Posts Tagged ‘federal reserve’

OMG, did the world go sane?

Sunday, August 30th, 2009

http://finance.yahoo.com/news/Rep-Frank-eyes-Fed-audit-rb-3402785272.html?x=0

This is certainly one of the signs of the end times – Barney Frank and I agree.    Did I turn into a mushy liberal from a bump to my head, or has Representative Frank finally realized how deep the hole is and that he’s the guy holding the football?

According to the story, the more important piece to me is that he wants to quickly “pull back” a lot of the emergency powers that were given to Tim Geithner (originally Henry Paulson) to deal with emergencies – things like waving your hand and declaring American Express to be a “bank” so you can have the entire country pay the costs of AMEX’s bad lending practices.

The other part is Representative Frank seems to be getting on board that the Federal Reserve needs a colonoscopy to see what the hell is going on.   Apparently, Ron Paul has critical mass now to force an unprecedented audit of the Federal Reserve and its processes.   I’m thinking that the Paulson / Geithner / Goldman-Sachs “connections” have finally been figured out (the stuff I’ve been screaming out loud as they were happening for close to a year) and how the U.S. Treasury has been plundered using the threat of an existential “emergency”.

Well, better late than never.    You can’t start fixing a problem until you recognize there is a problem.

Geithner and Rose – Part 2

Tuesday, May 12th, 2009

Secretary of the Treasury Timothy Geithner – formerly the head of the powerful New York branch of the Federal Reserve – had another hour long interview with PBS’s Charlie Rose last week.

The Wall Street Journal offers their opinion [here].

Charlie asks Tim Geithner why things went so wrong and what mistakes were made along the way.

Geithner’s response is a bit muddled.   He blames it partially on lax regulation of banks that were taking on too much risk (note: AIG is not a bank).   While not letting the U.S. off the hook, he does suggest that low interest rates caused the global economy to chase and leverage risk because so much money was available at such a cheap rate.   [Most people agree on that]

Since money could not be parked in US Treasuries and earn reasonable rates, that caused the global investment community  to rush to invest its excess dollars (being generated by the Fed) in riskier and riskier  investments like mortgage backed securities and hedge funds that “invested” money with Bernie Madoff.  The easy availability of cheap mortgage money led to a building boom of housing that wasn’t needed, an influx of construction workers from Mexico to build them and a run-up in housing prices.

He gets specific at blaming that part of the problem in the Federal Reserve’s actions from 2003-2005.   Tim Geithner joined the Federal Reserve in 2003.   Alan Greenspan was the head of the Central Bank, of course.  Probably the unspoken subtext of that statement is something like “We spent a lot of money on the War in Iraq but George Bush didn’t want people to feel the pain of paying for it – so the Federal Reserve “cheap money” policy paid for the Iraq war”.  [Did George Bush ever fight a spending measure of any type in his 8 years in office?]

What is interesting (and alarming) about this revelation is not that he is “owning up” to the Federal Reserve’s role in creating this mess – but that while describing easy availability of credit and low interest rates at the Federal reserve as the problem, he and current Federal Reserve Chairman Ben Bernanke are advocating exactly the same thing as the solution!

To “liquefy” the credit markets, Ben Bernanke in cooperation with Tim Geithner at Treasury have “monetized” about $1 trillion (so far) by creating “fiat” money – the Federal Reserve just creates money and loaning it to the US Government, which is now going to turn around and spend it.

The reason creating fiat money was necessary is that the US Treasury can’t find people willing to buy US Treasury instruments at the extremely low (close to zero) interest rates.    The only way to keep attracting dollars to the US Treasury (if there are any) would be to raise the interest rates we pay.  A lot.

If the Federal Reserve slammed the money creation door on the US Treasury, it would be VERY ugly – but that’s the only thing that will turn this problem around.    If the Federal Reserve didn’t fund wasteful government operations with new dollars, here are few of the logical consequences:

  • Interest rates – short term and long term – would shoot up
  • With the US paying higher interest rates, the US dollar would strengthen against other currencies
  • With the dollar going up in value, the price of oil would drop
  • People with money to invest in Treasury Securities or things like CDs based on Fed interest rates would earn more return on their life savings now languishing in money market accounts
  • LIBOR – the interest rate behind most of the world’s investments would go up drastically.   Companies and individuals with borrowing tied to LIBOR would be in serious trouble (as they should be)
  • Entities that sold LIBOR interest rate swaps would be in very serious peril (as they should be)
  • If the LIBOR interest rate swap market falls apart (it will), entities that agreed to loan money because they were protected by an interest rate swap hedge will be in serious trouble (as they should be)
  • The higher value of the dollar would cause U.S. exports to become more difficult to sell, but lower the cost of imported goods and commodities.

Businesses that built their growth on easy credit will fail – those who built on earning money by creating a useful product and hoping for a reasonable rate of return would survive.  Those businesses would be the ones to pick up the pieces of the rubble and start over.  Hopefully there are a few of them left.

Someone HAS to say “No” to the Obama administration’s plan to spend its way out of this problem with fiat money.   Is Timothy Geithner man enough to “bell the cat”?

When a heroine addict stops putting a needle in their arm, there IS a risk that they will die.  It is guaranteed that things will be extremely unpleasant for a while – but it is the only solution to an addiction.    Back at the very beginning of this unwinding, Glenn Beck made the statement (which he hasn’t repeated that I’ve heard) that this problem is only going to be solved by an alcoholic – someone like him.    He sees a clear pattern of people rushing in and “enabling” the addiction to continue, thinking they are being compassionate – but all they are doing is deepening the addiction and the pain at the bottom.  It’s time to confront the truth.

Coming down off the “Easy money” high is the only way out of this problem, but nobody in government is prepared (yet) to risk the consequences.  (bankruptcy, mortgage foreclosures, high unemployment, financial collapse of state governments, massive layoffs of government employees, etc…  It could lead to a second Civil War and social unrest on a scale this country has not seen for 140 years.  A lot of people could die.   This scenario may  happen no matter what the Federal Reserve does.   The longer this charade continues, the more likely that becomes the outcome.

The first Charlie Rose hour long interview with Timothy Geithner is [here]

This current hour long interview is [here], or if you only have the time or patience for the edited version, a 6 minute highlight is available [here].  The highlight reel does not have the comments the WSJ is writing about.

The biggest disconnect I heard was when Charlie asked about the small banks who want to return their TARP funds and not have the Federal Government regulating what they pay their mangement.  Geithner said that he expected the SEC would handle that issue.  Note to Tim Geithner:  SEC has no regulatory role over corporations that are not publicly traded on a stock market.  The Federal Government has no say in how much a privately owned bank pays its executives.

Bankruptcy Watch – General Motors

Tuesday, April 7th, 2009

Reuters Story

“Intense Preparations” are underway preparing for a possible GM bankruptcy, along the lines of Geither’s plan – to split the company into a “good GM” and a “bad GM”.

Reading between the lines, it sounds like the decision has been made – in a company as complex as GM, it takes a while for lawyers to write up the paperwork and anticipate possible objections the court or other parties (including countries in Europe) may have.

If GM “goes”, the automotive parts business will likely follow – as well as serious damage to the bondholders (most of the value of the bonds has already been “written off”, but forces everyone to adjust their valuation)

But don’t worry – the Federal Reserve has lots of “money” it can create to keep funding cascading bailouts of the companies that fail.

The cost of zero interest

Thursday, February 19th, 2009

The Federal Reserve has pushed interest rates as close to zero as is possible.  While on the surface, you might think “Wow, free money!”, this policy has many unintended consequences.

One that is likely to hit you personally in the near future involves Money Market funds.  These are the funds sold by mutual fund families,  that are typically used to “park” investment money while people are deciding what to do.

With short term treasury bills offering essentially no interest (the rates have gone negative a few days), money market funds have a serious problem.  If they invest their money in short term “safe” investments (like lending it to Lehman Brothers), they risk finding out their $1/share product is not worth $1 (“breaking the buck”), and they have very little cushion to “absorb” unexpected losses. 

If they invest 100% in short term US Treasury bills, they have no risk – but also no income.  The meager income would be less than what they have to charge to manage the fund, and people are unlikely to park money in a fund where they are guaranteed to lose money. 

If they invest their funds in slightly longer treasury securities to get better yields, they risk being unable to deal with a surge of withdrawals without realizing losses by dumping the T-Bills/notes before maturity.

Look for money market funds to begin to shut down or stop accepting new money if this interest rate environment continues for much longer.  This isn’t because they are “insolvent”, it is because there is no way to make money doing this.  Unless you’re the government, you can’t afford to throw away money doing things for no purpose.