Monday, May 3, 2010

Bernanke's Trillion Dollar Parlor Trick

The American Enterprise Institute is helping the Federal Reserve develop a strategy to dump $1.25 trillion in mortgage-backed garbage on the U.S. taxpayer. If the plan goes forward, the losses will be greater than all of the other bailouts combined. This is big, and it will require political activism to make sure the plan fails.

There's nothing fancy about the AEI's strategy; it's a straightforward "no frills" ripoff. Bernanke buys the toxic assets and non performing loans from the banks (which he's already done) and then transfers them to the GSE's (Fannie Mae and Freddie Mac). It's that simple. The Fed merely acts as a middle man to create a paper-trail long-enough to confuse the public about what's really going on. And, what's going on is another sleazy looting operation. Here's an excerpt from the AEI's web page by the eerily-named "Shadow Financial Regulatory Committee" which explains it all:

"Freddie and Fannie have been placed in conservatorship and the Treasury has confirmed that their debt is now guaranteed by the U.S. Government. This means that their debt is essentially identical to Treasury debt. The Treasury could simply issue Treasury debt to Freddie and Fannie with the offsetting accounting transaction being an IOU to the U.S. Treasury. Freddie and Fannie could then swap the acquired Treasury debt for MBS held by the Federal Reserve. This transaction would have several desirable features. It would place housing debt on the books of Freddie and Fannie where it belongs and remove the Fed from financing U.S. housing policy, which is appropriately a fiscal policy and not a monetary policy function. This would also help to re-establish Federal Reserve independence from the Treasury and fiscal policy. Finally, it would free the Fed to device strategies to reduce its balance sheet by engaging in more traditional asset sales in the much deeper Treasury market where the pricing impacts would be smaller and would accommodate a more rapid reduction in excess reserves." ("Mortgage Backed Securities in the Federal Reserve’s Portfolio" Shadow Statement No. 294, American Enterprise Institute)

So, there it is in black and white; the committee believes that dumping the red ink on the public would have "several desirable features." Indeed. It would move the bank's private losses off the Fed's books and onto Freddie and Fannie's "where it belongs". That would remove the Fed from any further obligation.

Naturally, the Fed will need a way to cover its tracks, so the AEI recommends that they ratchet up the fear of inflation. That means we can expect the Fed to mobilize its allies in the media to launch a public relations campaign that focuses on the imminent (and imaginary) threat of hyperinflation. That will create the diversion Bernanke needs to carry out his trillion dollar sludge-dumping operation.

According to the Wall Street Journal, Fannie and Freddie's total debt outstanding, at the end of 2009, was already a whopping $8.1 trillion, which is slightly higher than "the $7.8 trillion in total marketable debt outstanding for the entire US government." The off-balance sheet debts of the GSE's have mushroomed since the beginning of the financial crisis, because the banks and other financial institutions have used the two mortgage giants as a toxic recycling center for their sour investments. Bernanke's ginormous transfer of red ink follows that same pattern.

It's a shame that congress can't figure this stuff out. As an agent of the big banks, Bernanke is merely acting as one would expect. He saved the banks from nationalization and kept their political and financial power intact. He also usurped congress's authority over the budget purse-strings by purchasing the notorious toxic assets and, thus, dabbling in fiscal policy. Now he's putting the finishing-touches on another behemoth swindle so he can clear the Fed's books and resume the arduous task of bubblemaking.

Isn't it about time that congress wake up and smell the coffee?

No Hope for Britain By Afshin Rattansi

We have generations, now, of economists who have learned their profession not in the shadow of Keynes but of towers of glass and steel in the City of London. For journalists and economics pundits, this is not the time to increase the deficit through investment in infrastructure and making things. Instead, this is the time for cuts in public expenditure because bond traders demand it – all based on mistaken algorithms and formulae about risk. If the next government actually cuts expenditure to the orders of the bankers, it will surely lead to civil unrest on the streets of Britain. And it is astounding that the party leaders do not realize that civil unrest will not impress the bond markets." (Read more)

Why a Criminal Case against Goldman Matters Pam Martens

Excerpt:--"My advice to Goldman is to throw yourself on your sword. Come clean on everything and clean house. Put a modest gym in the basement of your new digs and donate the 54,000 square foot space to charities for the struggling folks you ripped off in their pensions and 401(k)s. And maybe it’s time to apologize for what you did in 1928 and 1929 as well." (Read more)

The Return of Hooverian Economics By Anthony DiMaggio

Excerpt:--"While the virtues of Keynesian economics have been understood for decades, right-wing government officials ... have undertaken a radical campaign to sell the public on cutting social services as a solution to “balancing the budget.” ... Jobs haven’t been created despite federal stimulus spending in the hundreds of billions of dollars, in large part because states are using stimulus money to make up for their budget shortfalls, rather than raising taxes to compensate for those shortfalls. In short, stimulus money is being used to replace declining budget revenues; by elementary logic, then, there can be no stimulus if federal funds are simply filling in the holes that were already present in state deficits.

According to the Center for Economic and Policy Research (CEPR), the $787 billion federal stimulus had the effect of subsidizing states that were in the process of cutting their budgets and social services. As CEPR estimates “state and local budget deficits to the tune of $100 billion a year will offset the stimulative effect of the president’s American Recovery and Reinvestment Act. Stimulus dollars used to cover deficits will have no stimulative effect.” ....

Without stimulus money, the economic decline in 2009 to 2010 would surely have been far worse. As the Center on Budget and Policy Priorities (CBPR) explains: “Because states also face legal requirements to balance their budgets, they must enact program cuts [or] tax increases to close their budget gaps.” Budget cuts, CBPR concludes, “reduce demand for goods and services, making a weak economy even weaker. Without federal funds, states would have to take even more dramatic measures that, by reducing demand, would cost jobs and make the recession even more severe.” This last sentence should be kept in mind when we discuss the future effects of further state budget cuts. States are likely to worsen the recession if they pass draconian budget reductions. While Democratic and Republican officials promise that cutting spending will help balance the budget, the effects will likely be the opposite, with budget revenues declining even further due to large numbers of state and local employees being fired from their jobs and contributions to state tax revenues declining further because of the mass firings. This has already happened, with massive cuts in the private sector leading to huge reductions in state budgets. Such job losses will put additional strains on the public sector, and justify additional pressures for another round of budget cuts and job losses. Such practices create a cyclical process whereby budget cuts and further economic deterioration become mutually reinforcing and contribute to a greater downward spiral in reducing tax pools and increasing budget deficits." (Read more)

Cliches won't fix the financial crisis, Dean Baker, UK Guardian

Excerpt Dean Baker: "Policy that rests on unexamined assertions (that emanate from the teachings of long-dead economists) will be every bit as destructive today as it was in the first Great Depression....Contractionary moves by these governments (in Europe) will worsen the downturn in these countries and in fact, make matters worse in the sound finance countries as well. ... downward pressure on these economies will likely require a debt restructuring at some point anyhow. The debt burden grows when economies shrink and that seems to be the plan coming from the economic centre of Europe.....

There was perhaps an excuse for bad policy in the 30s; after all Keynes didn't publish the General Theory until 1937. But, there is no excuse today – the ideas of Keynes have long been known and widely disseminated. It is a tragedy and an outrage that the people deciding economic policy are mindlessly repeating tired cliches rather than seriously trying to design policies that address the crisis in front of our faces." (Read more)

1 comment:

  1. Mike,
    Hi there my friend. Good to see your new blog up and running.
    I always learn something from your articles.
    I am looking forward to more from you on the state of what passes for an economy in the old US of A.