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Wednesday, October 27, 2010

The Ruinous Cost of Fed Manipulation of Asset Prices

Items of Interest:

More criticism of the Federal Reserve.

The Ruinous Cost of Fed Manipulation of Asset Prices

Jeremy Grantham / GMO:
Jeremy Grantham's 3Q 2010 letter [pdf] -- The Ruinous Cost of Fed Manipulation of Asset Prices

My diatribe against the Fed’s policies of the last 15 years became, by degrees, rather long and complicated. So to make it easier to follow, a summary precedes the longer argument. (For an earlier attack on the Fed, see “Feet of Clay” in my 3Q 2002 Quarterly Letter.)

Purpose: If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing.

To Summarize:
  1. Long-term data suggests that higher debt levels are not correlated with higher GDP growth rates.
  2. Therefore, lowering rates to encourage more debt is useless at the second derivative level.
  3. Lower rates, however, certainly do encourage speculation in markets and produce higher-priced and therefore less rewarding investments, which tilt markets toward the speculative end. Sustained higher prices mislead consumers and budgets alike.
  4. Our new Presidential Cycle data also shows no measurable economic benefits in Year 3, yet point to a striking market and speculative stock effect. This effect goes back to FDR, and is felt all around the world.
  5. It seems certain that the Fed is aware that low rates and moral hazard encourage higher asset prices and increased speculation, and that higher asset prices have a beneficial short-term impact on the economy, mainly through the wealth effect. It is also probable that the Fed knows that the other direct effects of monetary policy on the economy are negligible.
  6. It seems certain that the Fed uses this type of stimulus to help the recovery from even mild recessions, which might be healthier in the long-term for the economy to accept.
  7. The Fed, both now and under Greenspan, expressed no concern with the later stages of investment bubbles. This sets up a much-increased probability of bubbles forming and breaking, always dangerous events. Even as much of the rest of the world expresses concern with asset bubbles, Bernanke expresses none. (Yellen to the rescue?)
  8. The economic stimulus of higher asset prices, mild in the case of stocks and intense in the case of houses, is in any case all given back with interest as bubbles break and even overcorrect, causing intense financial and economic pain.
  9. Persistently over-stimulated asset prices seduce states, municipalities, endowments, and pension funds into assuming unrealistic return assumptions, which can and have caused financial crises as asset prices revert back to replacement cost or below.
  10. Artificially high asset prices also encourage misallocation of resources, as epitomized in the dotcom and fiber optic cable booms of 1999, and the overbuilding of houses from 2005 through 2007.
  11. Housing is much more dangerous to mess with than stocks, as houses are more broadly owned, more easily borrowed against, and seen as a more stable asset. Consequently, the wealth effect is greater.
  12. More importantly, house prices, unlike equities, have a direct effect on the economy by stimulating overbuilding. By 2007, overbuilding employed about 1 million additional, mostly lightly skilled, people, not counting the associated stimulus from housing related purchases.
  13. This increment of employment probably masked a structural increase in unemployment between 2002 and 2007, which was likely caused by global trade developments. With the housing bust, construction fell below normal and revealed this large increment in structural unemployment. Since these particular jobs may not come back, even in 10 years, this problem may call for retraining or special incentives.
  14. Housing busts also help to partly freeze the movement of labor; people are reluctant to move if they have negative house equity. The lesson here is: Do not mess with housing!
  15. Lower rates always transfer wealth from retirees (debt owners) to corporations (debt for expansion, theoretically) and the financial industry. This time, there are more retirees and the pain is greater, and corporations are notably avoiding capital spending and, therefore, the benefits are reduced. It is likely that there is no net benefit to artificially low rates.
  16. Quantitative easing is likely to turn out to be an even more desperate maneuver than the typical low rate policy. Importantly, by increasing inflation fears, this easing has sent the dollar down and commodity prices up.
  17. Weakening the dollar and being seen as certain to do that increases the chances of currency friction, which could spiral out of control.
  18. In almost every respect, adhering to a policy of low rates, employing quantitative easing, deliberately stimulating asset prices, ignoring the consequences of bubbles breaking, and displaying a complete refusal to learn from experience has left Fed policy as a large net negative to the production of a healthy, stable economy with strong employment.
discussion:
ZeroHedge: Grantham On The Ruinous Cost Of The Fed's Manipulation Of Asset Prices

related:
ZeroHedge: Eric Sprott On Bonfire of the Currencies
David Kotok / Cumberland Advisors: Quant. Easing II: Yabba Dabba Doo!
Jeff Matthews: “QE 2” or “Ben’s Titanic”?
Laurence Kotlikof & Richard Munroe / Bloomberg: U.S. Debt Is Child Abuse
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MarketWatch:
QE2 a ‘Ponzi scheme’, says Pimco’s Gross -- The Federal Reserve’s highly anticipated plan to engage in quantitative easing to pump money into the economy is a “Ponzi scheme,” said Bill Gross, who manages the world’s biggest bond fund for Pimco.

The actions of the Fed, led by Chairman Ben Bernanke, will “likely signify the end of a great 30-year bull market in bonds and the necessity for bond managers and, yes, equity managers to adjust to a new environment,” he wrote in a commentary posted on Pimco’s website Wednesday...
related:
Bill Gross / Pimco:
Run Turkey, Run -- Check writing in the trillions is not a bondholder’s friend; it is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. Public debt, actually, has always had a Ponzi-like characteristic. Granted, the U.S. has, at times, paid down its national debt, but there was always the assumption that as long as creditors could be found to roll over existing loans – and buy new ones – the game could keep going forever...
-----
Peter Orszag, former Director of the Office of Management and Budget under President Obama, NY Times:
Sailing the Wrong Way with QE2? -- the net effect of “QE2” is similar to having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds. The result is thus that the average maturity of government debt held outside the government falls. (From a debt management perspective and given current interest rates, the Federal government should probably be lengthening the average maturity of debt held by the public rather than reducing it, but let’s not worry about that for now.)

What are the benefits of such a reduction in the average maturity of government debt in the current economic environment?

They’re quite limited for two reasons...
----
The  Fed's Quantitative Easing (QE) will lead to a vicious currency war.

Michael Schuman / Time:
A Vicious Circle -- By increasing the amount of dollars in the world, the Fed would depress the greenback's value. Mere anticipation of the Fed's strategy has already weakened the dollar in global markets. That, in turn, places greater strain on the yuan. China's central bank would have to intervene on an even bigger scale by buying more and more dollars to stop the yuan rising in value. (On Oct. 19, the bank hiked its benchmark interest rate, signaling it would not fight potential inflation by allowing the yuan to appreciate.)

Can the U.S. force Beijing to loosen its grip on the yuan simply by generating more dollars? In theory, yes. The Fed has the ability to produce as many dollars as it wishes, potentially placing limitless pressure on China to let the yuan appreciate...
----
Another big problem with the Fed's Quantitative Easing (QE) money printing is "leakage". All the money the Fed creates leaks out of the United States and flows around the world to jack up asset prices.

Chris Ciovacco / Ciovacco Capital:  
Who Receives the Fed's Printed Money? -- To give a hypothetical example of how the Fed’s newly printed money can make its way around the globe...

Understanding the global footprints of the primary dealers and their clients allows us to visualize the broad geographic reach of the Fed’s printing press. Understanding the buying power and investment influence of large clients of the primary dealers, like sovereign funds, helps us understand how QE2 may potentially impact a wide range of markets from currencies to commodities...
----
Wall Street Journal:
Fed Gears Up for Stimulus -- Fed Chairman Ben Bernanke's push to restart the bond-buying program—a form of monetary stimulus known as quantitative easing—has been greeted with deep skepticism among some of his colleagues. In some of his strongest words yet, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, said Monday that more expansive monetary policy was a "bargain with the devil."

In the next few months, internal opposition to Mr. Bernanke's approach could intensify as presidents of three regional Fed banks who have expressed skepticism about the plan—Narayana Kocherlakota of Minneapolis, Richard Fisher of Dallas and Charles Plosser of Philadelphia—take voting positions on the Fed's policy-making body. There are 12 regional Fed banks, and five voting seats on the Federal Open Market Committee rotate among them every year, with New York always keeping one.

Investors already expect Fed action. Stock prices have rallied since Mr. Bernanke broached the idea of bond buying in late August. But investors and analysts are divided on whether the gambit will work...

Bloomberg Business:
Fed Dissenter Hoenig Wages Lonely Campaign Against Easy Credit -- In Washington, he is the burr in Fed Chairman Bernanke’s saddle: the rogue heartland banker who keeps dissenting alone -- for the sixth straight time on Sept. 21 -- to protest the Fed’s rock- bottom interest-rate policy. Hoenig warns that the Bernanke majority is setting the country up for an as-yet-unknown asset bubble: the next dot-com or subprime craze. He can’t tell yet where the boom-and-bust will materialize, but he can feel it coming, like a Missouri wheat farmer senses in his bones the storm that’s just over the horizon...

Hoenig harbors powerful misgivings over not dissenting more often and more forcefully during the Greenspan years. “He regrets going along with the votes when Alan Greenspan was chairman to get rates so low and keeping them so low so long,” says his friend Fisher...

Another reason Hoenig wants to end super-low interest rates is that Wall Street banks and large corporations are currently able to borrow for almost nothing and either hoard cash, make acquisitions, or invest in long-term Treasuries for a guaranteed profit. Retirees and other bank depositors effectively subsidize this borrowing and earn almost nothing on their savings. “It’s a distortion, and it favors the large institutions over the smaller ones and Wall Street over the saver,” Hoenig says in an interview. “I just don’t like it. It’s not fair.”...

Tuesday, October 19, 2010

Foreclosure-gate Roundup

Items of Interest:

Bloomberg:
N.Y. Fed Backing Boosts Pimco Push For Mortgage Buybacks -- The Federal Reserve Bank of New York joined with the biggest bond investors in the U.S. in seeking to force Bank of America Corp. to buy back bad home loans packaged into securities, as the battle over who will bear mortgage losses intensifies.

The regulator joined a group including Pacific Investment Management Co. and BlackRock Inc. in a letter to the lender and to Bank of New York Mellon Corp., the trustee for $47 billion of mortgage-backed bonds sold by Bank of America’s Countrywide Financial Corp. unit, people familiar with the matter said. Countrywide failed to service loans properly, law firm Gibbs & Bruns LLP said in a statement that didn’t name the firms...

related:
BusinessInsider.com: Here's The Letter The Fed, PIMCO And Others Sent To Bank Of America Over Putbacks
Washington Post: Banks' foreclosure hustle
----
Bloomberg:
Foreclosure Crisis Triggers Debate on Role of Mortgage Registry -- On July 1, a federal judge took away Robert Bellistri’s house in Arnold, Missouri.

Bellistri, who bought the house as an investment after it was seized for non-payment of taxes, failed to notify Mortgage Electronic Registration Systems Inc. of his purchase, the judge said. A state appeals court last year had ruled otherwise, finding Bellistri didn’t need to tell MERS, a company that lets banks electronically register their sales of home loans so they can avoid trudging down to the county land-records office.

The case highlights a debate raging in courts on the role MERS has, if any, in home foreclosures. How it’s resolved will determine whether MERS’s involvement produced a defective process and clouded millions of property titles. A definitive ruling against MERS might slow any future bundling of mortgages into securities since the company played a role in that process.

“MERS is the central device by which the banks have tried to opt out of the legal system and the real-property record system,” U.S. Representative Alan Grayson of Florida said in an interview...
related:
NY Times: Some Sand in the Gears of Securitizing
NY Times: The Homeowner Wins, Without a Lawyer
Wall Street Journal: Little-Known MERS Faces Big Challenges in Foreclosure Battle
Fierce Finance: Can MERS survive scrutiny?
----
MarketSurfer:
All Your Homes Are Belong To Us -- Reading the attached insider memo from Wells Fargo sent a chill up my spine. It appears they are preparing an aggressive and vicious counter attack against underwater home owners who are challenging the legality and validity of their mortgage contract...
----
David Dayen / Firedoglake:
MERS-y, Mercy Me: The Sewer Drain at the Bottom of the Housing Market — If you still think, like Shaun Donovan, that the crisis in the mortgage markets merely concerns foreclosure paperwork, you need to take a look at these two Law Review papers from Professor Christopher Lewis Peterson of the University of Utah (via). They provide, in excruciating detail, the story of MERS, short for Mortgage Electronic Registration System: the private corporation built by the mortgage lending industry, whose tool for electronically trading mortgages has thrown the entire housing market into turmoil. In the name of saving a buck, the mega-banks used this tiny company with almost no employees and entrusted it with 60 million of the nation’s mortgages on its system – 60% of all mortgages in the United States – to predictable results.

Starting in the early 1990s, the mortgage lending industry, seeking speed and the evasion of land title costs, decided to bypass the state and county registrars which would normally track and assign the title ownership of properties. Instead they created and used MERS, which operates a database to track that ownership. And they list MERS as the “mortgagee of record” with the county recorder – so that all the sales and resales and securitization of the mortgages will not result in the fees that follow the recording of mortgage assignments. Peterson explains that this saves the servicers a measly $22 a loan, which of course adds up when you consider the number of loans and trades per year...
discussion:
Shaun Donovan / The Huffington Post:   How We Can Really Help Families
Yves Smith / naked capitalism:   Guest Post: So Why Did the Mortgage Servicers Use “Robo Signers”?
Calculated Risk:   Why did the mortgage servicers use “robo-signers”?
----
Washington's Blog:
"At the Root of the Crisis We Find the Largest Financial Swindle in World History", Where "Counterfeit" Mortgages Were "Laundered" by the Banks -- The tidal wave of evidence showing that the giant banks have engaged in fraudulent foreclosure practices is so large that the attorneys general of up to 40 states are launching investigations.

People's homes are being taken when they didn't even hold a mortgage, and the big banks have been using "robo signers" to forge mortgage related documents...
----
CNBC:
We Could Be Headed For A Put-Back Tsunami -- That real issue has been lost in all this discussion of "robo signing" and affidavits. While there will probably be mistakes made on individual loans as to whether they were legitimately the basis of the foreclosure, the facts are after my team and I have been reviewing hundreds and hundreds of these loans, the vast majority of borrowers who are being foreclosed on are in default and those foreclosures need to go forward...
----
Christopher Whalen / Reuters:
In a new period of instability, Obama becomes Hoover -- It also is time for Chairman Bernanke and other Fed governors to publicly own up to the surreptitious transfer of hundreds of billions of dollars per year from American savers to the largest banks, a cowardly strategy that is allowing the Obama Administration and Congress to avoid making tough decisions about restructuring the U.S. financial system. The spectacle of Treasury Secretary Tim Geithner publicly accounting for repayment of TARP while the largest U.S. banks sink into insolvency is a national scandal...
----
Reuters:
Japan says economy at standstill -- Japan's government said on Tuesday that the economy was now at a standstill, highlighting the growing gulf between developed and emerging countries at the heart of global currency tensions.

In a monthly report, the government downgraded its assessment of the economy for the first time since February 2009. A senior Japanese official said further pressure on the economy, which is mired in stubborn deflation, could tip it into recession...

Monday, October 18, 2010

Steve Jobs Slams Google's Android

Steve Jobs slams Google's Android phones, from Apple's earnings conference call on Monday (10/18/10).


via Paul Kedrosky / Infectious Greed

Update:
Examiner.com: Google and TweetDeck respond to Steve Jobs' Android rant
PC Magazine: Google's Rubin Hits Back at Apple's Jobs Via Twitter
CNET: Why I think Steve Jobs is lying

Friday, October 15, 2010

The Biebs Takes A Shot At Greenspan

Justin Bieber (Jimmy Fallon) is another critic of Alan Greedspan Greenspan.



via Ritholtz/TBP

Tuesday, October 12, 2010

Down the Fed's QE2 Rat Hole

Items of Interest:

Matt Taibbi / Rolling Stone:
The Fed's Magic Money-Printing Machine, Act 2 -- It’s amazing, given the attention the Tea Party allegedly is paying to government waste and government spending, that there hasn’t been more controversy about the now-seemingly-inevitable arrival of “QE2” – a second massive round of money-printing cooked up by the Fed to prop up both the government and certain sectors of the economy. A more overtly anticapitalist and oligarchical pattern of behavior than the Fed’s “Quantitative Easing” program could not possibly be imagined, but the country is strangely silent on the issue...

QE is difficult to understand and the average person could listen to a Fed official talk about it for two hours right to his face and not understand even the basic gist of his speech. The ostensible justification for QE is to use a kind of financial shock-and-awe approach to jump-starting the economy, but its effects for ordinary people are hard to calculate...

But one thing we know for sure is that big banks and Wall Street speculators are real, immediate beneficiaries of the program, as they suddenly have trillions of printed dollars flowing through the financial system, with endless ways to profit on the new chips entering the casino....

related:


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Ron Paul / House.gov:
A Spooked Economy in October -- Last week we received worse than expected unemployment numbers, challenging recent claims that the recession has come and gone. Also, as the economy continues to suffer the after effects of the Federal Reserve-created bubbles of the last decade, there is renewed interest in gold. Fears that the Federal Reserve will pump even more money into the system had caused the price of gold to reach new highs. Also contributing to enthusiasm for gold is continued instability in the banking industry, symbolized this week by fraud allegations that have caused many banks to halt foreclosure proceedings, thus further destabilizing the housing market. Yes, October has a reputation for being a scary month economically and this month is shaping up to be frightening, as well.

The Fed has been wreaking havoc and devaluing our monetary unit steadily since 1913, and greatly accelerating it since the collapse of the Bretton Woods agreement in the 1970s. This severing of the dollar’s last tenuous link with gold allowed the Fed to create as much new money as it pleased, and it has taken full advantage of this opportunity.

In 1971, Gross Domestic Product (GDP) was $1.29 trillion. Today it is $14.6 trillion, nominally. But adjusted for all the inflating the Fed has been doing, it is only $2.73 trillion, which constitutes only a 1% real increase per year! So with all this extra money going around, we may appear nominally wealthier, but the reality is, we have barely moved at all.
 This is unfortunate especially for the prudent, conscientious savers, whose nest eggs are constantly being devalued. Unless of course, they have saved in something out of the Fed’s reach, like gold. While the economy has basically been in a holding pattern against the leeching of wealth by the Fed for 39 years, gold has seen an inflation adjusted increase in value of over 5% per year, if measured in 1971 dollars. This is due to the Fed’s ability to make dollars plentiful. And yet, this is the only tactic the Fed can come up with to rescue an economy already devastated by “quantitative easing”, as they call it.
The turmoil in the housing market demonstrates how disastrous it is to flood the economy with fiat money. Latest events with foreclosures are good examples of mistakes made in the market, in this case, by the banks, in the rush to soak up manipulated currency. This is why the truly free market depends on sound, honest money, free from false signals of artificially low interest rates.

The government finds ways to spend money even faster than the Fed can create it, bringing our national debt well past the point of the taxpayers ever being able to pay it off. Other nations who, in the past, have eagerly bought up any amount of debt we produced are now starting to resist. We are reaching a crucial point at which the dollar will no longer function, and in the absence of a functioning dollar, restoring sound money will be the only alternative.

The truly scary notion is that those in power might allow our system to collapse so chaotically to the detriment of so many people rather than simply obey the Constitution.
related:
YouTube: Ron Paul: U.S. Heading for Soviet-Style Economic Collapse
ZeroHedge: US Drops From First To Seventh In Average Wealth Per Adult, Behind Singapore, Sweden, And... France
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Friday, October 8, 2010

Grifters at Fed Are Cranking Up the Printing Press

This monetization of the debt, or quantitative easing scam that is being run by the Fed and Bernanke crew is one smooth con. This is pure Grifter heaven. The Federal Reserve Bank of NY creates money out of thin air to buy US. debt with the stroke of a key and a new computer book entry. They will then use this newly created money to buy all of the new US debt.

Monetization dilutes the value of financial (paper) assets. The Fed is robbing the frugal (savers) to pay-off reckless debtors, and bailout their bankster buddies. The toxic assets still sitting with the banks become less toxic with monetary dilution. A by-product of this government grifter scam is that value of the US dollar is wiped out. Currency debasement is the polite thing to call it. This is the perfect double bluff grift.

Meantime, the great American public will be like the proverbial frog in the pot of cold water, who is slowly boiled and cooked to death. Americans won't perceive the danger until too late. We are being defrauded by this confidence game run by the Fed. "QE2" is a boat ride to hell.

Items of Interest:

David Stockman / Minyanville:
Monetizing All the Debt, All the Time -- In the olden times -- say three years ago -- the idea of 100% debt monetization would have been roundly denounced as banana republic finance. No more. Earlier this week, William Dudley, who occupies the Goldman Sachs permanent seat on the Fed’s Open Market Committee, helpfully clarified that the new-age Fed should be judged by what’s in its heart, not what’s on its balance sheet. He said:

I am mindful of concerns… that [the Fed’s actions] could be interpreted as a policy of monetizing the federal debt. However, I regard this view to be fundamentally mistaken. It misses the point of what would be motivating the Federal Reserve.
It's doubtless true that the New York Fed Chairman, hereafter referred to as B-Dud in keeping with his brand of monetary doctrine, has run the Fed model and determined that each $100 billion of QE2 will result in a 9.895564 basis point reduction in the 10-year swaps rate. Still, B-Dud and his gang of merry money-printers on the Open Market Committee should be under no illusion that they have ascended to a new rung on the ladder of central banking sophistry...

These are pretty pathetic reasons for issuing massive quantities of digital greenbacks. Like all other experiments in printing press finance, its main impact will be to give a destructively erroneous signal to fiscal policymakers on both ends of Pennsylvania Avenue: Namely, that chronic, trillion-dollar deficits don’t matter because the Fed is financing them for free.
----
David Goldman / Inner Workings:
As I Was Saying: It’s Not, NOT a Growth Story -- Quantitative easing, once again, won’t create economic growth. It will just reprice assets. In the Keynesian model, it is supposed to drive money out of safe-haven refuges (which have a negative real return) and into brick-and-mortar and, presumably job creation. What it does, in fact, is turn gold into a safe haven, and force an increase in the savings rate! That’s because prospective pensioners who thought they could retire with a 7% annuity are looking at a 4% annuity instead. They simply have to save more, and that’s bad for consumption. The cost of money isn’t the main obstacle to job creation. Obamacare and associated regulatory burdens are the big problem...
-----
Donald Luskin / SmartMoney:
Why QE2 Isn't the Answer -- What's that great ship coming over the horizon to rescue us? Is that the QE2? Or is it the Titanic?

Paul Farrell / MarketWatch:
The Federal Reserve Is Dead, Maybe by 2012
 
Editorial / Investor's Business Daily:
As Fed Prints Money, Gold and Oil Soar

David Callaway / MarketWatch:
A Race To the Bottom In Currency Markets 

Doug Kass / TheStreet:
The Fed's Faulty Easing Policy Is Pumping Up Assets
 
Zero Hedge:

Sunday, October 3, 2010

Who Killed the US Dollar?

Who Killed the US Dollar? ... Ben Bernanke and Alan Greenspan
It was Ben Bernanke, from a helicopter, with a printing press!

via Slope of Hope

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia