Reason Foundation

What Twists Will We See from the FOMC Tomorrow?

Posted on June 19, 2012, 1:36pm | Victor Nava and Anthony Randazzo

Rumors are flying everywhere that the Fed is going to ease policy again after its meetings today and tomorrow. The Financial Times declared yesterday that "the doves are ready to act." And a report in Forbes suggests that more Fed easing is likely to come sooner rather than later, in the form of an extension of the Feds Operation Twist program. JP Morgan Chase and Barclays are also both expecting the FOMC will extend the $400 billion dollar (to this point) bond swap program known as Operation Twist.

These rumors are not terribly unexpected. Nor would Fed action tomorrow be shocking. The economy has been deteriorating this year steadily and financial markets have been tightening up. Chairman Bernanke has reiterated time and again this year that the Fed was willing to act if it needed to, but that they wanted to wait to see if their previous QE efforts could help recovery take hold. No such luck so far though.

More than two months ago Reason's James Groth predicted that rising yields in long-dated treasury bonds would likely lead to a new bond purchasing program or an extension of Operation Twist. It is looking like this is going to put more QE very much back in the cards—if not tomorrow then in coming months, as the global economy and U.S. economy are not going to hit an upswing soon. 

To date, 30-year US Treasury Bond yields have only gone down 9 basis points since the bond swap program began in October of 2011, and at many points during the programs original run 30-year US Treasury Bond yields were actually higher than before the program started. With economic conditions slowing (Barclays forecasts Q2 GDP to grow only 1.8% and May saw only 69,000 new jobs added) it's not surprising that this Fed would seek more easing.

One possible wrinkle, mentioned in the Forbes piece, in the program were it to be extended is that the Fed could move to purchasing more mortgage-backed securities and fewer treasuries (in order to limit the impact on the treasury market). If this turns out to be the case, you can add "a slowing of housing prices declining to normal levels" to the laundry list of Operation Twists negative side-effects.

The rest of the list (as illustrated by Dallas Federal Reserve Bank President Richard Fisher), first blogged about here:

1. "Embarking on an Operation Twist would provide an even greater incentive for the average citizen with savings to further hoard those savings for fear that the FOMC would be signaling the economy is in worse shape than they thought. They might view an Operation Twist as setting the stage for a new round of monetary accommodation-a QE3, if you will. Such a program was considered redundant by business operators given their surplus of undeployed cash holdings and bankers' already plentiful excess reserves. In addition, such a program might frighten consumers by further driving down the yields they earn on their savings and/or lead to long-term inflation that would erode the value of those savings;
2. The earning power of banks, both large and small, would come under additional pressure by suppressing the spread between what they can earn by lending at longer-term tenors and what they pay on the shorter-term deposits they take in;
3. Pension funds would have to reassess their potential returns, with the consequence that public and private direct-benefit plans would have to set aside greater reserves that might otherwise have gone to investments stimulating job creation;
4. Expanding the holdings of the Fed's book of longer-term debt would likely compound the complexity of future policy decisions. Perversely, the stronger the economy, the greater the losses the Fed would incur as interest rates rise in response and the prices of those longer-term holdings depreciate. The political incentive to hold rates down might then become stronger precisely when we want to initiate tighter monetary policy. This concern, of course, would be a good news/bad news issue: The good news is that it would stem from a stronger economy; the bad is that might hurt our maneuverability and, in doing so, might undermine confidence in the Fed to conduct policy independently."

Something that had not escaped some analysts is that the above discussion didn't factor in where inflation is at. As the FT shows in a chart, a number of inflation indicators are heading downward or hovering around 2 percent. However CPI has been on steady march up and hasn't slowed down since the middle of the first quarter of 2012. Concerns about economic and financial conditions could overshadow inflation fears at the FOMC meetings this week, but most are expecting some kind of action tomorrow. 

We'll have to wait for news tomorrow, but in the mean time, please ponder why since the "twist" dance went out of style 60 years ago, why this approach to monetary policy can't go out of style as well? 

Considering Causes of Recessions vs. Rates of Recessions

Posted on April 27, 2012, 3:14pm | Anthony Randazzo

High school economics wunderkind Evan Soltas put an interesting chart (see below) on his blog yesterday that The Atlantic's Matt O'Brien pointed out to me, asking for a libertarian response. I lightly and respectfully undertake an attempt below.

Evan writes that he pulled the chart together from FRED and NERB data showing that recessions have slowed down considerably since the 1850s. This is not incredibly new information—it is widely understood that since the 1930s that volatility is much more subdued than in the 19th century—though I had not seen the information presented like this before, to Evan's credit. 

(The chart was an embedded interactive file so I had to take a screengrab to show it here, but check out the original on Evan's blog here.)

By itself this chart doesn't tell you much until you start putting pieces of information on it to extrapolate as to the cause. For instance, Evan argues: 

In libertarian circles, the late 19th-century is seen as the pinnacle of growth and of laissez-faire and treated with according reverence. That story is not really true. Statistics which show unprecedented growth during the Gilded Age, I worry, are either imprecise, inaccurate, or worse, gamed according to their start- and end-points... It would be very possible that [GDP] grew quickly in between the frequent recessions, but the data do not support such a case: from 1800 to 1840, real GDP per capita grew at 0.4 percent annually; from 1840 to 1880, 1.44; from 1880 to 1920, 1.78; from 1920 to 1960, 1.68; from 1960 to 1978, 2.47.

I don't want to put words in Evan's mouth, but it appears the underlying assumption is that it was the creation of the Federal Reserve, victory of new Keynesian economic policy, Glass-Steagall, deposit insurance, and a less laissez-faire system that enabled the faster growth in the 20th century. Furthermore, I take an assumption that our present state of fewer recessions and GDP average growth of 2 percent over a multi-decade period is preferable. (I'm happy to be corrected if I am in error on these judgments.)

While I have not dug into this specific data myself for any extended period of time (and it appears there was a detailed attempt here anyway), there are a few things to consider in performing such economic analysis. To start, recessions are not ubiquitous events. They are not created equal. Their causes matter more than their numbers. For example, we might prefer five recessions that are six-to-eight months long scattered between 2002 and 2012, all caused by over investment in tech firms like we saw in the wake of the dot-com bubble's burst, to the boom from 2002 to 2007, followed by the 19 month recession, and then three-plus years of tepid economic growth. 

In the former scenario we are less likely to see recessions substantially impact household debt or long-term consumption trends. Spending would tighten up for a few months, balance sheets would be cleansed a bit, but the level of toxicity would not be so dramatic as to cause the losses we've experienced in the wake of our most recent bubble's bursting.

In the later scenario we have only 19 months of recession to deal with as opposed to as many as 40 months of recession to wrestle with. And we achieve much higher living standards for at least half of the time period. However, there is no inherent, objective measure that suggests this is better than the alternative scenario that I set up.

Nor is my alternative objectively better either. If the causes of those frequent recessions were bank runs that caused liquidity tightening and wide-spread bankruptcies as businesses failed to get access to credit to finance their payrolls, then we might not see quick bounce backs and the effects of those regular recessions could bleed into each other creating the environment Evan's data suggests for the middle part of the 19th century (which did include a devastating Civil War, by the way). 

All of this merely points out that the frequency of recessions is a relatively unimportant data point. It is the sources of such recessions. 

So to the second assumption, on the causes of the decreased volatility. This is a complex question. I pointed out the declining savings rate of the 1980s, 1990s, and 2000s earlier today on this blog and how this contributed to the economic boom years following the end of Stagflation and the Reagan recession. Perhaps if there were no technical advances to give us credit cards or if we were a less trusting society we would have had slower economic growth. Would this change have then discredited Reaganomics or influenced the way we view tax rate impact on GDP growth? Probably. 

The point here is to merely suggest that GDP growth rates as higher in the 20th century on average relative to the 19th century don't suggest much about the realities of the Gilded Age. What would the 20th century have been without the technical evolutions that gave us cars, planes, global telecommunication, and computing power? Back in 2008, this country would have given up a lot to get a 1.5 percent GDP growth rate. 

Evan concludes that his chart and argument shows "a very different picture of America, when you think about it. Frequent recessions, slow growth, little improvement in living standards, profound inequality -- all of this against what we have (had?) in the postwar era: fewer recessions, faster growth, faster improvement of living standards, less inequality."

On its face this is an efficiency argument for the central bank era vs. a supposed lassiez-faire era. The problem is that this assumes the desirability of a recession rate, speed of economic growth, and level of equality all divorced from their causes. That's not a leap of logic we should lightly undertake. 

The Fed As Source of Income Inequality

Posted on April 23, 2012, 2:24pm | Anthony Randazzo

We've noted before that income inequality is not inherently a bad thing—what matters is the source of the inequality. In last week's WSJ, hedge fund founder Mark Spitznagel points out one bad source creating artificial income disparagement... the Fed:

The Fed doesn't expand the money supply by uniformly dropping cash from helicopters over the hapless masses. Rather, it directs capital transfers to the largest banks (whether by overpaying them for their financial assets or by lending to them on the cheap), minimizes their borrowing costs, and lowers their reserve requirements. All of these actions result in immediate handouts to the financial elite first, with the hope that they will subsequently unleash this fresh capital onto the unsuspecting markets, raising demand and prices wherever they do.

The Fed, having gone on an unprecedented credit expansion spree, has benefited the recipients who were first in line at the trough: banks (imagine borrowing for free and then buying up assets that you know the Fed is aggressively buying with you) and those favored entities and individuals deemed most creditworthy. Flush with capital, these recipients have proceeded to bid up the prices of assets and resources, while everyone else has watched their purchasing power decline.

At some point, of course, the honey flow stops—but not before much malinvestment. Such malinvestment is precisely what we saw in the historic 1990s equity and subsequent real-estate bubbles (and what we're likely seeing again today in overheated credit and equity markets), culminating in painful liquidation.

The Fed is transferring immense wealth from the middle class to the most affluent, from the least privileged to the most privileged. This coercive redistribution has been a far more egregious source of disparity than the president's presumption of tax unfairness (if there is anything unfair about approximately half of a population paying zero income taxes) or deregulation.

See the full article here.

Sheila Bair on the Prowl, a Guide

Posted on April 16, 2012, 8:40am | Anthony Randazzo

My first thought when I read the soon-to-be infamous Sheila Bair op-ed in the Washington Post this weekend was to laugh out loud and share the $10 million-loan-for-everyone suggestion with the driver of the taxi I was traveling in through downtown D.C. My second thought was "damn, I wish I'd had written the case against ZIRP like that." 

In fact we have written similar arguments as the former FDIC chairwoman articulated her humorous and cutting commentary. But not in the tone that she was able to articulate, shining a light on what has truly become a farce: the Federal Reserve's free money passed out in bulk to Wall Street to "support" the financial system. The idea Bair proposes is completely crazy, but that is the point. She is just articulating what Fed policy is for the financial system, and it is no less crazy to be handing them billions in free loans. 

Here is a guide to understanding the Bair tongue-anchored-to-cheek op-ed. First she writes:

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them.

So why not let everyone participate? Under my plan, each American household could borrow $10 million from the Fed at zero interest. [...] Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Such a suggestion is usually overheard at one of D.C. well attended liquor and beer distributing establishments. Well, except for the bond trading part. The difference between professional investors and Americans suddenly power-ball-lottery-winner rich is the disciple to "order up a few trades" as she puts it later in the piece. Theoretically, if everyone just bought sovereign debt and lived off the interest we could avoid an inflation problem of all that new money chasing far too few widgets made by a rapidly declining labor force. But it is much more likely that all that money would flow into the economy, ruining creditors who are paid back to complete the deleveraging cycle, but unable to buy much with the now worthless cash that has been paid back to them (via Fed helicopter).

Bair begins to expose her point when suggesting how the "carry trade" could be accomplished for America's new denizens of wealth: 

The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

This is actually what financial institutions have been doing with all that Fed money. The bailout was supposed to shore up bank balance sheets so the failed institutions could lend. Quantitative easing was supposed to free up capital from assets and let the fresh money boost the economy. Zero interest rate policy (ZIRP) has long been declared necessary to encourage borrowing and keep housing prices propped up.

But all this has done is contribute to a limping, recoveryless recovery. As we predicted in Reason magazine two years ago, we've been going "sideways" for a while. And that is Bair's beef with the Fed.

She also has a barb to throw at Congress:

Of course, we will have to persuade Congress to pass a law authorizing all this Fed lending, but that shouldn’t be hard. Congress is really good at spending money, so long as lawmakers don’t have to come up with a way to pay for it. Just look at the way the Democrats agreed to extend the Bush tax cuts if the Republicans agreed to cut Social Security taxes and extend unemployment benefits. Who says bipartisanship is dead?

Fair point. When it comes to actually helping the economy, Congress goes AWOL. When it is time to score some political points, compromise abounds (under the cover of something substantive happening). Bair doesn't hold back from going after social issues either in the piece:

Because we will be making money in basically the same way as hedge fund managers, we should have to pay only 15 percent in taxes, just like they do. And since we will be earning money through investments, not work, we won’t have to pay Social Security taxes or Medicare premiums. That means no more money will go into these programs, but so what? No one will need them anymore, with all the cash we’ll be raking in thanks to our cheap loans from the Fed.

[...]

We can stop worrying about education, too. Who needs to understand the value of pi or the history of civilization when all you have to do to make a living is order up a few trades? Let the kids stay home with us. They can play video games while we pop bonbons and watch the soaps and talk shows. The liberals will love this plan because it reduces income inequality; the conservatives will love it because it promotes family time.

The frightening thing is that many of these attitudes are prevalent in American society even without the $10 million loans. 

The tax code is skewed. The answer is not to raise tax rates—the income tax system is a terrible way to tax a society and just slows down the economy—but that doesn't make the lower tax rates paid by wealthier segments of society any less damning. At the very least, the incentive structure of the tax code is set up to drive assets into many unsustainable things (like housing) and away from funding public liabilities (as Bair notes). 

Education is screwed up in America as well. Test scores are stagnant. High school graduation rates are sliding. Labor force mismatch issues are becoming an increasing concern. And it hasn't taken $10 million loans to end interest in math and history in many corners of America. 

So is Bair's solution viable? According to her, "This is the best American financial innovation since liar loans and pick-a-payment mortgages... Some may worry about inflation and long-term stability under my proposal. I say they lack faith in our country. So what if it cost 50 billion marks to mail a letter when the German central bank tried printing money to pay idle workers in 1923? That couldn't happen here. This is America." 

Touche. 

There will probably be more than a few out there who don't get the joke. But building on a pattern of loans without paper work to make everyone indebted to the Fed is not a serious policy proposal. Rather, her point is to channel the incredulous feelings of the readers into a criticism of the fact that the Fed does exactly this proposed idea, just with financial institutions instead of households. 

It is crazy and it has to stop. 

Discord in the Fed

Posted on April 12, 2012, 5:07pm | Anthony Randazzo

There is a bit of discord at the Fed. After Minneapolis Fed President Narayana Kocherlakota said earlier this week that the FOMC should consider raising interest rates later this year rather than maintain zero interest rate policy through 2014 (as is the current position of the Fed), vice chairwoman Janet Yellen remarked that ZIRP might actually need to be extended as far as 2015. The former San Francisco Fed President further commented in her speech at the Money Marketeers club of New York University that there has been "a significant shortfall in the overall amount of monetary policy stimulus since early 2009."

Then, at a meeting of the National Economics Club I was attending this afternoon, Philadelphia Fed President Charles Plosser note that when QE2 was launched in 2010 that unemployment was soaring and inflation was nill, and that because unemployment is falling and inflation is picking up that rather than talk about the need for QE3 we should be looking to tighten monetary policy.

After making this remark he backed off a bit and said he wasn't suggesting we should actually tighten monetary policy but rather just take it as a hypothetical response relative to the perceived need for QE3. 

Discord indeed.

At least the Federal Reserve appears to be about as conflicted as the blogosphere is on what to do and when to do it.

The Federal Reserve Signals No Further Easing…Until the Next Easing

Posted on April 4, 2012, 12:12pm | James Groth

Minutes for the latest Federal Open Market Committee (FOMC) meeting were released yesterday afternoon sending the stock market down and Treasury yields up largely due to the hawkish tone of the release. Committee participants noted stronger signs in labor markets and improvements to output as lacking necessity for further easing. Outspoken hawks, President Lacker being the only one, stated that the current degree of policy accommodation beyond this year would be “inappropriate.”

Yet despite the meeting’s tone, members’ hawkish comments and the securities markets’ reactions, we will most certainly be seeing continued accommodation and likely further easing before the year’s end.

Why?

The following two charts:

The first is a 5-year chart of Treasury Bonds:

The second is a 25-year chart of commodities prices:

Selling in long-dated Treasuries has pushed yields up to uncomfortable levels. Despite Bernanke purchasing more than $40 billion per month under Operation Twist, yields on the 30-year Treasury Bond have gone from 2.7 percent when Bernanke first commenced the unprecedented buying program to just over 3.4 percent in yesterday’s trade. They are expected to go much higher. As selling pressure persists, the Fed will likely purchase more to offset the rise in yields that has been persistent since last October either through extending Operation Twist or by announcing another round of bond purchases.

The one thing that would stop the Fed from such a move is inflation pressures. This is where the second chart comes into play.

Bernanke has remained consistent pointing to a slack labor market keeping wages down and so holding off inflation. Recently he has also been pointing to declines in commodity prices (highlighted) as a sign that the initial rise in commodity prices was indeed transitory as he predicted throughout its rise.

The combination of dangerously high Treasury yields (yes, when the Federal Debt is nearing $16 trillion, even 4.5 percent on a 30-year is unmanageable), a slack labor market, and “declining” commodity prices is reason enough to continue debasing our currency.

But take a look at the charts again. Much of the weakness in commodities, or rather the slight pullback in prices, can be attributed to lower demand from the Eurozone. Similarly, some of the money pumped into Treasuries over the last nine months has come from sales of Euro area debt and other Euro securities. Recent trends point to this continuing.

Despite nearly $1.5 trillion in loans from the European Central Bank (ECB) pumped into banks and institutions since December and more than $100 billion of additional direct purchases of sovereign debt over the year, European periphery debt is still pricing in downside risk. The ECB’s efforts have attracted significant interest from domestic buyers, but institutions abroad in the US and elsewhere have not participated, and many have sold into the backstopped Euro buyers. Without further accommodation from the ECB, bond auctions in Spain, Italy, and Portugal will continue to disappoint and push up yields (as can be seen following today’s Spanish auction). Couple this with negative growth over all of 2012 and most of 2013 in the Euro periphery, as projected by the IMF (more severe projections by most economists), and one has to conclude that commodity pressures will continue to ease.

That gives Bernanke the green light.

Unless US employers start kicking up wages, inflation will be kept in check. This is regardless of the trillions printed by the Fed and the trillions more in the pipeline. Wage increases won’t broadly occur until unemployment hits closer to 6 percent, and that isn’t in the cards for……..? So, as long as the current US and Euro picture persist, Bernanke will soon once again hit the gas. Both the Fed and the Treasury can ill-afford any rise in Treasury yields.

And they are rising.

Banks and institutional investors are exiting long-dated Treasuries in droves. Yields on the 30-year and 10-year Ts are 3.4 percent and 2.3 percent respectively. That is up from 2.7 percent and 1.7 percent last fall. European buyers are parking funds that would otherwise be allocated to Ts into German Bunds which have decoupled from US Ts following the massive injection from the ECB. German 30-year and 10-year paper trades at 2.5 percent and 1.8 percent respectively. This is a significant spread from Ts, which before the ECB easing used to trade with similar yields.

Bernanke knows that without buyers from European institutions, and with domestic institutional selling, current Treasury yields cannot be supported. The Eurozone weakness and the US slack labor market is a godsend to further accommodation.

Signaling aside, the Fed is not finished. They won’t be until either Congress forces their hand, or for some reason American employers decide to bump wages and share the wealth. At present, a larger percentage of corporate earnings are going towards profits than to wages than at any other period since 1947. That may help shareholders, and the wealthy, but it is short-term and does not improve the economy as a whole. Expect more easing, expect more wealth divide, and expect more central bank control of the “free market.”

Sound Money: Tide Laundry Soap Becoming Gold Standard in the Drug Trade

Posted on April 2, 2012, 7:57am | Anthony Randazzo

It is fitting that this story would surface around the same time that Bernanke has been harping about the gold standard. From TheDaily:

Law enforcement officials across the country are puzzled over a crime wave targeting an unlikely item: Tide laundry detergent. Theft of Tide detergent has become so rampant that authorities from New York to Oregon are keeping tabs on the soap spree, and some cities are setting up special task forces to stop it. And retailers like CVS are taking special security precautions to lock down the liquid. [...]

Tide has become a form of currency on the streets. The retail price is steadily high — roughly $10 to $20 a bottle — and it’s a staple in households across socioeconomic classes. Tide can go for $5 to $10 a bottle on the black market, authorities say. Enterprising laundry soap peddlers even resell bottles to stores. “There’s no serial numbers and it’s impossible to track,” said Detective Larry Patterson of the Somerset, Ky., Police Department, where authorities have seen a huge spike in Tide theft. “It’s the item to steal.”

So... what is up with this? Why Tide? Joseph Salerno picks up the story on the Christian Science Monitor blog:

This is just another confirmation of [Carl] Menger’s insight that the market responds to the absence of sound money by monetizing highly salable commodities. It is clear that Tide has emerged as a subsidiary local currency for black-market, especially drug, transactions — but for legal transactions in low-income areas as well. Indeed police report that Tide is being exchanged for heroin and methamphetamine and that drug dealers possess inventories of the commodity that they are also willing to sell. But why is laundry detergent being employed as money, and why Tide in particular?

Menger identified the qualities that a commodity must possess in order to evolve into a medium of exchange. Tide possesses most of these qualities in ample measure. For a commodity to emerge as money out of barter, it must be widely used, readily recognizable, and durable. It must also have a relatively high value-to-weight ratio so that it can be easily transported. Tide is the most popular brand of laundry detergent and is widely used by all socioeconomic groups. Tide also is easily recognized because of its Day-Glo orange logo. Laundry detergent can also be stored for long periods without loss of potency or quality. It is true that Tide is somewhat bulky and inconvenient to transport by hand in large quantities. But enough can be carried by hand or shopping cart for smaller transactions while large quantities can easily be transported and transferred using automobiles.

Sound money can be hard to come by.

John Taylor and the Need to Limit Fed Discretion

Posted on March 30, 2012, 2:27pm | James Groth

John Taylor, Stanford economist and creator of the nominal interest rate rule which bears his name, recently testified before the Joint Economic Committee discussing the merits of the newly introduced Sound Dollar Act. An op-ed published yesterday in the Wall Street Journal highlights his thoughts on the new legislation and on the necessity to curb ad-hoc monetary policy as currently practiced by the Federal Reserve under Ben Bernanke.

The Sound Dollar Act, if passed, would require the Federal Reserve to operate with a single mandate of long-term price stability instead of its current “dual mandate” which requires the Fed to promote price stability and maximum employment. The Act would also limit Federal Reserve purchases to Treasuries (except in emergencies), and give voting rights to all Federal Reserve district presidents at every Federal Open Market Committee meeting. Currently, voting rights are designated on a rotating basis to just four of the regional presidents, and the Fed is authorized to purchase anything it deems necessary, and in any quantity.

Critics of the Federal Reserve, and there are many, argue for a variety of reforms ranging from the return to a gold standard to competitive currencies to merely mild policy changes. Although an oversimplification, the main complaint currently is the uncertainty created by the Fed and Bernanke. Clearly there are numerous ways to solve this problem given the plethora of reform options on the table, but all seek to accomplish the same ends. That is holding Federal Reserve policy to an objective standard, and limiting the discretion of those entrusted with conducting monetary policy. Under a gold standard these are both accomplished through the limits of the commodity. Similarly in a competitive currencies market, the market itself accomplishes these goals. Of the policy reforms put forth, some are better than others, but again all more or less attempt to establish an objective standard and limit Fed discretion but without the headaches and general inconceivable nature of a gold standard or the elimination of the central bank.

Taylor’s testimony, contributions to economics and recent track record argue for the implementation of the Sound Dollar Act. By requiring the Fed to abide by a single mandate of price stability and limiting their open market operations to just Treasuries, the Fed is held to an objective standard and the discretion by which to conduct policy is limited to a single avenue of Treasury sales and purchases and interest rate adjustments.

This reform is not radical like those touting the merits of a gold standard, yet it accomplishes the same goals. It also would allow for a much more smooth transition period and maintain the ability of the United States to conduct monetary policy, but now one that is predictable and that actually promotes maintaining the purchasing power of the dollar, rather than pursuing its decline.

Taylor’s full testimony can be found here, and his op-ed here.

Bernanke Resolved to Favor Traders, Inflation, and Government Debt with Continued ZIRP

Posted on March 27, 2012, 1:59pm | Anthony Randazzo

Fed Chairman Bernanke told the National Association for Business Economics conference this week that the labor market was still in “deep” trouble and so we should expect ZIRP (zero interest rate policy) to continue for the next several years.

His comments stand in sharp contrast with the hyper-campaign-mode-minded Obama administration, which insists its policies since taking over are the reason why employment is improving. Ignore the data in these charts hidden behind the curtain though: White House unemployment projection and unemployment rate including labor market non-participants and dissatisfied part-time workers. 

Putting the politics aside, what Bernanke is essentially saying is that he prefers the trade off of propping up stock prices versus encouraging savings. 

He prefers low rates that enable federal borrowing to be more manageable in excess versus allowing housing prices to fall to their natural bottom and homeowner debt deleveraging to pick up steam. 

Just like his comments on the gold standard last week, he has it all backwards. The Wall Street Journal notes:

Mr. Bernanke argued, seemed likely to require "more-rapid expansion of production and demand from consumers and businesses, a process that can be supported by continued accommodative policies,"

The idea is that if consumers can borrow at low rates they can consume more. But since savings rates are next to nothing, ZIRP actually is dragging the consumer’s preferred preference of develeraging. So we don’t see housing hold debt declining very far nor is consumption carrying the economy forward.

The idea is that if businesses can borrow at low rates they will invest in their operations, hiring new workers with the cheaper cost of money. But since fiscal policy is threatening substantial regulatory and tax changes, and ZIRP itself creates inflation concerns, most new business activity gets sidelined in the uncertainty.

The idea is that with ZIRP, we can get positive inflation pressures that help stave off deflation. But deflation is often a good thing. Would you rather the price of iPhones go up or down? 

Finally, even if low-interest rates were the answer to jump starting the economy, they ignore that labor market problems go much deeper than the 2008-09 recession or the financial crisis. We have structural changes in the types of labor demanded in the U.S. that our workers are not well trained to accomplish. This is something that can’t be fixed over night nor can it be addressed by a simple economic growth upswing. 

From the WSJ:

Goldman Sachs Scams Federal Reserve Operation Twist

Posted on March 21, 2012, 7:43pm | James Groth

Last October we penned a post pointing to the failed policy of the Federal Reserve through Operation Twist. We noted that since the first day of long bond purchases under Bernanke, interest rates have done nothing but rise, despite the intention of the operation to have them fall.

The reason of course for the rise in rates was because big banks, institutional asset managers, and primary dealers bought an ocean of Treasuries, Equity traded Treasury instruments, and Treasury derivatives in front of the Fed only to sell them all back to the Fed when Bernanke commenced their purchases last October. 

The following is from our previous post:

“The above chart is of an Exchange Traded Fund (ETF) that uses derivatives sponsored by Barclays PLC, a Federal Reserve primary dealer, to track and invest in longer dated Treasuries of maturities greater than twenty years. I have highlighted on the chart significant events surrounding the speculation, announcement, and implementation of the Fed’s Operation Twist program…Despite what is written in the financial press about “investors seeking safety in Treasuries pushing prices up and yields down,” in reality, it is nothing more than banks and institutions and especially primary dealers with the Federal Reserve moving money over to Treasuries – in this case to be paid off by the Fed once they begin their purchases. Why they choose to say “investors” implying you and me, I do not know.

I chose the ETF in this case to highlight also the distortions that exist and the manipulation that is possible using a derivative-backed product issued and maintained by a primary dealer of the Fed. In the three months beginning August 1 and ending October 3, this product returned 25.6 percent plus three dividends bringing the total return to 26.7 percent. A comparable index or portfolio of Treasuries over the same period would have returned around 14 or 15 percent. The largest holder of this ETF as of June 30, just before the run-up began, was Credit Suisse, another primary dealer with the Federal Reserve, which holds more than 25 percent of all shares. Clearly, as the chart shows, these banks, institutions and especially primary dealers with the Fed have successfully manipulated the market around the Fed’s actions and came away quite well.”

An update of the transactions from the SEC reveals that from October 1, 2011 through December 31, 2011, Credit Suisse sold 43 percent of those shares I highlighted above. Over the same period, Morgan Stanley, Barclays, Deutsche Bank, JP Morgan, and Goldman Sachs all sold between 24 and 60 percent of their shares. Goldman was the biggest seller. Theses six Federal Reserve Primary Dealers sold a total of 9,041,933 shares while the Fed was buying. That represents one-third of all shares outstanding.

 The following table shows the respective sales:

Goldman Sachs stands out in particular relative to this group because in addition to the sales listed above, Goldman also purchased 1,971,964 shares of a product that makes money based on the falling prices of Treasuries. It’s a big bet that interest rates will rise. All of these shares were purchased between October 1, 2011 and December 31, 2011 and represent about 9 percent of all shares available. No other firm even comes close to this figure.

I’ve updated the Treasuries chart to reflect the trading that has ensued since our last post:

What’s important to notice here is that while Treasury prices have been falling since the Fed first began their purchases, they have remained at elevated prices. Indeed, yields for 10-year paper currently stand at 2.3 percent. This has everything to do with the Fed buying over $40 billion worth of long Treasuries every month since October, counterbalancing the institutional selling and mitigating the pressure from negative bets from Goldman and others.

However, this will end in June. At that time Operation Twist ends, and the Fed will no longer be buying our debt. As a result, most market participants are anticipating yields to rise precipitously this summer. Short positions, in addition to those placed by Goldman, are already being allocated to this move, and Treasury yields are beginning to trend higher. Traders are also betting that the Fed will raise interest rates a year earlier than the stated “end of 2014” date as fed funds futures markets are pricing in a quarter point rise in the November 2013 contract.

So it seems that the market has thrown a giant wrench in the monetary policy intentions of the Federal Reserve. The Fed target rate was intended to be at zero for another two-and-a-half years, and Operation Twist was to ensure that longer term borrowing rates for the United States were to remain low to allow for deficit spending to aid in the recovery a la Lord Keynes.

Instead, Goldman and a host of other institutional players scammed the Fed ahead of their purchases and are now betting against its long-term efficacy. What’s more is that the 30 percent bull-run in the S&P 500 over the past six months, which coincidentally began on the precise date of the beginning of Operation Twist, October 4^th, has been largely fueled by freed-up capital from purchases by the Fed.

Without further accommodation from the Fed, there is little that can support both asset prices and the ridiculously low yields on not only Treasuries, but also corporates, munis, and junk (which are all at about half their historical average).

I guess that means QE3.

Without robust economic growth, there really is no other alternative.

Let’s hope that Bernanke is soon proven right by his efforts and the United States starts putting up 3+ percent GDP growth with stable inflation. I think we’d all prefer remembering him as our savior from economic collapse rather than Goldman Sachs’ biggest sucker.

Oil Prices and Monetary Policy

Posted on March 16, 2012, 6:37pm | James Groth

“Most excellent article.   Off the charts, if only that could get published in the NY times or WSJ.   Thanks for taking the time to expound on critical issues.”

That is the lone comment on Jeffrey Snider’s most recent post published today at RealClearMarkets. As a peer, I regard him as one of the most insightful commentators on current Federal Reserve policy and by far the most underrated. An archive of his work can be found here.

His most recent work eloquently describes the distortions occurring in our economy as a direct result of monetary policy, a phenomenon I have highlighted numerous times since the Fed first opened it’s free money floodgates. Like all Snider articles, it is a must read.

From the article:

“At the heart of [artificial asset price inflation] is the misconfiguration of risk within monetary policy. For central banks, especially the Federal Reserve, risk is risk, undifferentiated. In reality, there is a chasm between financial risk and real risk. Certainly there are positives to convincing businesses and individuals to take and accept financial risk, but if it is not matched and then surpassed by true economic risk it is a doomed effort. Convincing an army of day traders to put money at risk speculating on stocks (or real estate) in the financial economy is wholly different than getting the same number of people to start their own business or to upgrade and invest in current businesses. At some point, should asset prices and paper "wealth" rise far enough, people stop working altogether and simply live off their accumulated paper wealth, all the while extinguishing true productive wealth that labor engenders. This is not a fine line either, it is night and day, yet the Fed does not distinguish between risks, expecting that an increase in financial risk-taking is a perfect substitute for an increase in real economy risk.

That is where the reflation attempt always falls apart. It encourages financial risk at the expense of, not in conjunction with, real economic risk. Current economic thinking is that getting participants to accept financial risk will eventually lead to a broadening of participation in real risk. But history shows rather conclusively that forcing financial risk-taking actually cannibalizes real risk-taking, thus reflations feature weak growth in both wages and real capital investment. When everybody is making easy money in asset markets, no one wants to work hard building or expanding a real business that might take years to bear fruit (and will likely be a net cost over the intermediate term), the mass psychology of asset bubbles. The economy at the margins is perverted into a kind of momentum-chasing price addict, herding the majority of marginal participation away from true production where it is really needed.

Again, it appears to work and is sustainable temporarily as long as there is a path to close the monetary circulation loop. In the recovery years since 2008, there has been no way to close that loop since the credit system has been chronically malfunctioning (the lack of balance sheet capacity and higher lending standards), and the overseas trade imbalance has now been recycled into regular US treasuries (at least until late 2011). Thus the reflation attempt has been fragmented into this yearly dance where optimism reigns around Christmas and early winter, then falling apart by summertime as monetary expansion fades and recession fears "unexpectedly" re-appear.

But in this new cycle of annual mini-reflations, there is a ratcheting upward of negative imbalances such as commodity prices, so it is not a neutral proposition. The economy has become zombified. Without a full circulation pathway, commodity prices cannot be matched by incomes, and thus consumers and households end up worse off than before each respective mini-reflation cycle. So as the economy "dies" with each commodity spike, the Fed and ECB return and revive it with even more asset prices - which only kill it again.”

Read the entire article here.

Another Gem from Fed President Richard Fisher

Posted on March 12, 2012, 2:38pm | James Groth

In a speech last week, Dallas Fed President Richard Fisher made comments that market participants have become addicted to the Federal Reserve’s easy money. He also criticized Congress and their fiscal woes. A must read.

From the speech:

“We have been thrown way off course by congresses populated by generations of Democrats and Republicans who failed the nation by not budgeting ways to cover the costs of their munificent spending with adequate revenue streams. The thrust of the political debate is now—and must continue to be—how to right the listing fiscal ship and put it back on a course that encourages job formation and gets the economy steaming again toward ever-greater prosperity. No amount of monetary accommodation can substitute for the need for responsible hands to take ahold of the fiscal helm. Indeed, if we at the Fed were to abandon our wits and seek to do so by inflating away the debts and unfunded liabilities of Congress, we would only become accomplices to scuttling the economy.”

Regarding liquidity and monetary policy:

“I am personally perplexed by the continued preoccupation, bordering upon fetish, that Wall Street exhibits regarding the potential for further monetary accommodation—the so-called QE3, or third round of quantitative easing. The Federal Reserve has over $1.6 trillion of U.S. Treasury securities and almost $848 billion in mortgage-backed securities on its balance sheet. When we purchased those securities, we injected money into the system. Most of that money and more has accumulated on the sidelines: More than $1.5 trillion in excess reserves sit on deposit at the 12 Federal Reserve banks, including the Dallas Fed, for which we pay private banks a measly 25 basis points in interest. A copious amount is being harbored by nondepository financial institutions, and another $2 trillion is sitting in the cash coffers of nonfinancial businesses.

Trillions of dollars are lying fallow, not being employed in the real economy. Yet financial market operators keep looking and hoping for more. Why?”

Good question. Maybe some of that money would find its way into expanding businesses, entrepreneurial activity, progress and innovation, and other elements of the economy so hindered by monetary and fiscal policies if someone, anyone, would take away the free-money mechanism. Make banks and institutions make money the old-fashioned way, through loans and investments, instead of tying it all up in guaranteed interest carrys. Then, finally, we can all begin to return to some sense of normalcy and real growth.

Read the full speech here.

Japan Reports Huge Current Account Deficit. Should the U.S. be Worried?

Posted on March 9, 2012, 3:46am | James Groth

Last January we highlighted that Japan was stepping up their foreign exchange borrowings through the Federal Reserve. They currently stand at $18.1 billion and have remained about that size since their initial borrowing in December. Though this amount is hardly alarming, it may possibly be an indicator of events to come.

Japan is in a precarious situation given the size of their debt, the demographics of their population, the history of their international finances, and the current trend towards current account deficits that could upset a very fine balance.

We detailed all of these elements about Japan last January in a blogpost and warned that if sustained current account deficits were to persist in Japan, the United States could find itself in a precarious situation of its own.

Sure enough, yesterday, Japan reported the largest current account deficit since comparable records began in 1985. It’s one of only five monthly current account deficits ever recorded, and by far the largest.

Below is an updated chart from our previous post:

The Financial Times wrote the following about the alarming shortfall:

“Following a full-year trade deficit in 2011, a first for Japan for more than two decades, fears are intensifying that the country is rapidly moving towards a lasting current-account deficit, which could lead to a reliance on foreigners buying government bonds. That, in turn, could drive up interest rates, threatening a fiscal crisis.”

Japan’s current account deficit is likely to reverse to a surplus next month, and many economists are not expecting full-year current account deficits for years to come. Given the size of Japan’s exports, one can hardly argue. Continued current account surpluses in the near-term are about as much of a sure thing as the Greek debt swap agreement that occurred just three hours ago.

But the writing is on the wall for it to happen sooner rather than later, and who knows, 2012 may very well see a full-year deficit. After all, no one expected Japan to turn in a trade deficit for 2011, and they did just that.

Point is, the future is unpredictable, and the US is not at all in a position to deal with the effects of Japan running deficits. Japan’s immediate solution would be to start dumping treasuries.

Politicians can banter all they want about the right time to begin reducing America’s debt and to curb spending. If, however, some exogenous shock occurs like say one of our largest creditors selling a trillion dollars in treasury securities, talk is cheap. The market, that we’ve all seemed to have forgotten, will make our decisions for us.

Our previous post can be found here.

Raskin and the Fed are Wrong to Inflate Stocks

Posted on March 8, 2012, 10:00pm | James Groth

In an article published today over at RealClearMarkets.com I argue that putting the horse before the cart pumping equity prices through monetary policy does nothing to improve the economy. Only when rising asset prices reflect gains to the economy as a whole, and not simply gains to the supply of money, do all members of that economy benefit.

In a society with a highly polarized wealth demographic, targeting specific assets through price inflation benefits only the holders of the assets targeted.

The Fed claims that most wealth is held in stocks, business equity, and real estate so they direct policy towards inflating those assets where wealth has accumulated. Fed Governor, Sarah Raskin pointed this out to explain why the Fed is foregoing helping savers who have money saved in interest bearing assets such as checking accounts, CDs, and savings bonds. Those savings are actually losing money to inflation, a drawback the Fed acknowledges, but dismisses nonetheless because most wealth is allocated in stocks etc.

The problem with the Fed’s assessment, and therefore their rationale for pumping these select assets, is that a majority of Americans don’t even hold, for instance, a single share of stock. It’s all held, not surprisingly, by the wealthiest of Americans. For the bottom 75 percent of all families, only 11 percent of them own stock. And of those, the average value of holdings is only $10,600. For families in the top 10 percent, the average value jumps to $683,500. They are the ones holding all the assets being inflated. And because it’s driven by easy money, and not the productive efforts of the members of the economy as a whole, most Americans are being starved of much needed investments in productive assets that provide employment, innovation, and efficiency gains leading to enhanced purchasing power and living standards. Instead, potential investments are being lured away into an artificially rising market.

From the article:

"The Dow's recent rise above 13,000 arguably owes much of its appreciation to the accommodative monetary policy of the Federal Reserve. This should not, however, be a reflection of an improving economy as Fed chairman Ben Bernanke is so quick to reference and take credit for. Much of the profits and investments of Dow Jones and S&P 500 companies take place and stay in other countries and do not benefit Americans who are themselves not invested.

And invested they are not. According to the same Fed report from Raskin's speech, the average value of stocks held by the bottom 90 percent of American families is $16,785. This pales in comparison to the wealthiest 10 percent of American families whose average value of stock holdings is $683,500.

But so what? So the rich are getting richer as the bulk of household wealth is being targeted and inflated by the Fed's free money. Doesn't that ultimately benefit those at the bottom as well?

Under today's fiscal and monetary policies, absolutely not.

A growing economy only benefits the economy as a whole, and thus those at the bottom, if growth comes in the form of operational innovation and gains in productive efficiencies. This means the ability to do more with less, to grow by leaps and bounds while driving down the cost of inputs. This was the case in the ‘80s and ‘90s, where for two decades technological and industrial innovation and efficiency gains allowed America to grow tremendously while having little to no effect at all on the price of commodities and the relative cost of labor. Real mean incomes grew nearly every year between 1981 and 2000 and 38 percent over the entire period according to the U.S. Census Bureau. Real wealth was created. The economy grew as a whole.

Then loose fiscal and monetary policies entered the story, and over the past decade the exact opposite has occurred. Commodity prices are skyrocketing, real mean incomes are at 1997 levels; having fallen nearly every year since 2000 according to the Census, and yet the relative cost of labor in America is still high. Real wealth is not being created."

The full article can be found here.

The Victims of Cheap Money Bernanke

Posted on March 2, 2012, 1:33pm | Anthony Randazzo

A few weeks ago we had a blog post highlighting some of the ways that the Fed’s ZIRP and QE policies are violating Bernanke’s maxim for Congress of “first do no harm.” Jeffrey Snider’s RCM column from two weeks ago (you can tell I’m a bit backed up on my to-read pile) lays out the argument much more eloquently:

In 2001, the Fed funds rate target was brought all the way down to 1%... For some reason, this is still thought of as capitalism even though the quantity and cost of money is set by a central mechanism for reasons other than individual market opinions (and often contrary to market opinions).

Most commentators (myself included) have focused on the financial fallout from this economic/financial schematic, but it is extremely important to not lose sight of the real economic context into which this intervention projected. Plentiful money meant companies were less constrained in their approach to operations. Market discipline was relaxed, meaning profitability fell in relative importance (this is not to say that profits were disregarded, but with plentiful funding the focus on sustainability gets muddied and papered). Easy access to cash can allow business lines and whole businesses to operate unprofitably longer than they really should meaning the relative importance of innovation and/or productivity is diminished. Efficiency gets lost in the euphoria of asset prices, as stock prices reflect quantities of money rather than true expressions of value.

The primary example of this dangerous imbalance was the massive surges in stock repurchase plans and leveraged merger activity during the middle part of the last decade, right up until the wholesale repo markets first froze in 2007. So much of overall marginal business resources in the last decade (and really for the past twenty-five to thirty years, such as the junk bond bubble in the mid-1980's that used an outsized proportion of business resources on leverage buyouts) were focused on financial schemes to boost share prices. Share repurchases and mergers, particularly leveraged takeovers, are nothing more than ownership changes conducted at premiums to current prices, competing with real productive endeavors for monetary resources. Since the price effects of ownership changes are instantaneous, whereas productive projects are a net cost up front and often take many years to bear fruit, the systematic skew toward the short-run favors asset manipulation over operational innovation and improvement. True investment is discarded in favor of financial "investment".

He then goes on to skewer the Fed for taking a backwards approach to its goals of price stability, financial market stability, and tighter regulation on executive pay:

Of course, the fact that so much of corporate management pay is directly tied to share prices only enhances the incentives for this kind of financial activity. That, again, is short-term thinking due to easy credit terms. In fact, during the last decade companies often borrowed cheap money in order to directly finance these kinds of equity extractions (the weighted average cost of capital calculation at work). How much of that financing would have flown to more real economy, productive endeavors will never be known, but I certainly believe it is non-trivial. In other words, this focus on short-term financial manipulation likely, in my opinion, crowded out both market discipline (and its focus on innovation and productivity) and real productive expansion, the very purpose of the Fed's cheap credit initiatives in the first place.

Read the whole column here.

Flawed Fed Predictions

Posted on February 27, 2012, 11:21am | Anthony Randazzo

We will, admittedly, put this one in the “not saying anything new” category, but Ben Steil’s WSJ op-ed from last weak bears highlighting. It features the sentence of the year so far: "In short, the Fed's premise that it can speak with authority about the future is flawed."

Here is how Steil came to this, not-so-surprisingly objective opinon:

The Fed studied its own staff's forecasting performance over the period 1986 to 2006. It found that the average root mean squared error—or the deviation from the actual result—for the staff's next-year gross domestic product (GDP) forecasts was 1.34, compared with 1.29 by what the Fed describes as a "large group" of private forecasters. That is, the Fed's predicting performance was worse than that of market-watchers outside the Fed. For next-year CPI forecasts, the error term was 1.03 for Fed staff, and only 0.93 for private forecasters. The Fed's conclusion? In its own words, its "historical forecast errors are large in economic terms."

How about the Fed's longer-term predictions? The Fed started publishing the Board of Governors' and Reserve Banks' three-year forecasts in October 2007. At that time, the GDP growth forecasts among this group of 17 ranged from 2.2% to 2.7%. Actual 2010 GDP growth was 3%, outside the Fed's range.

The Fed forecasters told us that unemployment in 2010 would be in a range between 4.6% and 5%. In fact, it averaged about twice that, or 9.6%. The forecasters further predicted that both Personal Consumption Expenditures inflation (PCE, similar to CPI) and core PCE inflation would be in a range from 1.5% and 2%. The former came in at 1.3% and the latter at 1%, again outside the Fed's range. The Fed's scorecard on its 2007 three-year forecasts: 0 for 4.

See the whole article here.

Bernanke and You: Charting His Control

Posted on February 22, 2012, 2:05pm | James Groth

Chairman of the Federal Reserve Ben Bernanke is largely responsible for the 1 percent interest rates under Greenspan in 2003-2004 that contributed to the housing bubble, and Bernanke is absolutely responsible for the $2.3 trillion of asset purchases and zero percent interest rates over the past three years. His policies, and his policies ALONE in conjunction with fiscal spending, are responsible for the following charts. The nearly one-to-one correlation has to do with the institutionalization of financial markets in commodities (backstopped by the Fed) over the past 30 years. Everything you read about growing global demand, diminishing supplies, global unrest, political instability, etc. etc. etc. is merely at the margin and largely the conjuring of the media to pocket whatever remaining disposable cash you may have left after the following has destroyed your purchasing power:

25 year copper price:

25 year heating oil price:

25 year corn price:

25 year crude price:

25 year wheat price:

25 year soybeans price:

25 year gold price:

The “crash” in commodities that took place during the winter of 2008 that saw crude prices drop from $150 per barrel to $30 over three months time in direct correlation with the fall in price of every other commodity was nothing more than a reversion to normalcy.  There was no crisis, no panic. It was the cleansing of exuberance, of stupidity, of irrational exploitation, of utter nonsense.

And now we’re right back. Thanks, Ben.

The difference now is that Americans are not insulated by high home equity and a strong labor market like during the lead-up to the bubble five years ago. The stock market may at present be robust, but the gains over the past three years priced in real terms relative to the rise in the price of commodities, particularly gold, is actually negative. It’s fluff.

Also, consider this: Bernanke likes to point to the fact that all the loans, totaling somewhere between $7 trillion and $16 trillion, made from October 2008 through early 2010 were paid back, and the Fed (and so the taxpayers) made money. The Fed just paid the Treasury $77 billion in 2011 and $80 billion in 2010 for the earnings on its balance sheet. Hey, great. But all that money just went to re-cap banks, institutions, insurance companies and the like to make outsize gains in the rally that was about to ensue, to the tune of 100 percent or even multiple doublings. If the Fed had just simply purchased $7 trillion of soybeans, for instance, taxpayers could have netted $4.3 trillion. We could have then paid for all of Obama’s deficits to date! Hurray, problem solved!

Investing ten percent of the world’s total GDP into soybeans may be impossible, but it’s not too far off as ludicrous as just giving it away to a handful of financial shells to re-inflate illusory wealth that never should have existed anyway.

This whole situation is far from simplistic, but understanding the effects is as simple as reading the charts. The price of such a diverse array of inputs (commodities) should not trade in such direct correlations as they have under the era of easy money, the stock and bond markets included. These movements will have a serious effect just as they did in 2008. Reversion to the mean is always inevitable in some not-always-observable fashion. To boot, the quicker they diverge, the quicker and harder they revert. Whether Bernanke succeeds with his monetary experiment by bringing up employment and GDP is not of concern if in a short-period thereafter it crumbles under its own weight.

Bernanke is Depriving Most Americans from Creating Real Wealth

Posted on February 8, 2012, 2:53pm | James Groth

In a commentary published today, I argue that Bernanke’s Fed policies are harming 90 percent of Americans while benefitting a wealthy few. Beyond punishing savers and rewarding borrowers, his policies are aggregating more wealth to individuals already holding significant amounts of it.

Bernanke has recently testified in front of both the House and Senate Budget Committees explaining his outlook on the economy and the Fed’s policies. No attention is given to the Fed’s role in affecting wealth disparity. It needs to be addressed.

From the Commentary:

"Bernanke's current Fed policy is harming savers whose primary assets are their deposit accounts, homes and vehicles while benefitting those with substantial stock, bond and real estate holdings and business assets.

According to the most recent Federal Reserve Survey of Consumer Finances, 90 percent of all income earners held on average less than $10,000 in stocks and less than $25,000 in bonds. And they're primarily dependent on their wages to support themselves and their families. The other 10 percent can augment their spending with income from sources other than wages like stocks, bonds and other productive assets. Those lacking a significant source of revenue apart from their job wages will not benefit from the Fed's money printing and zero percent interest rates.

The reason is that as the economy returns to growth, prices of both goods and wages will rise but the former faster than the latter. And the stocks and productive assets of the top ten percent of income earners will have appreciated at such a pace that they control a larger percentage of wealth than prior to the Federal Reserve's easy money policies. This is especially true and more pronounced under extremely low interest rates and high issuance of currency like at present and throughout the crisis."

(Video) Fed Doing Harm... to Savers

Posted on February 3, 2012, 5:57pm | Anthony Randazzo

Last night on Freedom Watch I questioned Fed Chairman Bernanke's ability to be self reflective after he suggested to Congress that they take care to "do no harm." While that is great advise and all, right now the Fed is actually causing harm itself, primarily to savers with its never ending zero interest rate policy (ZIRP).

At best, Bernanke seems to think that whatever harm is caused by ZIRP, it is less than the damage we would see without the monetary stimulus. ZIRP until 2014 signals the Fed thinks the economy is still in crisis (though President Obama's State of the Union address would suggest Treasury thinks otherwise). But the numbers suggest that ZIRP is what is causing the economy to continue in crisis mode. ZIRP has infused cash into the system, but it is just sitting in banks across America, not helping spur economic growth.

ZIRP has cut rates for savers, forcing many to move out of cash, money market funds, and CDs into stocks, which has inflated the value of equities. ZIRP has also cut rates for investors close to retirement, forcing them into riskier positions (also in equities). It may seem great that the Dow and Nasdaq are high has a kite, but the Fed is the one providing drugs for that high. ZIRP has also caused savers and investors in short-term, but low-yield bonds into long-term, higher-yield bonds that carry more risk of inflation if (and likely when) ZIRP backfires.

Simply put, ZIRP is huring the economy. We need to let interest rates move where the market takes them naturally. Backing up this view (at least on savers) is a column from MarketWatch.com's Chuck Jaffe in how savers shouldn't expect anything good for the next few years. He writes:

Central bankers made it clear that savers will not see any boost in money-fund returns for the foreseeable future, and can be sure that inflation will take its full bite out of their cash. So if you use a money fund for emergency savings, the dollars aren’t growing even as the cost of insurance is rising... In short, it will be at least 2015 before money-fund holders get anything approaching a meaningful return.

See his interview on Mean St. below:

Update 2/6: It appears that Charles Schawb also shares our sentiment. See this op-ed in the Wall Street Journal.

Fed Laughter

Posted on January 31, 2012, 12:21pm | Anthony Randazzo

This is... well, funny?

The blog, The Daily Stag Hunt, tracked the times “laughter” was recorded by the Fed’s stenographer during the FOMC meetings. In 2001, the FOMC averaged 16.5 moments of guffaws per meeting. In 2006, there were, on average, 44 outbreaks of laughter.

For those of you keeping score at home, that would be a lot of laughter as the world started collapse in around all of us. Guess it is not that funny. See the whole story at CNBC.

Japan Steps Up Fed Borrowing: A Good Indicator of a Slow Motion Train Wreck

Posted on January 23, 2012, 4:05pm | James Groth

Last week the Bank of Japan (BOJ) more than doubled their Swap borrowings from the Fed to a total of $20.4 billion. Though this is a quarter of the $82.3 billion the European Central Bank (ECB) has taken out since the Fed lowered its swap rates back in December, it may be more alarming.

With all the turmoil in Europe, few have paid attention to the situation in Japan. Japan currently has a 230% debt to GDP ratio and is borrowing close to 55 percent of every dollar (yen) it spends. Consistent current account surpluses have allowed them to stay solvent by funding their debt through domestic banks and insurance companies, government pensions, and Japanese savers. Just 5 percent of its debt is owned by foreigners. It’s largely a Ponzi scheme, but because of their huge exports and saving, it has perpetuated.

But this is beginning to change.

Since the start of the financial crisis in the summer of 2007, the Yen has appreciated nearly 40 percent against the dollar, and slightly more against the Euro, a result of the massive easing by the Fed and the ECB. As a result, Japan’s exports have become more expensive, declining over the entire period. Then the Fukushima Daiichi nuclear earthquake disaster last March crippled export volumes further. 

Japan’s current account has fluctuated violently since the beginning of the Yen appreciation over the past five years, but all the while has been in decline. 2012 may very well mark the first year of current account deficits in Japan following decades of annual surpluses.

If that should prove to be true, the last place Americans want their dollars to be going is the BOJ. Without current account surpluses, domestic buyers of Japanese debt will have no source of money with which to fund the Japanese government. Foreigners surely won’t pick up the slack with Japanese 10-year yields at 1 percent when they can get Treasuries and Bunds at 2 percent.

The only possible outcome would be for Japan’s borrowing costs to at least double or massive inflation by BOJ printing. Debt service is currently half of government tax revenue, so if borrowing costs double, and all else equal, debt service will be 100 percent of revenue. Of course that cannot happen, so something catastrophic would occur prior, namely the latter option of BOJ printing and hyperinflation.

 That’s not a situation we should be throwing dollars at in blind hope. However, the one thing the current Fed loves to do is throw money at any situation regardless of the cause and potential downside outcomes. So the questions are, what factors will lead Japan to current account deficits, and as a follow-up, what happens when BOJ swap operations with the Fed soar as a result?

Demand for Japan’s exports will be at the heart of determining a deficit or surplus for Japan’s current account. A weakening Europe, and stagnating U.S. will drag on demand, and the subsequent easing by the ECB and Fed will drive the Yen higher crushing exports and continuing the slide to current account deficits.

Another factor will be growth in Japan’s imports, namely that of commodities. A stronger Yen will contribute to this, but a fundamental shift is also on the rise. There now is a greater demand for energy generation from fossil fuels like coal and liquefied natural gas (LNG) because of the earthquake. Japan generates nearly a third of its electricity from nuclear, and in an island nation of limited natural resources, commodities imports are likely to boom.

Transfer payments too are beginning to exert pressure. Japan has a top-heavy aging population and the younger generations are not saving like the generations that preceded them. Social welfare will drastically increase net transfers. This is an inevitable drag on the current account even if the former scenarios do not play out.

Thus the situation looks grim. But it should not come as a surprise because the writing has been on the walls for decades and the recent trend towards current account deficits has been in place for nearly five years. Nevertheless, the Fed is addressing the issue with its usual band-aid of free money.

I suppose one can’t blame the Fed, however, because the solution for Japan in this situation would be to sell their nearly $1 trillion in U.S. treasuries held in reserves. At a time when the Fed has just binged on U.S. debt and the future of the dollar and the U.S. economy now hinge on the ability of our government to borrow cheaply, our debt-laden controllers can ill afford any foreigner dumping our paper, let alone the second largest creditor.

So, as our Fed works to bailout Japan, we must address the follow-up question of what happens when BOJ swap operations with the Fed soar as a result. The answer unfortunately is uncertain.

The Fed enters the swaps via a fixed exchange rate with the counterparty central bank, so arguably the Fed is insulated from any risk because any central bank can simply print money if the banks that are ultimately lent to collapse and cannot repay. But if the swaps soar to something like $500 billion or more, and banks do collapse, what central banker is really going to print the money necessary to make good on their end of the swaps? All holders of Yen (in this case) would get crushed. Likewise, the Fed would tell U.S. citizens that it’s in their best interest not to demand repayment and share the pain so as not to initiate a global slowdown, world financial crisis, or whatever the scare tactic phrase du jour may be.

Again, the problem is that nothing is being done to address the fundamental issues laid out here. Rather it’s more of the same printing money, providing liquidity, and dealing with “surprise” crises as they occur.

The Fed’s swap operations can be found here. They’re currently above $100 billion and climbing. We’ll write again on these swaps when that figure becomes a pittance. 

Bernanke’s White Paper: The Government Your Landlord

Posted on January 13, 2012, 5:49pm | James Groth

In a white paper submitted January 4^th to the Senate Banking, Housing, and Urban Affairs committee and to the House Financial Services Committee, Fed Chairman, Ben Bernanke put forth nearly every conceivable option for the government to completely take over the United States housing market. At a time when some government program or entity already has its hands tightly around the neck of every aspect of housing, it may surprise readers that there is still room for government involvement. Apparently there is, and Bernanke and friends are moving in.

Frustrated with the results of the Fed’s $2.1 trillion balance sheet expansion, zero percent interest rate policy, and skyrocketing M2, Bernanke is calling on congress and the housing agencies to break down the “barriers to refinancing [that] blunt the transmission of monetary policy to the household sector.”

That’s the funny thing about monetary policy. It’s a fickle beast. Printed money sometimes (always) finds its way into the areas not intended by its purveyors.

After having successfully recapitalized U.S. financial institutions through an unprecedented bailout operation, brought treasury yields to negative returns with the yield curve topping out at sub 3 percent levels in a 3.5 percent inflationary environment, and greased the wheels for an explosion of credit, for whatever reason, Bernanke has been stumped. His monetary flood corked. Housing is in decline.

The one asset Bernanke has targeted following making bankers whole is not cooperating. The only things successfully reflated, albeit unintentionally and certainly not desired, have been food, energy, and capital markets.

Never to be defeated, and always determined to achieve his desired result, Bernanke would be very comfortable, as would his entire new board, launching a third round of easing, QE3, which many foresee occurring in the near future. However, today’s political environment and media may very well bring pitch forks and torches to the Fed’s front door. The move would certainly seal his removal as Fed chair.

As such, Bernanke is resorting to alternatives.

In his paper, he advocated a number of policy options including a gross expansion of the loan modification (principal reduction) and refinancing programs, significantly expanding the GSE balance sheets to include more heavily levered loans and loans to subprime borrowers, and lastly a huge foray for the government to become the nation’s largest landlord through land banks and REO renting.

Where to begin?

First off, none of this should come across as reassuring. The loan modifications and refinancing programs in place, HAMP and HARP, have been failures, and any expansion of them will lead to further failures or much worse could create moral hazard for current borrowers to fall behind on payments or strategically default. Just listen to what Bernanke himself has to say of the idea: “lenders are unlikely to be willing to make such modifications on their own.  Moving further in this direction is thus likely to involve additional taxpayer funding, the overriding of private contract rights, or both.” Sounds like government business as usual to me.

Secondly, aren’t highly levered loans and loans to subprime borrowers purchased by government enterprises what got us into this mess in the first place? GSEs are supposed to be being wound down to allow private players into the market, not beefed up to continue down the same path of boom and bust.

Third, land banks, really!?

The GSEs and other financial institutions are sitting on an ocean of foreclosed properties. As they sit vacant, they deteriorate, lose value, and bring down the values of homes in their vicinity. To alleviate these issues, Bernanke advocates that the government institute land banks and other rental programs that put Uncle Sam in the slum business. Other ideas include giving big, established property managers a silver platter deal of taxpayer subsidized properties to manage for profit. Can you say crony capitalism?

Understand that ultimately price is the one and only thing to will clear us of the housing issue. The constant push for government to step in the way and control the uncontrollable will merely prolong the problems and stunt future growth. Bernanke himself acknowledges this in his paper, though I doubt he even realizes it. He says: “Nonetheless, some actions that cause greater losses to be sustained by the GSEs in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

That very well may be the only line of sense to come of all 26 pages, but at least it’s in there. Prices clarify and allow for participation and a fully functioning market. If they fall, buyers will once again come to market and begin drying up that ocean of bloated housing boom inventory. Recovery will follow swiftly.

One last word of caution: Bernanke is the Chairman of the Federal Reserve. He is charged with controlling our, and arguably the world’s, money supply, monitoring inflation, and creating a predictable and stable environment for exchange. He is neither a mortgage broker nor a landlord. Housing represents more than two-thirds of a majority of Americans’ wealth, and he is now advocating for its control. This is extremely disconcerting. Total control over America’s money and now too America’s largest asset by a handful of individuals should not be welcoming to anyone.

Fed to Adopt Inflation Targeting, a Few Thoughts

Posted on January 6, 2012, 5:16pm | James Groth

The Federal Reserve is very close to adopting an inflation targeting model to carry-out monetary policy. This will be a significant divergence from the past four years of gut-reaction, ad-hoc policy making, and more or less should be welcoming. There are a few things to consider, however, before accepting this as an effective and praise-worthy change.

Simply put, inflation targeting is where a central bank explicitly states a “target” rate for inflation and then makes changes in interest rates and conducts open market operations to achieve that desired rate of inflation. This differs from the Fed’s current policy because while the Fed implicitly tries to keep inflation around 2% or a little lower, they have risked higher inflation to, in their minds, promote higher employment.

On the surface, it can be viewed as the Fed moving toward a more predictable, transparent, and stable policy making regime which as history shows decreases volatility and contributes greatly to economic growth. If strictly adhered to, it achieves this goal. If not, and the FOMC continues with its monetary experiments, the policy will continue to produce uncertainty in markets.

Some things to consider:

1.) The Fed’s balance sheet

At $2.92 trillion, the Fed’s balance sheet is 20 percent of our nation’s GDP. This is up from just 6 percent as early as September, 2008 when the Fed began binge buying treasuries, mortgages, stocks, and AIG and Bear Stearns.

It has always been Bernanke’s intention to return the balance sheet to a normal and more manageable size, around $1 trillion, however, adopting inflation targeting at this stage in the game means that the $2 trillion in excess balance sheet bloat will not be coming to market soon, and will permanently remain on the Fed’s books. This could prove disastrous should a non-labor driven inflationary spike occur, the beginnings of which are already materializing.

2.) Implications for the agreed upon inflation gauge

In adopting inflation targeting, the Fed will not only need to determine the proper inflation rate, but will also need to decide upon the proper inflation gauge. St. Louis Fed President, James Bullard has said the Fed will use the personal consumption expenditures (PCE) index to determine inflation. The PCE index has been the inflation measure of choice for Bernanke’s communications, and will most likely be the chosen measure confirming Bullard’s statement.

The PCE index tends to underestimate the true inflation that consumers face. The current November reading has PCE inflation at 2.5 percent, while two other measures for inflation, the consumer price index (CPI) and the GDP deflator, reveal a November reading of 3.4 percent and 2.6 percent respectively. Improperly assessing inflation, regardless of the decided upon rate, will call for the wrong policy choices and harm consumers.

3.) Changes to the FOMC

The 2012 Federal Open Market Committee (FOMC) will usher in four new Regional Fed presidents. Kocherlakota, Fisher, Plosser, and Evans (whom we’ve profiled here, here, and here) will all be leaving. Taking their place will be Pianalto, Lacker, Lockhart, and Williams. Of the four that are leaving, three of them have been the only hawkish votes on the entire board. Evans, the most dovish and most outspoken of all members in the entire Federal Reserve System for more easing will thankfully be leaving with them.

Of the four replacements, three are doves and one is mildly hawkish.

For 2012, this leaves only one voting member to keep the printing presses in check, and he, Lacker, is not going to be enough to voice reason upon the board who already look poised to initiate another round of easing.

Despite making an announcement to adopt a strict adherence to inflation targeting, these three considerations could prove to ruin its proper implementation. The balance sheet will remain huge, inflation will remain improperly assessed, and an FOMC that retains the right to enact discretionary monetary policy outside a strict adherence to rule, now has only dovish members making decisions.

Bernie Madoff for President

Posted on December 29, 2011, 3:58pm | James Groth

The close of 2011 has brought so much liquidity and free money into the system that one has to question whether our central monetary authorities are running one big Ponzi scheme. In the last six months alone, the ECB has grown their balance sheet by €789 billion from €1.94 trillion on July 1, 2011 to €2.73 trillion today. The Fed too has been busy printing money bringing their balance sheet up more than $500 billion this year to $2.92 trillion.

The two central banks have recently begun collaborating together through existing currency swap facilities now discounted at a highly favorable rate relative to the market. The total amount drawn from the Federal Reserve is now $95 billion, up from $2 billion before the rates were reduced. We’ve written about the effects of these borrowings here.

While $95 billion is a significant amount of money, and has gone a long way to propping-up the Euro zone, it pales in comparison to the $640 billion lent to over 500 European banks through their Long-Term Refinancing Operation (LTRO). Many banks had already been borrowing from the ECB through similar facilities like the Main Refinancing Operation (MRO) and a shorter-term LTRO, but borrowing skyrocketed when the ECB allowed borrowing at 1 percent for up to three years in unlimited quantities which are the terms of the new LTRO.

These terms allow borrowers to make ungodly amounts of money never before possible in a market absent a central bank. Banks are now able to conduct carry trades by buying the debt of their country’s government risk-free with borrowed money from the ECB netting “profits” of upwards to $50 billion. It’s free money. Banks are also using the money to issue more of their own debt. The result is simply more debt hitting the market both from sovereign governments and from banks. Due to the seemingly infinite amount of free cash now available, interest on the debt is significantly lower than it otherwise would be allowing both banks and nations to continue operating in an unsustainable manner.

Banks can continue to pay their employees big bonuses and salaries while adding no value to the economy (which would otherwise be done through business loans, project loans, corporate loans, etc.) simply by taking advantage of the free money from central banks. Similarly nations like Italy, Spain, Portugal, and others can continue to offer social welfare, bloated pensions, and 25-hour workweeks without committing to austerity measures that would wean their citizens off of hand-outs and encourage their efforts into more productive means, benefitting the economy as a whole.

The Fed and especially the ECB believe that the current crisis in Europe and the financial crisis, which is still rearing its ugly head, is a liquidity problem. As such they are both throwing unlimited quantities of money at banks and governments to allow them to continue operating. They both also acknowledge that banks and governments are suffering from a crisis of confidence and that by backstopping their every failure, participants in the market (that’s you, me, institutions, sovereign wealth funds, and everyone) will be inclined to invest in and lend money to banks and governments.

The goal through all this money printing is that at some point bank assets will be able to generate enough cash flow to satisfy cash outflows from bank liabilities and similarly for governments, tax revenues will be able to satisfy all government commitments. The problem is that bank balance sheets are growing, and similarly so are government commitments. And they are both doing so from the free money furnished by central banks. Without it, banks would be forced to slim down and governments would be forced to streamline and cut commitments. So long as central banks can prop-up the massive size of banks and governments, both will continue to operate inefficiently and run-up larger and larger debts.

It has become clear that the ECB and the Fed, either unilaterally or jointly, will do whatever is necessary to continue funding the debts of banks and governments no matter what the prospects are for their future. Greece is in fact insolvent. So are a host of European and American financial institutions that would otherwise fail if not for the free money provided by central banks. Portugal is also insolvent but not to the extent of Greece, and Italy is not far behind them both. Yet, all remain funded, perpetuated by a free flow of money that circulates from banks to governments and back again providing unsustainable social services and banker compensation.

Bernie Madoff promised to his clients’ unsustainable returns, much like our government and governments of the European periphery have promised unsustainable benefits and programs. At some point Bernie could not produce his promised returns from the market alone and had to take money from new clients and the portfolios of others to continue producing his stated returns. In his mind, Bernie thought this borrowing would be temporary and that once he could make up for the losses in the market, he could return the borrowed money and continue producing his stated returns. But it wasn’t to be. His promised returns proved to be unsustainable and rather than quit early and return client money at a small loss, he chose to continue borrowing more and more money from new and existing clients to fund not only his lavish lifestyle, but also the lavish lifestyles of clients he had successfully fooled into thinking they had vast wealth accruing vast gains.

We all know how it ended. Confidence broke, clients demanded more than $50 billion that had already been spent, and everyone lost. A few individuals involved even took their own life.

The situation we’re facing now is not all that different. Banks promised unsustainable returns, and governments promised unsustainable programs and benefits. Rather than taking the pain of reducing these returns and taking losses on some of the commitments, our central banks instead are choosing to borrow unlimited amounts of money to continue down an unsustainable path thinking foolishly that at some point we’ll be able to produce gains and grow so extraordinarily quickly to the point we can all return the money in good faith. Like Bernie’s Ponzi scheme, it too will fail.

We will soon see further borrowings from the ECB and most likely QE3 from the Federal Reserve to the tune of $600 to $800 billion as early as February, 2012. The Fed’s swap facility has already reached nearly $100 billion in less than a month with purchases going straight to Europe and some are projecting it to reach $1 trillion or more. Rather than bring government and bank debt to a manageable and sustainable level now through write-downs and spending cuts, we’re betting our futures on a Ponzi scheme.

Because that is the clear path we have all chosen, coupled with the fact that Obama’s approval rating is the lowest of any standing president and the GOP has been selecting their chosen one based on either good hair or a numbered tagline, it very well may be prudent to have Bernie Madoff as commander-in-chief. We could certainly use someone with his experience.

He’s slated to be in jail for the next 150 years, but maybe our government could make an exception just this once because his skills and talents as a con artist are so desperately needed to protect the security of the world’s economies.

Our country’s future, our collective ability to live the lives we deserve, and the security for both depend upon growth, innovation, and prosperity. All of which is threatened by maintaining the status quo through historically unmatched monetary control. Yes, short-term pain will be felt by spending cuts and a reduction in monetary backstopping, but it will be short-lived, and it will not be felt by all. Money should be allocated to its most productive means, not towards the discretionary wishes of a central authority. This is terribly lacking under the current regime.

Trillions and trillions have been printed and pumped into the system since the financial crisis, and all we’ve been told when inquiring about accountability is that it would have been much worse had anything short of the trillions spent not been allowed. Well, it’s been more than three years and still there is no plan for when the money printing will stop or what entity and individuals are accountable for the inevitable mistakes. Central banks are completely reactionary. Every call for capital is met with more borrowing, more printing. It is a Ponzi scheme, and it is completely out of control.

Bernie Madoff for President.

Finally, the Federal Reserve’s Bailout of Europe Hits Mainsteam

Posted on December 28, 2011, 1:25pm | James Groth

Two weeks ago, we reported here about the Federal Reserve bailing out Euro land via its recently announced discounted currency swaps. Apparently not too many people seemed to care because little was reported on the subject, and the few who did note that it constituted a Euro bailout, did not fully grasp what it would entail. Most wrote it off as a non-event. But after nearly $100 billion has been drawn from the newly discounted Fed facility in the first two-weeks of operation going straight to European banks and Euro debt purchases, the mainstream is now taking notice.

Reported today from the Wall Street Journal (a bit late, but at least they’ve come around):

“America's central bank, the Federal Reserve, is engaged in a bailout of European banks. Surprisingly, its operation is largely unnoticed here.

The Fed is using what is termed a "temporary U.S. dollar liquidity swap arrangement" with the European Central Bank (ECB). There are similar arrangements with the central banks of Canada, England, Switzerland and Japan. Simply put, the Fed trades or "swaps" dollars for euros. The Fed is compensated by payment of an interest rate (currently 50 basis points, or one-half of 1%) above the overnight index swap rate. The ECB, which guarantees to return the dollars at an exchange rate fixed at the time the original swap is made, then lends the dollars to European banks of its choosing.

Why are the Fed and the ECB doing this? The Fed could, after all, lend directly to U.S. branches of foreign banks. It did a great deal of lending to foreign banks under various special credit facilities in the aftermath of Lehman's collapse in the fall of 2008. Or, the ECB could lend euros to banks and they could purchase dollars in foreign-exchange markets. The world is, after all, awash in dollars.

The two central banks are engaging in this roundabout procedure because each needs a fig leaf. The Fed was embarrassed by the revelations of its prior largess with foreign banks. It does not want the debt of foreign banks on its books.”

The full WSJ article can be found here. The article itself merely scratches the surface, but the point being that it is now reaching a mainstream audience. To those still doubting whether this Fed action amounts to anything, I encourage you to read the testimony of George Mason University Finance Professor, Anthony Sanders given to the House Committee on Oversight and Government Reform in which he warns of Fed bailout lending through these discounted swaps could reach $1 trillion or higher. A good summary and the full testimony can be found here.