FedUpUSA

Archive for the ‘Bernanke’ Category

In what is the start of the biggest uphill battle in D.C., arguably even bigger than deposing the printing press leprechaun, five democrats are proposing an amendment to reinstate Glass-Steagal, whose repeal, through the Larry Summers orchestrated Gramm-Leach-Bliley Act, in 1999 set the economy on the collision course that culminated with the implosion of every single Goldman Sachs FICC competitor in 2008. The five Democrats who have undertaken the sisyphean task of taking on both Wall Street and their direct boss, are Maurice Hinchey of New York, John
Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington,
and John Tierney of Massachusetts.

If adopted, the measure would give banks one year to choose between
being commercial banks or investment banks. The nation’s biggest –
those now commonly referred to as “too big to fail” — would be broken
up. The Obama administration opposes the measure.

Obama, presumably a Democrat, continues to persist in endorsing each and every Republican legacy when it comes to Wall Street’s landed interests (and risk “management” practices). Of course, the last thing the administration needs is for the populace to comprehend the chameleonic nature of the administration’s action.

More from HuffPo:

The act was repealed in 1999 at the urging of, among others, Larry
Summers, now President Barack Obama’s chief economic adviser.

The five congressman all voted against the repeal then — and now they want it back.

Former Federal Reserve Chairman Paul Volcker is one of a number of
financial luminaries calling for at least a partial return to
Glass-Steagall. The Wall Street Journal’s
editorial page also endorsed the concept in a recent editorial as a way
to “reduce moral hazard” and “limit certain kinds of risk-taking by
institutions that hold taxpayer-insured deposits.”

The law’s repeal ushered in an era marked by big banks getting even
bigger. The country’s four largest — Bank of America, JPMorgan Chase,
Citigroup and Wells Fargo – now control more than half of the nation’s
mortgages, two-thirds of credit cards and two-fifths of all bank
deposits.

And because their deposits are taxpayer-insured, there’s a growing
concern that they will feel overly confident about making risky bets
through their investment arms because they know that should they suffer
huge losses, taxpayers will ultimately be there to bail them out.

The five Democrats face big obstacles, including their own leadership and the Obama administration.

At this point the whole systemic regulation debate is getting glaringly amusing. At the core of every conflict are proposed reforms that are so obvious from a risk mitigation debate: audited Fed, split up banks which are now bigger than ever before, propping a bankrupt FDIC, which in turn is backing up bankrupt institutions, and a bankrupt country which is trying to fool the world into a game of M.A.D. knowing full well if the US taxpayer goes down directly or indirectly, the world, and the proverbial flood, follow after. And the only sensible reforms are those getting the biggest push back from Obama, and of course, Wall Street. How these two seemingly traditional opponents have ended up on the same side of the page is testament enough to the cataclysmic legacy of Bernanke and Summers. Of course, nothing will be done about anything, in tried and true American fashion, until it is too late, and Main Street is left sorting through the rubble of Goldman’s new glass-plated headquarters, even as all inhabitants have long-ago departed the country and left the U.S. with a few quadrillion in I.O.U.’s. At this juncture the best option before politicians is to simply delay for one year until mid-term elections provoke some vestige of sensibility in the ruling class.

From The Daily Capitalist
December 3, 2009

Since the biggest financial collapse in world history was built on credit related to housing, it is pretty obvious that we should be paying very close attention to that market. The reasons are complex, but a recovery must be based on the liquidation of bad debt. The sooner that happens the quicker a recovery will happen.

When we mean “liquidation of debt” we are talking about a mountain of credit built on the housing bubble. This phony bubble wealth permeated the entire economy. When home owners saw the price of their home rising, they saw it as a source of capital to use for a variety of things, but let’s face it, most people spent it.

New stores opened, malls were built, financial institutions grew, cars and boats, second homes, vacations, and restaurants all flourished. Credit card debt mushroomed. Home mortgages were increased to pull cash out for spending. Yes, some of it went to good things, like our children’s education, helping our aged parents, and paying off bills. But the reality was that our debt kept growing.

The clever lads created even more phony wealth under the guise of insurance, but as we found out, companies like AIG really had no idea how large their obligations were for credit default swaps written against almost any financial risk. And these instruments were further leveraged without understanding the magnitude of these triple-counted obligations or their relationship to housing.

It all comes back to housing as the fuel for the 70% of our economy that was consumer spending. The thought was that housing has always gone up, and if it went down, it really never went down if you averaged growth since the post-WWII-period. A drop of 10%? Never has happened. 20%? Not even a 6th deviation possibility.

My thesis has been that this was all fueled by the Fed through monetary policies that created and supported the bubble. Aided and abetted by governmental policies and financing schemes that favored housing and risky loans. This was not a “free market” phenomenon. Far, far from it.

My thesis has also been that we can’t recover until all this bad debt is liquidated, and capital generated by savings is created and ultimately invested in profitable enterprises. It would be a mistake to rekindle the bubble. But, as we know, that’s what our government is trying to do. The government creates uncertainty as it flails around with programs, spending, and debt schemes to revive the economy. As a result mark-to-market accounting is thing of the past and banks are guarding their balance sheets, corporations are sitting on a lot of cash, cutting costs, and becoming leaner, and Mr. and Mrs. America still favor savings and debt instruments over equities and spending.

The big question: is the housing market bottoming out? Because once it does, debtors and debt holders will then have a handle on how great their losses are. When the bottom is falling out, it is difficult to get lenders to lend if they are afraid their remaining cash reserves will be needed to shore up the bank because of loan losses. The holders of subprime debt find it difficult to value their assets while housing values are still dropping.

Lenders have been shepherding their cash, reducing debt obligations, and cutting back lending and new investments because they do not know how deep their hole will be until housing bottoms out. Keynes called this a “liquidity trap.” More reasonable people, especially the Austrian school economists, call this a reasonable and necessary response to uncertainty.

The Fed and the federal government have been flogging this liquidity trap issue without let up and basically credit is still drying up. A 0.25% Fed Funds rate is basically a negative rate and they still can’t get banks to lend. The Fed’s balance sheet is at a record high. They have bought $850 million of mortgage backed securities. They are injecting cash into lenders. They have basically suspended mark-to-market accounting.

In Q3, the FDIC reported that bank lending still contracted by 3%:

Loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008, according to a separate statistical release from the Fed.

 

Commercial and industrial loans have dropped to $1.37 trillion from $1.6 trillion, commercial real-estate loans have declined to $1.66 trillion from $1.72 trillion, and consumer loans have fallen to $847 billion from $857 billion at the end of last year.

What do banks do? They have decided they would rather hold Treasury paper instead of make loans. This chart shows what’s been happening. No wonder T-rates have stayed so low despite massive deficit financing.

This is what makes Bernanke, Geithner, and Summers lose sleep at night. “It’s supposed to work, dammit!” Maybe this is why Summers is always falling asleep. No matter what they’ve tried, they can’t get banks to lend. I think they are very worried about this and while they say the economy is recovering nicely, they are crossing their fingers at the same time.

Back to housing.

I have been saying that I think the housing market is finding a bottom. I thought that low prices and rising affordability was the main driver of the housing market. If this were so, then housing prices would reflect real market valuations and this would finally bring about the liquidation of assets and debt wastefully invested during the prior artificial credit cycle. Lenders would know where they stood financially and would liquidate bad assets and rebuild their balance sheets. No more waiting around wondering what the Fed or the government would do to save housing.

I was wrong.

The housing market I now believe is being sustained almost entirely by the Fed and the federal government. This rekindling of the housing bubble is counterproductive and will hinder a real recovery of the economy because an artificially backed market will delay the necessary liquidation of the prior cycle’s malinvestment of capital.

Here is why I changed my mind:

First, 59% of new home buyers are relying on government-backed FHA, the Veterans Administration, and the Department of Agriculture loans. Most of these sales are driven by the first-time home buyers tax credit. The tax credit program has been extended through April, 2010.

Second, existing home sales are being driven by the tax credit and by foreclosure and short sales. Existing home sales are up 10.1%. Distressed sales — mainly foreclosures and short sales — accounted for 30% of transactions in the third quarter. And. according to the NAR, home sales are being driven by first time home buyers trying to make the previous November deadline.

This will have a negative impact on future sales. Like Cash for Clunkers, these government-driven sales may just be eating into sales that would have occurred in 2010. Many economists are referring to this phenomenon as “payback.”

Third, mortgage rates are now at 30 year lows. Another Fed related gift to home buyers. The average 30-year mortgage rate was 4.95% in October, down from 5.06% in September, according to Freddie Mac. Today, Freddie said the rate was down to 4.7%.

But … home prices are still falling. The S&P/Case-Shiller index of prices fell 8.9% for the July-through-September period from a year earlier. That was an improvement from the 14.7% drop in the second quarter and the 19% decline in the first three months of 2009. Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier. The national median price was $177,900, down 11.2% from the third quarter of 2008. [Don't ask me to explain the disparity. Case-Shiller and NAR measure this differently.] Last month the median price for an existing home was $173,100, down 7.1% from $186,400 in October 2008.

Thus, despite record interference in the housing market by the government, home prices are still falling. There are several reasons why it is likely that home prices will continue to fall.

Almost 25% of home owners are upside down with their mortgages. Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic. This shadow market is huge:

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home’s value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American. …

 

But negative equity “is an outstanding risk hanging over the mortgage market,” said Mark Fleming, chief economist of First American Core Logic. “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.” Borrowers who owe more than 120% of their home’s value, he said, were more likely to default.

 

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” the study said.

This overhang will continue to drive prices down. There is no way the Feds can force lenders to modify enough loans to make a serious dent in this overhang. It’s imply too big. Eventually the losses from forced modifications will mount and the FHA or any other agency will not be able to pay off their guarantees to lender. Nor should they try.

Mark Zandi, who correctly predicted a crisis in the housing market, but not the Crash, said on Wednesday, “The housing crash is not over.” He said the lull in foreclosure sales for the past few months, due to the government’s pressure on lenders to modify loans, has resulting in higher prices. He expects Case-Shiller to bottom by Q3 2010 with an overall price decline of 38% (now at 32%).

“Foreclosure sales will increase, and home prices will resume their decline by early 2010 as mortgage servicers figure out who will not qualify for a modification,” he said.

 

Zandi said 7.5 million foreclosure sales will have taken place between 2006 and 2011. The majority of these sales, however, have not emerged yet, with 4.8 million foreclosure sales expected between 2009 and 2011.

What this means is that the housing supply, now down to a 7+ months supply, will rise again, and prices will continue to decline. We haven’t seen the bottom yet.

The economy is so hot, that democrats in Congress are now moving with yet another stimulus package, this one for $170 billion, targeting bankrupt states and formerly surging unemployment (Obama has some TV appearances today; the BLS will be back to its previously scheduled job collapse next month). In other news, Japan did approximately 10 such small scale bailouts even as its market proceeded to keep probing new lows over the last two decades, and as reinvested 3x its annual GDP in comparable such one-time boosts to the economy without doing anything to prevent its current deflationary collapse.

From Dow Jones:

Congressional Democrats are moving ahead with a roughly $170 billion package to spur jobs growth and boost emergency  assistance to the unemployed, Democratic congressional aides say.

The two separate bills are taking shape amid an improving jobs picture, but with unemployment still at 10%. U.S. President Barack Obama will deliver a speech Tuesday at the Brookings Institution where he intends to lay out his own ideas for a narrowly targeted jobs bill, which will overlap with  Congress’s intentions but won’t be identical.

Both the administration and Congress will almost certainly pay for part of their program with some of the $115 billion that bailed out banks have repaid to the Treasury Department.

Some more details on Krugman’s wet dream:

The legislation will likely be split in two. The first part, at around $110 billion, would be considered emergency spending. It would again extend unemployment insurance, food stamp increases and a provision in the stimulus bill that subsidizes private-health insurance for the unemployed. This portion will likely be attached to a giant spending bill this month to fund the federal government, and will be added to the already huge U.S. budget deficit.

A second “jobs” bill would cost up to $70 billion, funded by the bank bailout. It would include more money for highway and bridge building, school construction and repair, and water and sewer projects. A second component would be direct aid to state governments cutting back services and raising taxes, moves that are hurting the economic recovery.

Finally, some repaid bailout funds will be lent back to small businesses directly from the Treasury.

Of course, nobody will have the brilliant idea of actually using TARP repayments (before they are needed to bail out the banking system again some time in late 2010) to actually pay back some of the debt which as of a few months ago has been classified as “unmanageable” by everyone including Mr. Bernanke. But why care about the sovereign default in 4-6 years when there are mid-term elections to be worried about. At least in the meantime, the abovementioned Fed Chairman can teach us all we need to know about Fiscal responsibility, courtesy of a completely “apolitical” and transparent Federal Reserve.

By Tyler Durden and Geoffrey Batt

These days catching the Fed chairman telling the truth as opposed to a b(a)ld faced lie is in itself a six sigma event. Sadly this post will continue with hugging the median. Some observations on the most recent fabrications by the chief money printer himself, which go to show just how willing Bernanke is willing to bend reality and/or his perception of it as the occasion suits.

A week ago Zimbabwe Ben wrote an op-ed in Washington Post last week in which he said:

“Now more than ever, America needs a strong, nonpolitical and independent central bank with the tools to promote financial stability and to help steer our economy to recovery without inflation.”

Recovery without inflation is another way of articulating the Fed’s quixotic dual mandate.  Of course, everyone knows the Fed does not care about inflation, or, it seems, the economy, unless of course Goldman Sachs recently changed its name to Inflation Economy, Inc. But what’s striking about this sentence (the last sentence, no less, of a decidedly political op-ed), is that it directly contradicts what he says about QE in two papers in 2004.
 
In the May 2004 edition of The American Economic Review, Bernanke and Reinhart published “Conducting Monetary Policy at Very Low Short-Term Interest Rates.”  ZH cited this paper before as evidence that Bernanke considered monetizing equities viable in a debt deflation.  This time, however, it’s useful because he claims aggressive QE may “have expansionary fiscal effects.” 

Furthermore:

“So long as market participants expect a positive short-term interest rate at some date in the future, the existence of government debt implies a current or future tax liability for the public. In expanding its balance sheet by open-market purchases, the central bank replaces public holdings of interest-bearing government debt with non-interest-bearing currency or reserves. If the increase in the monetary base is expected to persist, then the expected interest costs of the government and, hence, the public’s expected tax burden decline. (Effectively, this process replaces a direct tax, say on labor, with the inflation tax.)”

Then in the Fed Minutes from Nov 4th we get:

“Participants noted that the recent fall in the foreign exchange value of the dollar had been orderly and appeared to reflect an unwinding of safe-haven demand in light of the recovery in financial market conditions this year, but that any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

An odd remark considering what Bernanke et al said in Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment Author(s): Ben S. Bernanke, Vincent R. Reinhart, Brian P. Sack Source: Brookings Papers on Economic Activity, Vol. 2004, No. 2 (2004), pp. 1-78. More specifically:

…quantitative easing may work through a signaling channel if its implementation marks a general willingness of the central bank to break from the cautious and conventional policies of the past. A historical episode that may illustrate this channel at work (although the policymaker in question was the executive rather than the central bank) was the period following Franklin D. Roosevelt’s inauguration as U.S. president in 1933. During 1933 and 1934 the extreme deflation seen earlier in the decade suddenly reversed, stock prices jumped, and the economy grew rapidly.Christina Romer has argued persuasively that this surprisingly sharp recovery was closely associated with the rapid growth in the money supply that arose from Roosevelt’s devaluation of the dollar, capital inflows from an increasingly unstable Europe, and other factors. Because short-term interest rates remained near zero throughout the period, the episode is reasonably characterized as a successful application of quantitative easing.

It appears despite Bernanke (and Geithner’s) repeated appearances, admonitions and Fed Minute posturings to the contrary, Bernanke is fully aware of what his actions will do to both inflation and the dollar, and that the devaluation of the greenback is critical to the success of his campaign of bailing out CREs laden bank balance sheets. Yet in the meantime on every TV and congressional appearance the Chairman will eagerly lie and prevaricate, hoping his listeners have short memories, and have not bought a Kindle yet (difficult to imagine judging by Amazon’s 1,000,000,000,000,000 (non)inflation adjusted P/E) to have read his own scribblings on the matter of impending dollar devaluation. America deserves all it gets if it allows its Senators to reconfirm this human being for the most important post in the world.

We can’t let Bernanke’s confirmation hearings go without comment – but we also think we’re better off letting Senator Jim Bunning deliver the comment, since he was eager to lay the smackdown. A few choice extracts:

Now, I want to read you a quote: “I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled.”

That should sound familiar, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing. I’m going to ask that the full question and answer be included in today’s hearing record.

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

…

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.

Emphasis mine, because it’s where I noticed the most painful burns…

(h/t to Jr. Deputy Accountant where I saw this first)

ETA: Matt found the video via Karl Denninger:

This exciting development from Firedoglake:

As Ben Bernanke’s confirmation hearing begins in the Senate Banking
Committee, a source tells FDL News that one Senate staffer and an
outside source confirmed to him that at least one Republican on the
committee will also place a hold on the Federal Reserve chairman,
throwing the process into potential turmoil and giving Chris Dodd a
difficult series of choices to make.

Dodd, who just announced his intention to vote for Bernanke’s
confirmation in the Banking Committee and on the floor of the Senate,
would be in charge of the decision to honor or ignore that hold. The
fact that Dodd tried to place a hold on the FISA Amendments Act in
2007-08, and was generally ignored by Harry Reid, just adds a layer of
irony to the process.

The source, speaking on condition of anonymity because of his work
behind the scenes on the Bernanke confirmation, told me that two
separate sources assured him that the Republican hold would be made
public after today’s hearing. One staffer said that two Republicans
would place the hold, while the other said it would just be one. The
source said that the trans-partisan nature of opposition to Bernanke,
with a conservative Republican and a socialist independent uniting to
block the appointment, shows the intensity of the feelings on the
issue. “It’s great to see everyone come together – Democrats,
Republicans, progressives and libertarians, against this Federal
Reserve, which is not federal, and not a reserve, just a group printing
money and giving it to their buddies,” the source said.

While most people think that the multiple holds would delay the
process, it’s unclear whether or not it would succeed. Dodd would
probably have the discretion to roll over the hold in committee, though
he may be reluctant to do so, experts in Senate procedure said. Harry
Reid could also seek cloture on the motion to proceed on Bernanke’s
nomination on the floor, which would require 60 votes.

At the very least, this delay and the publicity surrounding
bipartisan opposition to Bernanke would bring attention to the issue of
the Federal Reserve and the desire for transparency, like the movement
to audit the Fed. That provision has already passed in the large
financial reform bill in the House Financial Services Committee, and Barney Frank said yesterday
that he didn’t expect any changes to the bill as it passed the House,
citing the public anger over the issue of transparency. There is
language on Fed audits in the draft financial reform bill written by
Sen. Dodd, which also strips the Fed of some of its power, but it is
not the same as Bernie Sanders’ audit the Fed bill, which has as many
as 30 cosponsors.

The source, who has been working on the Federal Reserve issue for
five years, marveled at how the issue has gained so much new attention
during the financial crisis. “Up until last year, nobody knew what the
Fed was. Ron Paul got 5 co-sponsors on his audit bill when he first
introduced it, and now we have 300.”

Sen. Dodd’s office has not yet responded with a comment.