Jan 302013


American taxpayers are expected to lose USD 27 billion from the 2008 financial bailout.
American taxpayers are expected to lose USD 27 billion from the 2008 financial bailout, as a report reveals further losses attributed to the US Treasury Department.

US taxpayers can expect to lose even more than the estimated USD 22 billion made in the fall last year, due to increased losses for the Treasury Department on sales of shares in bailed-out companies, according to a report released on Wednesday by the special inspector general for the Troubled Asset Relief Program (TARP).

The report said taxpayers could lose USD 5.5 billion specifically on Ally Financial – formerly called GMAC under a partnership with General Motors – in losses based on unsafe mortgages given right before the financial crisis. Ally owes USD 14.6 billion of the USD 17.2 billion in assistance it received.

The US government would also need to sell all General Motors shares it holds at USD 71.86 per share, more than double the current price of USD 28. GM still owes USD 21.6 billion of the USD 49.5 billion bailout it received.

“Taxpayers saved GMAC, and they should not be put in the position of needing to save the company again,” said Special Inspector General Christy Romero, adding that both Ally and General Motors owe more than half of the USD 67.3 billion still owed to taxpayers by companies that were bailed out during the financial crisis.

The government watchdog went on to reveal fraud related to TARP during investigations that subsequently led to criminal charges against 119 people, including 82 senior company executives.

This comes as Romero accused the Treasury Department for providing “excessive” pay for executives tied to the bailed-out corporations rescued from the financial crisis including General Motors, Ally Financial and AIG – the largest bailout recipient at USD 182 billion.

After the 2008 financial crisis, Congress authorized USD 700 billion for the bailout of some of America’s largest companies. About USD 413 billion was eventually issued.

Continue reading »

Jan 242013

Nick Summers
A Wells Fargo branch on San Francisco's Market Street

More than $114 billion exited the biggest U.S. banks this month, and nobody’s quite sure why.

The Federal Reserve releases data on the assets and liabilities of commercial banks every Friday. The most current figures, covering the first full week of 2013, show the largest one-week withdrawals since the Sept. 11, 2001, attacks. Even when seasonally adjusted, the level drops to $52.8 billion—still the third-highest amount on record, and one for which bank experts and analysts were reluctant to give a definitive explanation.

The most obvious culprit is the expiration of the Transaction Account Guarantee program, the extraordinary federal effort to shore up the country’s non-gigantic banks during the 2008 financial crisis. Big banks were considered “too big to fail,” while smaller ones were vulnerable to runs. The TAG program backstopped their deposit bases by temporarily offering unlimited insurance on money kept in non-interest-bearing accounts. That guarantee ended on Dec. 31, so a decrease in deposits would be expected first thing in January.

But hold on: The Fed data show $114 billion leaving the 25 biggest banks—about 2 percent of their deposit base. Only $26.9 billion left all the others, equivalent to 0.9 percent of their deposit base. Experts had predicted that the end of TAG would hurt the nation’s small banks because the big ones are still considered too big to fail. “I think [customers] are going to go back to the mega banks,” the head of a regional bank in Bethesda, Md., told The Washington Post in December. “They’ve been assured by the government that mega banks are too big to fail. It’s a horrible, bad, poorly-thought-out situation.” Small banks fearfully lobbied the Senate to extend TAG, with analysts telling the New York Times that they expected $200 million to $300 million—yes, with an m—to move from affected accounts into money market funds or elsewhere.

So if the missing $114 billion is not the result of the TAG program expiration—or at least not all related to TAG—what’s going on? Paul Miller, a bank analyst with FBR Capital Markets, cautions against reading too much into the Fed’s weekly data. “It’s a noisy database,” he says. Among large U.S. banks, there have been movements of greater than $50 billion (not seasonally adjusted) during 107 different weeks since 2000. It’s not uncommon to see 11-figure swings—that is, tens of billions of dollars—from positive to negative, or vice-versa, one week to the next.

Noise can increase near the start of a year. “The first quarter is always a wacky quarter,” Miller says. And January 2013 has seen an incredible amount of change. First, the fiscal cliff drama had companies shifting dividends and had bank clients guessing what their tax liabilities would be, which might explain the $60.4 billion pumped into the largest banks during the week ending Dec. 26. (Seasonally adjusted, it was the sixth-highest level on record.) Second, the payroll tax just went up, sticking most wage earners with paychecks that are 2 percent smaller.

Third, ordinary investors may be ready to move out of federally guaranteed accounts and into investments. Stocks did very well in 2012. As Bloomberg Businessweek’s Roben Farzad wrote on Jan. 16, equity mutual funds saw their second-highest inflows on record in the first week of the year. Economists are worrying that market exuberance is getting too high, with one measure of risk aversion at a three-decade low.

“If deposits are really trending down—and at the end of the month, we’ll be smarter than we are now—if that’s the case, it can tell us a few things,” says Dan Geller, executive vice president of Market Rates Insight. “And one thing that it could tell us is that the law of elasticity is finally catching up with deposits.” In other words, contrary to what economic theory predicts, deposits have been piling up at banks ever since the crisis, even though they offer pitiful yields. Geller says that may finally be ending—though like Miller, he says not to put too much stock in just one burst of Fed data.

“One week is just a very thin slice,” he says. Still, $114 billion is a big figure, and it’s one to keep an eye on in order to understand where the economy is headed in 2013. Continue reading »

Jan 242013

Roxana Tiron
James Rowley

The U.S. House voted to temporarily suspend the nation’s borrowing limit, removing the debt ceiling for now as a tool for seeking deeper spending cuts.

The measure, passed 285-144, lifts the government’s $16.4 trillion borrowing limit until May 19. It goes to the Senate, where Majority Leader Harry Reid said lawmakers will pass the bill unchanged and send it to President Barack Obama.

Three-Month Suspension of U.S. Debt Ceiling Passed by House

Three-Month Suspension of U.S. Debt Ceiling Passed by House

Senate Majority Leader Sen. Harry Reid on Capitol Hill.

“The premise here is pretty simple; it says that there should be no long-term increase in the debt limit until there’s a long-term plan to deal with the fiscal crisis that faces our country,” House Speaker John Boehner, an Ohio Republican, said during floor debate. “This is the first step in an effort to bring real fiscal responsibility to Washington.”

The revised strategy eliminates the risk that House Republicans would be blamed for a default in the short term. Republicans plan to focus on other fiscal deadlines and say they aren’t giving up their fight for cuts to federal programs.

Stocks rose, with the Standard & Poor’s 500 Index (SPX) surging to its highest level since 2007. The S&P 500 gained 0.15 percent to 1,494.81 at 4:35 p.m. in New York. It rose 4.8 percent in January through today for the best start to a year since 1997. The Dow Jones Industrial Average (INDU) rose 67.12 points, or 0.49 percent, to 13,779.33.

Two Deadlines

Republicans plan to use two other approaching deadlines — the March 1 start of automatic spending cuts and the need to pass a bill by the end of March to fund the government — to extract spending reductions from Obama and congressional Democrats.

The measure passed today, H.R. 325, would allow the nation’s borrowing authority to automatically rise May 19 to accommodate the amount the U.S. Treasury borrowed during the three months that the limit is suspended.

“The president believes that we need to, as a country, do the responsible thing and without drama or delay pay our bills,” White House press secretary Jay Carney said after the debt bill passed the House. “Ideally we would extend or raise the debt ceiling for a long period of time.”

Carney said the vote “represents a fundamental change” in the House Republicans’ strategy. Continue reading »

Nov 012012

Tyler Durden

One week ago, when we reported the news that the Bundesbank had secretly pulled two thirds of its gold from London years ago, we said the following:
… Germany has done nothing wrong! It simply demanded a reclamation of what is rightfully Germany’s to demand.
And here is the crux of the issue: in a globalized system, in which every sovereign is increasingly subjugated to the credit-creating power of the globalized “whole”, one must leave all thoughts of sovereign independence at the door and embrace the “new world order.” After all this is the only way that the globalized system can create the shadow cloud of infinite repoable liabilities, in which we currently all float light as a binary feather, which permits instantaeous capital flows and monetary fungibility, and which guarantees that there will be no sovereign bond issue failure as long as nobody dares to defect from the system in which all collateral is cross pledge and ultra-rehypothecated… for the greater good. Until the Buba secretly defected that is.
And this is the whole story. Because by doing what it has every right to do, the German Central Bank implicitly broke the cardinal rule of true modern monetary system (never to be confused with that socialist acronym fad MMT, MMR or some such comparable mumbo-jumbo). And the rule is that a sovereign can never put its own people above the global corporatist-cum-banking oligarchy, which needs to have access to all hard (and otherwise) assets at any given moment, on a moment’s notice, as the system’s explicit leverage at last check inclusive of the nearly $1 quadrillion in derivatives, is about 20 times greater than global GDP. This also happens to be the reason why the entire world is always at most a few keystrokes away from a complete monetary (and trade) paralysis, as the Lehman aftermath and the Reserve Fund breaking the buck so aptly showed.
We are confident that little if anything will be made of the Buba’s action, because dwelling on it too much may expose just who the first country will be (or  already has been) when the tide finally breaks, and when it will be every sovereign for themselves. Because at that point, which will come eventually,not only Buba, but every other bank, corporation, and individual will scramble to recover their own gold located in some vault in London, New York, or Paris, or at your friendly bank vault down the street, and instead will merely find a recently emptied storage room with humorously written I.O.U. letters in the place of 1 kilo gold bricks.
It appears that the story, which has refused to go away, was not covered sufficiently fast, and precisely the worst case scenario – at least for the “asset-lite” status quo – is slowly but surely starting to materialize. From Bloomberg:
Ecuador’s government wants the nation’s banks to repatriate about one third of their foreign holdings to support national growth, the head of the country’s tax agency said.
Carlos Carrasco, director of the tax agency known as the SRI, said today that Ecuador’s lenders could repatriate about $1.7 billion and still fulfill obligations to international clients. Carrasco spoke at a congressional hearing in Quito on a government proposal to raise taxes on banks to finance cash subsidies to the South American nation’s poor.
So yesterday: Germany… today: Ecuador… tomorrow: the World?

Because while Ecuador, with its 26.3 tonnes of gold, may be small in the grand scheme of gold things, all it takes is for more and more banks to join the bandwagon and demand delivery in kind from official repositories (i.e., New York and London), and the myth that is the overcollateralization of hard money by central banks will promptly come to an abrupt, bitter and, likely, quite violent end.Help Us Transmit This Story

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Oct 242012

Silver Doctors

German Federal auditors handed in a report slamming the Bundesbank for not inspecting their foreign held gold reserves to verify their book value. The report says the gold bars “have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight.” Instead, it relies on “written confirmations by the storage sites.”  The lion’s share of Germany’s gold reserves (nearly 3,400 tons estimated at $190 billion) are housed in vaults of the US Federal Reserve, the Bank of England and the Bank of France since the post-war days, when they were worried about a Cold War Soviet invasion. The Bundesbank stated, “There is no doubt about the integrity of the foreign storage sites in this regard”. In contrast with best industry practices Germany’s gold reserves do not seem to be independently verified by a third party. Philipp Missfelder, a politician from Merkel’s own party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German’s daily Bild reported. The Bundesbank won’t let German parliament members inspect the German gold vaulted abroad because the central bank vaulting facilities supposedly lack “visiting rooms. And yet one of those vaults, the Federal Reserve Bank of New York, offers the public tours that include “an exclusive visit to the gold vault”.
From Goldcore:
Today’s AM fix was USD 1,717.00, EUR 1,317.22, and GBP 1,072.12 per ounce.
Yesterday’s AM fix was USD 1,725.00, EUR 1,321.03, and GBP 1,075.10 per ounce.
Silver is trading at $31.80/oz, €24.52/oz and £19.95/oz. Platinum is trading at $1,590.25/oz, palladium at $605.25/oz and rhodium at $1,125/oz.
Gold climbed $6.40 or 0.37% in New York yesterday and closed at $1,728.50. Silver hit a high of $32.434 and finished trading with a gain of 1%.
Gold edged down on Tuesday, in tandem with equities that relinquished gains, however demand from jewellers supported prices as investors await the policy statement from the US Federal Reserve meeting to be released on Wednesday at 18:15 GMT.
No major announcements are expected to come out of the meeting.  Last month the Fed committed to hold rates low even after the economic recovery has strengthened. This was the signal that indicated it will continue intervening until the economy grows fast enough to decrease US unemployment sharply.
The euro remained firm against the dollar as the market expects Spain to apply for a bailout within the next month.  Now that Spain’s regional elections are complete and with Spain’s Prime Minister Rajoy’s People’s Party winning 41 out of 75 seats in the Galician assembly this affirmed the approval of financial austerity measures and paves the way for a formal bailout from the EU.
Spain’s central bank announced this morning that the Spanish economy contracted at a faster pace in Q3 (1.7% vs. 1.3%) and that the country may miss its budget-deficit target because of tax-revenue shortfalls.
In India, demand for the yellow metal climbed overnight after a rebound in the rupee discounted prices by 1%.
German Federal auditors handed in a report slamming the Bundesbank for not inspecting their foreign held gold reserves to verify their book value.
The report says the gold bars “have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight.” Instead, it relies on “written confirmations by the storage sites.”
The lion’s share of Germany’s gold reserves (nearly 3,400 tons estimated at $190 billion) are housed in vaults of the US Federal Reserve, the Bank of England and the Bank of France since the post-war days, when they were worried about a Cold War Soviet invasion.

The Bundesbank stated, “There is no doubt about the integrity of the foreign storage sites in this regard”.
In contrast with best industry practices Germany’s gold reserves do not seem to be independently verified by a third party. GoldCore Gold Bullion Services offers clients secure storage accounts in Zurich, London, USA and Hong Kong, with independent verification of all client stored assets.
Philipp Missfelder, a politician from Merkel’s own party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German’s daily Bild reported.
The Bundesbank won’t let German parliament members inspect the German gold vaulted abroad because the central bank vaulting facilities supposedly lack “visiting rooms.” And yet one of those vaults, the Federal Reserve Bank of New York, offers the public tours that include “an exclusive visit to the gold vault”.
With German elections around the corner (and this a politically sensitive issue) the central bank decided last month to repatriate about 50 tons of gold per year over the next 3 years from New York to its headquarters in Frankfurt for “thorough examinations” regarding weight and quality, the report revealed.
The auditor’s report stated that the German Central Bank’s gold in London has dropped “below 500 tons” due to recent sales and repatriations, but it did not specify how much gold was held in the U.S. and in France. German media have widely reported that some 1,500 tons — half of their total is stored in New York.
The lack of an announcement of the sale of the German gold in London suggests that the sale was actually part of a gold swap with another central bank — like the New York Fed. The only question is the lack of transparency surrounding the fall in London.  Was German gold sold at the behest of the US and in exchange Germany took title to US gold vaulted in the New York? Or was title to gold supposedly vaulted in the United States?
German economists have led a rally to “bring home our gold” and the news article listed below was circulated by the AP.

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Oct 192012

The Daily Bell

Large Cash Transactions Banned In Mexico … Outgoing Mexican President Felipe Calderon has signed into law a ban on large cash transactions. The ban will take effect in about 90 days and it is part of a broader effort to control monetary flows within the country. Under the law, a Specialized Unit in Financial Analysis operating within the Attorney General’s Office will be created to investigate financial operations “that are related to resources of unknown origin.” For real estate transactions, cash payments of more than a half million pesos ($38,750) will be forbidden and, for automobiles or items like jewelry, art, and lottery tickets, cash payments of more than 200,000 pesos ($15,500) will be forbidden. The law carries a minimum penalty of five years in prison. – Forbes

Dominant Social Theme: Terrorism must be combated by controlling people’s money.

Free-Market Analysis: What we consider to be the “phony” war on terror is the gift that keeps on giving to those who run our governments.

The phony war on drugs only adds to the rationales for telling people what they can and cannot do with their resources.
What is going on is a pattern, not a series of defensive moves taken out of desperation. The power elite intends to lock down the world, it seems, in order to track every monetary transaction of any significance.

We wrote about this trend previously in “Spain Bans Cash.” Here’s an excerpt:

… As we have long predicted, the phony “sovereign debt” crisis in Europe is being used to justify all sorts ofauthoritarian measures.

It is government pols that gladly borrowed what European banks threw at them. And somehow the upshot earlier this week is that Spanish citizens now lose the right to conduct many transactions in cash.

Spectacularly, the reports such as this one, excerpted above, don’t even both to hide the real point. The Spanish government wants to ensure that it can “track transactions and make sure that people and businesses are paying taxes.”
Of course, anyone who has visited Spain of late knows that the tax burden in Spain is onerous indeed, and is one reason that the truculent tribes that have co-existed uneasily with Madrid are again beginning to beat the drums of secession.
The taxes that the central government levies on small businesses especially are verging on punitive. But there are no apologies. The official position is one of unflinching demands.

And now Mexico is going the way of Spain. Always there is a justification. But the reality of the project is much broader and has to do with a power elite wish, apparently, to create a world government that is fully in charge of what people can and cannot transact. Here’s some more from the Forbes article excerpted above:

In 2010, Mexico instituted strict limits on foreign exchange cash transactions to $1,500 per person per month, which caused several cash dollar exchanges to withdraw from the business and had the effect of penalizing tourists.

Of course, US dollars are a huge portion of the actual paper cash that this effort is aimed at, but the Mexican peso is the 12th most traded currency in the world and by far the most traded currency in Latin America.

Reuters reported that, “Sales of drugs from marijuana to cocaine and methamphetamine in the United States are worth about $60 billion annually, according to the United Nations. About half of that amount is estimated to find its way back to cartels in Mexico.”

The Woodrow Wilson International Center For Scholars’ Mexico Institute published a comprehensive study in May 2012 entitled “It’s All about the Money.” The report recommended tight integration and coordination with the United States in the areas of legal framework, financial institution regulation, intelligence on cross-border currency flows, and non-conviction based asset forfeiture.

Two years in the making, the new law also requires notaries, real estate brokers, and other dealers to report the forms of payment for transactions above the respective limits. Financial institutions will also be required to report monthly credit card balances in excess of 50,000 pesos ($3,875).

The article mentions that Italy has also banned cash transactions above a certain amount. Certainly this is a growing trend.

The Forbes article mentions the prevalence of the Mexican drug trade but it is well known at this point in alternative news circles that US Intel is behind much Western drug trade in order to fund various black and gray ops. Presumably, MI6 and the Mossad are also involved.

The British Crown made a fortune in the 1800s selling opium to the Chinese. Government drug trafficking is an ancient business. In order for something to be maximally profitable, it has to be in short supply. Making something illegal is one way to damp supplies and raise profits.

Conclusion: We figure at some point gold and silver will also come under attack, as that’s the way the world is trending. But in the meantime, these national bans continually pressure more and more freedoms, including the freedom of shielding one’s wealth from prying eyes. And that’s just the point …

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Oct 122012
Liberty Classroom

by Tom Woods on October 9, 2012 • 43 Comments
(by Tom Woods and Bob Murphy)
The other day the Huffington Post ran an article by a Bonnie Kavoussi called “11 Lies About the Federal Reserve.” And you’ll never guess: these aren’t lies or myths spread in the financial press by Fed apologists. These are “lies” being told by you and me, opponents of the Fed. Bonnie Kavoussi calls us “Fed-haters.” So she, a Fed-lover, is at pains to correct these alleged misconceptions. She must stop us stupid ingrates from poisoning our countrymen’s minds against this benevolent array of experts innocently pursuing economic stability.
Here are the 11 so-called lies (she calls them “myths” in the actual rendering), and our responses.
HuffPo’s Myth #1: “The Fed actually prints money.”
She leads off with this? As if this is some big discovery that will refute the end-the-Fed people? When we talk about Fed money-printing, we are speaking in shorthand. We’re pretty certain someone like Ron Paul knows the Fed doesn’t actually print money. But he, along with pretty much the whole financial world, speaks of the Fed as printing money. You know why? Because it’s a teensy bit more convenient than saying, “We need the Fed to credit some banks’ accounts with increased balances, which it does by means of a computer, though if these balances are lent out and the borrowers prefer to use some of this lent money as cash, the Treasury will go ahead and print the cash.”
HuffPo’s Myth #2: “The Federal Reserve is spending money wastefully.”
You may think the Federal Reserve is throwing around money like crazy, just like the federal government. But you’re wrong! As Kavoussi explains, the Fed doesn’t spend money like the federal government does; it creates money! That’s just totally different! And so we read, “Both CNN anchor Erin Burnett and Republican vice presidential nominee Paul Ryan have compared the Federal Reserve’s quantitative easing to government spending. But the Federal Reserve actually has created new money by expanding its balance sheet.”
She then points out that hey, the Fed earned a profit of $77.4 billion last year. We are supposed to be impressed. But if you can create money out of thin air and buy bonds with it, and then earn interest on those bonds, wouldn’t it be pretty hard to lose money? (But they just might, if interest rates should spike.)
HuffPo’s Myth #3: “The Fed is causing hyperinflation.”
Is it just us, or does Bonnie Kavoussi word things awkwardly? Do you know of anyone who says the Fed is causing – as in present progressive tense — hyperinflation?
Kavoussi then goes on to tell us that the CPI is showing low price inflation — again, as if she’s reporting some extraordinary revelation that will put all Fed critics to shame. There is no hyperinflation because the banks are holding the newly created money as excess reserves with the Fed. If the banks begin lending and the money multiplier is enacted, an inflationary spiral could easily occur — trillions of dollars of high-powered money would expand via the fractional-reserve banking system into tens of trillions of dollars. The only way for the government to stay ahead of the curve would be for the Fed to keep creating boatloads of new money — which is how hyperinflation happens, after all.  If that were to happen, we rather doubt Kavoussi would want to come tell us how the CPI is doing.
HuffPo’s Myth #4: “The amount of cash available has grown tremendously.”
“Some Federal Reserve critics claim that the Fed has devalued the U.S. dollar through a massive expansion of the amount of currency in circulation,” says Kavoussi. “But not only is inflation low; currency growth also has not really changed since the Fed started its stimulus measures, as noted by Business Insider’s Joe Weisenthal.”
This looks like another silly gotcha with definitions, like the “printing money” canard. The graph below shows that the currency component of M1 hasn’t shot up like a rocket, it’s true; but M1 itself (which consists of not just physical paper but also checking account deposits) has indeed risen sharply, notwithstanding the insights of Business Insider’s Joe Weisenthal.
HuffPo’s Myth #5: “The gold standard would make prices more stable.”
Kavoussi writes, “Rep. Ron Paul (R-Tex.) has claimed that bringing back the gold standard would make prices more stable. But prices actually were much less stable under the gold standard than they are today, as The Atlantic’s Matthew O’Brien and Business Insider’s Joe Weisenthal have noted.”
Does our critic even read the things she links to? Her two authors’ blog posts depict a very brief period in the twentieth century, after the classical gold standard had already given way to the gold exchange standard. What is that supposed to prove?
So against Bonnie Kavoussi’s two blog posts that examine the gold exchange standard and only for a period of about 15 years at that, all we have in reply is only the most meticulous study of gold and its purchasing power ever written, Roy Jastram’s The Golden Constant: The English and American Experience 1560-2007, which finds gold to be extraordinarily stable over four and a half centuries.
Even John Kenneth Galbraith, not exactly gold’s biggest fan, conceded that once someone had gold, there was little uncertainty about what he would be able to get with it. “In the last [19th] century in the industrial countries there was much uncertainty as to whether a man could get money but very little as to what it would do for him once he had it. In this [20th] century the problem of getting money, though it remains considerable, has diminished. In its place has come a new uncertainty as to what money, however acquired and accumulated, will be worth. Once, to have an income reliably denominated in money was thought…to be very comfortable. Of late, to have a fixed income is to be thought liable to impoverishment that may not be slow. What has happened to money?”
Of course, gold standard advocates, at least in the Austrian tradition, are not fixated on price stability in the first place.
HuffPo’s Myth #6: “The Fed is causing food and gas prices to rise.”
This can’t be, Kavoussi says, since some sources deny it. Bob Murphy testified before Congress on this very issue. He thinks the Fed does play a role. Where is the flaw in his reasoning?
HuffPo’s Myth #7: “Quantitative easing has not helped job growth.”
How could we think such a thing? Why, we should be satisfied to know, as Bonnie Kavoussi assures us, that “the Fed’s quantitative easing measures actually have saved or created more than 2 million jobs, according to the Fed’s economists.” Gee, the Fed’s economists think the Fed contributes to job growth? How about that! On the same grounds, we might say there was no housing bubble in 2005 and that the fundamentals of real estate were sound — after all, we could find a whole bunch of “Fed economists” who were saying just that.
In fact, these models build in the very assumptions about purchases helping the economy that they then spit out, just like with the ex post “analysis” of the Obama stimulus package. No matter what numbers one fed into such models, it would be impossible for them to say that QE (or the Obama stimulus) hindered economic growth; the worst they would show is a build-up of price inflation once “full employment” had been achieved.
HuffPo’s Myth #8: “Tying the U.S. dollar to commodities would solve everything.”
Whenever you hear a mocking writer like Bonnie Kavoussi say something like, “My opponents think X would solve everything,” you can be sure her opponents have said no such thing. Why, as a matter of simple courtesy, could she not simply have described this alleged myth as, “Tying the U.S. dollar to commodities would improve the American monetary system”? Because that might sound reasonable, and it’s Bonnie Kavoussi’s job to make her opponents sound like troglodytes.
That’s all we have to say about this myth, though, since we are not interested in tying the dollar to a basket of commodities. Here is our preferred monetary reform.
HuffPo’s Myth #9: “Ending the Fed would make the financial system more stable.”
Here’s Bonnie Kavoussi: “Rep. Ron Paul (R-Tex.) claims that ending the Federal Reserve and returning to the gold standard would make the U.S. financial system more stable. But the U.S. economy actually experienced longer and more frequent financial crises and recessions during the 19th century, when the U.S. was using the gold standard and did not have the Fed.”
Categorically false. As wrong as wrong can be.
First, an excerpt from the 2011 Tom Woods book Rollback, whose chapter on the Fed spends some time on this claim. (We omit the notes here, but thanks go to George Selgin and Peter Klein for help with sources.)
When people raise questions about the utility of the Fed, they are usually lectured about how volatile the economy used to be and how much better it is now, thanks to the wise oversight of our central bank. Recent research has thrown cold water on this claim. Christina Romer finds that the numbers and dating used by the National Bureau of Economic Research (NBER, the largest economics research organization in the United States, founded in 1920) exaggerate both the number and the length of economic downturns prior to the creation of the Fed. In so doing, the NBER likewise overestimates the Fed’s contribution to economic stability. Recessions were in fact not more frequent in the pre-Fed than the post-Fed period.
But let’s be real sports about it, and compare only the post-World War II period to the pre-Fed period, thereby excluding the Great Depression from the Fed’s record. In that case, we do find  economic contractions to be somewhat more frequent in the period before the Fed, but as economist George Selgin explains, “They were also almost three months shorter on average, and no more severe.” Recoveries were also faster in the pre-Fed period, with the average time peak to bottom taking only 7.7 months as opposed to the 10.6 months of the post-World War II period. Extending our pre-Fed period to include 1796 to 1915, economist Joseph Davis finds no appreciable difference between the length and duration of recessions as compared to the period of the Fed.
But perhaps the Fed has helped to stabilize real output (the total amount of goods and services an economy produces in a given period of time, adjusted to remove the effects of inflation), thereby decreasing economic volatility. Not so. Some recent research finds the two periods (pre- and post-Fed) to be approximately equal in volatility, and some finds the post-Fed period in fact to be more volatile, once faulty data are corrected for. The ups and downs in output that did exist before the creation of the Fed were not attributable to the lack of a central bank. Output volatility before the Fed was caused almost entirely by supply shocks that tend to affect an agricultural society (harvest failures and such), while output volatility after the Fed is to a much greater extend the fault of the monetary system.
When we look back at the nineteenth century, we discover that the monetary and banking instability that existed then were not caused by the absence of a government-established agency issuing unbacked paper money. According to Richard Timberlake, a well-known economist and historian of American monetary and banking history, “As monetary histories confirm…most of the monetary turbulence — bank panics and suspensions in the nineteenth century — resulted from excessive issues of legal-tender paper money, and they were abated by the working gold standards of the times.” In a nutshell, we are faced once again with the faults of interventionism being blamed on the free market.
From here, we recommend Tom’s article Life with the Fed: Sunshine and Lollipops? and his resource page Economic Cycles Before the Fed.
HuffPo’s Myth #10: “The Fed can’t do anything else to help job growth.”
Bonnie Kavoussi: “Many commentators have claimed that there simply aren’t any tools left in the Fed’s toolkit to be able to help job growth. But some economists have noted that the Fed could target a higher inflation rate to stimulate job growth.”
So we’re back to the old Phillips Curve analysis, which posited an inverse relationship between inflation and unemployment. You can get low unemployment, the argument went, but the price will be high inflation.
Time has not been kind to the Phillips Curve.  As economist Jeff Herbener told an interviewer:
The theory was that there was a trade-off between unemployment and inflation. But if you go back to the original article by Phillips, he never demonstrates that such a thing exists in the real world. He manipulated and maneuvered the data around to make it look as if there was one. Once his errors are swept away, and the data broken down, the Phillips Curve vanishes as any kind of long-run pattern. It didn’t take stagflation to teach us that. It was always untrue.
This raises a much more interesting question. How did the idea ever come to dominate the macroeconomic literature in the first place? Here’s my theory. Recall that Keynesian theory suggests there are no downsides to manipulating aggregate demand through fiscal and monetary policy. If you created full employment, it would stay there and we’d all live happily ever after. It seems paradoxical, then, that Keynesians would embrace a theory that suggests that creating full employment risks generating inflation. Keynes never said that, but people like Paul Samuelson did….
It became fairly well recognized, even in the 1950s, that there could be such things as inflationary recessions. That put orthodox Keynesians in big trouble. In order to cover themselves, Samuelson and Solow adopted the Phillips Curve as a model. It served as the means to save themselves from the realization that Keynesianism was fundamentally flawed.
When inflation and unemployment increase, they don’t have to throw in the towel on Keynesian theory; they merely claim that the Phillips Curve has shifted outwards. They are saved–until of course the outward and inward shifts of the whole curve dominate movement along the curve. That means the supposed trade-off itself has disappeared. That’s exactly what happened. Many people see that the curve is now discredited. But in fact, it never did stand up. It was an escape hatch built by Keynesians that no longer allows them an escape.
For the systematic takedown of the Phillips Curve — if only Bonnie Kavoussi could recognize a real myth when she saw one, instead of just repeating what she learned in Ec 10 at Harvard — see chapter 3 of Dissent on Keynes.
HuffPo’s Myth #11:  ”The Fed can’t easily unwind all of this stimulus.”
Kavoussi: “Some commentators have claimed that the Fed can’t safely unwind its quantitative easing measures. But the Fed’s program involves buying some of the most heavily traded and owned securities in the world, Treasury and government-backed mortgage bonds. The Fed will likely have little problem finding buyers for these securities, all of which will eventually expire even if the Fed does nothing. But economists have noted that once the Fed decides it’s time to unwind the stimulus, the economy will have improved to such an extent that this won’t be an issue.”
Nobody is denying that the Fed could find a buyer for its assets. The issues are: (1) at whatprice will the Fed be able to unload those assets, and (2) what happens to the financial sector when the reserves are destroyed in the act of selling off these assets? The Fed could dump its entire holdings of Treasury securities tomorrow, but the critics are worried that this would send interest rates soaring and would cripple the banks which would no longer have excess reserves.
Look closely at what Kavoussi is saying: If the economy begins to recover before price inflation becomes a problem, then the Fed will be able to sit back and let its “stimulus” unwind naturally. Yes, great, but what if the economy is still in the toilet when price inflation heats up? Then, as Bob Murphy argues, all of the Fed’s ballyhooed “exit strategies” will seem pretty useless.
In short, it’s safe to say that there are indeed plenty of myths about the Fed, and that Bonnie Kavoussi believes pretty much all of them.

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Oct 052012

QE3, the Federal Reserve’s third round of quantitative easing, is so open-ended that it is being called QE Infinity.  Doubts about its effectiveness are surfacing even on Wall Street.  The Financial Times reports:

Among the trading rooms and floors of Connecticut and Mayfair [in London], supposedly sophisticated money managers are raising big questions about QE3 — and whether, this time around, the Fed is not risking more than it can deliver.

Which raises the question, what is it intended to deliver?  As suggested in an earlier article here, QE3 is not likely to reduce unemployment, put money in the pockets of consumers, reflate the money supply, or significantly lower interest rates for homeowners, as alleged.  It will not achieve those things because it consists of no more than an asset swap on bank balance sheets.  It will not get dollars to businesses or consumers on Main Street.

So what is the real purpose of this exercise?  Catherine Austin Fitts recently posted a revealing article on that enigma.  She says the true goal of QE Infinity is to unwind the toxic mortgage debacle, in a way that won’t bankrupt pensioners or start another war:
The challenge for Ben Bernanke and the Fed governors since the 2008 bailouts has been how to deal with the backlog of fraud – not just fraudulent mortgages and fraudulent mortgage securities but the derivatives piled on top and the politics of who owns them, such as sovereign nations with nuclear arsenals, and how they feel about taking massive losses on AAA paper purchased in good faith.
On one hand, you could let them all default. The problem is the criminal liabilities would drive the global and national leadership into factionalism that could turn violent, not to mention what such defaults would do to liquidity in the financial system. Then there is the fact that a great deal of the fraudulent paper has been purchased by pension funds. So the mark down would hit the retirement savings of the people who have now also lost their homes or equity in their homes. The politics of this in an election year are terrifying for the Administration to contemplate.
How can the Fed make the investors whole without wreaking havoc on the economy?  Using its QE tool, it can quietly buy up toxic mortgage-backed securities (MBS) with money created on a computer screen.
Good for the Investors and Wall Street, But What about the Homeowners and Main Street?
 The investors will get their money back, the banks will reap their unearned profits, and Fannie and Freddie will get bailed out and wound down.  But what about the homeowners?  They too bought in good faith, and now they are either underwater or are losing or have lost their homes.  Will they too get a break?  Fitts says we’ll have to watch and see.  Perhaps there was a secret agreement to share in the spoils.  If so, we should see a wave of write-downs and write-offs aimed at relieving the beleaguered homeowners.
A nice idea, but somehow it seems unlikely.  The odds are that there was no secret deal.  The banks will make out like bandits as they have before.  The never-ending backdoor bailout will keep feeding their profit margins, and the banks will keep biting the hands of the taxpayers who feed them.
How can Wall Street be made to play well with others and share in their winnings?  In a July 2012 article in The New York Times titled “Wall Street Is Too Big to Regulate,” Gar Alperovitz observed:
With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses.  If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions. . . .
Nationalization isn’t as difficult as it sounds.  We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock.  We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.

Bailout or Receivership?

Nationalization also isn’t as radical as it sounds.  If nationalization is too loaded a word, try “bankruptcy and receivership.”  Bankruptcy, receivership and nationalization are what are SUPPOSED to happen when very large banks become insolvent; and if the toxic MBS had been allowed to default, some very large banks would have wound up insolvent.
Nationalization is one of three options the FDIC has when a bank fails.  The other two are closure and liquidation, or merger with a healthy bank.  Most failures are resolved using the merger option, but for very large banks, nationalization is sometimes considered the best choice for taxpayers.  The leading U.S. example was Continental Illinois, the seventh-largest bank in the country when it failed in 1984.  The FDIC wiped out existing shareholders, infused capital, took over bad assets, replaced senior management, and owned the bank for about a decade, running it as a commercial enterprise.  In 1994, it was sold to a bank that is now part of Bank of America.
Insolvent banks should be put through receivership and bankruptcy before the government takes them over.  That would mean making the creditors bear the losses, standing in line and taking whatever money was available, according to seniority.  But that would put the losses on the pension funds, the Chinese, and other investors who bought supposedly-triple-A securities in good faith—the result the Fed is evidently trying to avoid.
How to resolve this dilemma?  How about combining these two solutions?  The money supply is still SHORT by $3.9 trillion from where it was in 2008 before the banking crisis hit, so the Fed has plenty of room to expand the money supply.  (The shortfall is in the shadow banking system, which used to be reflected in M3, the part of the money supply the Fed no longer reports.  The shadow banking system is composed of non-bank financial institutions that do not accept deposits, including money market funds, repo markets, hedge funds, and structured investment vehicles.)
Rather than a never-ending windfall for the banks, however, these maneuvers need to be made contingent on some serious quid pro quo for the taxpayers.  If either the Fed or the banks won’t comply, Congress could nationalize either or both.  The Fed is composed of twelve branches, all of which are 100% owned by the banks in their districts; and its programs have consistently been designed to benefit the banks—particularly the large Wall Street banks—rather than Main Street.  The Federal Reserve Act that gives the Fed its powers is an act of Congress; and what Congress hath wrought, it can undo.
Only if the banking system is under the control of the people can it be expected to serve the people.  As Seumas Milne observed in a July 2012 article in the UK Guardian:
Only if the largest banks are broken up, the part-nationalised outfits turned into genuine public investment banks, and new socially owned and regional banks encouraged can finance be made to work for society, rather than the other way round.  Private sector banking has spectacularly failed – and we need a democratic public solution.

Ellen Brown is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.comhttp://EllenBrown.com, andhttp://PublicBankingInstitute.org.

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