cloud_zhou - 2008/10/9 15:13:00
Do You Know How the Fed Is Managing Your Money?
By Bud Conrad
While the world concentrates on the drama surrounding the Treasury's request for a multi-year $700 billion bailout, the latest iteration starting with an installment of $250 billion, they are missing a far more important move to debase our dollar being undertaken the Fed. Specifically, in the two weeks ending October 1, 2008, the Fed added another $502 billion of new liquidity to the banking system. This infusion of over half a trillion dollars is extremely important as it is dollar debasement writ large. And yet, almost no mention of it is being made by politicians and the media alike.
THe Fed Added $502B in Last 2 Weeks!
The Fed is planning to do even more: on September 29 it made the following announcement:
Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmark's Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.
http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm
As a result of those moves, 1) the TAF will rise to $300 billion from the existing $150 billion; 2) two times the $150 billion will add another $300 billion over the year-end. The swaps had already been issued at the amazing level of $290 billion, and I am just amazed that they plan to provide $620 billion.
The Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) was announced September 19, which allows money market funds to borrow at low rates to provide liquidity to the asset-backed commercial paper market.
In total, these programs don't seem to have worked. Despite the massive liquidity intervention with promises of more, the fear assigned to second-tier commercial paper remains high, with the rate staying at the extreme level of the last two weeks:
Rate Stayed High Despite Massive Liquidity
The conclusion is that while the Congress and public are fiercely debating the $700 billion Paulson plan to turn the U.S. Government into a giant investment bank, buying toxic waste with the proceeds of Treasury borrowing, the Fed is already massively pouring gasoline on the fire with its multi-pronged paradigm shift from lender of last resort for commercial banks, to market manipulator and guarantor of a wide range of financial institutions. This can only lead to dollar debasement and loss of trust in the U.S. financial system.
Call Us Utopians... or Free Marketers
[Ed. Note: I began writing this early on the morning of Friday, October 3. As I was finishing up the edition, the House of Representatives passed the bailout bill. As I write, someone is, literally, hot-footing it over to the White House for signature... just in case anyone changes their minds. While that may make this discussion seem a bit out of date, simply file it away to drag out after the Treasury has burned through the latest round of cash and has returned to the trough for more. Our position won't have changed.]
As I write, the U.S. House of Representatives is, once again, preparing to vote on Paulson's bailout (more on that topic momentarily from our new man on the scene, Don Grove). In that we've received a number of emails asking what our position is on the bailout, I thought I'd set it down in writing.
First and foremost, we are of the opinion that the government should stop meddling in the markets. Instead, it should step aside and let the banks and other institutions fail. The housing bubble has to be resolved by prices falling to a point where buyers find them attractive. It won't be solved by competing with private lenders or declaring moratoriums on home foreclosure. In other words, the government should avoid, at all costs, the default mode of meddling, especially by using its fiat monetary powers to inflate the country out of this long-coming crisis.
Of course, the outcome might be that this downturn would be particularly deep – thanks to the scale of the market dislocations created by the "good works" of government, egged on by its many parasitical toadies from the last 50 years or so. But it wouldn't necessarily need to be prolonged, because people will know where they stand, and quickly.
But that position presupposes that the government would simultaneously take other actions to encourage wealth building, like lightening the tax load on everyone, reducing barriers to entry for businesses, fairly dramatically cutting size of government, and reducing the expensive business of empire building/maintenance (along with the wars that engenders). And, to assure that things never again run out of control, the Fed would be dismantled and the nation put back on a gold standard.
In short, if the nation is going to benefit from the medicine we would propose, then a paradigm shift in the standard operating procedure for the country is required. Fortunately, our "leaders" don't need to look very hard for a working model: a quick perusal of the very same principles that gave the United States the unprecedented economic kick-start that moved it from subsistence farming to the world's most powerful economy in just a bit over 100 years will do fine.
As none of that is going to happen, however, the following are far more likely scenarios, in my personal opinion:
Scenario A. The bailout passes, but only with everyone involved promising to increase regulation in order to avoid it happening again... and raising taxes to boot, based on a flawed rationale that this will help pay for the cost. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal (he'll come up with a phrase that evokes the same idea, but spun just different enough to be claimed as his own), and then the size of the government really ramps up. Inflation rages.
Scenario B. The bailout fails, the markets get slammed, the meltdown accelerates until the point that the increasingly desperate government passes Plan B, the net cost being more or less identical to Scenario A. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal, and then the government really ramps up. Inflation rages.
So, when you come right down to it, our position is correctly called utopian, or even delusional... because the odds of a voting majority of Americans waking up to the true nature of the problem and resolving themselves to taking their medicine, good and hard, and swearing off the government teat for good, are unlikely in the extreme.
Instead, to quote a succinct email I received yesterday from my dear partner and resident guru Doug Casey...
"Cockamamie schemes will proliferate from all quarters. The only solution is liquidation, total deregulation, and cutting back the government massively. But there's no way that's going to happen. The only question is which combination of harebrained schemes the government will embrace."
The Arabs have a saying that is quite apropos, "The dogs bark, but the caravan moves on."
This caravan is inexorably on its way to an inflationary catastrophe. Done barking, the dogs turn back to their calculations on ways to invest to take advantage.
[Ed. Note: Post-bailout approval, I think Donald's article below is still relevant as it looks at some of the more onerous provisions of the new bill. Another member of the Casey team just wrote in with the following message... "Bailout approved. Good-bye USA... Hello USSA, United Socialist State of America."]
Oink! Oink! For Shame!
By Don Grove, Casey Research Washington D.C. Correspondent
Have you been concerned about the BAILOUT? Like me, you may have completely misunderstood what this is about. Fortunately, our senators have set us straight with a 442-page tome that only a bureaucrat could love. We've come a long way from the modest 3-page draft statute that Hank Paulson brought to the Hill on September 20. This is pork barrel politics at its finest.
You may have thought this was just about bailing out banks. Like me, you may be surprised to learn what that entails. Among other things, it's about arrows – yes, arrows.
Not just any arrows. We're talking about favored tax treatment for "wooden arrows designed for use by children." Now for those who would protest that this important provision is just too costly during this time of global economic crisis, don't worry. The senators have sensibly clarified that the favored arrows are only those having a "shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine." See HR 1424 § 503 (attached and linked so you can search the PDF and find this comforting language for yourself). Obviously that leaves one very important question unanswered: How big are they? Well, "5/16 of an inch or less in diameter."
Is that all it takes to bail out a bank? Certainly not. It takes wool; yes, wool. I will admit that as I reveled in the House defeat of HR 3997 Monday, I had completely overlooked the critical importance of wool to the economic well-being of every American. Of course we're talking specifically about "fabrics of worsted wool" and "yarn of combed wool." HR 1424 § 325. It's also about rum, health care, economic development in American Samoa, bicycle commuters, Indians, recycling, and oil spills.
It was clear to the Senate that the House got it wrong. What can you expect from that unruly crowd? Unfortunately, Article I, § 7, clause 1 of the Constitution requires that "All Bills for raising Revenue shall originate in the House of Representatives." Bummer! What's the Senate to do – just stand by? Not! Fortunately, that same clause continues, "but the Senate may propose or concur with Amendments as on other Bills."
Now it just so happens that a handy little piece of legislation had already passed in the House, been sent over to the Senate for its approval, and had been languishing on the Senate's legislative calendar since March: HR 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007. Perfect. Everyone is in favor of mental health and against addiction. Let's roll it out and load it up. In one busy day, this obscure 45-page bill designed "to require equity in the provision of mental health and substance-related disorder benefits under group health plans" was magically transformed into an $800 billion vehicle to save the world – with something in it for everyone – and for only $100 billion more than the House bailout bill. Such a deal.
In times of great crisis, Rome would select a magister populi who answered to no one and was empowered to take whatever steps were necessary to alleviate the crisis. In his original September 20 bailout plan, Hank Paulson proposed that "ecisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Hey, Paulson's a smart guy. Letting him work out the details would have kept it simple – too simple. Instead, we now have a bailout plan that Congress can be proud of, and the secretary has been properly reined in, as has, hopefully, his yet unnamed successor.
We were assured that American taxpayers would probably get their money back and might even show a profit on this exercise. Meanwhile, just to be on the safe side, Paulson built in a little room to maneuver. His draft would have raised the national debt limit by providing "that Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000." The Senate, in its infinite wisdom, left that very important part of Paulson's proposal completely intact. See HR 1424 § 122. I think it's fair to say that the United States Government is technically incapable of saving (on our behalf or otherwise) or of ultimately paying off its debts. The statutory debt ceiling now stands at $10.615 trillion. See http://www.treasurydirect.gov/govt/charts/charts_debt.htm. Sounds to me like we will never see our $800 billion again.
Always the optimist.
Regards, Don
THe Fed Added $502B in Last 2 Weeks!
The Fed is planning to do even more: on September 29 it made the following announcement:
Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmark's Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.
http://www.federalreserve.gov/newsevents/press/monetary/20080929a.htm
As a result of those moves, 1) the TAF will rise to $300 billion from the existing $150 billion; 2) two times the $150 billion will add another $300 billion over the year-end. The swaps had already been issued at the amazing level of $290 billion, and I am just amazed that they plan to provide $620 billion.
The Asset Backed Commercial Paper (ABCP) Money Market Mutual Fund (MMMF) Liquidity Facility (AMLF) was announced September 19, which allows money market funds to borrow at low rates to provide liquidity to the asset-backed commercial paper market.
In total, these programs don't seem to have worked. Despite the massive liquidity intervention with promises of more, the fear assigned to second-tier commercial paper remains high, with the rate staying at the extreme level of the last two weeks:
Rate Stayed High Despite Massive Liquidity
The conclusion is that while the Congress and public are fiercely debating the $700 billion Paulson plan to turn the U.S. Government into a giant investment bank, buying toxic waste with the proceeds of Treasury borrowing, the Fed is already massively pouring gasoline on the fire with its multi-pronged paradigm shift from lender of last resort for commercial banks, to market manipulator and guarantor of a wide range of financial institutions. This can only lead to dollar debasement and loss of trust in the U.S. financial system.
Call Us Utopians... or Free Marketers
[Ed. Note: I began writing this early on the morning of Friday, October 3. As I was finishing up the edition, the House of Representatives passed the bailout bill. As I write, someone is, literally, hot-footing it over to the White House for signature... just in case anyone changes their minds. While that may make this discussion seem a bit out of date, simply file it away to drag out after the Treasury has burned through the latest round of cash and has returned to the trough for more. Our position won't have changed.]
As I write, the U.S. House of Representatives is, once again, preparing to vote on Paulson's bailout (more on that topic momentarily from our new man on the scene, Don Grove). In that we've received a number of emails asking what our position is on the bailout, I thought I'd set it down in writing.
First and foremost, we are of the opinion that the government should stop meddling in the markets. Instead, it should step aside and let the banks and other institutions fail. The housing bubble has to be resolved by prices falling to a point where buyers find them attractive. It won't be solved by competing with private lenders or declaring moratoriums on home foreclosure. In other words, the government should avoid, at all costs, the default mode of meddling, especially by using its fiat monetary powers to inflate the country out of this long-coming crisis.
Of course, the outcome might be that this downturn would be particularly deep – thanks to the scale of the market dislocations created by the "good works" of government, egged on by its many parasitical toadies from the last 50 years or so. But it wouldn't necessarily need to be prolonged, because people will know where they stand, and quickly.
But that position presupposes that the government would simultaneously take other actions to encourage wealth building, like lightening the tax load on everyone, reducing barriers to entry for businesses, fairly dramatically cutting size of government, and reducing the expensive business of empire building/maintenance (along with the wars that engenders). And, to assure that things never again run out of control, the Fed would be dismantled and the nation put back on a gold standard.
In short, if the nation is going to benefit from the medicine we would propose, then a paradigm shift in the standard operating procedure for the country is required. Fortunately, our "leaders" don't need to look very hard for a working model: a quick perusal of the very same principles that gave the United States the unprecedented economic kick-start that moved it from subsistence farming to the world's most powerful economy in just a bit over 100 years will do fine.
As none of that is going to happen, however, the following are far more likely scenarios, in my personal opinion:
Scenario A. The bailout passes, but only with everyone involved promising to increase regulation in order to avoid it happening again... and raising taxes to boot, based on a flawed rationale that this will help pay for the cost. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal (he'll come up with a phrase that evokes the same idea, but spun just different enough to be claimed as his own), and then the size of the government really ramps up. Inflation rages.
Scenario B. The bailout fails, the markets get slammed, the meltdown accelerates until the point that the increasingly desperate government passes Plan B, the net cost being more or less identical to Scenario A. Meanwhile, behind the scenes, the Fed and FDIC continue to bail out like crazy. Obama gets elected and announces a New Deal, and then the government really ramps up. Inflation rages.
So, when you come right down to it, our position is correctly called utopian, or even delusional... because the odds of a voting majority of Americans waking up to the true nature of the problem and resolving themselves to taking their medicine, good and hard, and swearing off the government teat for good, are unlikely in the extreme.
Instead, to quote a succinct email I received yesterday from my dear partner and resident guru Doug Casey...
"Cockamamie schemes will proliferate from all quarters. The only solution is liquidation, total deregulation, and cutting back the government massively. But there's no way that's going to happen. The only question is which combination of harebrained schemes the government will embrace."
The Arabs have a saying that is quite apropos, "The dogs bark, but the caravan moves on."
This caravan is inexorably on its way to an inflationary catastrophe. Done barking, the dogs turn back to their calculations on ways to invest to take advantage.
[Ed. Note: Post-bailout approval, I think Donald's article below is still relevant as it looks at some of the more onerous provisions of the new bill. Another member of the Casey team just wrote in with the following message... "Bailout approved. Good-bye USA... Hello USSA, United Socialist State of America."]
Oink! Oink! For Shame!
By Don Grove, Casey Research Washington D.C. Correspondent
Have you been concerned about the BAILOUT? Like me, you may have completely misunderstood what this is about. Fortunately, our senators have set us straight with a 442-page tome that only a bureaucrat could love. We've come a long way from the modest 3-page draft statute that Hank Paulson brought to the Hill on September 20. This is pork barrel politics at its finest.
You may have thought this was just about bailing out banks. Like me, you may be surprised to learn what that entails. Among other things, it's about arrows – yes, arrows.
Not just any arrows. We're talking about favored tax treatment for "wooden arrows designed for use by children." Now for those who would protest that this important provision is just too costly during this time of global economic crisis, don't worry. The senators have sensibly clarified that the favored arrows are only those having a "shaft consisting of all natural wood with no laminations or artificial means of enhancing the spine." See HR 1424 § 503 (attached and linked so you can search the PDF and find this comforting language for yourself). Obviously that leaves one very important question unanswered: How big are they? Well, "5/16 of an inch or less in diameter."
Is that all it takes to bail out a bank? Certainly not. It takes wool; yes, wool. I will admit that as I reveled in the House defeat of HR 3997 Monday, I had completely overlooked the critical importance of wool to the economic well-being of every American. Of course we're talking specifically about "fabrics of worsted wool" and "yarn of combed wool." HR 1424 § 325. It's also about rum, health care, economic development in American Samoa, bicycle commuters, Indians, recycling, and oil spills.
It was clear to the Senate that the House got it wrong. What can you expect from that unruly crowd? Unfortunately, Article I, § 7, clause 1 of the Constitution requires that "All Bills for raising Revenue shall originate in the House of Representatives." Bummer! What's the Senate to do – just stand by? Not! Fortunately, that same clause continues, "but the Senate may propose or concur with Amendments as on other Bills."
Now it just so happens that a handy little piece of legislation had already passed in the House, been sent over to the Senate for its approval, and had been languishing on the Senate's legislative calendar since March: HR 1424, the Paul Wellstone Mental Health and Addiction Equity Act of 2007. Perfect. Everyone is in favor of mental health and against addiction. Let's roll it out and load it up. In one busy day, this obscure 45-page bill designed "to require equity in the provision of mental health and substance-related disorder benefits under group health plans" was magically transformed into an $800 billion vehicle to save the world – with something in it for everyone – and for only $100 billion more than the House bailout bill. Such a deal.
In times of great crisis, Rome would select a magister populi who answered to no one and was empowered to take whatever steps were necessary to alleviate the crisis. In his original September 20 bailout plan, Hank Paulson proposed that "ecisions by the [Treasury] Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency." Hey, Paulson's a smart guy. Letting him work out the details would have kept it simple – too simple. Instead, we now have a bailout plan that Congress can be proud of, and the secretary has been properly reined in, as has, hopefully, his yet unnamed successor.
We were assured that American taxpayers would probably get their money back and might even show a profit on this exercise. Meanwhile, just to be on the safe side, Paulson built in a little room to maneuver. His draft would have raised the national debt limit by providing "that Subsection (b) of section 3101 of title 31, United States Code, is amended by striking out the dollar limitation contained in such subsection and inserting in lieu thereof $11,315,000,000,000." The Senate, in its infinite wisdom, left that very important part of Paulson's proposal completely intact. See HR 1424 § 122. I think it's fair to say that the United States Government is technically incapable of saving (on our behalf or otherwise) or of ultimately paying off its debts. The statutory debt ceiling now stands at $10.615 trillion. See http://www.treasurydirect.gov/govt/charts/charts_debt.htm. Sounds to me like we will never see our $800 billion again.
Always the optimist.
Regards, Don