters that he expects to see Private Equity start buying into the banking sector before the year is up:

Private equity firms have been eyeing troubled banks and thrifts as investment opportunities as the credit crisis has taken a toll on share prices.

Randal Quarles, managing director at Carlyle Group CYL.UL, one of the world's largest buyout firms with $83 billion under management, forecasts that many of the investments will be minority stakes -- which can be accomplished without dramatic changes in the Fed's rules.

Quarles, previously undersecretary of the U.S. Treasury, said there could be an uptick in investment activity before the end of the year.

"It is going to be hard to raise (capital) in the public markets, particularly for depository institutions," he said. "I think that's going to drive a lot of private equity deals."

Interesting situation, we have a very smart guy in Quarles ready to take the plunge in bank stocks, while we have Bernanke about to the torpedo the entire economy (see Crashing Money Supply Numbers Signal Depression). If Bernanke doesn't start pumping M2 money and if Quarles starts buying without that M2 money pumping, Quarles is going to have his ass handed to him, courtesy of Bernanke.

On the other hand, if Benanke figures out that he has launched a torpedo at the economy, he may actually start printing money again and Quarles will make a fortune.

Stay tuned. We are watching money supply very closely and will report on what we see.

Crashing Money Supply Numbers Signal Depression

It is now clear that Ben Bernanke has no clue as to how to control the money supply.

We have been commenting in recent weeks regarding the slowdown in money supply. It has been growing at approximately 2.5% (M2SA) over the last three months on an annualized basis, earlier this year it was growing at double digit rates. This is a dramatic downturn. The numbers out yesterday show no end to the money growth slowdown, in fact, three month annualized growth (M2SA) has dipped further to 2.2.%.

While there is a lot to be said for a no growth money supply that results in a recession to clear the system, the Fed doesn't believe this and neither does Bernanke. They are eternal money pumpers, who consistently want to prop up the economy and never have a recession. Thus, it is truly bizarre that they would allow money growth to collapse. They simply have their eye on the wrong ball. They are watching the Fed Funds rate and believe they are providing huge amounts of liquidity to the system because of the 2.0% Fed Funds target. But the fact that money supply at this target rate is not climbing suggests that the real interest rates must be lower.

Indeed, the actions of M1 suggest this is exactly the case. Since what is climbing is M1. Three month annualized M1SA is growing at 5.8%. And what is exploding is demand deposit money (a part of M1). Three month annualized demand deposits are growing at 9.5%. This suggests there is huge fear in the system, and depositors prefer keeping their money in demand deposits as opposed to M2 components such as saving accounts and retail money market funds, which are displaying no growth. Clearly, this situation tells you that depositors prefer what they perceive is safety over yield.

Only a much lower interest rate would reverse the current situation, or perhaps non-sterilized loans and purchases of bank collateral provided by those using the Term Auction Facility. If this isn't done soon then the economy and stock market will worsen by leaps and bounds, including a major eye opening stock market crash.

LaTi: Osama bin Laden Caused the Mortgage Crisis

That's what the Los Angeles Times wants you to think.

LaTi takes readers on a wild ride this morning.

First LaTi tells us that the FBI saw the threat of the mortgage crisis:

Long before the mortgage crisis began rocking Main Street and Wall Street, a top FBI official made a chilling, if little-noticed, prediction: The booming mortgage business, fueled by low interest rates and soaring home values, was starting to attract shady operators and billions in losses were possible.

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said

Of course, the mortgage crisis is a lot worse than a few bad brokers. The FBI may have spotted some bad seeds moving into the mortgage brokerage industry, but they always move into the hot areas. They are probably operating in the homeland security sector, now. The real criminals were the money pumpers, Greenspan and Bernanke.

But Lati wants us to think it was a few morally challenged brokers, so they proceed:

In 2007, the number of agents pursuing mortgage fraud shrank to around 100. By comparison, the FBI had about 1,000 agents deployed on banking fraud during the S&L bust of the 1980s and '90s...

The tepid response reflects a broad realignment of law-enforcement priorities at the Justice Department in which mortgage fraud and other white-collar crimes have been subordinated to other Bush administration priorities...

Of course, the new priorities are to snoop on Americans to see if any are candidates for waterboarding. So we end up with the resource and priority challenged FBI, going after the morally challenged brokers

Absent a major shift in priorities and resources...it is likely that the Justice Department and the FBI will continue on their current path of focusing on simple cases...

What does Lati want us to think other than it is all Osama bin Laden's fault, causing the reassignment of agents that were responsible for protectng us against the mortage crisis?

It's a nutty theory, but when you don't know basc economics, that's what you get.

Fireworks at Jackson Hole: Buiter Let's It Rip

At the Jackson Hole, Wyoming Federal Reserve conference, London School of Economics professor and former Bank of England and European Bank for Reconstruction and Development official, Willem Buiter, ripped into the manner in which the Federal Reserve, the European Central and Bank of England have handled the current financial crisis. His remarks were particularly critical of the Federal Reserve claiming the the Fed is too close to Wall Street:

Cognitive regulatory capture of the Fed by Wall Street resulted in excess sensitivity of the Fed not just to asset prices (the ‘Greenspan- Bernanke put’) but also to the concerns and fears of Wall Street more generally.

The Fed listens to Wall Street and believes what it hears. This distortion into a partial and often highly distorted perception of reality is unhealthy and dangerous.

He charged that all three banks went well beyond what was necessary to stabilise the financial sector:

All three central banks have gone well beyond the provision of emergency liquidity to solvent but temporarily illiquid banks. All three have allowed themselves to be used as quasifiscal agents of the state, providing subsidies to banks and other highly leveraged institutions, and assisting in their recapitalisation, while keeping the resulting contingent exposure off the budget and balance sheet of the fiscal authorities. Such subservience to the fiscal authorities undermines the independence of the central banks even in the area of monetary policy.

He listed three factors contributing to the Fed's poor performance in handling the crisis:

[T]hree factors contribute to Fed’s underachievement as regards macroeconomic stability. The first is institutional: the Fed is the least independent of the three central banks and, unlike the ECB and the BoE, has a regulatory and supervisory role; fear of political encroachment on what limited independence it has and cognitive regulatory capture by the financial sector make the Fed prone to over-react to signs of weakness in the real economy and to financial sector concerns.

The second is a sextet of technical and analytical errors: (1) misapplication of the ‘Precautionary Principle’; (2) overestimation of the effect of house prices on economic activity; (3) mistaken focus on ‘core’ inflation; (4) failure to appreciate the magnitude of the macroeconomic and financial correction/adjustment required to achieve a sustainable external equilibrium and adequate national saving rate in the US following past excesses; (5) overestimation of the likely impact on the real economy of deleveraging in the financial sector; and (6) too little attention paid (especially during the asset market and credit boom that preceded the current crisis) to the behaviour of broad monetary and credit aggregates.

All three central banks have been too eager to blame repeated and persistent upwards inflation surprises on ‘external factors beyond their control’, specifically food, fuel and other commodity prices. The third cause of the Fed’s macroeconomic underachievement has been its tendency to use the main macroeconomic stability instrument, the Federal Funds target rate, to address financial stability problems. This was an error both because the official policy rate is a rather ineffective tool for addressing liquidity and insolvency issues and because more effective tools were available, or ought to have been. The ECB, and to some extent the BoE, have assigned the official policy rate to their price stability objective and have addressed the financial crisis with the liquidity management tools available to the lender of last resort and market maker of last resort.

It is difficult to argue with Buiter on these points. Indeed, the Fed's reliance on the Fed Funds rate target as its chief monetary tool is currently ignoring the fact that there is little growth in the money supply. Ignoring money growth is also a charge Buiter makes of the Fed: "too little attention paid...to the behaviour of broad monetary and credit aggregates."

Unfortunarly, reports out of Jackson Hole suggest that rather than take Buiter's critque to heart and learn from it, members of the Fed and others have chosen to attack the analysis:

Fed Governor Frederic Mishkin said Buiter's paper fired ``a lot of unguided missiles,'' and former Vice Chairman Alan Blinder ``respectfully disagreed'' with his analysis of the central bank's crisis management.....Mishkin lashed out against Buiter's assertion that the Fed's rate reductions may cause higher consumer prices.``I wish he had actually read some of the literature on optimal monetary policy, because it might have been very helpful in this context,'' said Mishkin, who collaborated with Bernanke on inflation research in the 1990s. Mishkin, a leading advocate of the Fed's effort to sustain economic growth through rapid rate reductions, said research shows that ``what you need to do is act more aggressively.''

2007 Bernanke versus 2008 Bernanke

Paul Kedrosky created word clouds for Ben Bernanke's 2007 and 2008 speeches in Jackson Hole. Here are the results. The larger a word appears the more often that word was used:

2007 Bernanke Speech

2008 Bernanke Speech


As Kedrosky notes, it's pretty obvious that Bernanke's focus has moved from concern about the housing market to concern about the financial system. Note that "inflation" finally makes an appearance, although tiny, in 2008. Also note the heavy use of regulators and regulation in 2008.

The Curious Beliefs On Current Monetary Policy: A Depression Warning

As we pointed out below, Fed chairman Bernanke believes the Fed is currently conducting an easy money policy.This despite the fact that as recently as Mar.2008 three month annualized money growth (M2) was climbing at annualized rate of 12.6%, but has since collapsed to the point where as of Aug. 21 three month annualized money growth (M2) is increasing at only a 2.5% annualized rate.

This is simply a remarkable drop in money growth that will lead to a depression, if not reversed.

It can be argued that a halt to money growth pyrotechnics is a good thing, and we would concur that the end to money supply manipulations by the central bank can be a positive if it is adopted as a long term attempt at stable monetary policy. However, the clueless nature of the current slowdown in money growth could lead to a depression whereby radical government policies are adopted to "cure" the recession. Such new polices are apt to further stifle the economy and prolong any downturn by years.

Thus, Bernanke's misunderstanding of current money supply policy is shocking. More shocking is that many other economists, if not most, hold this inaccurate belief. In today's WSJ, economist Gerald O'Driscoll warns of potential inflation and writes that "Now Fed Chairman Ben Bernanke has decided to try to... spend the Fed's reputational capital on an easy credit policy."

They hold this inaccurate belief because interest rates are low. Generally, such low rates would result in huge money increases. However, if real interest rates are lower than fed fund rates, which appears to be the current case for no-risk government securities, money growth will not occur.

If this policy is not soon reversed, we repeat, we are headed for a depression. It will make the current housing crisis look like boom times.

Ben The Blind

In a truly remarkable speech at the Federal Reserve Bank of Kansas City's Annual Economic Symposium at Jackson Hole, Wyoming, Fed Chairman Ben Bernanke demonstrated cluelessness across the spectrum of his remarks.

Let start at the top. Bernanke says:

The Federal Reserve's response to this crisis has consisted of three key elements. First, we eased monetary policy substantially, particularly after indications of economic weakness proliferated around the turn of the year. In easing rapidly and proactively, we sought to offset, at least in part, the tightening of credit conditions associated with the crisis and thus to mitigate the effects on the broader economy. By cushioning the first-round economic impact of the financial stress, we hoped also to minimize the risks of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, further damages economic prospects.

Although the Fed has cut interest rates, this is not easing monetary policy. Easing monetary policy occurs when, well, money growth policy is eased. In the last three months, money supply growth, far from being eased, has collapsed. From double digit money supply growth earlier this year, the money growth over the past three months has grown at a remarkably slow 2.5% annualized rate.

For Bernanke to say monetary policy has eased he seemingly must not be aware that money supply growth has slowed to a trickle, that the Fed has sterilized the bailouts it has conducted by selling or loaning out Treasury securities, and that in the face of the current financial crisis the real interest appears to have collapsed which is behind the fact that, despite Fed interest rate cuts, money supply has not grown.

Bernanke also speaks on the Bear Stearns collapse:

The collapse of Bear Stearns was triggered by a run of its creditors and customers, analogous to the run of depositors on a commercial bank. This run was surprising, however, in that Bear Stearns's borrowings were largely secured--that is, its lenders held collateral to ensure repayment even if the company itself failed. However, the liquidity of markets in mid-March was so severe that creditors lost confidence that they could recoup their loans by selling the collateral. Many short-term lenders declined to renew their loans, driving Bear to the brink of default.

Clearly, something else was going on with Bear Stearns, given the fact that, as Bernanke points out, Bear's securities were collateralized. Either Ben isn't capable of drawing the conclusion from these facts that the Bear collapse appears to have been orchestrated, most likely by Treasury Secretary Paulson. Or he was in on the game and is now just blowing smoke, or he has chosen to stick his head in the sand on this one.

Bernanke also tells us that there is consideration as to whether the Fed should supervise the entire financial system:

Going forward, a critical question for regulators and supervisors is what their appropriate "field of vision" should be. Under our current system of safety-and-soundness regulation, supervisors often focus on the financial conditions of individual institutions in isolation. An alternative approach, which has been called systemwide or macroprudential oversight, would broaden the mandate of regulators and supervisors to encompass consideration of potential systemic risks and weaknesses as well.

At least informally, financial regulation and supervision in the United States already include some macroprudential elements. As one illustration, many of the supervisory guidances issued by federal bank regulators have been motivated, at least in part, by concerns that a particular industry trend posed risks to the stability of the banking system as a whole, not just to individual institutions. For example, following lengthy comment periods, in 2006, the federal banking supervisors issued formal guidance on underwriting and managing the risks of nontraditional mortgages, such as interest-only and negative amortization mortgages, as well as guidance warning banks against excessive concentrations in commercial real estate lending. These guidances likely would not have been issued if the federal regulators had viewed the issues they addressed as being isolated to a few banks. The regulators were concerned not only about individual banks but also about the systemic risks associated with excessive industry-wide concentrations (of commercial real estate or nontraditional mortgages) or an industry-wide pattern of certain practices (for example, in underwriting exotic mortgages). Note that, in warning against excessive concentrations or common exposures across the banking system, regulators need not make a judgment about whether a particular asset class is mispriced--although rapid changes in asset prices or risk premiums may increase the level of concern. Rather, their task is to determine the risks imposed on the system as a whole if common exposures significantly increase the correlation of returns across institutions.

Of course, Bernanke may tout some supervisory guidance in 2006, but the fact of the matter is that in 2004, New York Federal Reserve economists Jonathan McCarthy and Richard W. Peach wrote a paper, Is There A Bubble in The Housing Market Now? Their answer was decidedly, "No". The Fed is not God, the solution to the financial crisis is not more supervision, it should be less supervision. The more alternatives and creative routes people take, the less likely that we will see the huge macro-collapses of the current day where regulators funnel all players in the same direction.

In conclusion, from all possible angles Bernanke is missing key points. His monetary policy is driving the economy toward a huge economic crisis, which in itself would not be a bad thing, if the economy would be allowed to adjust from the crisis period in a laissez faire manner and wipe out previous malinvestments. However, Bernanke and other government operators are apt to step in with new regulations that will cause things to go from very bad to even worse.

This is all simply very alarming.

Alert: Fed Chairman Bernanke Speaks at Jackson Hole, Thursday

Each year since 1978, the Federal Reserve Bank of Kansas City has sponsored a symposium on an important economic issue facing the U.S. and world economies. Symposium participants include prominent central bankers, finance ministers, academics, and financial market participants from around the world.

Fed Chairman Ben Bernanke speaks Thursday at the symposium.

Is It Time To Put A Presidential Candidate In Your Pocket?

The presidential campaigns are going begging for super-CEO support, but keep in mind these CEO's know how to collect on a chit when it is time. If a CEO is on one of the lists of support below, he considers the candidate he is endorsing in his pocket. .

Monca Langley at WSJ reports:

In the contest for business approval, the campaigns are lining up "poster CEOs." Sen. McCain has FedEx Corp. Chairman Fred Smith, private-equity guru Henry Kravis and Merrill Lynch & Co. CEO John Thain.

McCain plans to release the "Tech 100" -- high-tech executives who back his economic plans, a list the campaign says includes Cisco Systems Inc.'s John Chambers and Scott McNealy, chairman of Sun Microsystems Inc...

[F]ormer chief executives Carly Fiorina of Hewlett-Packard Co., or Meg Whitman of eBay Inc., back up Sen. McCain on the stump.

In Sen. Obama's camp are investor Warren Buffett, former Federal Reserve Chairman Paul Volcker and Robert Wolf, president of UBS Investment Bank...

The Obama campaign is also enlisting [other] heavy hitters. A few weeks ago, the Obama campaign, led by billionaire Penny Pritzker and J.P. Morgan Chase & Co. executive William Daley, invited a group of business executives to a meeting in New York, including some who had supported Sen. Hillary Clinton, such as former deputy Treasury Secretary Roger Altman and private-equity financier Steve Rattner

Henry Kravis is campaigning for McCain for one reason and one reason only, he doesn't want Obama in with his heavy tax hand on the rich. It would impact Kravis big time.

I don't have a clue why Paul Volcker is supporting Obama, but it does mean one thing. If Obama gets in Ben Bernanke is a one term Fed chairman. Volcker has no respect for Bernanke.

The Pritzkers are the real big money, early money behind Obama.

Obama supporter, Warren Buffett is kind of an idiot savant, he is an investment genius, but when it comes to economic understanding or basic common sense, he has none. The man has bllions, and still lives in the same house as when he only had $10 in his pocket, which means he is also a very odd duck. Obama can have him.

Freddie CEO: Home Prices Could Fall Another 20%

U.S. house prices will fall by as much as 20 percent nationally and the current mortgage finance crisis is about half-way through, according to Richard Syron, the chairman and CEO of Freddie Mac.

"Previously, we said house prices would fall at least 15 percent nationally, peak to trough. Today's challenging economic environment suggests that the housing market is far from stabilizing," Syron, told investors in a conference call held to discuss the company's earnings."As a result, we now believe that national home prices will fall 18 to 20 percent peak to trough. ... The long and short of it is that we now think that we are half-way through the overall peak-to-trough decline."

These "half-way through" forecasts are being derived by forecasters looking at the potential number of future problems, including payment option mortgages. They then look at when specific problems should hit and the size of the problems. This is a pretty good basic forecasting method, with one BIG caveat: Ben Bernanke. If the Fed continues to slow money growth, like it has over the last three months, things could be much worse, on the other hand, if the Fed spikes money growth, the housing market problems could clear up much faster than expected. Bernanke is the key.

The Obama-Bernanke Meeting

Barack Obama met with Fed Chairman Ben Bernanke, today at the Federal Reserve.

The meeting lasted for 40 minutes.

According to Obama's Senate spokesman Michael Ortiz, "Senator Obama had an informative meeting with Chairman Bernanke at the Federal Reserve about the health of the U.S. economy and the risks of further economic deterioration."

"Senator Obama made clear his respect for the independence of the Federal Reserve System and the special importance of its role during periods of economic uncertainty," Ortiz continued.

Obama Meeting With Bernanke, Today

Drudge is reporting thta Barack Obama will be meetng with Fed Chairman Ben Bernanke, today at the Fed.

Money Supply Watch

Has Bernanke crashed his helicopter? Money supply growth is virtually non-existent. The three month M2NSA money supply measure is showing an annualized growth rate of only 1.2% through the end of June.

We don't expect this slow money growth to continue, but, if it does, we are headed for a Depression.

Ben Bernanke's Hush Money

A must read essay on the current state of the banking system and the economy, by Gary North is here.

Plunge Protection Team Disses Senate Bill Harassing Speculators

The Plunge Protection Team gets one right:

The members of the President’s Working Group on Financial Markets (aka, The Plunge Protection Team) fired off a letter denouncing a Senate measure designed to curb speculation in the oil futures markets.

The working group — which consists of Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox and Commodity Futures Trading Commission Acting Chairman Walter Lukken — called the measure a bad idea.

The four noted in their letter that the bill would “significantly harm U.S. energy markets without evidence that it would lower crude oil prices.”

What’s more, they said, the bill’s “unprecedented restrictions on market participation could reduce market liquidity, hinder the price discovery process and limit the ability of market participants to manage and transfer risk.”

Is The Fed In Crash Dive Mode?

Krishna Guha at FT writes this morning that the Fed has moved towards an inflation bias.

If Guha is correct, the Fed may very well crash the economy.

According to Guha, this inflation bias comes in spite of the continuing troubles at Fannie Mae and Freddie Mac, extreme volatility in bank stocks and the recent dip in the price of oil.

He focuses on the June 30 Fed meeting where the minutes of that meeting say:

With increased upside risks to inflation and inflation expectations, membersbelieved that the next change in the stance of policy could well be an increase in the funds rate.

Bernanke is no Alan Greenspan. He will never get away with tightening money now, if he does we could very well have a stock market crash of the October 1929/October 1987 variety, with an accompanying recession.

Is this where Bernanke is going? Who really knows with this guy? I have never before seen a Fed that has gone from double digit money printing to zer growth, but that has just occurred with this Fed.

M2NSA money supply growth has been flat--zero growth--for the months of May and June. If Bernanke thinks he needs to get around to fighting inflation now, then he doesn't even realize what he has been doing for the last two months.

Further, given the failure of IndyMac, the fears of a bank run have escalated, which means that some bank customers from around the country are likely to have pulled their funds from banks and those funds are now in the form of physical currency. Thus, there are likely to be all kinds of distortions in the money supply numbers which make a shift in Fed policy at this time particularly insane.

Sweet Music: Larry Kudlow and Ron Paul Discuss Bernanke and Trends in the Economy

Bernanke Defends Oil Speculators

Federal Reserve Chairman Ben Bernanke in testimony, yesterday, in his Semiannual Monetary Policy Report to the Congress before the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate, defended oil speculators by saying:

Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices. Certainly, investor interest in oil and other commodities has increased substantially of late. However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell. But in fact, available data on oil inventories show notable declines over the past year. This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term.

The only argument that critics have against this line of defense is that oil production may be down by oil producing countries because they are speculating on higher prices and are reducing short-term output, thus causing the decline in oil inventories. It does not appear on first glance that this is the case. But, Bob Murphy, senior economist at The Institute for Energy Research, informs me that he is doing some work on recent oil production levels and sales levels by oil producing countries. Once he's out with the numbers, I'll post them here at EPJ.

UPDATE: Bob Murphy just sent this email note over to me:

All I've got right now is the official EIA estimates, but if they're in the right direction then I think we can rule out supply cutbacks. Both OPEC and total world supply did fall ever so slightly from 2006> to 2007, but they're up sharply in first quarter 2008. So I don't think you can blame the huge run up in prices on "speculators pushed up futures prices so producers cut back" argument.

Bernake Warns On Inflation, But Generally Clueless

Fed Chairman Ben Bernanke is testifying this morning before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate. The gist of his comments: We don't know what the hell is going on, but it sure looks scary, and inflation is definitely a problem We'll play it one day at a time.

Here are key excerpts from his prepared remarks, our emphasis:

The economy has continued to expand, but at a subdued pace. In the labor market, private payroll employment has declined this year, falling at an average pace of 94,000 jobs per month through June. Employment in the construction and manufacturing sectors has been particularly hard hit, although employment declines in a number of other sectors are evident as well. The unemployment rate has risen and now stands at 5-1/2 percent.

In the housing sector, activity continues to weaken. Although sales of existing homes have been about unchanged this year, sales of new homes have continued to fall, and inventories of unsold new homes remain high. In response, homebuilders continue to scale back the pace of housing starts. Home prices are falling, particularly in regions that experienced the largest price increases earlier this decade. The declines in home prices have contributed to the rising tide of foreclosures; by adding to the stock of vacant homes for sale, these foreclosures have, in turn, intensified the downward pressure on home prices in some areas.

Personal consumption expenditures have advanced at a modest pace so far this year, generally holding up somewhat better than might have been expected given the array of forces weighing on household finances and attitudes...

In the second quarter, the available data suggest that business fixed investment appears to have expanded moderately. Nevertheless, surveys of capital spending plans indicate that firms remain concerned about the economic and financial environment, including sharply rising costs of inputs and indications of tightening credit, and they are likely to be cautious with spending in the second half of the year. However, strong export growth continues to be a significant boon to many U.S. companies...

FOMC participants indicated that considerable uncertainty surrounded their outlook for economic growth and viewed the risks to their forecasts as skewed to the downside.

Inflation has remained high, running at nearly a 3-1/2 percent annual rate over the first five months of this year as measured by the price index for personal consumption expenditures. And, with gasoline and other consumer energy prices rising in recent weeks, inflation seems likely to move temporarily higher in the near term...

The elevated level of overall consumer inflation largely reflects a continued sharp run-up in the prices of many commodities, especially oil but also certain crops and metals. The spot price of West Texas intermediate crude oil soared about 60 percent in 2007 and, thus far this year, has climbed an additional 50 percent or so. The price of oil currently stands at about five times its level toward the beginning of this decade...

The decline in the foreign exchange value of the dollar has also contributed somewhat to the increase in oil prices. The precise size of this effect is difficult to ascertain, as the causal relationships between oil prices and the dollar are complex and run in both directions. However, the price of oil has risen significantly in terms of all major currencies, suggesting that factors other than the dollar, notably shifts in the underlying global demand for and supply of oil, have been the principal drivers of the increase in prices...

Although the inflationary effect of rising oil and agricultural commodity prices is evident in the retail prices of energy and food, the extent to which the high prices of oil and other raw materials have been passed through to the prices of non-energy, non-food finished goods and services seems thus far to have been limited. But with businesses facing persistently higher input prices, they may attempt to pass through such costs into prices of final goods and services more aggressively than they have so far. Moreover, as the foreign exchange value of the dollar has declined, rises in import prices have put greater upward pressure on business costs and consumer prices...

...in light of the persistent escalation of commodity prices in recent quarters, FOMC participants viewed the inflation outlook as unusually uncertain and cited the possibility that commodity prices will continue to rise as an important risk to the inflation forecast. Moreover, the currently high level of inflation, if sustained, might lead the public to revise up its expectations for longer-term inflation. If that were to occur, and those revised expectations were to become embedded in the domestic wage- and price-setting process, we could see an unwelcome rise in actual inflation over the longer term...

At present, accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy makers. The possibility of higher energy prices, tighter credit conditions, and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified lately, as the rising prices of energy and some other commodities have led to a sharp pickup in inflation and some measures of inflation expectations have moved higher. Given the high degree of uncertainty, monetary policy makers will need to carefully assess incoming information bearing on the outlook for both inflation and growth. In light of the increase in upside inflation risk, we must be particularly alert to any indications, such as an erosion of longer-term inflation expectations, that the inflationary impulses from commodity prices are becoming embedded in the domestic wage- and price-setting process.

Rozeff: A Wimp and a Manipulator Are in Charge of the Bailout

Michael Rozeff gets it right:

Bernanke is destroying the independence and the balance sheet of the Fed. Whatever independence it may have had is being compromised as it becomes more and more a creature of the national government. The reason for this seems to be Bernanke’s fears. He has little or no confidence in the ability of the capital markets to recover, in a short timeframe at least. In this respect, he is a Keynesian. Bernanke has exaggerated fears of declines in asset prices, especially stock prices. He overreacted and caved in the Bear Stearns case. He has made clear his anxieties and apprehensions about the banking system, derivatives, and investment banks. But price declines are just what is needed to place depreciated assets in the hands of those willing to shoulder the risks of owning them. Price declines will raise the expected rates of return on assets to proper levels. By creating a stock price bubble, inflation lowered rates of return below their appropriate levels. This had numerous bad consequences which include more corporate scandals, more accounting peccadilloes, and more investments that destroy value rather than create it. A stock market decline is just what is needed to lead to a resolution of these and other such financial problems caused by the earlier inflation. Now Bernanke fears the demise of the GSEs. The result seems to be that Paulson, who is strongly statist and a stronger figure, is ruling the roost.

Rozeff also ponts out the dangers this will cause for the overall economy:

The recommended measures, being hustled through Congress, have several negative consequences. (1) The GSEs are to be kept in the business of being the major end-buyers of housing loans. This maintains the same system that has led to the current mortgage market woes and does nothing at all to rectify the situation. (2) By maintaining the system and opening both the Fed and the Treasury to the GSEs, the latter can actually become even larger. (3) They will also be even more beholden and responsive to the political forces surrounding the housing business.

(4) The Fed will provide the GSEs with money loans, on either Treasury or a GSE’s own debt as collateral. That is directly inflationary and amounts to printing money and placing it at the disposal of the GSEs. (5) If money has to be created for the GSEs, there is less that can be created for all the other many banks that are in trouble. The Fed is less likely to discount their bad paper. This may be one reason (beyond the Indymac failure) why regional bank shares fell so sharply on the news (an index was down more than 8 percent.).

(6) Feeding the GSEs taxpayer dollars from the Treasury is a pure bailout. It rewards them for financing too many mortgages and too many mortgages of low quality. It means that Congress intends business as usual. (7) More government money and government stock ownership enlarge the GSEs while worsening the control and financial structures of the company. Any control by the government is going to enhance politically-motivated conflicts about the company policies and retard taking politically unpopular measures. The GSEs become even more of a political football than they already are.

(8) Another negative result is that the uncertainty surrounding the financial crisis will be prolonged. (9) Instead of the Fed and Treasury strengthening the GSEs, the GSEs will weaken the Fed and Treasury, that is, weaken the government. The government debt will rise. This jeopardizes other government programs, which is likely to end up either being inflationary or mean higher taxes. The Fed is basically losing a degree of independence while kowtowing to the dominant political forces, which weakens it and raises the odds of higher inflation. (10) Giving the GSEs taxpayer monies weakens the country’s productivity. It takes capital out of the private sector and transfers it to an industry that is already overbuilt.

It appears that Bernanke has become Paulson's lap dog. The curious news last week Friday that Bernanke was going to open the discount window to Fannie Mae and the denial issued by the Fed on Saturday, now appears to be Paulson asserting himself as top dog. Bernanke most likely leaked the story and Paulson made him kill it, even though that news was announced on Sunday by the Fed in conjunction with a Treasury statement.

Yes, "Hank is for Hank" Paulson is in charge and his plan is in execution phase.

Alert: Bernanke Testimony This Week

Fed Charman Bernanke delivers his semi-annual testimony to Congress on Tuesday and Wednesday.

Fed Denies Talks On Discount Window Access For Fannie and Freddie

Federal Reserve officials haven’t discussed discount-window access with Fannie Mae and Freddie Mac, a Fed spokeswoman said Friday, according to WSJ.

“Federal Reserve officials are following the situation closely, but there have been no discussions with the GSEs about access to the discount window,” Fed spokeswoman Michelle Smith said when asked about a report that Fed Chairman Ben Bernanke had told Freddie Mac’s chief executive that the GSEs were eligible to use the facility.

Reuters reported Friday that Bernanke told Freddie Mac Chief Executive Richard Syron that Freddie Mac and Fannie Mae are eligible to use the Fed’s discount window, citing a source with knowledge of the conversation. Also on Friday, Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said “there are a number of things, including things like the discount window, that they’re, I know, considering.”

Bernanke To Fred and Fannie: The Money Window Is Open

Reuters is reporting:

Federal Reserve Chairman Ben Bernanke told Freddie Mac chief Richard Syron that his company and Fannie Mae could take advantage of the emergency discount window, according to a source familiar with the conversation.

The source said that Bernanke and Syron spoke by phone Thursday afternoon and the central bank chief said in that call he intended the discount window to be opened if necessary to the two largest U.S. mortgage finance companies.

In the junk mortgage loans to date that the Fed has acquired, the Fed has been either exchanging Treasury securities for junk mortgage paper or selling Treasury securities to raise cash. As we have pointed out, as of April 3, 2007, the Fed held $781 billion in various Treasury securities. They are now down to $479 billion in Treasury securities. With trillions of mortgages outstanding by Fannie Mae and Freddie Mac, a bad hour by just one of them could absorb the entire balance of remaining Fed Treasury securities, then the only option the Fed will have on bailouts is the printing of more money, lots more.

SUPER ALERT: Dramatic Slowdown In Money Supply Growth

After growing at near double digit rates for months, money growth has slowed dramatically. Annualized money growth over the last 3 months is only 5.2%. Over the last two months, there has been zero growth in the M2NSA money measure.

This is something that must be watched carefully. If such a dramatic slowdown continues, a severe recession is inevitable.

We have never seen such a dramatic change in money supply growth from a double digit climb to 5% growth. Does Bernanke have any clue as to what the hell he is doing?

Monetary growth is one thing. A slowdown in money growth is another. To jerk the money supply back and forth is to jerk the economy back and forth. Our guess is that the Fed is using models, in an attempt to sterilize their junk mortgage paper purchases, and that somehow they have miscalculated how much of the Feds portfolio had to be sold off for the sterilizations.

As of April 3, 2007, the Fed held $781 billion in various Treasury securities. By the start of April of this year, the Fed held only $589 billion in Treasury securities. As of July 10 of this year, the Fed held only $479 billion in Treasury securities. In the last three months, alone, the Fed has sold off (or traded for junk paper) $110 billion of its Treasury securities!

In the last year, the Fed has liquidated 39% of its Treasury portfolio and replaced it with mortgage junk. That last $110 billion to go out the window was 18.6% of what they had left. With a Fannie Mae bailout, a Freddie Mac bailout, rumors about Lehman and Merrill Lynch, the Fed will most assuredly be liquidating more Treasury securities to buy more junk. At the rate it is going (This is not a prediction) the Fed could be out of Treasuries by the end of the year, then its sterilization efforts will by necessity have to end and we would get a knee jerk reaction back to huge money printing as the Fed would have spent all the cash, i.e. Treasury securities, in its till.

Keep in mind that Freddie Mac has a loan portfolio of 1.5 trillion dollars and Fannie Mae's is over 700 billion. Together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

Depending on the details of how a Freddie Mac/ Fannie Mae bailout goes, it could certainly result in the Fed liquidating the remainder of its government securities portfolio.

Fannie and Freddie May Go Under

NYT is reporting:

Alarmed by the growing financial stress at the nation’s two largest mortgage finance companies, senior Bush administration officials are considering a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, people briefed about the plan said on Thursday.

The companies, Fannie Mae and Freddie Mac, have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.

We have given less coverage to the mortgage crisis of late because it is pretty obvious how the Federal Reserve will react to further crisis situations. They will buy any junk. If Freddie and Fannie have junk in their portfolios (and they probably have billions), Buy'em up Ben Bernanke will buy'em up. Nothing new here. It is now obvious this is Bernanke's modus operandi.

To date, Buy'em up Ben has been sterilizing his buying operations by selling other parts of the Fed's portfolio simultaneously with his junk mortgage purchases, but soon he will be out of paper to sterilize his buying operations, and at that point Ben will become Ben the money printer. If we get to that point, all our aggressive inflation projections will be taken off the table and replaced with even greater inflation projections.

Bernanke Congressional Testimony Announced

Federal Reserve Chairman Ben Bernanke will deliver his semiannual testimony before Congress next Tuesday and Wednesday, July 15 and 16.

Bernanke Eyes Extending Emergency Loans

It's headline news. Bernanke spoke this morning at the Federal Deposit Insurance Corporation's Forum on Mortgage Lending for Low and Moderate Income Households, in Arlington, Virginia.

During his speech he said that the Fed is considering giving squeezed Wall Street firms more time to draw emergency loans directly from the central bank to help them overcome credit problems.

"We are currently monitoring developments in financial markets closely and considering several options, including extending the duration of our facilities for primary dealers beyond year-end should the current unusual and exigent circumstances continue to prevail in dealer funding markets," Bernanke said.

I always expected the Fed to extend the loans, what else are they going to do, the banks don't have the money to pay back the loans?

Harvard University Cashing In On Inflation

Fed Chairman Ben Bernanke recently spoke at Harvard University. He told Harvard College’s graduating class that "I see the differences between the [inflationary] economy of 1975 and the economy of 2008 as more telling than the similarities."

Meanwhile, elsewhere at Harvard, Harvard's money management team was witnessing huge profits from their bets on inflation.

The Harvard Crimson reports, "Harvard's endowment posted returns of approximately 9 percent through the first 10 months of this fiscal year, according to data from the University. The increase puts the endowment's value at around $38 billion as of this April, up from $34.9 billion as of last June."

During the same period the S&P 500 Index lost 8 percent. So how did Harvard do it?

Heavy bets on inflation.

The John Harvard Letter that was released last August shows that Harvard's investment in commodities was at 17 percent of the endowment for fiscal year 2008, making it their single largest investment by asset class. That number reflects a near tripling of the share of the endowment invested in commodities since 2000. Further, the endowment held another 7 percent of its portfolio in inflation-indexed bonds. Thus, a full 24 percent of Harvard's endowment was a bet on inflation.

With commodity prices soaring, it was the place to be, and Harvard was there.

Federal Reserve Maintains Inflationary Stance On Interest Rates

Below is the Federal Reserve announcement stating that they will keep the Federal Funds at a target rate of 2%. At this interest rate level, M2NSA money supply is growing at a rate of around 10%. Thus, by the Fed keeping interest rates steady at this level, the Fed will most assuredly be required to continue to increase the money supply at the 10% growth rate, if not faster. Only Richard Fisher appears to be any kind of an inflation hawk, as he voted against
the current target rate, and wanted a higher rate:

The Federal Open Market Committee decided today to keep its target for the federal funds rate at 2 percent.

Recent information indicates that overall economic activity continues to expand, partly reflecting some firming in household spending. However, labor markets have softened further and financial markets remain under considerable stress. Tight credit conditions, the ongoing housing contraction, and the rise in energy prices are likely to weigh on economic growth over the next few quarters.

The Committee expects inflation to moderate later this year and next year. However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high.

The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time. Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was
Richard W. Fisher, who preferred an increase in the target for the federal funds rate at this meeting.

Fed's Yellen Sees Signs of Recovery, But Conditons Not Normal

Always keep an eye out for comments from San Francisco Fed President Janet Yellen. She never rocks the boat and always tows the line. If you want to really know what Bernanke is thinking, Yellen will channel his thoughts.

This morning she spoke at an Asian banking conference in San Francisco and said that:

While there have been glimmers of hope that strains in our markets may be easing, conditions are still not normal...

Translation: The Fed is in no hurry to battle inflation and raise rates aggressively.

Let The Show Trial Begin!

Billions upon billions in mortgage losses, and the Feds bust these two poor saps, Matthew Tannin and Ralph R. Cioffi--subprime fund managers at the defunct Bear Stearns....

While the real criminals, Alan Greenspan and Ben Bernanke, get away...


...and the counterfeiting, that will really take out the middle class, goes on to this day!

Last look Bernanke is printing new money (M2NSA) at a 10.0% plus rate...and you wonder why prices are climbing? When the inflation rate hits 20%, and it will, can you imagine the price collusion show trials we will have?

To the execs reading this blog, keep in mind what the show trial expert of all-time, Eliot Spitzer, said, before he got busted for his own (heh, heh) private shows:

Never write when you can talk. Never talk when you can nod. And never put anything in an e-mail.

Bernanke Tells Harvard: Things Are Different This Time

Federal Reserve Chairman Ben Bernanke ’75 spoke to Harvard College’s graduating class today in Tercentanary Theatre at Harvard.

Bernanke spoke to the class about the year 1975, the year he graduated from Harvard. He told the class:

Then as now, we were experiencing a serious oil price shock, sharply rising prices for food and other commodities, and subpar economic growth. But I see the differences between the economy of 1975 and the economy of 2008 as more telling than the similarities.

Oh yeah, they are different alright.

Bernanke again:

Economists generally agree that monetary policy performed poorly during this period. In part, this was because policymakers, in choosing what they believed to be the appropriate setting for monetary policy…

Sure, it is real different this time, for the worse. In 1975 money supply (M2) grew at 8.0%, today it is growing at 10.2%.

Bernanke again:

For a central banker, a particularly critical difference between then and now is what has happened to inflation and inflation expectations. The overall inflation rate has averaged about 3-1/2 percent over the past four quarters, significantly higher than we would like but much less than the double-digit rates that inflation reached in the mid-1970s and then again in 1980.

The inflation rate in 1975 was 9.0%. According to John Williams at Shadow Government Statistics, if you calculated the inflation rate now, the same way it was calculated in 1975, the CPI is near 12% this year.

Bernanke then had the chutzpah to add:

The Federal Reserve and other central banks have learned the lessons of the 1970s… as a central banker, I would be remiss if I failed to mention the contribution of monetary policy to the improved productivity performance.

Bernanke to Real Estate Investors: Drop Dead

Federal Reserve chairman pride themselves on being opaque in their testimony before congress. You always have to read between the lines to find out what they are really saying. Reading between the lines of today's testimony by Fed chairman Bernanke, before the House Financial Services Committee, should be far from comforting to the real estate industry.

Does Bernanke know the housing market is crashing? Oh yeah. During today's testimony, he said: "The downturn in the housing market so far appears to be orderly."

Translation: The housing boom is over. All the numbers point to declining prices from here, but there is no crash yet. At the Fed we call this "orderly." This means there are still a few people out there who think they can buy real estate and flip it in six months. Once we run out of these people, we have no idea how bad things will get.

Does Bernake care about falling housing prices?

Reuters reports on his testimony this way:

One of the things that Bernanke and his Fed colleagues are keeping close tabs on is the extent to which a housing slowdown will put a damper on overall economic activity.

"We recognize the risk ... and we are watching it very carefully," he said.

Translation: The Fed at this point doesn't care about the real estate crash. If things get so bad that there is a major crisis somewhere in the economy, the Fed may stop just watching. But for now the Fed is just watching. Housing market be damned, pass the popcorn.