Results 1 to 5 of 5

Thread: Cheap money creates bubbles

Hybrid View

  1. #1
    Join Date
    Aug 2008
    Location
    Lone Star State
    Posts
    43

    Default Cheap money creates bubbles

    <table id="table3" border="0" width="100%"><tbody><tr><td width="9"> </td> <td>
    The U.S needs a breather from the FED!


    The World Needs A Breather From The US.
    And they'll get it sooner than many think

    By Mike Whitney

    August 14, 2009 -- We're making this way too complicated. It's simple really.

    The Fed has only one tool at its disposal; to create more money. Typically, the way the Fed adds to the money supply is by lowering interest rates. When the Fed lowers rates below the rate of inflation; they're basically selling dollars for under a buck. That's a good deal, so, naturally, speculators jump on it and trigger a credit expansion. What follows is a frenzy of market activity that ends in a housing, credit, tech or equity bubble. Eventually, the bubble bursts and the economy goes into a tailspin. Then, after a period of digging-out, the process resumes again. Wash, rinse, repeat. It's always the same.

    The moral is: Cheap money creates bubbles; and bubbles move wealth from workers to rich motherf**kers. It's as simple as that. That's why the wealth gap is wider now than anytime since the Gilded Age. The rich own everything.

    The Federal Reserve is the policy arm of the big banks and brokerage houses. Period. Ostensibly, its mandate is to maintain "price stability and full employment". Right. Anyone notice how many jobs the Fed has created lately? How about the dollar? Is it really supposed to zig-zag like it has been for the last decade? The central task of the Fed is to shift wealth from one class to another. And it succeeds at that task admirably.

    The Fed's "mandate" is public relations claptrap. Bernanke hasn't lifted a finger for homeowners, consumers or ordinary working stiffs. "Yer on yer own. Just don't expect a handout. That's socialism!" All the doe is flowing upwards...according to plan. The Fed is a social engineering agency designed to serve as the de facto government behind the smokescreen of democratic institutions. Did you really think a black, two year senator with no background in foreign policy or economics was calling the shots?

    Puh-leeese! Obama is a public relations invention who's used to cut ribbons, console the unemployed, and convince Americans they live in a "post racial" society. Right. (Just take a look at the footage from Katrina again)

    The Fed has complete control over monetary policy and, thus, the country's economic future. Bernanke doesn't even pretend to defer to Congress anymore. Why bother? After Lehman caved in, Bernanke invoked the "unusual and exigent" clause in the Fed's charter and declared himself czar. Now he has absolute power over the nation's purse-strings.

    The $13 trillion the Fed has committed to the financial system since the beginning of the crisis --via loans and outright purchases of mortgage-backed garbage and US sovereign debt--was never authorized by Congress. In fact, the Fed stubbornly refuses to even identify which institutions got the "loans", how much the loans were worth, what kind of collateral was accepted for the loans, or when the loans have to be repaid.

    In truth, the loans are not loans at all, but gifts to the industry to keep asset prices artificially high so that the entire financial system does not come crashing down. Check this out:

    "In an analysis written by economist Gary Gorton for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference titled, "Slapped in the Face by the Invisible Hand; Banking and the Panic of 2007", the author shows that mortgage-related securities ballooned from $492.6 billion in 1996 to $3,071.1 in 2003, while asset backed securities (ABS) jumped from $168.4 billion in 1996 to $1,253.1 in 2006. All told, more than $20 trillion in securitized debt was sold between 1997 to 2007. "

    $20 trillion! How much of that feces paper--which is worth just pennies on the dollar-- is sitting on the balance sheets of banks and other financial institutions just waiting to blow up as soon as the Fed asks for its money back? And the Fed will never get its money back because the prices of complex securities and derivatives will never regain their pre-crisis values. Why? Because these derivatives are linked to underlying collateral (mortgages) which have already declined 33% from their peak and are headed lower still. Also, these toxic assets were sold as risk-free (many of them were rated triple A) and have now been exposed as extremely risky or fraudulent. Because these assets were heaped together in bundles to strip out their interest rates, they cannot be easily separated which means that they are worth considerably less than the 33% that has been lost on the underlying collateral (mortgages) The securitization markets are not expected to rebound for a decade or more, which means that the Fed will have to find other more-creative way to goose the credit system to avoid a downward spiral.

    But how?

    Zero percent interest rates haven't worked because qualified borrowers are cutting spending and saving their disposable income, while people who need to borrow, no longer meet the banks' tougher lending standards. Bank credit is shrinking even though excess bank reserves are nearly $900 billion. When banks stop lending, the economy contracts, business activity slows, unemployment soars and growth sputters.
    Presently, the economy is still contracting, but at a slower pace than before. "Less bad" is the new "good". All the recession indicators are still blinking red--income, employment, sales, and production--all down big! But it doesn't matter because it's a "Green Shoots" rally; plenty of cheap liquidity for the markets and a freeway off-ramp (for sleeping) for the unemployed.

    The Fed's lending facilities are designed to pump liquidity into the system and inflate another bubble by generating more debt. Unfortunately, most people accept Bernanke's feeble defense of these corporate-welfare programs and fail to see their real purpose. An example may help to explain how they really work:

    Say you bought a house at the peak of the bubble in 2005 and paid $500,000. Then prices dropped 40% (as they have in Calif) and your house is now worth $300,000. If you only put 5% down, ($25,000) then you are underwater by $175,000. Which means that you own more on the mortgage than your house is currently worth. (This is essentially what has happened to the entire financial system. The equity has vaporized, so institutions are using dodgy accounting tricks instead of reporting their real losses.) So Bernanke comes along and gives you $175,000 no interest, rotating loan to you so that no one knows that you are really busted and you can continue spending just as you had before. Not bad, eh? This is what the lending facilities are all about. It is a charade to conceal the fact that a large portion of the nation's financial institutions are insolvent and propped up by state largess.

    But there's more, too.

    Now that Bernanke has given you $175,000 no interest, rotating loan; you expect that eventually he will ask for his money back. Right? So your only hope of saving your home, in the long run, is to engage in risky behavior, like dabbling the stock market. It's like playing roulette, except you have nothing to lose since you are underwater anyway.

    This is exactly what the financial institutions are doing with the Fed's loans. They're betting on equities and hoping they can avoid the Grim Reaper.

    Here's how former hedge fund manager Andy Kessler summed it up last week in the Wall Street Journal: "By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market." (Andy Kessler, "The Bernanke Market" Wall Street Journal)

    Only a small portion of the money that has gone into the stock market in the last 6 months (since the March lows) has come from money markets. The fed's loans are being laundered into stocks via financial institutions that are rolling the dice for their own survival. The uptick in the markets has helped insolvent banks raise equity in the capital markets so they don't have to grovel to Congress for another TARP bailout.

    Everybody's elated with Bernanke's latest bubble except working people who have seen their wages slashed by 4.5%, their credit lines cut, the home values plunge, and their living standards sink to third world levels.
    And the Fed's spending-spree is not over yet; not by a long shot. The next wave of home foreclosures (already 1.9 million in the first half of 2009) is just around the corner--the Alt-As, option arms, prime loans. The $3.5 trillion commercial real estate market is capsizing. The under-capitalized banking system will need assistance. And there will have to be another round of fiscal stimulus for ailing consumers. Otherwise, foreign holders of US Treasurys will see that the US can no longer provide 25% of global demand and head for the exits.

    Bernanke's back is against the wall. The only thing he can do is print more money, shove it though the back door of the stock exchange and keep his fingers crossed. The rest is up to CNBC and the small army of media cheerleaders.

    There is some truth to the theory that Bernanke saved the financial system from a Chernobyl-type meltdown. But that doesn't change the facts. Accounts must be balanced; debts must be paid.
    The Fed chief has committed $13 trillion to maintain the appearance of solvency. But the system is bankrupt. The commercial paper market, money markets, trillions of dollars of toxic debt instruments, and myriad shyster investment banks and insurance companies are now backed by the "full faith and credit" of the US Treasury. The financial system is now a ward of the state. The "free market" has deteriorated into state capitalism; a centralized system where all the levers of power are controlled by the Central Bank. If Bernanke's Politburo withdraws its loans--or even if he raises interest rates too soon-- the whole system will collapse.

    The economy is now balanced on the rickety scaffolding of the dollar. As the Obama stimulus wears off, the rot in the economy will become more apparent. Household red ink is at record highs, so personal consumption will not rebound. That means US assets and US sovereign debt will become less attractive. Foreign capital will flee. The dollar will fall.

    The world needs a breather from the US. And they'll get it sooner than many think.




    </td> <td width="4"> </td></tr></tbody></table>

  2. #2
    Raz is offline iTulip Ambassador, Select Premium Member
    Join Date
    Mar 2008
    Location
    The Deep Southern United States
    Posts
    2,385

    Default Re: Cheap money creates bubbles

    Thanks, Runlikehe11. Very entertaining read.

    And I agree with Mr. Whitney - except for the lying slur about Katrina victims being deliberately ignored by the evil white people in charge of the Federal government in 2005. The real culprit was the idiot govenor of Louisiana, Ms. Blanco, and cool-daddy Nagin of New Orleans, who had buses to evacuate people and didn't do it.

    I personally know a FEMA official in Louisiana who just happens to be black, and although he never liked Bush, he doesn't blame him for what happened during Katrina.

  3. #3
    Join Date
    Apr 2006
    Posts
    1,519

    Default Re: Cheap money creates bubbles

    With all due respect, this guy is an utter moron.

    I'll buy that Barack doesn't have as much power as maybe Clinton or Regan did, but the fed has very little power. They buy and sell treasuries. Who do you think actually creates the treasuries for them to buy? Who do you think decides what the treasuries get spent on?

    Did Alan Greenspan invade Iraq? No.

  4. #4
    Raz is offline iTulip Ambassador, Select Premium Member
    Join Date
    Mar 2008
    Location
    The Deep Southern United States
    Posts
    2,385

    Default Re: Cheap money creates bubbles

    Quote Originally Posted by blazespinnaker View Post
    With all due respect, this guy is an utter moron.

    I'll buy that Barack doesn't have as much power as maybe Clinton or Regan did, but the fed has very little power. They buy and sell treasuries. Who do you think actually creates the treasuries for them to buy? Who do you think decides what the treasuries get spent on?

    Did Alan Greenspan invade Iraq? No.
    Good points. Perhaps I should have said that I found it very entertaining and I sympathized with his outrage.

    Now lets look at this from another angle - what if we had a REAL Fed Chairman back in the 1990s, one like William McChesney Martin?
    One who would have politely told Mr. Bush that he was unwilling to buy Treasury Bonds and force interest rates to ridiculously low levels, that if Mr. "W" wanted a war he would have to find a way to pay for it because the Fed wasn't going to deliberately screw the working people and everyone else who saved a US Dollar, and what if he'd had the intestinal fortitude to raise margin requirements on stocks back in 1996 and prevented the stock bubble from reaching such an astronomical size? Yes, he probably wouldn't have been reappointed, but at least he wouldn't be seen as the irresponsible sell-out that he in fact was and is.

    "W" is a dumbass, Paulson belongs in jail, the Congressional RepubliCrats are self-serving whores, and we are in very deep doo-doo.

    But Greenspan deserves much of the blame for this present mess.


  5. #5
    Join Date
    Sep 2008
    Location
    North Texas
    Posts
    5,971

    Default Re: Cheap money creates bubbles

    Quote Originally Posted by blazespinnaker View Post
    ... the fed has very little power.
    Your claim doesn't seem right to me. I'm probably not the best person to state the opposite case, but I'll give it a go.

    • The Fed has helped start many recessions by raising short term rates enough to invert the yield curve.
    • The Fed has helped start bubbles by lowering short term rates, such as they did with the housing bubble.
    • The Fed plays a key role in the intentionally obfuscated funding of the nations debt (well less obfuscated recently, as they purchase Treasuries outright shortly after they are created.)
    • The Fed provides a powerful "Federal" front for the big banks.
    • The Fed helps (artificially) smooth out the reserves of its member banks, leading to increased systemic risk and the misallocation of resources that result from privatizing profits and socializing losses.
    • The Fed has played a key (unauditable!) role in the theft of Trillions of dollars this last year by banks "too big to fail."

    Quote Originally Posted by blazespinnaker View Post
    Did Alan Greenspan invade Iraq? No.
    No, but he helped fund it. No nation goes to war without funding.

    Andrew Jackson was right to oppose a national bank. President Wilson was right when he concluded, near the end of his life, that his biggest mistake was to create the Fed.

    Banks should be small enough to fail, too small to obtain regulatory capture, and competitive businesses. The Fed has played a key role in elevating JPMorgan and similar banks to a level that is now more powerful than the federal government in critical ways.

Similar Threads

  1. Replies: 7
    Last Post: 08-09-09, 09:46 AM
  2. Copycat trading creates boom/bust
    By blazespinnaker in forum News
    Replies: 7
    Last Post: 08-22-08, 06:21 PM
  3. Replies: 8
    Last Post: 05-17-08, 06:13 PM
  4. US mortgage crisis creates ghost town
    By Rajiv in forum Housing Bubble
    Replies: 6
    Last Post: 01-31-08, 01:12 AM
  5. Greenspans Cheap Money role in the US Housing Crash of 2007
    By Sapiens in forum Sapiens' Comments
    Replies: 0
    Last Post: 02-08-07, 01:20 AM

Bookmarks

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •  
Opinions expressed herein are those of the posters, not those of iTulip, Inc., its owners, or management. All material posted on this board becomes the intellectual property of the poster and iTulip, Inc., and may not be reposted in full on another website without the express written permission of iTulip, Inc. By exception, the original registered iTulip member who authored a post may repost his or her own material on other sites. Permission is hereby granted to repost brief excerpts of material from this forum on other websites provided that attribution and a link to the source is included with the reposted material.

Nothing on this website is intended or should be construed as investment advice. It is intended to be used for informational and entertainment purposes only. We reserve the right to make changes, including change in price, content, description, terms, etc. at any time without notice. By using this board you agree that you understand the risks of trading, and are solely responsible for your own investment and trading decisions. Read full legal disclaimer.

Journalists are not permitted to contact iTulip members through this forum's email and personal messaging services without written permission from iTulip, Inc. Requests for permission may be made via Contact Us.

Objectionable posts may be reported to the board administrators via Contact Us.

-->