Time to Audit the Federal Reserve, RICO statutes should apply.

by Zak Klemmer

The Fed lowered the Federal funds interest rate from 6% on July 6, 1995 down to 1% on June 25, 2003. The Fed the gradually raised interest rates to 5.25% on June 29, 2006 before gradually easing rates to zero on December 16, 2008.  Credit expansion ensued as lower interest rates spur demand.  No standards in mortgage lending allowed the funding of stated income loans, which were also known as sub-prime “liar loans”.  This created the housing bubble and an oversupply in new housing.  These mortgages are bundled into Collateralized Debt Obligations or structured asset backed securities.  They are sold on the premise that they are safe because housing prices will continue to rise over time.  By funding mortgages then re-selling them the mortgage companies were able to pass the risk onto the investors in these CDOs. This allowed the mortgage industry to continue to originate new mortgages regardless of risk.

Other exotic investments such as credit default swaps were written as insurance to protect investors of bonds and other investment vehicles. These were written on both the buy and sell side without any capital requirements incase of an actual default.  It was not a requirement that the purchaser be required to actually own the bond or investment that the CDS were written on so these became a speculative investment vehicle the purchaser betting that the investment would actually go into default. 

The ISDA International Swaps and Derivative Association a trade association in the over-the-counter derivative market reported in April 2007 that there were a national amount of 35.1 trillion dollars in credit derivatives.  The London times reported that on September 15, 2008 worldwide credit derivatives was valued as 62 trillion dollars. 

The write down of values of these CDO and CDS because of the collapse of real estate values and derivatives markets have caused the bankruptcy of investment banks and failure or near failure of our commercial banks. Mark to market means that the holders of these derivatives must show the value of these at the present market price rather than the purchase price. Banks must show reserve capital to operate and make loans to customers and these write downs diminish their ability to operate. The solution proposed by treasury secretary Hank Paulson was to re capitalize the banks by buying these toxic assets under the TARP program passed in October 2008. 

Are they in over their head? Sen. Evert Dirkson of Illinois criticizing federal spending said: “A billion here, a billion there and pretty soon it adds up to real money.” Adding it all up we have: 2.7 Trillion dollars and counting: Tarp 700 billion, Bear Stearns 29 billion, GM and Chrysler 25 billion, AIG 150 billion, Fanny and Freddie Mac 200 billion, CDO’s 144 billion, FHA 300 billion, Lehman 87 billion, TAF 200 billion, commercial Paper 50 billion, Fed currency swaps 740 billion- over 2.7 Trillion dollars.

I remember seeing a bumper sticker in 1980: No Trillion dollar National Debt. The Obama Administration projects budget deficits averaging one trillion dollars from 2010- 2019. This is madness! Burdening future generations with this debt that undermines their wealth and prosperity. Trashing the future all in the pursuit of free money or as one economist stated: There is no such thing as a free lunch.

Inflation v. Deflation

By Colin Twiggs
March 26, 2009 5:30 a.m. ET (8:30 p:m AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

There are two competing views of global markets. One is driven by the rapid contraction of the money supply following collapse of the debt bubble. This points to a protracted deflationary spiral, with falling prices fuelled by debtors attempting to reduce their exposure by selling off assets. The outcome would be high unemployment, low commodity prices, low stock prices and a low gold price.

The second scenario is where the Fed and other central banks expand the money supply, fuelling inflation. Purchasing bonds to expand the monetary supply may be easy, but as the Japanese discovered, this does not necessarily translate into rising prices — bank credit continued to contract throughout the 1990s.

Monetary Base

We have already witnessed a rapid rise in the US monetary base, caused by the Fed's actions to shore up the financial sector. But the surplus has not succeeded in expanding bank lending, most of it finding its way back to the Fed, deposited as excess reserves. Banks are trapped by their inability to find sound customers who want to borrow: the private sector are selling off assets and reducing debt.

Will the Fed succeed where the Bank of Japan failed — and persuade the private sector to borrow to acquire new assets? The bond market is betting they will fail, with TIPS and treasury yields declining in anticipation of low inflation.

Gold buyers, however, are betting they will succeed and inflation will rise. Though silver appears to be taking the opposite view.

Despite recent signs that the Fed is prepared to inflate, the deflationary spiral will be difficult to break. Expect deflation for a year if not longer, followed by inflation if the Fed succeeds in its attempts to raise bank lending. This is likely to be a protracted recession.

Self-Defeating Behavior

It is interesting to observe most governments attempting to shore up falling asset prices — to protect banks from complete collapse. But their efforts may succeed in prolonging the recession. Low asset and commodity prices are the catalyst that spurs private business and individuals to start borrowing again. At some point the opportunities presented become to good for them to pass up. If prices are prevented from falling, the market stagnates as there is insufficient incentive to take on the additional risk.

When it comes to a trade-off between saving the banks or prolonging the recession, my bet is that the Fed will follow the BoJ and save the banks.

Read More....
Euro	Japanese Yen	Australian Dollar

The difficulty lies not so much in developing new ideas as in escaping from old ones.

Here is a link to the Reason Foundation's Bailouts and Bull:

Link to Bailouts and Bull

Link to the Bailout Game

No Stimulus Without Stability

By Colin Twiggs
January 29, 2008 12:15 a.m. ET (4:15 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

Global leaders are planning on capital expenditure programs to promote employment and tax cuts to stimulate consumption. Neither will be effective unless consumer confidence is restored. In 1929 President Hoover implemented similar measures, but with little effect. Confidence had been shaken by the rash of bank failures and soaring unemployment (exacerbated by a commitment to maintain high wages and attendant tariff protection). Consumers increased savings and paid off debt to protect themselves from uncertainty, while business adopted a similar defensive strategy: cutting costs, reducing debt and deferring new capital projects. Their priority was survival.

Herbert Hoover is undoubtedly one of the most capable and business-focused leaders to have graced the White House. A professional engineer with a reputation as an efficiency expert, by the age of 35 he had become financially independent and devoted his life to public service. Serving as Secretary for Commerce under presidents Harding and Coolidge, he earning a reputation for thorough research and a bias for action that made him the obvious successor to Coolidge. Despite this, his efforts to rescue the economy from recession failed dismally.

While Hoover is often blamed for the Great Depression, as Secretary for Commerce he had criticized the Federal Reserve's expansionary (cheap money) policy. His attempts to intervene were thwarted by the independent status of the Fed. Bankers serving on the board of the New York Fed (in those days more dominant than the Federal Reserve Board) resented this interference from an outsider. They also sought to preserve the margins enjoyed by borrowing at artificially low interest rates and lending on brokers loans secured by stocks — at call rates between 15 and 20 per cent.

As Secretary for Commerce, Hoover had prepared the economy for a future recession. He planned to smooth out any fall in consumption with increased capital spending programs by government, railroads and other large corporations over whom he had influence. The increase in capital spending was, however, outweighed by an overall decline in private sector investment and in residential construction. Tax revenues also fell as the economy declined, hampering further federal, state and municipal spending programs. Consumption continued to fall, leading to more business and bank failures, more job losses and declining tax revenues. The downward cycle became self-reinforcing. The economy was only rescued by World War II: increased war production and, later, conscription helping to solve the unemployment problem.

In the present crisis, as in the 1930s, neither business nor consumers are likely to be lured into new capital investment or increased consumption until stability is restored. Stimulus packages treat the symptoms of a recession, but they do not address the underlying cause. Rebuilding confidence requires more effort than increasing government spending and a few media releases. Only when concerns over bank solvency, inflationary monetary policy, ballooning federal debt, business failures and further job losses have been settled are we likely to witness a return to normal consumption and investment patterns. The task requires exceptional leadership as well as a deep understanding of the underlying issues. Otherwise we could end up in a worse position than Herbert Hoover.

Attempting to stimulate the economy while confidence is this low is like pushing on a piece of string.

Blaming Wall Street

For decades ill-conceived monetary and fiscal policy have insidiously driven investors and consumers into increasingly risky financial behavior. Fiscal deficits and monetary expansion debased the value of most major currencies, with resultant inflation eroding investors capital. Many investors were forced to abandon a conservative investment ethos in favor of speculation based on inflationary gains. Artificially low interest rates compelled others to invest in high risk securities and derivatives in order to derive an adequate income from their capital. Business, seduced by cheap equity finance and inflationary gains, became fixated on short-term profit growth; while consumers grew overly reliant on cheap finance. All are now bearing the consequences.

While I have little sympathy for investment bankers who risked shareholders funds in order to earn exhorbitant bonuses, they are not the cause of this debacle. Merely a symptom.

Dow Jones Industrial Average

The Dow respected support at 8000, reversing above 8300 to signal another test of 9000. Twiggs Money Flow retracement that respects the zero line would indicate a secondary rally to test 10000. Long term, the primary trend is down and reversal below 8000 would signal another down-swing with a target of 6000; calculated as 7500 - ( 9000 - 7500 ).

Gold

Spot gold respected resistance at $900; the recent surge in volume signaling selling pressure. The retracement will tell us a lot about the strength of the trend. A weak retracement would signal that upward breakout is likely, which in turn would indicate another test of $1000 (medium term) and a long term target of $1200; calculated as 900 + ( 1000 - 700 ). A test of $800 would mean further consolidation is likely; while failure of this level would warn of another test of $700.

"Both parties are responsible for the economic bubble. These are smart men- Greenspan has the knowledge of Austrian Free Market Economics yet he created the bubble rather then using the present system to counter balance it. Wealth creation requires discipline, sacrifice and a vision for the future. We are ruled by men who have no desire to preserve a free society.  What I see: a political class that can’t see beyond the next election cycle who use the weakness of human nature to manipulate the public for their own benefit."

--Zak Arthur Klemmer

I give President George W. Bush the dubious credit for destroying the remainder of Reaganism that his father didn't dismantle. I really think that the Bush family is poison for the Republican Party. There is no longer a vision that has political legs, which will propel America forward in the 21st century in the tradition of the Bill of Rights. The Washington DC culture is so corrupt that I doubt that America can be saved. 1913 when the 16^th Amendment and the Federal Reserve was passed may have doomed America to fascism/ socialism. Is this the death of the conservative movement?

The credit bubble was created by the Federal Reserve and Congress through the Community Reinvestment Act and allowing Fannie Mae and Freddie Mac to buy no document home loans. This last economic expansion was created artificially through the over expansion of credit.  Destroying the traditional standards that financial institutions had used before extending credit has ruined the balance sheets of most public companies that were in the business of extending credit.  Congress and the President have created more debt to throw good money after bad in bailing out insolvent companies. I find it terribly ironic that the institutions that created these bad loans like the money was free are getting bailed out with taxpayer’s money and debt while citizens who are in trouble because of their debt may actually face bankruptcy while in the long term be subject to additional taxation to service this debt and dollar repudiation.

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

I am very sad for my country. Changing the President doesn’t create a positive reality. Barack Obama’s appointments are the same beltway insiders that created this mess in the first place. While I want my country to succeed, I am not a cheerleader for the Obama administration.

You often hear about the "$10 trillion national debt". This is a phenomenal sum, to be sure. But it doesn't even come close to what our REAL obligations are.

The "national debt" conveniently leaves out the government's obligations for Social Security, Medicaid and Medicare and similar obligations. Add these figures to the mix and the U.S. is in the hole by about $70 TRILLION!

And this is just the projected SHORTFALL. That puts a different spin on things, now doesn't it?

These obligations are impossible to meet through taxation. And they will never be met by cuts in government spending (the entire government would have to be practically eliminated... which doesn't sound like a bad idea!)

This leaves only two basic options...

Either the U.S. government eventually defaults on foreign loans and obligations to retirees

Or we hyper-inflate the currency and pay back previous obligations with fresh new money created from thin air

Which route do you think politicians will choose? They have already chosen, and the process is now underway.

Is your retirement protected? Are you prepared for the inflation that is inevitable?

Current Account Weakness

By Colin Twiggs
November 18, 2008 4:00 a.m. ET (8:00 p.m. AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

Imprudent Investors

President Bush and the Group of 20 blame the global recession on imprudent investors who "sought higher yields without an adequate appreciation of the risks" (Bloomberg). That is an interesting statement considering who suppressed interest rates to artificially low levels — forcing investors to assume greater risk in order to earn an adequate return on their investments. Was it not the major central banks, at the urging of their governments? The attempt to engineer a soft landing in 2002/2003 caused far more pain than it saved. The cure almost killed the patient. Political leaders are not prepared to admit that we are currently reaping the results of their past intervention. And they fail to realize that further intervention to prevent falling prices is likely to cause more trouble in the future — prolonging the current recession.

Another Rate Cut

The spread between the New York Funds Rate (1-month) and the fed funds target rate returned to 50 basis points, typical of normal market conditions. The Overnight Index Swap Rate (OIS), reflecting traders best estimates of the effective fed funds rate, is significantly below the target rate of 1.0 percent — signaling another 0.50 percent rate cut. Confidence is not yet restored, however. Financial markets remain on life support with massive injections of liquidity by the Fed.

Gold

Spot gold continues to consolidate between $700 and $770. Breakout above $770 would offer a target of $840, calculated as $770 + ( 770 - 700 ). Reversal below $700 remains more likely, as gold is in a primary down-trend, and would offer a target of the June 2006 low of $550.

Source: Netdania