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September 19, 2009
Issue 62  -  Potpourri
 
 
This week I don't have a single topic but rather a mixture of different items that I found interesting this week.
 
 
Housing
 
My first topic is housing.  The recent uptick in housing prices is making some wonder if the decline is over.  Now if the inflation is really picking up, as I've suggested, than prices may have bottomed.  However, I think the current lull in price drops is due to two things:  First the $8,000 first time buyer government tax credit and secondly, the lull in mortgage resets which I have written about before.  Here is another look at the reset chart:
 
 
Here's another look at it which I've shown before:
 
 
Looking at these two charts you can see that we are in a lull of resets that will end in January of 2010.  After this point, the mortgage resets will rapidly increase.  This is reiterated here in a Reuters story:
 
"Option" mortgages to explode, officials warn. The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset. "Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams. "That's the next round of potential foreclosures in our country," he said. Option-ARMs are now considered among the riskiest offered during the recent housing boom and have left many borrowers owing more than their homes are worth. These "underwater" mortgages have been a driving force behind rising defaults and mounting foreclosures. In Arizona, 128,000 of those mortgages will reset over the the next year and many have started to adjust this month, the state's attorney general, Terry Goddard, told Reuters after the meeting…"
 
The effects of this will not be felt for at least 6 months after the start of the wave, so we are looking at July/August of next year before the really "bad" stuff starts to appear.  Until, then the pressure on the housing market will be easing, which will drive prices in a northerly direction.  This should also help the stock market.  By the end of 2010, the housing market should be in another melt down. 
 
Another thing you can see on the chart is that by mid 2012, this mess will largely be over.  6 months from this point will mark the first truly safe time to buy a house.  How far could houses fall?  Let's look at another chart for a clue:
 
 
 
 
This is a chart showing population growth, income growth, and housing prices.  As you can see, the last jump in housing prices was unprecedented.  Just looking at the chart it looks like another 25% fall would bring us back to long term levels.  That seems about right to me.  For now, enjoy the ride and if you want to sell a house, do it before next summer.

 
Bank Shenanigans
 
The banks run this country.  It's really that simple.  If you are looking at any political discussion or argument, and you want to determine if the legislation will pass, there is a good rule of thumb:  will it hurt the banks or not?  If it will, then chances are high it won't pass, and vice versa.  If the topic doesn't affect the banks than that issue will revert back to ideology and the Democrat versus Republican debate comes back into play.  This is one of the reasons I don't vote for either of the major parties anymore.  The problem is the banks and the Federal Reserve, NOT Republicans versus Democrats.  As long as you think like that you are playing into their hands.  They want you to think there is a difference between the two parties, and there is, on certain issues, just not the ones that REALLY matter.  You have to separate yourself from the game THEY want you to play and back up so that you can see the whole playing field.  If you do that it is easy to see that banks are the real problem and everything else is just a grand distraction.
 
So how corrupt are the banks?  How about this: (with thanks to Jim)
 
 
"Wells Fargo Dismisses Executive Accused of Using Foreclosed Home for Parties

Wells Fargo& Co. dismissed a senior vice president who was accused of improperly using a foreclosed home in Malibu, Calif., for violating company policies.

After a couple who lost money in Bernard Madoff's Ponzi scheme surrendered their oceanfront home to Wells Fargo, neighbors saw one of the bank's executives spending weekends in the $12 million beach house and hosting parties there, the Los Angeles Times reported Friday.

Wells Fargo said late Monday that it concluded its internal investigation with the dismissal of Cheronda Guyton, senior vice president of Wells Fargo Bank and head of commercial ORE, or owned real estate. Ms. Guyton didn't respond to an email message.

"We deeply regret the activities that have taken place as they do not reflect the conduct we expect of our team members," a statement from the bank said."
 
 
 
Now the problem here is that this IS the conduct of these guys.  This isn't an exception.  The reason is, these guys think they are untouchable, and a lot of times they are.  Another time they were caught:

Bank of America defiant over Merrill Lynch bonuses

By Zachary A. Goldfarb

September 10, 2009 | 12:00 a.m.


Bank of America Corp. struck an increasingly defiant tone Wednesday against allegations that it misled investors at the height of the financial crisis, making clear to state and federal regulators that it was willing to wage a legal battle to defend itself.

The bank told a federal judge in court filings that it "stands ready to litigate" if he didn't approve a $33-million settlement with the Securities and Exchange Commission. The company reiterated that it agreed to pay the money only to avoid an extended dispute with one of its regulators.

The filings followed a harshly worded letter to New York Atty. Gen. Andrew M. Cuomo, asserting that his office made "spurious" claims about the bank's conduct and had its facts "simply wrong."

The salvos from Bank of America raise the odds that one of the most controversial chapters of the financial crisis will lead to a protracted court battle in which some of Wall Street's and Washington's biggest names testify.

The dispute involves competing claims over whether Bank of America hid from shareholders important details about its plans for Merrill Lynch & Co., the troubled Wall Street giant the bank agreed to acquire last fall in a hastily arranged deal aimed at avoiding a repeat of the collapse of Lehman Bros. Holdings Inc.

The SEC claims that Bank of America improperly failed to tell shareholders about plans to pay billions of dollars in bonuses to Merrill Lynch employees. Cuomo's broader inquiry also is looking into whether BofA concealed losses at Merrill before shareholders voted to approve the deal.

Bank of America has maintained that it did nothing wrong. Any court trial could involve testimony from BofA Chief Executive Kenneth D. Lewis and former Merrill Lynch CEO John A. Thain.

Current and former federal officials could face increased pressure to come before the court, including Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson, who were actively involved in seeing that the acquisition was completed. Some lawmakers have suggested that the Fed and the Treasury were too involved in the transaction.

Bank of America was joined by the SEC in trying to persuade U.S. District Judge Jed S. Rakoff of New York to approve the settlement.

Rakoff has expressed serious doubts about the settlement and demanded to know why the executives at Bank of America and Merrill Lynch who made the decisions about disclosures weren't charged as well.

The SEC says evidence showed that the executives relied on their outside lawyers and that they didn't conspire to lie to investors.

Rakoff has not indicated when he will rule.

Bank of America's letter to Cuomo was in response to one his office sent to the bank earlier this week. That letter cited four failures to disclose information to shareholders, strongly suggesting that Cuomo was contemplating filing securities charges against Bank of America or its executives.

Goldfarb writes for the Washington Post."
 
 
Think of the arrogance here.  We bailed their asses out and they hid BILLIONS of dollars in BONUSES and now they are demanding we settle with them for 33 MILLION!  You can't make this stuff up.  How does this happen?  It's all about control.  The banks control EVERYTHING.  I am going to include the whole text of a very long story because it really explains what is going on here:  (I have colored highlights)
 
 
"The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."


One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past.

The Fed failed to see the housing bubble as it happened, insisting that the rise in housing prices was normal. In 2004, after "flipping" had become a term cops and janitors were using to describe the way to get rich in real estate, then-Federal Reserve Chairman Alan Greenspan said that "a national severe price distortion [is] most unlikely." A year later, current Chairman Ben Bernanke said that the boom "largely reflect strong economic fundamentals."

The Fed also failed to sufficiently regulate major financial institutions, with Greenspan -- and the dominant economists -- believing that the banks would regulate themselves in their own self-interest.

Despite all this, Bernanke has been nominated for a second term by President Obama.

In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry.

Paul Krugman, in Sunday's New York Times magazine, did his own autopsy of economics, asking "How Did Economists Get It So Wrong?" Krugman concludes that "[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system."

So who seduced them?  The Fed did it.

Three Decades of Domination

The Fed has been dominating the profession for about three decades. "For the economics profession that came out of the [second world] war, the Federal Reserve was not a very important place as far as they were concerned, and their views on monetary policy were not framed by a working relationship with the Federal Reserve. So I would date it to maybe the mid-1970s," says University of Texas economics professor -- and Fed critic -- James Galbraith. "The generation that I grew up under, which included both Milton Friedman on the right and Jim Tobin on the left, were independent of the Fed. They sent students to the Fed and they influenced the Fed, but there wasn't a culture of consulting, and it wasn't the same vast network of professional economists working there."

But by 1993, when former Fed Chairman Greenspan provided the House banking committee with a breakdown of the number of economists on contract or employed by the Fed, he reported that 189 worked for the board itself and another 171 for the various regional banks. Adding in statisticians, support staff and "officers" -- who are generally also economists -- the total number came to 730. And then there were the contracts. Over a three-year period ending in October 1994, the Fed awarded 305 contracts to 209 professors worth a total of $3 million.

Just how dominant is the Fed today?

The Federal Reserve's Board of Governors employs 220 PhD economists and a host of researchers and support staff, according to a Fed spokeswoman. The 12 regional banks employ scores more. (HuffPost placed calls to them but was unable to get exact numbers.) The Fed also doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a "visiting scholarship." A Fed spokeswoman says that exact figures for the number of economists contracted with weren't available. But, she says, the Federal Reserve spent $389.2 million in 2008 on "monetary and economic policy," money spent on analysis, research, data gathering, and studies on market structure; $433 million is budgeted for 2009.

That's a lot of money for a relatively small number of economists.
According to the American Economic Association, a total of only 487 economists list "monetary policy, central banking, and the supply of money and credit," as either their primary or secondary specialty; 310 list "money and interest rates"; and 244 list "macroeconomic policy formation [and] aspects of public finance and general policy." The National Association of Business Economists tells HuffPost that 611 of its roughly 2,400 members are part of their "Financial Roundtable," the closest way they can approximate a focus on monetary policy and central banking.

Robert Auerbach, a former investigator with the House banking committee, spent years looking into the workings of the Fed and published much of what he found in the 2008 book, "Deception
and Abuse at the Fed". A chapter in that book, excerpted here, provided the impetus for this investigation.

Auerbach found that in 1992, roughly 968 members of the AEA designated "domestic monetary and financial theory and institutions" as their primary field, and 717 designated it as their secondary field. Combining his numbers with the current ones from the AEA and NABE, it's fair to conclude that there are something like 1,000 to 1,500 monetary economists working across the country. Add up the 220 economist jobs at the Board of Governors along with regional bank hires and contracted economists, and the Fed employs or contracts with easily 500 economists at any given time. Add in those who have previously worked for the Fed -- or who hope to one day soon -- and you've accounted for a very significant majority of the field.

Auerbach concludes that the "problems associated with the Fed's employing or contracting with large numbers of economists" arise "when these economists testify as witnesses at legislative hearings or as experts at judicial proceedings, and when they publish their research and views on Fed policies, including in Fed publications."

Gatekeepers On The Payroll

The Fed keeps many of the influential editors of prominent academic journals on its payroll. It is common for a journal editor to review submissions dealing with Fed policy while also taking the bank's money. A HuffPost review of seven top journals found that 84 of the 190 editorial board members were affiliated with the Federal Reserve in one way or another.

"Try to publish an article critical of the Fed with an editor who works for the Fed,"
says Galbraith. And the journals, in turn, determine which economists get tenure and what ideas are considered respectable.

The pharmaceutical industry has similarly worked to control key medical journals, but that involves several companies. In the field of economics, it's just the Fed.

Being on the Fed payroll isn't just about the money, either. A relationship with the Fed carries prestige; invitations to Fed conferences and offers of visiting scholarships with the bank signal a rising star or an economist who has arrived.

Affiliations with the Fed have become the oxygen of academic life for monetary economists. "It's very important, if you are tenure track and don't have tenure, to show that you are valued by the Federal Reserve," says Jane D'Arista, a Fed critic and an economist with the Political Economy Research Institute at the University of Massachusetts, Amherst.

Robert King, editor in chief of the Journal of Monetary Economics and a visiting scholar at the Richmond Federal Reserve Bank, dismisses the notion that his journal was influenced by its Fed connections. "I think that the suggestion is a silly one, based on my own experience at least," he wrote in an e-mail. (His full response is at the bottom.)

Galbraith, a Fed critic, has seen the Fed's influence on academia first hand. He and co-authors Olivier Giovannoni and Ann Russo found that in the year before a presidential election, there is a significantly tighter monetary policy coming from the Fed if a Democrat is in office and a significantly looser policy if a Republican is in office. The effects are both statistically significant, allowing for controls, and economically important.

They submitted a paper with their findings to the Review of Economics and Statistics in 2008, but the paper was rejected. "The editor assigned to it turned out to be a fellow at the Fed and that was after I requested that it not be assigned to someone affiliated with the Fed," Galbraith says.

Publishing in top journals is, like in any discipline, the key to getting tenure. Indeed, pursuing tenure ironically requires a kind of fealty to the dominant economic ideology that is the precise opposite of the purpose of tenure, which is to protect academics who present oppositional perspectives.

And while most academic disciplines and top-tier journals are controlled by some defining paradigm, in an academic field like poetry, that situation can do no harm other than to, perhaps, a forest of trees. Economics, unfortunately, collides with reality -- as it did with the Fed's incorrect reading of the housing bubble and failure to regulate financial institutions. Neither was a matter of incompetence, but both resulted from the Fed's unchallenged assumptions about the way the market worked.

Even the late Milton Friedman, whose monetary economic theories heavily influenced Greenspan, was concerned about the stifled nature of the debate. Friedman, in a 1993 letter to Auerbach that the author quotes in his book, argued that the Fed practice was harming objectivity: "I cannot disagree with you that having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results," Friedman wrote.

Greenspan told Congress in October 2008 that he was in a state of "shocked disbelief" and that the "whole intellectual edifice" had "collapsed." House Committee on Oversight and Government Reform Chairman Henry Waxman (D-Calif.) followed up: "In other words, you found that your view of the world, your ideology, was not right, it was not working."

"Absolutely, precisely," Greenspan replied. "You know, that's precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well."

But, if the intellectual edifice has collapsed, the intellectual infrastructure remains in place. The same economists who provided Greenspan his "very considerable evidence" are still running the journals and still analyzing the world using the same models that were incapable of seeing the credit boom and the coming collapse.

Rosner, the Wall Street analyst who foresaw the crash, says that the Fed's ideological dominance of the journals hampered his attempt to warn his colleagues about what was to come. Rosner wrote a strikingly prescient paper in 2001 arguing that relaxed lending standards and other factors would lead to a boom in housing prices over the next several years, but that the growth would be highly susceptible to an economic disruption because it was fundamentally unsound.

He expanded on those ideas over the next few years, connecting the dots and concluding that the coming housing collapse would wreak havoc on the collateralized debt obligation (CDO) and mortgage backed securities (MBS) markets, which would have a ripple effect on the rest of the economy. That, of course, is exactly what happened and it took the Fed and the economics field completely by surprise.

"What you're doing is, actually, in order to get published, having to whittle down or narrow what might otherwise be oppositional or expansionary views," says Rosner. "The only way you can actually get in a journal is by subscribing to the views of one of the journals."

When Rosner was casting his paper on CDOs and MBSs about, he knew he needed an academic economist to co-author the paper for a journal to consider it. Seven economists turned him down.

"You don't believe that markets are efficient?" he says they asked, telling him the paper was "outside the bounds" of what could be published. "I would say 'Markets are efficient when there's equal access to information, but that doesn't exist,'" he recalls.

The CDO and MBS markets froze because, as the housing market crashed, buyers didn't trust that they had reliable information about them -- precisely the case Rosner had been making.

He eventually found a co-author, Joseph Mason, an associate Professor of Finance at Drexel University LeBow College of Business, a senior fellow at the Wharton School, and a visiting scholar at the Federal Deposit Insurance Corporation. But the pair could only land their papers with the conservative Hudson Institute. In February 2007, they published a paper called "How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?" and in May posted another, "How Misapplied Bond Ratings Cause Mortgage Backed Securities and Collateralized Debt Obligation Market Disruptions."

Together, the two papers offer a better analysis of what led to the crash than the economic journals have managed to put together - and they were published by a non-PhD before the crisis.

Not As Simple As A Pay-Off

Economist Rob Johnson serves on the UN Commission of Experts on Finance and International Monetary Reform and was a top economist on the Senate banking committee under both a Democratic and Republican chairman. He says that the consulting gigs shouldn't be looked at "like it's a payoff, like money. I think it's more being one of, part of, a club -- being respected, invited to the conferences, have a hearing with the chairman, having all the prestige dimensions, as much as a paycheck."


The Fed's hiring of so many economists can be looked at in several ways, Johnson says, because the institution does, of course, need talented analysts. "You can look at it from a telescope, either direction. One, you can say well they're reaching out, they've got a big budget and what they're doing, I'd say, is canvassing as broad a range of talent," he says. "You might call that the 'healthy hypothesis.'"

The other hypothesis, he says, "is that they're essentially using taxpayer money to wrap their arms around everybody that's a critic and therefore muffle or silence the debate. And I would say that probably both dimensions are operative, in reality."

To get a mainstream take, HuffPost called monetary economists at random from the list as members of the AEA. "I think there is a pretty good number of professors of economics who want a very limited use of monetary policy and I don't think that that necessarily has a negative impact on their careers," said Ahmed Ehsan, reached at the economics department at James Madison University. "It's quite possible that if they have some new ideas, that might be attractive to the Federal Reserve."

Ehsan, reflecting on his own career and those of his students, allowed that there is, in fact, something to what the Fed critics are saying. "I don't think [the Fed has too much influence], but then my area is monetary economics and I know my own professors, who were really well known when I was at Michigan State, my adviser, he ended up at the St. Louis Fed," he recalls. "He did lots of work. He was a product of the time...so there is some evidence, but it's not an overwhelming thing."

There's definitely prestige in spending a few years at the Fed that can give a boost to an academic career, he added. "It's one of the better career moves for lots of undergraduate students. It's very competitive."

Press officers for the Federal Reserve's board of governors provided some background information for this article, but declined to make anyone available to comment on its substance.

The Fed's Intolerance For Dissent

When dissent has arisen, the Fed has dealt with it like any other institution that cherishes homogeneity.

Take the case of Alan Blinder. Though he's squarely within the mainstream and considered one of the great economic minds of his generation, he lasted a mere year and a half as vice chairman of the Fed, leaving in January 1996.

Rob Johnson, who watched the Blinder ordeal, says Blinder made the mistake of behaving as if the Fed was a place where competing ideas and assumptions were debated. "Sociologically, what was happening was the Fed staff was really afraid of Blinder. At some level, as an applied empirical economist, Alan Blinder is really brilliant," says Johnson.

In closed-door meetings, Blinder did what so few do: challenged assumptions. "The Fed staff would come out and their ritual is: Greenspan has kind of told them what to conclude and they produce studies in which they conclude this. And Blinder treated it more like an open academic debate when he first got there and he'd come out and say, 'Well, that's not true. If you change this assumption and change this assumption and use this kind of assumption you get a completely different result.' And it just created a stir inside--it was sort of like the whole pipeline of Greenspan-arriving-at-decisions was
disrupted."

It didn't sit well with Greenspan or his staff. "A lot of senior staff...were pissed off about Blinder -- how should we say? -- not playing by the customs that they were accustomed to," Johnson says.


And celebrity is no shield against Fed excommunication. Paul Krugman, in fact, has gotten rough treatment. "I've been blackballed from the Fed summer conference at Jackson Hole, which I used to be a regular at, ever since I criticized him," Krugman said of Greenspan in a 2007 interview with Pacifica Radio's Democracy Now! "Nobody really wants to cross him."

An invitation to the annual conference, or some other blessing from the Fed, is a signal to the economic profession that you're a certified member of the club. Even Krugman seems a bit burned by the slight. "And two years ago," he said in 2007, "the conference was devoted to a field, new economic geography, that I invented, and I wasn't invited."

Three years after the conference, Krugman won a Nobel Prize in 2008 for his work in economic geography.

One Journal, In Detail

The Huffington Post reviewed the mastheads of the American Journal of Economics, the Journal of Economic Perspectives, Journal of Economic Literature, the American Economic Journal: Applied Economics, American Economic Journal: Economic Policy, the Journal of Political Economy and the Journal of Monetary Economics.

HuffPost interns Googled around looking for resumes and otherwise searched for Fed connections for the 190 people on those mastheads. Of the 84 that were affiliated with the Federal Reserve at one point in their careers, 21 were on the Fed payroll even as they served as gatekeepers at prominent journals.


At the Journal of Monetary Economics, every single member of the editorial board is or has been affiliated with the Fed and 14 of the 26 board members are presently on the Fed payroll.

After the top editor, King, comes senior associate editor Marianne Baxter, who has written papers for the Chicago and Minneapolis banks and was a visiting scholar at the Minneapolis bank in '84, '85, at the Richmond bank in '97, and at the board itself in '87. She was an advisor to the president of the New York bank from '02-'05. Tim Geithner, now the Treasury Secretary, became president of the New York bank in '03.

The senior associate editors: Janice C Eberly was a Fed visiting-scholar at Philadelphia ('94), Minneapolis ('97) and the board ('97). Martin Eichenbaum has written several papers for the Fed and is a consultant to the Chicago and Atlanta banks. Sergio Rebelo has written for and was previously a consultant to the board. Stephen Williamson has written for the Cleveland, Minneapolis and Richmond banks, he worked in the Minneapolis bank's research department from '85-'87, he's on the editorial board of the Federal Reserve Bank of St. Louis Review, is the co-organizer of the '09 St. Louis Federal Reserve Bank annual economic policy conference and the co-organizer of the same bank's '08 conference on Money, Credit, and Policy, and has been a visiting scholar at the Richmond bank ever since '98.

And then there are the associate editors. Klaus Adam is a visiting scholar at the San Francisco bank. Yongsung Chang is a research associate at the Cleveland bank and has been working with the Fed in one position or another since '01. Mario Crucini was a visiting scholar at the Federal Reserve Bank of New York in '08 and has been a senior fellow at the Dallas bank since that year. Huberto Ennis is a senior economist at the Federal Reserve Bank of Richmond, a position he's held since '00. Jonathan Heathcote is a senior economist at the Minneapolis bank and has been a visiting scholar three times dating back to '01.

Ricardo Lagos is a visiting scholar at the New York bank, a former senior economist for the Minneapolis bank and a visiting scholar at that bank and Cleveland's. In fact, he was a visiting scholar at both the Cleveland and New York banks in '07 and '08. Edward Nelson was the assistant vice president of the St Louis bank from '03-'09.

Esteban Rossi-Hansberg was a visiting scholar at the Philadelphia bank from '05-'09 and similarly served at the Richmond, Minneapolis and New York banks.

Pierre-Daniel Sarte is a senior economist at the Richmond bank, a position he's held since '96. Frank Schorfheide has been a visiting scholar at the Philadelphia bank since '03 and at the New York bank since '07. He's done four such stints at the Atlanta bank and scholared for the board in '03. Alexander Wolman has been a senior economist at the Richmond bank since 1989.

Here is the complete response from King, the journal's editor in chief: "I think that the suggestion is a silly one, based on my own experience at least. In a 1988 article for AEI later republished in the Federal Reserve Bank of Richmond Review, Marvin Goodfriend (then at FRB Richmond and now at Carnegie Mellon) and I argued that it was very important for the Fed to separate monetary policy decisions (setting of interest rates) and banking policy decisions (loans to banks, via the discount window and otherwise). We argued further that there was little positive case for the Fed to be involved in the latter: broadbased liquidity could always be provided by the former. We also argued that moral hazard was a cost of banking intervention.

"Ben Bernanke understands this distinction well: he and other members of the FOMC have read my perspective and sometimes use exactly this distinction between monetary and banking policies. In difficult times, Bernanke and his fellow FOMC members have chosen to involve the Fed in major financial market interventions, well beyond the traditional banking area, a position that attracts plenty of criticism and support. JME and other economics major journals would certainly publish exciting articles that fell between these two distinct perspectives: no intervention and extensive intervention. An upcoming Carnegie-Rochester conference, with its proceeding published in JME, will host a debate on 'The Future of Central Banking'.
"You may use only the entire quotation above or no quotation at all."
Auerbach, shown King's e-mail, says it's just this simple: "If you're on the Fed payroll there's a conflict of interest."


The reality is that the Fed has done this on purpose.  Notice how very few in congress will ever criticize the Fed?  It's always "Big business" or "greedy speculators" that caused  the problems.  When in reality, it is the Fed that is the source of nearly all our ills.  And after we've bailed them out, what is there condition?  Strong and stable?  Well, not exactly......:
 
Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

By Mark Deen and David Tweed
 


Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.


"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."


Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."


A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.


While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.


Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.


G-20 Steps


"We aren’t doing anything significant so far, and the banks are pushing back," he said. "The leaders of the G-20 will make some small steps forward, given the power of the banks" and "any step forward is a move in the right direction."


G-20 leaders gather next week in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers last week reached a preliminary accord that included proposals to claw-back cash awards and linking compensation more closely to long-term performance.


"It’s an outrage," especially "in the U.S. where we poured so much money into the banks," Stiglitz said. "The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?"


Global Economy


Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is "far from being out of the woods" even if it has pulled back from the precipice it teetered on after the collapse of Lehman.


"We’re going into an extended period of weak economy, of economic malaise," Stiglitz said. The U.S. will "grow but not enough to offset the increase in the population," he said, adding that "if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs."


The Federal Reserve faces a "quandary" in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.


"The question then is who is going to finance the U.S. government," Stiglitz said.
 
 
Isn't that special?  You see these guys are bankrupt also.  They are just using the taxpayer to fund their getaway before the Titanic sinks.  We need to immediately end the Federal Reserve and get back to a free market.  Because of the Fed's total control of academia, this won't happen.  So we are destined to go down hard.  A little more analysis of this snip from MontyHigh:
 
"This quote provokes a few thoughts:

"Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult".

It begs the question, what is politically difficult about challenging the banks? You would think the banks are a fat populist target
not politically entrenched. What makes them difficult to challenge? Is it:
(a) They have a huge number of voters standing behind them like the unions? No,
(b) They control TV and newspapers which shape public debate? No, not directly.
It most be something hidden and sinister. The fact that they got that 700 billion dollar TARP money when voters phoned in against it 100 to 1 shows that the hidden, sinister political power of the banks is very real as Stiglitz alludes."
 
 
Yes, why can't the banks be questioned?  Well, now you know the answer.  They are the bosses. 
 
  
The Reality of Bankruptcy
 
Several people were asking me about last week's post and the approximate $1.5 million dollars of debt each family of four is responsible for in debt and liabilities.  One said something to the effect that if they buckled down real hard the family could pay it off but most of today's families just wouldn't agree to do that.  I responded that it is impossible to pay this off.  Here's why.  If the average household income is $50,000, and they pay, let's say $5,000 in taxes.  (this is probably low)  This leaves them $45,000.  Let's divide $45,000 by $1.5 million.  This gives a result of 3%.  This means if the $1.5 million of debt and liabilities had an interest rate of 3%, it would take ALL of the families remaining money to just pay the INTEREST.  The principle would never go down in this scenario.  Not to mention that the family is probably living on the edge with the whole $45,000.  If they "buckled down", they might be able to pay $25,000 a year toward the debt.  That means they couldn't even pay a 2% rate of ONLY interest.  
 
Now most of this debt is at rate much higher than 2 or even 3% so the whole exercise is futile.  There is NO way out by being "fiscally prudent".  The next politician that suggests this is either a liar or economically illiterate.   We are, as a country BANKRUPT, period.
 
 
One Last Thing
 
Here is another chapter from the Crash Course by Chris Martenson.  He does a great job here, of explaining a "trillion".  (thanks to Mike)   Have a great week!

 
 
 
 







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