Federal Reserve

It appears that Ben Bernanke has his knickers in a bit of a bind this morning....

For many Americans, the financial crisis, and the recession it spawned, have been devastating -- jobs, homes, savings lost. Understandably, many people are calling for change. Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

That's correct Ben.  Indeed, the only people who aren't calling for change are those who have abused their power to loot, pillage, and violate Americans over the last thirty years or so.  They're quite content with how things are now, and indeed, have gone so far as to threaten Congress with events that will lead to martial law if they don't get their way.

There is some history behind this, is there not?

The American Bankers Association secretary James Buel expressed the bankers attitude well in a letter to fellow members of the association. He wrote: "It is advisable to do all in your power to sustain such prominent daily and weekly newspapers, especially the Agricultural and Religious Press, as will oppose the greenback issue of paper money and that you will also withhold patronage from all applicants who are not willing to oppose the government issue of money. To repeal the Act creating bank notes, or to restore to circulation the government issue of money will be to provide the people with money and will therefore seriously affect our individual profits as bankers and lenders. See your congressman at once and engage him to support our interest that we may control legislation."

That would be 1890 Mr. Bernanke.  More than 100 years ago.  Once a viper, always a viper.

I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers.

You should not have bank regulatory powers.  The reason is simple: You have abused them and willfully ignored the abuses served upon the people, specifically:

• The marketing of trash securities with alleged "AAA" ratings that you either knew or should have known were backed by no ability to repay on the original terms - indeed, the only hope of payment was the continued appreciation of property values.
  
  
• The abusive practices of banks with regards to overdraft fees and costs - fees and charges that amount to the imposition of interest rates of hundreds of percent on terms that customers not only did not opt into but could not opt out of.  This has generated more than $30 billion in illicit profits in the last year alone.  Your belated half-hearted actions in this regard in the last two months come only after decades of abuse and threats to impose that which you would not do as a regulator by statute.
  
  
• Likewise, the "rate jack" operations of credit card issuers has not come under attack or regulation by The Fed.  Indeed, it was once again Congress that had to step in after years of willful blindness on your part.
  
  
• Finally, The Fed refused to regulate various predatory lending practices - including but not limited to those targeting minorities and low-income persons in general.

In short, The Federal Reserve is one of the primary architects of the current economic malaise and indeed the credit bubble that led to it.  For you to come to The People of this Nation and ask for more power and authority, say much less keeping that which you have had but refused to exercise in the best interest of the people, is an outrage.

The Fed played a major part in arresting the crisis.

You "arrested" the crisis through lies, chicanery and papering over the truth of insolvency.  Not one step has been taken by The Fed since the inception of the crisis to address the root causes of the collapse, which are:

• Excessive leverage - specifically, dodges and cheats on reserve ratios and Tier Capital, including but not limited to Sweep Accounts (first put in place by Greenspan), off-balance-sheet vehicles (Citibank alone has nearly a trillion dollars of alleged "assets" hidden in them) and advocacy of mark-to-myth rather than a strict standard of mark-to-market.
  
  
• Shifting of apparent risk via derivatives purchased and sold without proof of ability to pay in the event of default.  This was the proximate cause of the near-collapse of virtually all of the major banks in this country.  While you did not have the authority to prohibit AIG (and others) from transacting in these instruments without sufficient capital to pay dollar-for-dollar of exposure, you did have the authority to prevent banks under your regulatory umbrella from transacting in them and counting them as valid "hedges" against other positions.  You willfully and intentionally failed to do so, and still are willfully and intentionally failing to exercise your existing regulatory power to demand that each and every derivative be either with a counterparty that is proven to be able to pay or is disregarded as being "money good" by the bank under your jurisdiction.

In short The Federal Reserve has willfully and intentionally allowed the seeds of this crisis to be sown and grown while blithely reclining in somnescence,  smug in the belief that it will be able to paper over any failures by shifting the cost thereof to the citizens of The United States.

The People have (rightly so) said "no f%#$ing way!" and are insisting that this sort of willful blindness and open conspiracy to defraud the public be stopped.

Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is "too big to fail" -- while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

No it won't.  Not without real capital constraints and a demand that lending only happens in a sound, secure, and collateralized environment. 

Indeed, had The Federal Reserve exercised its already existing authority to demand that banks never lend out more unsecured than they have in "owner's capital" - that is, the total amount of bond and stockholder equity - there would have been no "systemic risk" or "crisis."  Instead those who had done imprudent things would have simply gone bankrupt, as businesses do each and every day, but the banking system as a whole would have been just fine.

But The Fed didn't do that, because forcing Wall Street and other big banking interests to live within their capital would mean they would make less money when times were good.

Leverage multiplies both risk and reward.  There is nothing wrong with using it, provided that the risk you take is your own - that is, it entirely belongs to the owners of the firm (the aforementioned stock and bondholders.)  But when you allow leverage to extend beyond a firm's capital you force the risk on to other, non-affiliated and non-consenting parties.

This is an outrage, and yet it is part and parcel of The Fed's mantra for the previous twenty years or more.  We have seen repeated instances of this, beginning with LTCM, extending into the Latin American and Asian debt crises, and then again into the Tech Wreck in 2000.  Time and time again the solution has been to reduce the margins between systemic insolvency and operating leverage.

This time you went too far and the system failed.  Rather than admit this, you now come to the people of this nation and demand even more control, after proving that you're a financial arsonist with both a big can of gasoline and an insatiable smoking habit.

We the people must say "no."

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking.

No you haven't.  The former 14:1 leverage limit on investment banks, lifted in 2004 at the behest of Henry Paulson, has not been re-imposed.  You have not removed the Sweep Account exception put in place by Alan Greenspan.  You have not demanded that all derivatives be cleared on a central exchange with a central counterparty, forcing nightly mark-to-market and posting of margin, thereby removing the ability of banks to falsely claim hedges for which the counterparty cannot pay.  During the depths of the crisis you even demanded (and got) the right to set the required reserve ratio for a bank to zero - that is, you demanded and got the right to allow banks to take on infinite leverage.  This was buried in the EESA/TARP legislation and I, along with just a handful of others, noticed it. 

All of this you could have already taken care of under your existing authorities, or you could do all of this tomorrow - but you have done none of it, nor have you pledged to do any of it in the future as a condition of your continued existence as a banking regulator.

In short you are a bald-faced liar.

There is a strong case for a continued role for the Federal Reserve in bank supervision. Because of our role in making monetary policy, the Fed brings unparalleled economic and financial expertise to its oversight of banks, as demonstrated by the success of the stress tests.

The Fed's statements, including yours, demonstrate that you have absolutely no clue as to the path of the economy.  In the months and years leading up to this crisis you repeatedly proclaimed that "subprime is contained", that "we will not slip into recession" and the biggest whopper of all, that "house price appreciation reflects strong demand and sound economic fundamentals."  None of this was true.  Indeed, you are a walking contrary indicator - whatever you pronounce the market would be wise to turn on its ear in terms of actual expectations for the future.

I made most of these points in April of 2008 - but of course you won't pay attention to anyone who gets it right, yes Ben?  Nor will you answer those critics, except through Goebbels-style repetition of bald-faced lies.

Or should you read my August 2008 missive in which I cited specifics:

Just like you said "subprime is contained"? (3/07)

Or "we do not expect spillovers from the subprime markets to the rest of the economy or to the financial system"? (5/07)

Or "monetary and fiscal policies are in train that should support a return to growth in the second half of this year"? (4/08)

Or "our baseline forecast is for moderating inflation"? (7/06)

Or ".... expect energy and other commodity prices to flatten out"? (7/07, right before the insane run in these prices began!)

Or if you prefer, you can read about them right here:

Chairman Bernanke before the Congressional Joint Economic Committee on March 28th 2007, just a few days later: "Although the turmoil in the subprime mortgage market has created severe financial problems for many individuals and families, the implications of these developments for the housing market as a whole are less clear. The ongoing tightening of lending standards, although an appropriate market response, will reduce somewhat the effective demand for housing, and foreclosed properties will add to the inventories of unsold homes. At this juncture, however, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. In particular, mortgages to prime borrowers and fixed-rate mortgages to all classes of borrowers continue to perform well, with low rates of delinquency."

Chairman Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, May 17th, 2007: "We do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system."

Chairman Ben S. Bernanke speech to the 2007 International Monetary Conference, Cape Town, South Africa, June 5th: "The troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system."

Chairman Bernanke to Committee on Banking, Housing, and Urban Affairs, U.S. Senate, April 3rd, 2008: "Clearly, the U.S. economy is going through a very difficult period. But among the great strengths of our economy is its ability to adapt and to respond to diverse challenges. Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year."

Is it possible to be more wrong Mr. Bernanke?  I think not.

Of course, the ultimate goal of all our efforts is to restore and sustain economic prosperity. To support economic growth, the Fed has cut interest rates aggressively and provided further stimulus through lending and asset-purchase programs.

Asset purchase programs.... do they have to be lawful Mr. Bernanke?  As I have repeatedly pointed out you have very limited authority to purchase assets and yet you act like those limits don't exist.  Specifically, Fannie and Freddie both explicitly disclaim the "full faith and credit guarantee" required under Section 14 of The Federal Reserve Act for you to buy their MBS and debt - yet you have and are willfully ignoring that requirement.

But all of this, Mr. Bernanke, belies the underlying problem - that is, mathematics.  The "Ponzi Finance Indicator" tells you (and everyone else who cares to look) exactly what is and has been going on:

This is the underlying issue you refuse to face, because doing so means repudiating decades of bad monetary policy and taking the inevitable hit to your reputation, along with that of The Fed, that would come from doing so.  It also would mean accepting an even deeper recession than we are in now - even a Depression.

But if we do not - and you do not - we will follow the path of Japan, which is staring straight down the barrel of government monetary failure.  Not today, but tomorrow for certain.

The reality of our situation is quite stark.  You cannot expand credit faster than actual GDP - that is, output.  Yet GDP is manipulated and falsely reported, with plenty of double-counting.  It thus is in fact presented as a much-more rosy figure than reflects reality.

But even with this distortion, credit is growing faster, and has been since 1953.  The "spread" has been, on average, about 3%.  And as you can see from the chart above, over the last 30 years it has gotten much worse.

The ultimate issue is that as debt grows faster than output the available money to service debt contracts.  That is, an ever-larger portion of gross output must be paid in debt service costs. 

If an attempt is made to prevent defaults, as you and Greenspan have done, you are forced to drive interest rates lower.  This is inherently backward - as one's debt-to-income ratio rises, the demanded interest rate should rise, not fall, as the risk of non-payment increases.

By intentionally tampering with the relationship between credit risk and interest rates the margin between current operating leverage and insolvency narrows.  Eventually you reach a zero interest rate.

But with a lower interest rate leverage rises exponentially.  At a 10% interest rate the maximum leverage possible is 10:1.  At 1% it is 100:1.  At 0% you are attempting to divide by zero.

This forces you into "extraordinary" measures.  But those are a chimera as well.  Dividing by zero is impossible no matter how you try to disguise it, and yet that is what you, and Treasury, are doing.

The simple fact of the matter is that debt service ratios became unsustainable as a direct consequence of your and your predecessor's willful blindness and outrageous conduct.  You don't want to admit this, because once again doing so means admitting that you have willfully ignored the math for more than a decade, but it is nonetheless true.

You cannot make a bad debt good by hiding it.  Losses happen when bad loans are made, not when they're recognized.  There is no escape from this fundamental reality of banking, and you know it.

Only by forcing the bad debt into the open and defaulting it can we clear the excessive leverage and cause debt-service ratios to fall back to sustainable levels.  The proper way to do this is to let the market set interest rates based on risk, rather than tampering with liquidity as you have done, and let the market sort out the failures.

Yes, Ben, I recognize that you face a "Hobson's Choice."  But it is one of your own making, and the lesser of the evils is to take the damage now while our government's credit is still strong enough to withstand the shock.

Japan took the other path, and they now have a real risk of an actual sovereign collapse.  We are following them down the same road, and there is no evidence that you, or other policymakers, recognize not just risk but the mathematical inevitability of where that road leads.

It is time to stop bloviating and dissembling Ben.  Our nation needs leadership and truth, not obfuscation and lies.  This is not a matter of political will and desire.  Mathematics bend to no one - not even Caesar, and should we refuse to acknowledge how and why we're here, along with taking concrete steps to address it, we shall discover that attempting to divide by zero will have disastrous consequences for our economic, monetary and political systems.

On what basis do you come before The Senate with this request?

We continue to see the alleged goal of "sustainable economic growth in an environment of price stability" in your Fedspeak, but the fact is that The Fed has never met that metric - not now, not ever.  Specifically:

"All money is debt" in modern monetary systems.  That is, it is borrowed into existence.  Since 1953 outstanding debt in the system has grown at a 8.78% compound annual rate, a 7.91% rate since 1990 and at an 8.50% rate since 2000.  Since you took office the rate has been 8.905%, the highest recorded of those four measurements.  Not only has The Fed failed to maintain price stability the instability has risen during your tenure - significantly.

How can you make a claim to adherence to your mandate when The Fed has in fact promoted and operated a monetary system that for the last fifty years has maintained a credit growth rate in excess of GDP growth, typically by 2-3%?  I present the following graphical representation of the mathematically-inevitable outcome of such a policy.  Since debt must be serviced and paid down with output, promotion and maintenance of such a policy will, with mathematical certainty, result in monetary system failure given a sufficient period of time.

Please explain why The Senate should confirm you when your policy, along with that of all previous Fed Chairmen, has been to permit and foster growth in credit that exceeds GDP - a policy that must, mathematically, eventually lead to monetary and fiscal collapse?

You claimed in a June 5th of 2007 speech that: "However, fundamental factors--including solid growth in incomes and relatively low mortgage rates--should ultimately support the demand for housing, and at this point, the troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system." 

The facts, however, bear out that you either knew or should have known more than a year earlier that Goldman Sachs, among others, was issuing securitizations with "mortgages" that, on dollar value:

• 72.21% were taken for cash-out refinances and 12.28% were to refinance existing loans.  Only 15.52% of the principal balance was taken out to BUY a house.
• Of that 72.21% balance, the AVERAGE FICO of the person taking the cash-out refinance was 604 (!) - the lowest average of all categories.  (If that isn't special I don't know what it is - people with severely-impaired credit attempting to keep their head above water by cashing out alleged "equity" in their homes at usurious interest rates!)
• The vast majority of the loans had a lifetime maximum rate of 15% or higher, with 26% having a cap OVER 16%.  This in a time when "conventional" financing was at half that interest rate.  If that's not hard evidence of predatory behavior, what is?
• 46.85% of the principal balance was stated documentation.  That is, no verification of income or assets.

In other words, these were "debt-pyramid" loans being taken out by borrowers to either cash out of their homes to fund their lifestyles, were utterly impossible to be paid as agreed, or both.  A year later, FRBNY published a research paper on this topic in which your position as expressed less than a year prior was shown to be fallacious.

Explain the discrepancy between your statement and what primary dealers, whom you have supervisory authority over via the NY Fed Desk (indirectly), were and had been issuing for more than a year as of mid-2007.

On May 31st 2003 you said while speaking in Tokyo: One might argue that the legal objective of price stability should require not only a commitment to stabilize prices in the future but also a policy of actively reflating the economy, in order to restore the price level that prevailed prior to the prolonged period of deflation.  You went on to explain that you believed there was a mandate to recover not only bubble-produced previous asset prices but also the imputed additional inflation that "would have happened" over the intervening time period.

The US Federal Reserve has such a mandate.  Please clarify and extend your remark, particularly in the case where the prior inflated value of assets that has collapsed, in this case, specifically, houses and commercial Real Estate, were a direct and proximate consequence of both unsound and even fraudulent lending practices, forcing prices dramatically beyond equilibrium levels as a consequence of the classic inflationary mechanism of "too much money (credit) chasing too few goods."

This is particularly topical to the present circumstance given that the context of your remarks was provided with the backdrop of Japanese monetary policy.  Their nation (similar to ours) suffered a real estate valuation collapse when their real estate asset bubble popped - a bubble that, like our asset bubble, was generated as a consequence of ridiculously-loose lending standards and speculation.

Indeed, given the above question, where it becomes clear that the alleged "pre-bubble-bursting" price level was achieved as a consequence of creating a credit bubble of unimaginable size, fostered over the space of more than fifty years, it is clear that the claim of policy you made in that speech of 2003 would be in fact a commitment to pursue a mathematically-impossible goal - and one that would lead to the destruction of the currency and possibly political system of the nation.

Please defend the propriety of your comments given these facts and explain both your current position and any current commitment to actions you intend to take in this regard.

In the most-recent Fed Minutes (3-4 November 2009) it was said:   Members noted the possibility that some negative side effects might result from the maintenance of very low short-term interest rates for an extended period, including the possibility that such a policy stance could lead to excessive risk-taking in financial markets or an unanchoring of inflation expectations. While members currently saw the likelihood of such effects as relatively low, they would remain alert to these risks.

Please square this statement with the following chart, showing the presence of a monstrous dollar "carry trade" - a trade only profitable in the presence of zero interest rates, where the dollar can be borrowed (by primary dealers and other large banking interests) at zero or near-zero rates:

The white line is the dollar on a relative basis, while the chart is of the S&P 500.  The correlation since June has been nearly 100%.  Not coincidentally, the carry first appeared within weeks after The Fed lowered short-term interest rates to zero.

The size of this "Carry Trade" is currently estimated at more than $500 billion outstanding.  During this time the dollar has lost more than 15% of its value against other major currencies - a direct devaluation of every American's purchasing power.  During this same time oil has more than doubled in price as have other essential commodities.

Historically, there has never been a carry trade that has unwound in an "orderly" fashion.  The Yen Carry unwind featured prominently last year in the stock and credit market crashes.  It is entirely reasonable to expect that when the dollar carry trade unwinds it will inflict direct economic loss of at least $50 billion, with 10 or even 100 times as much damage to the economy in knock-on effects from asset value destruction.  That the unwind will occur, and this damage will occur, is axiomatic - we can debate only timing, not the event itself, as a carry trade is an inherently unstable condition and is mathematically impossible to sustain on a permanent basis.  Further, the asset classes into which the carried funds flow (or spill over into) become bubble-like and inflated in value - claimed "value" that is in the fullness of time proved to be false.

Indeed, the little mini-meltdown over Thanksgiving may be the only warning that the market serves up before things get truly ugly.  How far will this little meltdown - or a big one if we refuse to heed it - go?  There's no good way to know, but this much I am absolutely certain of: the longer we continue to distort foreign exchange markets with zero interest rate games with the intention of fueling "carry trades" as a means of pumping asset values, the greater the risk of a catastrophic reversal.

On "as-reported" earnings the S&P 500's current 12-month trailing P/E stands at nearly 60.  Historical average P/Es run closer to 15.  Even with the disastrous 4th quarter of last year removed, the P/E is well over 20.

An increase in short-term interest rates to as little as 2% would make the carry trade unprofitable and halt it immediately, while remaining extremely accommodative in terms of monetary policy.  Yet The Fed continues to commit to "extraordinarily low rates for an extended period of time", intentionally fostering enormous distortions in the currency markets and risk assets.

Additionally, China has disclosed that it has taken as much as a $350 billion loss on its holdings since March, and believes it may take another $220 billion should the dollar fall a further 10%.  Under what possible scenario do you see China continuing to buy our debt when your actions, along with Treasury's, intentionally wipe out half a trillion dollars of value in the assets purchased from us?

Further, exactly how much "excessive risk-taking" do you need to see before you act when the current P/E on the S&P 500 is considerably higher than the market's P/E was when Alan Greenspan gave his famous "irrational exuberance" speech?

The US Federal Reserve has a "dual mandate" of maximum employment in an envornment of price stability.  As shown in the below chart, The Market Ticker Ponzi Finance Indicator, The Fed has in fact promoted a policy of intentional over-expansion of credit:

The Ponzi Finance Indicator is simply the arithmetic difference in percent change between the expansion of credit and expansion of GDP, both on a year-over-year basis to remove seasonal adjustments.

Due to the mathematical realities that govern the behavior of all compound functions (whether they be compound interest, compound growth, or compound debt accumulation) any time there is a difference in growth rates between two compound functions over time the larger will "run away" from the former.  This is governed by the immutable laws of mathematics.

When one maintains a negative divergence between the compound rate of debt growth and compound rate of GDP growth, as The United States has since 1953 on balance, and continually, with only one short single-year exception since 1981, the mathematical certainty of debt coverage insufficiency will occur. 

Due to the mathematical realities of monetary systems that are debt-based - that is, where "money" is borrowed into existence at interest, it is inevitable that debt-liquidation must periodically occur, bankrupting both borrowers and lenders.

Your actions, along with those of Greenspan before you, have been consistent with bankrupting borrowers who make imprudent decisions.  But you have consistently, along with Mr. Greenspan, tried to protect lenders who have made imprudent decisions.  This is not only unjust it is mathematically unsustainable and, if it continues, will, as a matter of mathematical certainty, lead to monetary (and likely political) collapse.  You simply must be held to account for your actions in this regard, given the mathematical realities that underlie all debt-based monetary systems.

I will not presume to debate the wisdom of a debt-based monetary system in this missive, since the subject of this Ticker is not whether The Federal Reserve should exist as an entity charged with the issuance and management of the nation's money supply.  That is a screed for another time.

Rather, this Ticker is focused on your performance as Chairman of said body, along with your performance as a member of the FOMC prior to your appointment.

As Chairman, it is my contention that you have an absolute obligation to the truth - a truth that is driven by mathematical facts, not the fancy of banksters who infest both Wall and "K" Streets, promoting knowing lies related to the sustainability of that which is mathematically impossible.

In that regard you, as with your predecessor, are in my opinion unfit to hold your position - or indeed any position - within The Federal Reserve, and The Senate must vote to NOT confirm you for a second term.

Heh Ben, how's that sphincter (pick which one) feel about now?

NEW YORK (Reuters) - Fannie Mae (FNM.N), shrunk its gross mortgage portfolio by an annual rate of about 28 percent in October and delinquencies on loans it guarantees rose sharply in September, the largest U.S. home funding company said on Tuesday.

The key in the story is that the single-family "serious" delinquency rate (that is, 90+ days behind - in the "forget it, they're hosed" bucket) is now 4.72% of the entire portfolio, where a year ago it was 1.72%.

That's 275% of the previous rate.

Where's the MBS portfolio going?  Fannie isn't running it down, you know.

Oh no - those MBS are going right onto The Federal Reserve's balance sheet through "outright purchases" - that is, monetization.

Unlike a loan, which is recourse and can be "put back", these can't.  They're owned by The Federal Reserve, which printed up new money (debasing the currency) to purchase an "asset" of questionable (or worse) quality.

The perversity of The Fed's "purchase" program is that it has dramatically boosted the price of these "securities", even as their quality has gone into the toilet.

The outcome of this should not have been in question, of course - you can always drive up the "price" of something by intentionally overpaying for some of that thing.  The wise owner of said "asset" will immediately sell it to you, of course, detecting that you are willing to overpay on purpose.

The perversity of such a "program", however, is that it destroys the market.  The claim is that such "quantitative easing" is in some way "supportive" of the market for these securities.  Nothing could be further from the truth - what has instead happened is that private demand has disappeared as The Fed has been paying more for them than the market price - and as a consequence anyone who might have been a buyer has immediately turned into a seller instead.  Worse, the cost of funding new securities has become unattractive for Fannie and Freddie. 

Net-on-net the risk of default is being transferred to you as The Fed, if they have taken in so-called "good securities" by intentionally overpaying for toilet paper their actions amount to nothing more than raw printing of money.

The dollar is reacting to this, along with the fact that the so-called "independent" Central Bank has effectively correlated its actions with Treasury, which instantly issued more than $1 trillion in new debt right into its "low interest rate" environment and "Quantitative Easing" program.

Reality is this:

The housing market's performance is not improving - it continues to deteriorate, with loan performance deteriorating, not stabilizing.

Virtually all of the Fannie/Freddie paper that is "Seriously Delinquent" will foreclose.  Nobody 90+ delinquent (statistically) cures - those are "hard" defaults that are either in foreclosure or will be in foreclosure.

The Fed will, by the end of the first quarter of 2010, own 20% or more of this paper - and it intentionally overpaid.  The losses will be real, they will be in the tens if not hundreds of billions of dollars, and you will eat it via devaluation of the currency and deterioration of your living standard - even if you were prudent.

There is no exit from this policy.  Should The Fed dump the MBS paper on the market the price would collapse.  Should they not and run it off the value will collapse.  Either way the losses are real and will be absorbed - by you.

"Independent" Central Bank eh?  Contemplate the wisdom of a so-called "independent" central bank having the right to levy a tax on all Americans - because that's what they're doing, in point of fact, to the tune of hundreds of billions of dollars.

Oh, and to Darrell Issa, who made the comment to a constituent when challenged that HR.3221 of 2008 provided a "full faith and credit" guarantee to Fannie and Freddie, thus making their MBS purchase-eligible by The Fed: That was a lie sir.

HR.3221 did no such thing.  It in fact authorized but did not require the purchase of MBS and Debt Instruments by Treasury, to wit (Sec 1117, P30)

As I noted on Blogtalk a couple of weeks ago, Representative Watt is doing his level best to derail the "Audit The Fed" bill and amendments introduced by Representatives Grayson and Paul.

Representative Watt's "alternative", however, doesn't open The Fed's books - it further snaps them shut!  It not only leaves all the existing restrictions against an audit in place and refuses to mandate audits it also places four new restrictions on any such audit activity.

The most outrageous new restriction is that an audit, under Watt's proposal, may not examine the loans or liquidity arrangements that The Fed enters into or the impact of those deals on the reserves, balance sheet or financial condition of either a Fed-regulated bank or The Federal Reserve itself.

It isn't hard to figure out why Watt would want such blanket secrecy.  One need only look at his heavily-gerrymandered district, which happens to contain the corporate headquarters of Bank of America.

This gives new meaning to "kneel before Zod."

The Dishonorable Representative Watt must resign - there have been ridiculous and outrageous claims made in the past, but any representation that his amendment would somehow "open the books of The Fed" is an outrageous lie, and further, it appears to be intentionally designed to protect one of the very "too big to fail" banks that likely has caused The Fed to get in trouble in the first place - Bank of America.

Does anyone remember my ranting at Paulson when he was talking about his "Bazooka"?  Here is what I said:

This joins the list of other "dead wrong" statements you've made, of which I am keeping a running copy and sent them around on the 19th of July. 

How many times do you get to be wrong as Treasury Secretary Hank before you resign in shame?

And now I must ask again - is that really a Bazooka in your pocket, or an empty launcher?  I'm not the only one that's curious you know; the bond market seems to think it smells like BS, and so does the stock market.

Fannie and Freddie collapsed, remember?

Paulson was proved - and rather quickly so - to be completely full of crap.

Bernanke's comments today may have just provoked a dollar catastrophe - a collapse move that may have just begun.  Witness this chart:

The market took about 10 minutes to discern that Bernanke's "concern" was BS, and now has pushed in the chips - "all in" - breaking key support below 75 - and still going.

The carry traders have redoubled their bets and obviously intend to force Bernanke to either put up or shut up.

The problem with Paulson's claim is that when the market called the bluff he wound up sticking the taxpayer for up to $400 billion, of which more than $100 billion has now been dissipated.

It appears the FX market intends to force Bernanke (and Geithner) to either defend the dollar or allow it to collapse.  The violence of this move and the concurrent "ramp job" that accompanied it in the S&P 500 makes clear a few points though.

• The "efficiency" of transmission between this move down and the move up in the stock market is lower than the previous moves have been, although the correlation remains intact.
  
  
• The FX markets will press this bet incessantly as they did when Geithner last mouthed the "strong dollar" mantra.

The Fannie and Freddie game wound up bankrupting both firms and forcing the government to bail them out.

Who is going to bail out the United States Government if and when the FX markets and carry traders cause a disorderly collapse in the dollar?

Just as with Paulson's idiocy I'll bet not one person in Congress or The Administration will stand up and put a sock in Bernanke, despite the fact that we are again seeing the "ALL IN!" game when the person doing it is holding 2-7 off-suit.

But this post, if Bernanke has indeed provoked a collapse of the dollar, is one I will be printing as a full-page advertisement in USA Today - if there still is a USA Today, or for that matter any other national newspaper to which one can freely insert material, in a couple of years.