There is probably nobody in the political/government scene that I detest more than Ben Bernanke.  But this does not mean that politicians showing the mental acuity of a 2-year old should feel free to take false shots at his policy actions and those of The Fed generally.

Yet they have. 

Bernie Sanders, for example, has been screaming about "$16 trillion in secret loans" for a while.  He can probably technically defend his claim, but to do so he has to perform some rather interesting mathematical gymnastics.  For example, if I loan you $100, and the next day you pay me back and then borrow it again, doing this 10 times, how much did I loan you?  A reasonable man would say that $100 was lent repeatedly.  A media ***** looking for headlines would say it was $1,000.  The latter is Bernie.

Nor is he alone.  Alan Grayson, who started out a very reasonable politician and then went off into the weeds with hard-left socialism (which he couldn't pay for) has made the same sort of charge and sadly, Yves over at Naked Capitalism has given him ink:

Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, over $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received over a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Again, if I borrow the same $100 over and over again.... 

Alan, you ignorant ass (or mendacious bastard -- pick one.)

It continues, of course, but once you find the first intentional (or ignorant) distortion you no longer need to keep looking.

Bernanke, for his part, appears to be rather annoyed and has written a rebuttal aimed at Congress' Financial Services Committee.  He's right in many areas, but in being right he intentionally glosses over where the real devil-style acts are and have been within The Fed.

Let's pick on a couple of things:

"The article also fail to note that the lending directly helped support American businesses by providing emergency fuding so they could meet weekly payrolls and on-going expenses.  The commercial paper funding facility, for example, provided support to businesses as diverse as Harley-Davidson and National Rural Utilities, when the usual market mechanism for their day-to-day funding completely dried up."

Notice what's missing here: Any exposition or explanation on exactly why a firm like Harley-Davidson needs to borrow money to make payroll.

Perhaps most of America (and most of Congress) has never run a business.  I have -- since I was much younger, both as either a near single-person show, one with a couple of employees, and then one with a bunch.  You never, ever borrow to make payroll - if you actually have to do that you're on the brink of bankruptcy and only through pure luck do you avoid it.

Bloomberg printed their own rebuttal to Bernanke's screed and within the scope of their original article and the rebuttal spot-on correct.  The problem is that they, like Ben, intentionally and studiously avoid the actual issues, save one: The "lender of last resort" function which is a proper central bank function, is supposed to always be at a penalty and yet it is flatly impossible to argue that a 0.01% interest rate is at a "penalty" to a market that is demanding much higher interest rates (or refusing to lend at all) because it believes the entities seeking to borrow are lying.

That, at its core, is the problem, and that is a problem The Fed has been facilitating for a very long time -- and is facilitating today.

The real scandal in the 2008 crisis, which has not been stopped, is the fact that there was then and still is now an unknown number of financial institutions that are factually bankrupt and hiding it. 

One example will make this clear -- Colonial Bank, which blew up.

The bank's last-filed 10Q, dated March 31st 2009, showed $14.1 billion in alleged "assets" (loans held for sale and investment) with $450 million in loss reserves (expected losses), or about 3% of expected loss.  That's not great, but it's also not catastrophic.

Here's the problem - In August, five months later, the bank detonated and was closed.  BB&T "acquired" the bank.  Their internal "deal book" which was published showed a nearly-identical $14.3 billion in loan assets but $5 billion - not $450 million - in expected losses.

In other words when BB&T came in they found eleven times the losses claimed by Colonial's 10Q just five months earlier.  Put another way 35% of the bank's "assets" were worthless.

This is the underlying scam that nobody's talking about: The carrying of alleged "assets" on balance sheets at entirely-unrealistic valuations, which is why credit locked up in 2008 and why it always threatens to do so -- the person who you wish to borrow from doesn't believe he'll get paid, and the so-called "collateral" you intend to post is worthless.

Everyone talks about "market confidence" but in point of fact there are two sorts of "confidence" -- the confidence that the market will remain "orderly" and thus you'll get paid (in which case the so-called collateral is a formality and nobody really cares if its used dogfood) and the confidence that the claimed asset values you post via that collateral actually has the value claimed so the loan you're taking out is really secured.

Why am I banging on this drum?  Because it's still going on.

There is no way you are ever going to get me to believe that Colonial lost 35% of its asset value in five months' time post the collapse itself -- if you remember, "mark to lie" became legal post Kanjorski's hearing and thinly-veiled threat to FASB, which folded like a cheap suit.

Indeed it was that hearing that effectively "made legal" what Colonial and every other firm was doing and must be presumed to still be doing, as even a cursory examination discloses that these same sorts of games are almost-certainly still occurring to this day.

Earlier this year CreditSights claimed that US banks have $147 billion in outstanding home equity lines behind underwater firsts -- that is, entirely unsecured borrowing as a HELOC gets zero recovery should an underwater first default.  Bank of America has some $47 billion, JP Morgan $41 billion, Wells $39 billion and so on. 

Note that Wells' latest 10Q shows $88 billion in total second-line exposure - in other words according to CreditSights 44% of that total is impaired and in a default is worth zero.  Yet Wells claims just $893 million in reserves against this portion of their portfolio - or 1/43rd of the unsecured and thus, if the first defaults, worthless loan balance. 

That is ridiculously inadequate and yet this is today -- not 2005, 2006, 2007 or 2008.  It is going on right here, right now, in the present tense.

Wells is not alone -- they're just easy to analyze as their 10Q isn't cluttered with a hundred different subsidiaries and similar things that make analysis difficult.  You can look at any of the big banks and you will see the same sort of game being played -- and it's entirely legal under current US law.

This is why the market locked up in 2008 and the problem has not been fixed.   Until it is there is no actual solution and any demand for actual good collateral that arises will result in an immediate resumption of the credit lockup of 2008 and a "new" financial crisis.

If you want to know why the banks and government are so desperate to try to stop the inexorable decline of home prices, this is the reason.  But there's no way to fix this problem in the main other than through defaults as the loans that were made had no foundation in the actual ability to pay.  Defaults, however, expose the truth of these balance sheets -- the loans in question are worthless behind an underwater first and that $39 billion is more than a quarter of Wells' equity value in home equity lines alone!

Note that we've not dug into the commercial real estate lending, which is a problem as well -- all the strip malls and other commercial property that was built out during the bubble and yet has no realistic lease-out prospect at anything that comes close to amortizing construction and operating costs.  Some are managing to roll due to ridiculously suppressed interest rates but that will and must eventually end, and when it does the fact that these loans are deeply impaired will float to the surface and start stinking up the financial system as the dead fish that they are.

The Fed claims that it lent only to "sound" financial institutions that were "solvent."  On any sort of objective analysis this must be declared a bald lie -- only through the making of utterly fanciful marks could such a claim be sustained and that was the entire point of the spring 2009 hearing -- bludgeoning FASB with the full force of Congressional threat.

But making the telling of lies legal does not change the fact that they're lies; all it does is prevent you from being thrown in the slammer for telling them.  As we saw with Colonial the fact is that the claimed "asset values" were fantasies and just a few short months later that fantasy detonated.  The truth -- a monstrous loss for the FDIC and BB&T's examination and publication of their "deal book" for the acquisition -- then became apparent and what I and a few others had been saying for more than two years at that time was vindicated as factually correct.

The problem is that this same dynamic and set of facts must be assumed to be in place at all of the existing large financial institutions and it is an utter impossibility for the FDIC to cover 35% losses against the balance sheet of even one large financial institution, say much less all of them in a cascade failure.

The politicians on both sides of the aisle are demagoguing Bernanke and The Fed -- on one side we have those claiming that Ben loaned out wild multiples of what was actually outstanding at any point in time (a lie) and on the other we have people claiming (including Bernanke himself) that Ben loaned only to sound institutions and that doing so "prevented a Depression" but that is a lie as well as there is absolutely no reason to believe that the claimed "asset values" on these balance sheets in any way reflects reality.  The so-called "aversion" of a Depression and chain-reaction collapse is due to nothing more than backstopping liars -- a temporary condition that amounts to doubling down every time you lose at the Blackjack table in the hope that you'll get good cards before you run out of money.

Unfortunately the housing market shows no signs of actually bottoming -- and it won't until we get back to much lower prices, perhaps as low as 1x annual incomes on an average basis.  The collapse of the tax base on a municipal and state basis along with the lies on these balance sheets will eventually be exposed.  We have built a debt pyramid that requires ever-increasing amounts of debt to keep the balls in the air but the ability to service more new debt has been exhausted. 

This is not supposition -- it is a fact that cannot be argued against as we reached the point in 2007 where more than $6 in new debt was being put into the economy for every $1 of "growth"; returning to this state of affairs is mathematically impossible and attempting to evade the inevitable consequences futile.

For four and a half years I have pointed this out and have called for the truth to be exposed and the results accepted.  Our government had to shrink by some 20% in 2007 in order to accomplish this, along with dealing with the resolution of the large financial institutions in the United States. Instead of doing so we have "doubled down" on deficit spending and lies on balance sheets, and people like Bernanke and Paulson have repeatedly claimed that their actions have "avoided" a Depression.  Today, four years into the lie parade, we have now managed to pile up a need to shrink the size of government by half to restore balance and that required shrinkage grows each and every day that we refuse to accept that which must occur.

Unfortunately for those who argue otherwise there have been repeated examples in actual realized bank failures that have validated my position -- that these balance sheets are lies and that the firms involved are all deeply underwater, remaining operational only through intentional and willful aversion of lawfully-required regulatory oversight.

I'm no fan of Bernanke and in fact have plenty of ugly things to say about him in this regard, but we do nobody any good in attacking him on a false premise.  Go after him on the actual sins he has committed and the intentional and willful lies of regulators and executives -- there's plenty of "red meat" there and on that foundation you will find solid support in both history and fact.