Fed Hubris On Display: Fisher
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2009-09-28 08:32 by Karl Denninger
in Federal Reserve Ignore this thread
Fed Hubris On Display: Fisher

This sort of hubris is almost beyond belief:

But what B-movie writer could have conjured up this scary scenarioToo Big To Fail (TBTF) banks as the Blob that ate monetary policy and crippled the global economy? That's just about what we've seen in the financial crisis that began in 2007.

He then goes on to try to plead "Fed as victim" with:

Obstructions in the monetary-policy channels worsened a recession that has proven to be longer and, by many measures, more painful than any post-World War II slump. With its conventional policy tools blocked, the Fed has resorted to unprecedented measures over the past two years, opening new channels to bypass the blocked ones and restore the economy's credit flows.

That is a damned lie.

The Fed hasn't managed to establish "routes around" the blockage at all - they have instead supplanted normal credit flows, and in fact have done so through opacity and intentional hiding of losses. 

What's the mark-to-market loss on the Fannie and Freddie paper (which I argue The Fed doesn't even have a legal right to purchase, by the way) in their portfolio?  Maiden Lane I-III?  Who knows!  Taking down nearly 50% of net issuance of Treasuries?  Wow, that's a real effective "bypass", right?

Uh, no.  Anyone can drive the price of something up by bidding for more of it.  But Treasuries were never the problem and credit card interest rates, along with virtually all over real spreads in the real economy, remain outrageously high.

Fisher claims this is a "bad thing" but in fact it is not, for The Fed has in fact ran a Ponzi Economy for the last 30 years, as I have repeatedly documented.  Now, having come to the end of the rope they wove themselves they're upset that the Ponzi Game has run out:

Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.

See how all that trash got there?  How the "TBTF" banks wound up with it on their balance sheets? 

It was not an accident - it was an intentional, willful policy of The Federal Reserve, of which Fisher is a part!

Without junk borrowers you don't have trash masquerading as real loans!  This was no "accident" of history or some sort of "hoodwink" game being pulled on The Fed - quite to the contrary.

The Fed was not only complicit in the scam it was a chief architect - one without which the mess simply could not have happened in the first place.  It was logistically and operationally impossible for these banks to become "Blobs" without the active conspiracy and fellowship of The Federal Reserve.

Today The Fed continues in this role.  It has not forced banks to come clean, it has not forced regulatory reform and in fact has obstructed it, it continues to take garbage for "assets" and purchases same, and it has resisted FOIAs intended to discover the truth.  It argues that we should "trust The Fed" when in fact there is a nearly-unbroken 28 year history of driving the economy closer and closer to the cliff of insolvency by maintaining an interest rate environment that is low enough that debt grows faster than GDP in the economy as a whole. 

This is by definition a destabilizing condition - the mathematics are facts and not subject to argument or dispute, nor is the simple graph that I have presented more than once showing the destabilization:

Again, this chart is simple: Whenever the Ponzi Finance Indicator is negative, the economy is becoming less stable in regard to debt and output - that is, the "coverage" of a given dollar of debt with a given dollar of GDP is shrinking.

When the ratio is positive then coverage is improving.

It is that simple - if the ratio is negative than the market is supporting the use of credit not for productive purposes but rather for pulling forward demand - that is, to finance consumption.  This, if carried on for long enough, will inevitably lead to the inability to make the payments and insolvency.  This is a mathematical fact, not supposition.

As a result it is axiomatic that when this indicator is negative it is essential that liquidity be withdrawn (and rates forced to rise as a consequence) until this destructive use of credit ceases - and the ratio turns positive.  A slightly-positive ratio is desirable over long periods of time - this provides an increasing cushion of debt-carrying capacity, allowing for The Fed to utilize monetary policy as a means of compensation for recession.

But The Fed has done no such thing.  It has consistently run a negative ratio on purpose for the last 30 years and in fact has cooperated with the banking industry to loosen standards so as to cause real market interest rates to fall precipitously on a risk-adjusted basis.  This in turn has led to a monstrous credit-driven spike in consumption, which looks good in the short term in the GDP numbers but in fact is disastrous when not backed by productive output of our citizens.  Pushing paper isn't production - you must mine, manufacture or grow something to actually produce, and yet we have become a "service economy" where most of the manufacturing and too much of the mining is now done in other nations - where labor is 20 cents/day.

The illusionist game of covering up our own pending insolvencies by borrowing against faux "wealth" from phantom price appreciation in our houses has now come to an end.  The emperor Bernanke (and Greenspan before him) has been found standing butt-naked behind the curtain pulling the levers but in fact producing nothing other than smoke and obfuscation, not wisdom.

It is time to stop coddling an institution that has wantonly and intentionally participated in the looting of America through active conspiracy with the banksters who wrote knowingly-bad paper and spread it all over the world.  This bad debt must be forced from the system and if this means that The Fed must go down in history as yet another "Bank of The United States", then so be it.