FEDERAL RESERVE SUPPORTS MASK LARGER PROBLEM(S)

I've been saying this for some time now. The Federal Reserve has been helping to manage and keep our economy afloat for years. In the modern era, when the Federal Reserve (i.e. the Fed) intervenes in the economy it does so in ways that props up the market, which helps keep our economy moving along. It did so with trillion dollar money dumps immediately after the market collapse of 2008. It continues to do so with other market supporting tools today.

The problem with their actions is that they are not being done to clean out the market imperfections that brought us the 2008 market collapse. Instead, we're getting market infected band aids that are simply masking larger problems.

This is a distinct shift from the #1 job of any central bank, which is to guard the integrity of the currency.

Helping us to understand the Fed's actions is this article, "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates." In the article, authors Eric Swanson and John Williams demonstrate that Fed interest rate policies, and their purchases of bonds and securities, have been very effective at managing market expectations. This has worked to keep our economy moving along, as I've pointed out many times (with the Fed's Quantitative Easing I, Quantitative Easing II, and Quantitative Easing III  programs).  
 
These activities have worked so well that ordinary Americans not only can't see that there is no real free market, but they no longer care to look for the man behind the curtain.
 

 
   
The problem with this is that we now have the appearance of normalcy, so we keep on dancing towards Emerald City, as if everything is fine. 
 
 

 
But things aren't OK. We're living off of borrowed time. History's whispering in our ear, but we don't seem to see or care about the coming calamity.

I'll have more to say about this in a coming post, later this week.

- Mark

UPDATE: The CEO and co-CIO of PIMCO, Mohamed A. El-Erian, agrees with me that market valuations are dependent on central bank policies. Specifically, what's been helping to keep markets afloat are the money dumps (or, as El-Erian puts it, the "aggressive provision of liquidity") from the Federal Reserve and the European Central Bank.

HISTORY: "ON HOOVER'S ATTEMPTS TO RESCUE THE BANKS"

Bloomberg.com has a regular "Echoes" column that covers economic history. The articles are not long, are informative, and provide insight into who we are today. Below I've posted the opening to Phillip Scranton's article "On Hoover's Attempts to Rescue the Banks." If you see similarities to what's happening today you're not alone.

************** 

In 1929, there were nearly 25,000 banks in the U.S. Many European nations had fewer than 100. More than 90 percent of U.S. banks served small towns and rural districts, held state charters and hadn't joined the Federal Reserve System (which was mandatory for nationally chartered banks). Thus they couldn't seek loans from the Fed to support liquidity.

Given that deposits were uninsured, "runs" commenced when rumors circulated that a bank was having difficulty collecting mortgage and loan payments. Accountholders lined up hoping to recover their savings or liquidate their checking accounts. Banks often responded by limiting payouts or requiring, say, 30 days' notice for withdrawals. Fears of being "wiped out" spread and deepened, credit dried up, closures multiplied.

About 800 banks closed their doors in late 1930, and more than 1,500 in 1931 ...

Read the rest here.

****************

- Mark

BORROWING $1 TRILLION IN ONE DAY ... WHY IT MATTERS (and where the hell is the Tea Party on this?)

Exactly three years ago today, at the height of the market crash, I pointed out on my blog (and my radio program) that the biggest banks in America were granted well over $1 trillion in ultra-low interest rate loans by the Federal Reserve. These loans were granted so the biggest banks would have money to stuff the financial holes that their trillion dollar (derivative) bets had created. They also helped purify toxic crap and kept the banks out of court.

Best of all, the loans were backed by the government American taxpayer.

Thinking how bad things were - and so people could see for themselves - I explained (very slowly) how to find the more than $1 trillion in loans in the Federal Reserve's December 11, 2008 "Flow of Funds Accounts" release.

Things were so bad at the end of 2008 that the banks borrowed $1.2 trillion on December 5, 2008. Let's repeat that ... the banks had to borrow $1.2 trillion on one day.

Worse, much of the collateral the banks put up to secure the loans was either inflated, or simply toxic crap. These toxic instruments are the stuff you and I will get stuck paying for over the next few decades.

Putting it All in Perspective
To put $1.2 trillion in perspective, think about this little nugget: $1.2. trillion is much more than what President Bush spent on the TARP bailout ($750 billion), and far more than what President Obama asked for in the Stimulus Program ($825 billion, of which $275 billion were tax cuts). And it's also far more than the $907 billion we owed as a nation in 1980.

As you can imagine, the Federal Reserve and the big banks fought to keep $1.2 trillion in bailout loans a secret. To do otherwise would have alerted America to how much trouble the banks were really in back in 2008 (they're still in trouble). It was the largest loan-bailout in U.S. history, after all.

Fortunately for America's biggest financial institutions most Americans didn't catch on to what was happening. This includes the vast majority of our incredibly hypocritical "We Just Found Financial Jesus" Tea Party movement. Most them still don't have a clue. Nor do they seem to understand how the banks used more than $1 trillion in low interest loans to profit off of the U.S. taxpayer.

How the Banks Profited ...
Thanks to Bloomberg News we can see exactly who profited from the barely above zero interest loans made to Wall Street's biggest banks. One thing's for sure. It wasn't the American taxpayer. Here's the details.

Simply put, the banks made about $13 billion in taxpayer funded profits (play with the interactive here). How did they do it, you ask? Simple. They borrowed the money at rock bottom interest rates from the Federal Reserve, then "walked down the street" (as it were) to purchase Treasury Bonds from the federal government that paid almost 3% interest. A classic case of robbing Peter (the American taxpayer) to pay Paul (themselves).

But wait, it gets better (or is that 'worser'?).

Flush with cheap taxpayer-backed loans America's bankers began lobbying Washington to stop the movement for more regulations. Their argument? Since they were so healthy - and weren't bankrupt - they didn't need pesky regulations. Regulations and oversight distracted them from making money.

That's right. While America's biggest bankers were on government life support - and had one hand in the taxpayer's pockets - they were also pretending they had done nothing wrong. Ergo, they didn't need to be regulated.

While TARP and taxpayer backed loans enabled banks and Wall Street to dodge bankruptcy, America's biggest banks began turning away and punishing customers who lost their jobs and homes as a result of the 2008 market collapse. Bankrupt citizens facing tough times as a result of the market collapse had to be punished.

Long story short? In spite of collapsing the economy, and asking the American taxpayer to underwrite their market stupidity, the banks demanded market-like discipline be imposed on the American public. It didn't matter that the American taxpayer had helped turn their toxic investments and stupid bets into market gold.

Aren't double standards beautiful?

The Chutzpah Behind the "Self-Esteem" Loans ...
Let's make this real simple. If the banks had not received government loans, or had been forced into bankruptcy or receivership, the lobbying efforts of the banks would have been comical (they still are in my book, but that's another story).

But stuffed with TARP bailout money, and with emergency loans from the Federal Reserve (who created brand new loan "facilities" for troubled banks), America's biggest failed banks were able to escape market justice and pretend things were just fine. Congress played along ... as they continue to do today. But here's the kicker.

In a classic WTF moment, the banks argued that they were simply borrowing from the Fed (again, at least $1.2 trillion in one day) so other banks wouldn't feel "stigmatized" by having to take loans from the Federal Reserve. Huh? Are you kidding me? How clueless are these people? They didn't want other banks to feel shame for making stupid decisions, so banks had to borrow money from the Federal Reserve? Unbelievable.

At the end of the day, the thinking behind our banker bailout programs is akin to the logic behind toddler leagues. You know, the leagues where parents don't keep score so they don't hurt little "Johnny's" feelings. Incredible. Apparently bankers and Wall Street need self-esteem programs too.

Keep this in mind the next time your friend wants to discuss corporations and rugged individualism in America.

The End ...
This, my friends, is just one reason why it's difficult to take the status quo "happy talk" about profits, falling unemployment, and Wall Street success stories seriously. It's all backstopped with trillion dollar federal loans and taxpayer furnished bailout money.

The happy talk about Wall Street means little for jobless and foreclosed upon Main Street. Monopoly Man's successes mean nothing to Joe Six-Pack. This is especially the case since it's all backstopped with taxpayer money, still overly complex loan structures, lax regulatory oversight, and record debt loads.

So - again - my question is Where's the Tea Party outrage on all of this?

- Mark

QUANTITATIVE EASING III (a.k.a. "Corporate Welfare") HAS BEGUN (again)

My God, this is getting way too easy. I said it would happen back in 2010. This past summer I said it would happen, again. So, what happened? Simply put, the Federal Reserve is dumping more cheap money into the markets. This time it's down a European rat hole.

Here's the problem. The Fed's action won't accelerate recovery. It also won't fix Europe's debt woes. And it certainly doesn't make market players any smarter. But it keeps many market players solvent (and arrogant) because it's a bailout that maintains market confidence.

While the Federal Reserve doesn't want to anyone to think it amounts to another market bailout (it is), the sudden availability of cheap cash in Europe allows European banks and market players around the world to continue pretending that our market environment is sound (it isn't). Here's how the bailout plan works.

HOW IT WORKS
In real simple terms America's central bank, the Federal Reserve, is lending dollars to European central banks. European banks need dollars because European banks lend significant amount of dollars (about $3 trillion) to investors and other market players. Dollars are getting harder to find in Europe (which drives up the price). In exchange European central banks send us other currencies (as "collateral"), which include Euros (these are called Fed Swap Lines).

The idea is to put enough cheap dollars into European central banks so that they will lend to domestic banks throughout Europe. What's the goal? To prevent U.S. markets from tanking. How would this happen, you ask? Glad you asked.

If European banks, who need dollars, can't borrow dollars they will begin dumping (selling) U.S.-denominated assets, like U.S. stocks, mortgages, and corporate loans (among others). They do this because they need dollars to cover their losses elsewhere. If the European banks can borrow dollars cheaply, the thinking goes, they don't have to sell U.S. assets. Ergo, if the Fed makes more dollars available to Europe, we don't get a sudden market dump of stocks and bonds out of Europe, which might lead to a wholesale fire sale, and the sudden collapse of the U.S. stock market (again).

Seriously, lending money to Europe on the cheap is our way of keeping Wall Street and our financial markets afloat. But opening the money gates for European banks is really corporate welfare. By not having European banks dump U.S. assets into the market (in order to generate dollars in Europe) the Federal Reserves money dump helps maintain, or artificially inflates, the value of U.S. assets around the world. Portfolio managers win. Wealth managers win. Wall Street wins, again.

You and I, however, foot the bill if (when) it all blows up. We're also told to be quiet when market players cash out their bonus-laden contracts, which have been made whole by these money dumps. No Fed-Funded bailout tax. No "QE Tax." No taxes on taxpayer backed money dumps, period. Nada. Zilch.

Finally, because it sounds better than corporate welfare the Federal Reserve likes to call making cheap money available quantitative easing. Quantitative easing has been done twice since the market began it's crash in 2007. But they're not calling it quantitative easing (QE) this time because, according to the Fed, it isn't. Huh? [head scratch]

BUT "QUANTITATIVE EASING III" IT ISN'T ... HUH?
The Federal Reserve - and everyone who benefits financially from the money dump - don't like to see what's happening (the money dump) as the opening of QE, Round III. They don't like to call it QE III because they know it's corporate welfare, and it kind of hurts market confidence (and their feelings).

As such, global money managers are making a point of letting everyone know that (1) this is for Europe only (it's actually to prop up U.S. assets), (2) the cost of money's not getting cheaper in the U.S. (it's also not available unless you give up your first born), and (3) they haven't restarted 2007-08 crisis programs, like the Term Auction Facility (which would signal a real mess).

Great. In plain speak, this is like saying your recovering alcoholic in-laws are doing fine because you're only giving them beer instead of the hard stuff. Oh, and you're limiting them to drinking until midnight. You get the point.

QE III has begun. But don't call it QE III because it's really corporate welfare, which hurts market player feelings. Shhhh ...

- Mark

ADDENDUM: Almost forgot, here's a humorous but surprisingly well-informed look at quantitative easing and the Fed. Enjoy ...

IT'S DEJA VU ALL OVER AGAIN

It's déjà vu all over again ... yet, all the U.S. media want to talk about are Herman Cain's girlfriends, while ignoring the GOPs "Just Say No" obstructionism in Congress. Today, with the debt crisis in Europe flaring up again (this time with Italy), we're reminded that there's another world out there that warrants some serious discussion. Yet, America's political burlesque show is mesmerized (again) by sex scandals, and appears more than content pondering why Mitt Romney hasn't caught fire with the GOP (like that's some kind of mystery). Sigh ...

All of this kind of reminds me of all the Gary Condit sightings, and the shark fear mongering off the Florida coast right before 9/11. Seriously, what's happening with Europe's debt-to-default dance is pretty big stuff, and deserves more attention than Herman Cain's predations. Consider the following ...

Here's a statistical table with more countries that could be affected once the financial dominoes begin to collapse in Europe ...

I know, I know. Simply putting figures like these up without context is unfair.

So consider this. When Germany finally defaulted on it's World War I debt obligations after 1929 it had a debt-to-GDP ratio that stood at around 90 percent (they owed about $33 billion, or about $402 billion today, which was a reduction from the original $63 billion, or about $768 billion today). Today Greece's debt-to-GDP ratio stands at 157.7 percent, while Italy is around 120 percent. Is history whispering in our ear, again? I think so.

Relatedly, when Germany finally defaulted the French Chasseurs Alins (elite mountain infantry) had already occupied Germany's Buer (in North Rhine-Westphalia) region in 1923.

Today, instead of sending in the troops to deal with troubled debtors the world's economic mandarins are banking on central bank (or IMF sanctioned) cash. Specifically, they're banking on the Federal Reserve shoving half a trillion dollars or more on to Europe's books (and hoping no one notices). When all is said they're doing little more than pushing the economic debt can down the road.

This is especially not good when you consider that MF Global's recent Chapter 11 bankruptcy was not supposed to happen. Think about it. In our post 2008 market collapse environment, a firm like MF Global wasn't supposed to be able to borrow so heavily (or use investor funds) to make multi-billion bets on European debt. How much did MF Global borrow? It appears that MS Global may have had a 40:1 debt to equity ratio. What does this mean? It means that if you made $40,000 per year at your job, the bank would give you a $1.6 million loan ... three years after doing the same thing and watching previous clients piss it away gambling.

Yet MF Global's private industry regulator raised no red flags about MF Global debt to equity ratios, nor said anything about it dipping into $600 million of investor money to make their bets.

Yeah, it's déjà vu all over again, on so many levels.

- 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

GET GOVERNMENT OFF MY BACK? HARDLY ...

We hear it all the time. Don't interfere with the marketplace. Deregulate. Get the government out of the market. Unfettered competition leads to the best possible outcome for everyone because people rationally pursuing profit will enhance both productivity and quality in the marketplace. Like an "invisible hand" the needs of society would be met. In the end consumers get better products. Producers get more money. Workers earn better wages. Everyone wins.

At least this was the message many believe that Adam Smith, the intellectual godfather of capitalism, told us in The Wealth of Nations (1776). It's this belief system that has fed the free market and deregulation push we've seen over the past 30 years. It's what's pushing us today. Unfortunately, much of what Adam Smith wrote was often misrepresented and taken out of context by many of his followers, including Milton Friedman. It's one of the reasons I wrote The Myth of the Free Market.

To be sure, Adam Smith argued that the state should stay out of the marketplace. But not because market players should be free to do what they wanted. Rather Smith believed that government should stay out of the market because it usually intervened on behalf of monopoly and privilege. Smith's message was that we shouldn't allow market players run herd over the rest of us.

Many of today's market players have no clue about any of this. And it shows. In fact, contrary to popular belief, market players today ignore - or don't recognize - how they have been pushing and benefiting from the very visible hand of government subsidies and supports, which Adam Smith feared would happen. Check it out:


A SERIES OF MARKET BAILOUTS: Talk about a lack of accountability. One of the cornerstones of a competitive market system is the idea that there would be retribution for stupid decision making. You would go bankrupt and/or lose your business. Guess what? Increasingly, for Wall Street's biggest players, it's simply not happening. Anyone who argues otherwise is either clueless or on crack.

Here's a short list of the bailouts Americans have yawned at or supported since Ronald Reagan's "free market" revolution began in 1980:

* Wall Street / Mexico in 1982.
* Continental Illinois in 1984.
* The Discount Window intervention to save floundering banks in the late 1980s.
* Market support after the October 1987 crash.
* The Savings & Loan debacle of 1989-1992.
* Intervention to save the Bank of New England and Citibank.
* The 1994-1995 Wall Street / Mexico rescue.
* The Asian Currency rescue in the late 1990s.
* The Fed-organized LTCM bailout.

Impressive, ain't it? But know one thing. This list is incomplete.

In virtually every case above we were told, in one way or another, by the Chicken Little's of the financial world (and Washington) that bailouts and subsidies were necessary or else "prosperity in our time" could end. Markets would collapse, and middle class Americans would be hurt. So we propped up the stupidity with bailouts, rather than "let the market work." We were saved.

Then 2008 came along. Oops.

THE GREENSPAN PUT:
Perhaps the greatest guaranteed money flood in human history. It all began when Alan Greenspan became chair of the Federal Reserve (1987-2006). Instead of letting market players pay for their market stupidity, Greenspan made the decision to push money into Wall Street - the Greenspan Put - every time they created a mess of things. And he did it by making money available at a cheap price (and he said he wasn't a Keynesian ...).

Coupled with deregulation, this fed market appetites for bigger and bigger market bets (it didn't matter to Greenspan that the vast majority of trading is not done by humans buying and selling a few hundred shares, but by computers and high frequency traders dealing in ever more complex instruments).

Accountability flies out the door when The House backs your bets in Vegas. So it is with Wall Street (though, to be fair, Vegas doesn't do what Washington does). The Greenspan Put has been continued under Ben Bernanke with QE I, QE II, and what we can expect to be QE III (yes, it's coming).

FAVORABLE LEGISLATION / MARKET INTERVENTIONS: If markets are logical, and market players are rational, why do free marketeers need the very visible hand of government for this ...

* You're not smart enough so ... The 401k was created in 1978 by Congress to encourage workers to invest in the market (by allowing employees to defer paying taxes on income they invest). The rules impose strict penalties for early withdrawal (why penalties if market players are rational?). The end result is that by enticing investors with tax breaks our financial markets have been given an artificial boost, which is good for portfolio and wealth managers who get paid based on fees and volume managed. Don't believe me? Check out what's happened to market activity and volume traded since the 401k and other "invisible hand" of the market tools were invented by Congress ...

- The Helmet Laws for brokers ... NYSE circuit breaks, which stop trading, are designed to maintain confidence when markets tank. Then we allow market players to suspend redemption's (not allowing clients to sell their investments) in order to stabilize markets in panic. Both make a travesty of market logic and the code of rationality that we're told dominates the market. It rewards gambling and stupidity by telling brokers "we'll control the panic, even if your incompetence starts it."

- The "socialize the losses" law (deduction) ... If you sell a stock at a loss you can deduct it (as a "capital loss") from your tax bill. Nice.

- The "carry it forward" tax law (deduction) ... Stock losses can be carried forward for tax purposes. Specifically, a banking stock that collapse can be used to offset gains from more successful ventures, or even a portion of your everyday income. So much for taking it on the chin when you make a stupid investment decision.

There are many more of these legislative and political gifts. The point is that it's hard to argue that the millionaire wunderkinds on Wall Street are rugged individualists going it alone in a jungle-like market environment when we look at all the government created, and taxpayer funded, market supports that are out there.

In fact, in many ways Wall Street has become a walled off, protected, ward of the state.

Still, today there are plenty of market players who are dumb and arrogant enough to believe they're actually market gurus, slaying market dragons. In reality, monkeys picking stocks randomly could have made money in this state subsidized market environment (and they have the tests to prove it).

At the end of the day, Wall Street and their financial mandarins are the beneficiaries of a massive legislative and regulatory group hug given by Washington over the past 25-30 years.

Get government off my back? What a joke. Worse, market players don't even know it.

- Mark

UPDATE: Here's an excellent article (9/26/11) explaining ETFs, or exchange-traded funds. It's written by Money Mornings Shah Gilani. ETFs are complex derivative products, which fit into the "complex instruments" noted above.

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

BERNANKE'S SPEECH ... IT'S DEJA VU ALL OVER AGAIN

OK, I couldn't just leave this alone as an "update" to my post from yesterday. I have to elaborate ...

It's déjà vu all over again. It was February 2007. Markets were in a tizzy over stocks that went crazy days before. Ben Bernanke came out after the market took a tumble and said that "markets were working well" and that he expected the U.S. economy to pick up. In June of 2008 he would add, “The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.” Oops.

Then we have Bernanke's other pre-market collapse gaffes, which include predicting 5% unemployment through 2011.

Look, Bernanke's mistakes aren't him simply saying inflation is going to be 2.5% when it turns out to be 3.1% They are numerous, and they are huge. This link helps us understand how he and the Federal Reserve have become the chief apologists and enablers of Wall Street.

But wait, there's more.

Back in September 2008, right in the middle of our market collapse, Fed Chair Bernanke supported granting Treasury Secretary Hank Paulson Czar-like authority to do what he wanted with $700 billion dollars. No looking at what actually caused the mess, just hand over the money. No strings attached. Seriously. No strings attached.

Rosy pictures before. No questions asked afterwards. Move along, nothing to see here. Nice, if you're a market player on Wall Street.

Fast forward 4 1/2 years to August 26, 2011 (i.e. today). Markets were worked up over recent roller coaster rides on Wall Street, and what appears to be an imminent recession. Federal Reserve Chairman Ben Bernanke gave a much anticipated talk in Wyoming and said that the U.S. is on track for long-term economic growth. While he also announced that no new economic stimulus measures were on the table, he did leave open the possibility of more action by the Fed if another recession looks likely.

Now, where have I heard this kind of open-ended murky talk before?

Oh yeah, I started writing about the Fed's "everything is fine" pep talks almost as soon as I started my blog, back in 2007. I kept talking about our collapsing economy throughout 2008, right up until the market collapsed. And through it all, Mr. Bernanke was painting a rosy picture ...

At the end of the day, it really doesn't matter. It's business as usual in Washington and on Wall Street. You and I are going to pick up the tab, like we did the last time. And it could well be done in a way that nobody notices (as I discuss here and here).

If we look at Bernanke's track record, and translate his Fed-speak talk at Jackson Hole this afternoon, we should know that the die has been cast. And we should all be seeing the same thing. We're in trouble. Expect another money dump (i.e. a quantitative easing stimulus).

It really is déjà vu all over again.

- Mark

I'M A MARKET GURU

What do you know? I'm a market guru. If I put my tinfoil, Fox News analyst, hat on here's how I know ...

Ultraconservative market newsletter "newsmax.com" had this to say about market "guru" Robert Prechter.

... Prechter sees a plunge ahead for stock prices. The reason is because investors have turned way too bullish [confident] ...

According to Newsmax, then Prechter lists the tell-tale signals that tell him trouble's around the corner:

• Individual investors are the most bullish in six years ...
• Newsletter advisers are the most bullish in seven years ...
• Futures traders are the most bullish in four years ...
• Mutual fund managers are the most bullish ever ...
• Hedge fund manager are the most bullish ever ...
• Economists are unanimously bullish ...
• Top global strategists on three national panels expressed bullishness.

In other words, according to Prechter we have a bunch of market players who, once again, are confident about the prospects of the market (keep in mind these guys get paid commissions and bonuses only if they make their clients so confident that they invest their money with them). And, with their confident "nothing's-in-it-for-me" objective analysis, they've convinced their clients too.

So, collectively, according the Prechter, market players and their clients are swallowed up in yet another market herd stampede.

But, with Americans jittery about their individual prospects, and with the economy on shaky grounds, why all the confidence? What, in God's name, could have triggered this "bullish" herd mentality from today's market players (who, again, get paid big bucks only if they get people to believe markets are growing)? Is it tied to improving market fundamentals? Is a new tech driven boom on the horizon? Could the world be poised for the next super market innovation?

Interestingly, None of the Above.

What's driving this current bubble cycle - according to Byron Wien, vice chairman of Blackstone Advisory Services - is the Federal Reserve's trillion dollar money dump over the past two and a half years. But what's really made the market players bubbly is how this money has been "recycled into stocks" and onto Wall Street's books.

That's right. Because the federal government has been dumping money into the economy for years now - euphemistically called Quantitative Easing (QE I & II) - market players have regained their confidence. And why not? They're making record profits, again. Their mojo is back. In fact, the money dump has worked so well (for America's moneyed elite) that the GOP is even looking for "novel" ways to continue the money dump, but hoping nobody notice what they really want to do. 

At the end of the day, the goal of dumping taxpayer backed money into the economy is to prop up Wall Street. Market gurus like Robert Prechter and Bryon Wien know this. They also know that if the money dump stops we're all in trouble. Market guru Prechter even predicts the stock market could drop 40% (if we don't get another big money dump - or QE III - I have no problem with this number).

The interesting thing is that I've been saying all of this for years. I guess that makes me a market guru too ;-).

- Mark

PRINTING MONEY (A.K.A. "QUANTITATIVE EASING") EXPLAINED

I attached this as a post script on my previous post, which dealt with social security and quantitative easing. It's too good to leave as an add-on.



- Mark

PRIVATIZING SOCIAL SECURITY ... QUANTITATIVE EASING IN PERPETUITY?

Have you ever wondered why the stock market never seems down for long, and then makes sudden and even convenient rallies? Even the 2008 market crash and recovery seems strangely managed, and is now taken for granted. What we're seeing is the virtual elimination of volatility and risk in the stock market (which Zero Hedge discusses here).  And it's all being done on the backs of the American taxpayer.

How has this happened? While the process may seem complex, it's all tied to a bailout and stimulus addicted market where cheap taxpayer-backed money is made available (in Washington-speak it's called Quantitative Easing, or QE). Simply put, the federal government, through the Federal Reserve, is doing it's level best to pump taxpayer money into a gambling den that used to be a competitive market system.

This money pump makes it very difficult for firms to fail, and for their stock prices to collapse, when they do stupid things.

While the goal is to get the economy back on it's feet and to instill confidence in reality it subsidizes and props up a crippled market environment. This helps the Mafia of Mediocrity that runs Wall Street feel good about the crappy decisions they've made. It also encourages Wall Street and other market players to continue doing business as usual, in the process ignoring how their taxpayer subsidized profits make them the super star investors they see in the mirror.

And why not? The government through the Federal Reserve simply won't let the biggest and most foolish market players collapse.

Why is this important? Because as Tyler Durden at Zero Hedge points out there is no longer "normalcy" in the market. The integrity of the market suffers because bad management is no longer weeded out. This is a problem because once Treasury purchases, trillion dollar guarantees, or future stimulus programs get cut, or fail to produce results, our Mafia of Mediocrity on Wall Street will still be there.
 
Worse, the only people who will win in this environment are the money barons who are rolling the dice today, betting on the market's collapse (i.e. those who "short" the market).

This is one of the reasons market players and their Republican errand boys want to privatize social security (which is currently generating cash surpluses). They're going to need a flood of money to cover the bets they've made in the market. A steady stream of Social Security payments from you and me will guarantee payoffs for those who bet against America.

Think of it as a Quantitative Easing, in perpetuity.

To be sure, a steady stream of social security payments will help to stimulate the market, at first. But it's real effect will be to lock the American taxpayer into Wall Street's casino for generations. Can you imagine Wall Street with trillions in taxpayer guaranteed funds, in perpetuity?

Viva Las Vegas!

If you want a road map into how this looks in real life check out how the Bush administration transferred $64 billion in carefully managed public pension funds to their market buddies right before the market collapse here. While big fees and bonuses went to those who made big bets on Wall Street, the big losers were the retirees who depended on the government to protect their pension funds, only to see it siphoned off by Wall Street's biggest players.

Any one who expects Wall Street to treat trillions of dollars in social security funds any different is simply living in a fantasy world.

- Mark

P.S. This helps to explain Quantitative Easing ...

WHY THE BANKS ARE STILL IN TROUBLE

I've been saying this for some time now. In spite of trillions in aid the banks are still in trouble and the Federal Reserve is doing their level best to cover for the banks.

Specifically, the Federal Reserve is flooding Wall Street's biggest market players with money by keeping interest rates low. But, instead of being called Wall Street's Trillion Dollar Money Flood, or Wall Street's Bailout in Perpetuity Program (BPP), like it should be, the media is going along with the Federal Reserve's misleading and mind-numbingly opaque "quantitative easing" (QE) terminology.

They're doing this because, you know, Wall Street hates it when they get money virtually for free and we call it what it is - Corporate Welfare.

Interestingly, even though we are deep into the second phase of the Federal Reserve's trillion dollar QE/Money Flood for Wall Street, the Fed knows full well that their first two QE programs aren't working. How do they know this? Because the economy stinks and, in spite of having trillions of dollars dumped in their laps (a process that actually began in 2007), the banks still aren't lending because they don't trust one another.

As a result, the Federal Reserve is moving beyond QE II and is now preparing to push through QE III - or, more appropriately, they're preparing another money dump for Wall Street.

There are four reasons that the banks are in trouble. I've been blogging on these reasons for some time now, but Shah Gilani, contributing editor for Money Morning, has done us all a favor and put them into a nice little list.

Banks Still Carrying Toxic Assets: In spite of being able to dump hundreds of billions in toxic assets on the American taxpayer Federal Reserve the banks still have toxic assets on their balance sheets - for starters, $2.4 trillion in mortgages and more than $1 trillion in mortgage-backed-securities.


Industry Accounting Gimmicks: The banks have been able to juggle accounting rules to make their books look better than they really are.

Bank Smoke & Mirror Profits: The banks have made their recent profitability look robust by moving loan-loss reserves back over into the revenue columns of their income statements - booking that as top-line growth.

Banks Facing Lawsuits: And the onslaught of litigation banks now face that could force them to mark down their assets at the same time that they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized.

There you have it. Trillions of dollars handed over Wall Street's biggest banks. Still, in spite of using dishonest accounting standards, and dumping hundreds of billions of their toxic assets on the American taxpayer, the banks are still in trouble. They know it ... The Fed knows it ... The Obama administration knows it. Yet, we're going to do it all over again with QE III.

For what we've gotten in return I'd say this is like dumping money down a drain.

- Mark

WALL STREET'S TRILLION DOLLAR MONEY FLOOD

I've been saying this for some time now, but it bears repeating since most of America doesn't seem to be interested in much beyond Sarah Palin's latest Tweet and who's on American Idol. So let me make this perfectly clear, again: The $750 billion bailout that George W. Bush signed off on, and the subsequent $700 billion stimulus package that President Obama coughed up, were only the beginning.

Drops in the bucket, as it were.

What we should have been looking at - as I pointed out in my book, and have posted on my blog- are the trillions of dollars that were made available, loaned on the cheap, or effectively handed over to Wall Street's banks and other financial players.

Now, as a result of a forced transparency rider attached to the Wall Street reform bill (thank you Sen. Bernie Sanders) we have some numbers and names. Check out the trillions of dollars that were transferred to Wall Street by the Federal Reserve as our market collapsed ...

Goldman Sachs ... $600 billion
Bear Stearns ... $1 trillion
Citigroup ... $1.8 trillion
Merrill Lynch ... $1.5 trillion
Morgan Stanley ... $2 trillion

And this is just the easy stuff to pick out from the numbers. No wonder Wall Street's been making record profits. The U.S. taxpayer Federal Reserve essentially flooded Wall Street's accounts with cash so they could pay off each others bad bets.

This money, my friends, explains why Wall Street was able to pay 100 cents on the dollar for ill-conceived contracts, and then made good on billions in bonus payouts (to each other) for their incompetence.

 

At the same time, by looking at the figures on the Federal Reserve's new site we're able to confirm that the market collapse began a long time before September 2008. Worse, what we're able to see from the data is that the geniuses on Wall Street, and their errand boys in Washington, knew what was happening long before September 2008!

In fact, as I pointed out in December of 2007, Wall Street and the Federal Reserve began setting up the bailout "facilities" that would transfer trillions to Wall Street's biggest banks way back in 2007 (be sure to play with the graphs on the site to see what I mean).

But wait. It gets worse. Today the NY Times is confirming what I've been writing about for a while now.

Not only did Wall Street effectively extort money and guarantees from Washington but the Federal Reserve was either playing dumb or deliberately covering up for Wall Street during the bailout. Like Sargent Schultz in Hogan's Heroes, they knew or saw nothing as trillions were flying out the door.



Specifically, the NY Times is confirming that thousands of private firms and other market players who had their hand out received trillions in low interest loans AND other market guarantees from you and me the Federal Reserve during the bailout.

That's right. It wasn't just Wall Street's biggest banks that looted the treasury. Wall Street's biggest market players - a.k.a. America's super rich - also had their hand in our trillion dollar bailout cookie jar.

Try sticking this in your conservative friends' Christmas stocking, and then see if they want to hold a Tea Bag rally over it during our Christmas holidays. My guess is that they'll be more concerned over President Obama's birth certificate, or whine about more tax breaks for the super rich because they're the ones who "create jobs" in America.

Idiots.

- Mark