EXPLAINING THE FED'S CASH MACHINE (for Wall Street)

I know this is off of every body's radar screen, for now. But Congress has been asleep at the switch while the American taxpayer has been put on the hook for trillions in financial guarantees to Wall Street. As a public service, I'm going to remind everyone how trillions in obligations have been dumped on to our lap.

Let's start with this. Through the Federal Reserve and Treasury Department - who get their resources from the U.S. taxpayer - we have covered over $4.7 trillion in bets and obligations for the financial sector since the 2008 market collapse.

The key here is keeping in mind that this $4.7 trillion is not included in the TARP (Bush) and the Stimulus (Obama) programs that cost us a little over $1.5 trillion.  But wait. It gets better. In addition to the $4.7 trillion the Fed and the Treasury have put us on the hook for, as of today, they have underwritten an additional $13 trillion ... which you and I backstop.

That's a total of $17.7 trillion for you and me. How much is this, you ask? Think about this. It would be the functional equivalent of you going out to spend all the money you earn in a year in just one month. Nice.

Think about it. Our nation's GDP (what we produce) is expected to hit about $15.7 trillion in goods and services this year. You would think that our representatives in Congress might want to ask how and why the Federal Reserve and Treasury have been able to put us on the hook for $17.7 trillion.

Fortunately, several members of Congress have been asking questions.

To date Rep. Ron Paul (R-TX) and former Rep. Alan Grayson (D-FL) are on record for pressing the Fed on the topic (and more). Former Rep. Grayson was especially good at questioning the Fed's Inspector General about trillions (much of it in credits) that suddenly appeared on its books.

To his credit, even Terry Phillips (I-CA), Majority Whip Kevin McCarthy's (R-CA) opponent in Bakersfield, brought up the issue in their only debate in Bakersfield (Rep. McCarthy ignored the topic).

But - as you can imagine - no one in a real position of power wants to have this discussion. With former representative Alan Grayson out of office (for the moment), Bernie Sanders (I-VT) acting as a voice in the wilderness, and Rep. Ron Paul effectively marginalized by his own party the Fed's cash machine is largely ignored.

At the very least we can ask, where's the money going, right? So let's do that  ...

The simplest way to put it is that there is a veritable cash machine for Wall Street, and it's operated and funded by the Federal Reserve and the Treasury Department. You can try and walk through the maze of credits, guarantees, and loan programs here. Created after the 2008 market collapse among the programs created to cover the bets of Wall Street and the financial sector include

* $3.3 trillion in federal guarantees for private mutual funds.
* Over $2 trillion to underwrite toxic financial crap and "private" business ventures (TALF and PPIP).
* At least $1.8 trillion in Federal Reserve guarantees for short term business loans (or "commercial paper").

If you're wondering what these programs are all about welcome to the club.

Most Americans (and members of Congress) don't have a clue about any of this either (if you want to know a little more about these market subsidizing programs check out this, this, and this). But let's be clear here. These programs were essentially created to underwrite market stupidity and create a perpetual bailout culture that make it appear that the market is recovering. It's not.

The market is being being resuscitated by a life support cash machine that you and I pay for, but only a small group on Wall Street are using to get fabulously rich.

And, as a reminder, that cash machine is stuffed with $17.7 trillion in taxpayer backed guarantees.

The worst part of all of this is that these guarantees aren't directed to build bridges, roads, schools and dams. These guarantees were created to prop up and backstop incredibly stupid market bets made by market players who are more interested in creating paper empires (which we knew about as far back as the Clinton administration).

The focus is not in making hard investments in the American economy, but in extracting wealth from middle class taxpayers. Oh, it's also going to prop up the financial stupidity of our nation's financial mandarins.

With Congress asleep at the switch, this is what's behind the Fed's cash machine.

- Mark 

THE FED'S TRILLION DOLLAR BACK DOOR BAILOUT(S)

This shouldn't be a surprise to anyone. But I'm sure it is. Thanks to a Bloomberg investigation, many are now learning the details behind the Federal Reserve's $1.2 trillion back door bailout for Wall Street's biggest financial institutions. I've been writing about it for some time already (see links below), so I wasn't going to post on this when it came out last week. But it's important, so I'll make a few short comments. 

Simply put, the nation's biggest banks like "Citigroup, Bank of America​, Morgan Stanley​, and Goldman Sachs, along with dozens of others, received about $1.2 trillion in loans from an alphabet soup of Fed supplementary lending programs."

In the FYI category, you and I don't have access to any of the Fed's loan programs. Just the banks. Sweet.

How did this happen, you ask? Simple, as I wrote about then, the Federal Reserve opened up the equivalent of new "teller windows" to deal with our collapsing institutions in 2007. Since then the Fed has lent Wall Street's biggest banks at least $1 trillion to deal with their financial mess. While I suggest you check out Bloomberg's cool interactive, here's what it looks like in chart form ...

While Bloomberg's interactive refers to the money lifelines as "secret" that really isn't the case. The information has been out there. I've been blogging about the "Fed's cash machine," the money dumps, and the Fed's numerous handouts immediately after the market collapsed in 2008. In fact, I started writing about financial favors for Wall Street long before the market collapsed in 2008 (see this, this, this, and this).

Throughout the money dump Wall Street's largest "let the market work" institutions have been encouraging it all.

The incredible thing is that none of this has been a secret. It's just that no one was paying attention ... or they didn't care ... or they didn't think middle America could figure it out ... take your pick.

Whatever you want to believe, it's one of the reasons I've been saying for years that we don't have a free market. It's also why I've saying that our banks are insolvent, even if they appear liquid. They may have access to money, but they're still sitting on toxic assets that could wipe them out if they were forced to log them in at market value ... and if we had a government that would force them to live by market values.

Instead, through the Fed's miracle cash machine they've been granted bailout after bailout, and one regulatory favor after another.

Sigh ...

- Mark

THIS IS WHY MORE AMERICANS SHOULD BE IN THE STREETS

Yesterday we had an interesting conversation in class about the global economy and America's debt load. Students wanted to know why we're accumulating so much debt. I explained, apart from reckless policy decisions made under President Bush, that we're lending or committing massive amounts of money - backed by the American taxpayer, mind you - with little or no understanding of where it ends up.

One egregious example was when half a trillion dollars was transferred to Europe's central banks. Federal Reserve Chair Ben Bernanke couldn't track or explain it's final whereabouts. Seriously, even after trying to check his notes, Federal Reserve Chair Ben Bernanke had no clue about the final destination of half a trillion dollars. That's $500,000,000,000. Check it out here.

Look, accounting for a half a trillion dollars shouldn't be that difficult. Back in 2009 half a trillion dollars amounted to approximately one-half of what all of America produced and sold (GDP) in one month ...

Not being able to account for the monetary equivalent of one-half of America's total economic output for a month is akin to you and me not knowing where half our paycheck goes every month. Most people can explain where one-half of their paycheck goes every month.

I know I can. And I can do it without notes too.

But wait. It gets better (or is that worse?). Half a trillion dollars is small potatoes when we consider the trillion dollar transactions that the Federal Reserve couldn't account for back in May of 2009. Actually, it was about $9.7 trillion. But who's counting, right?

Fortunately, for us, there were several independent bean counters who figured out where the money was going. And they have nice interactive graphs that explain where the money went. Here's The Atlantic Monthly with a nice interactive of "The Fed's Cash Machine" ... in May of 2009.

If Bernanke was too busy saving the world during May of 2009 to read the The Atlantic Monthly he could have checked out Bloombergs interactive of the $9.7 trillion that we've encumbered ... back in February of 2009!

So, how many of you have heard Washington's courageous politicians talk about the trillions in future obligations that we've been put on the hook for to save Wall Street? But I'm sure you've heard plenty about taxing the bottom 50% of Americans who pay no income tax, right?

But consider this. The bottom 50% earn or own the equivalent of $1.5 trillion, total. This means we could confiscate everything the bottom 50% earn or own this year - and then turn them into industrial slaves - and we still wouldn't come close to paying what we've paid as a down payment on the 2008 market collapse.

At the end of the day, as I explained in class, we're looking at several problems here.

First, all of the money we've made available to Wall Street and the biggest banks is being used to clean up toxic assets and the failed market bets that created our bubble economy. The result is that many market players now look solvent and successful when, in fact, many should be under indictment.

Also, I have a problem with Federal Reserve officials who often don't know - or claim not to know - who ultimately gets the money we lend or make available. Playing stupid with our money is not a quality we should encourage.

Look, as early as December 2008 I found a trillion dollar hole in the Federal Reserves balance sheets. It didn't take as long as you might think. If I can find a trillion dollar obligation made with taxpayer backed dollars don't you think Federal Reserve officials should be able to explain where it went? Me too.

Next - getting back to Bernanke and that mysterious half a trillion dollars we discussed above - we need to keep in mind that the European Union could collapse under a series of national defaults (hello Greece). This is a problem because we lent the money to the EU, not to individual European nations. If the European Union collapses the EU may never pay back the hundreds of billions they've borrowed. This is a distinct possibility since Europe is essentially using debt to pay off debt, and because the language in the Fed's loan contracts to Europe effectively allows roll overs in perpetuity.

This means that what we've lent to Europe would stay on our books as debt. Nice.

Long story short? We've accumulated trillions in debt obligations that Congress neither signed off on, nor seem overly concerned about. And it's all been done in the name of saving Wall Street and the biggest banks.

Even if most ordinary Americans don't understand the specifics, they intuitively understand the larger implications. This is why they are pissed off at Wall Street. It's really that simple.

- Mark

THE FED'S CASH MACHINE

The Atlantic has two interactive graphs illustrating how the fiscal stimulus program ($787 billion) is "puny" compared to what the Federal Reserve has taken on over the past 15 months. Check it out here.

- Mark