Fed Versus Fraud

SUBHEAD: The danger here is debt repudiation going viral as borrowers realize there is no end to them being had. Image above: Political cartoon by Craig Bennett for the Chattanooga Times Free Press. By Steve Ludlum on 14 October 2010 in Economic Undertow - (http://economic-undertow.blogspot.com/2010/10/fed-versus-fraud.html) One of the reasons the world's economies haven't disappeared down some alley to an awful fate has been the efforts of the Establishment in all parts of the world to keep 'Key Men' afloat. When a systemically important institution looks like its going to give out and trigger (the final, fatal) disturbance various central banks and political organs rush in with bags of freshly borrowed money. Another teetering 'Key Man' is propped up. Lehman Brothers was a mistake. So was the Great Oil Spike. Never again! Look who gets support? Big Wall Street investment banks, Insurance companies, credit card companies (which turned themselves into street corner banks in order to access the discount window), auto manufacturers, Fannie and Freddie, large manufacturers with bank-like subsidiaries, Greece, Dubai, Latvia, California, Illinois (and a bunch of other US states), various Anglo-Irish banks, French banks, German banks, Chinese banks, most of Japan, Chinese construction companies, Chinese real estate speculators ... US stock speculators, gold speculators, commodities traders ... the list goes on and on! When I grow up I want to be a Key Man! The only growth industries in the world right now are poverty and bailouts. The number of Key Men in trouble threatens to overwhelm the resources left to prop with. Crooks get bailed. The honest get stuck with the bill. This is a characteristic of our post-modern crisis. It's of a piece with its parent, industrialization. Identical promises are made by hopeful promoters: one more bailout, one more taxpayer ruined, one more group of employees fired and the recovery will take place. Just one more sacrifice by someone low to the ground to the interests of the the temporarily discomforted Key Men and recovery - glorious recovery - will spring across this great land like a new dawn! All money creates an equal amount of debt - a bookkeeping entity - contingent to its birth. This debt vanishes by repayment or default. Money tends to remain in circulation for extended periods along with its debt shadow. As business expands more money is lent into existence, at some point the amount becomes unserviceable by business cash flow. The outcome of money/debt creation is periodic deflations where debt is defaulted upon or repaid. Excess debt is destroyed along with money. When debt levels reach the point where they can be serviced by commerce the cycle repeats and debt/money increases again. What is taking place is an attempt to maintain the large level of debt by the Establishment adding new money in an attempt to replace that destroyed by repayment or default. The intention is to support asset price levels so that declines as collateral do not render creditors insolvent. The nation suffers for the sake of bookkeeping entries! At the same time, the establishment seeks to keep funding itself at levels it can afford. So far, this exercise has failed as there is little business activity to support high levels of debt. As fast as fresh funds are shoveled into some rathole, debt is destroyed at a greater rate in other ratholes. Since the wealthiest often possess the greatest debts or have the greatest amounts due them, their claims gain priority. Their credit issues threaten others because they are counterparties to so many. The assets of the 'little people' are dragooned into the socially useful task of servicing or repaying the liabilities of their betters. Usually the government is the agent of the wealthy deadbeats and the 'Key Man' effort becomes political necessity. When the effort fails, the outcome is labeled a 'mistake' and blame is fixed on 'liberals'. Rapidly corroding modernity weighs overwhelmingly upon its forest of creaking props. New Key Men are materializing every other day. The central banks are in a quandary. In order to satisfy all the key men an astounding sum of funds needs to be created - out of whole debt - and turned over to the wealthy. The estimable Ed Harrison writes of Paul Krugman's plan: Krugman: We Need $8-10 Trillion Worth of Quantitative Easing Video above: Warning - advertisement first. Paul Krugman on CNBC. From (http://www.creditwritedowns.com/2010/10/krugman-we-need-8-10-trillion-worth-of-quantitative-easing.html). By Edward Harrison on 13 October 2010 for CreditWritedowns.com - (http://www.creditwritedowns.com/2010/10/krugman-we-need-8-10-trillion-worth-of-quantitative-easing.html)

The interesting thing about this clip is that Paul Krugman is probably right: you need trillions of printed dollars to get the stimulative effect the Federal Reserve is looking for. Ambrose Evans Pritchard was talking about taking the Fed’s balance sheet to $5 trillion in June.

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed’s balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

In the video above, Paul Krugman talks about $8 – $10 trillion of Treasury buying. I think the sum needed to provide the stimulus the Fed wants could be higher still. Krugman doesn’t think this will happen.

Earlier today I picked up on a Reuters piece on this issue at Portfolio.com. It says:

"One should not expect too much from further quantitative or credit easing," said Olivier Blanchard, the chief economist of the International Monetary Fund. "It should be done but the implications for the economy will be limited."

Christina Romer, who recently stepped down as a White House economic adviser, said the Fed is in uncharted waters and it is unclear how much further easing will accomplish.

"There’s a lot of questions about quantitative easing and how it works and how communications policies work, but they need to be tried because this is still a crisis," she said.

My take: monetary policy won’t have much oomph here. Fiscal policy is better and more targeted. But, of course, fiscal policy is off the table except for a re-institution of the Bush tax cuts. So, we’ll see some serious money printing instead – probably not $10 trillion, but a lot.

The Fed is calling the shots - there are no other entities able to produce the appearance of funds so the central banks are in the spotlight by default. They must produce fake currency and endeavor to keep the population of key men afloat. Neat trick if it can be done, as the central bank liquidity illusion is constrained by two opposing sets of circumstances. On one hand, any sum less than $10 trillion will be insufficient to have any effect on declining output. Yet, the Fed cannot create any new money by quantitative easing! 'Funds' created by this means wind up as reserves at the Fed! It's a shell game. Anything shoveled down a rathole is the result of a rathole created elsewhere. Shuffling funds between ratholes creates the Potemkin Economy where asset market reactions are seen as a substitute for productive enterprise. 'Fake', 'Appearance', 'Illusion': QE is Cash For Clunkers Deux, another pitch to put suckers further into debt. Fed and Fraud, one is all the other has left to sell! Finance players are participants in Planet Bernanke's money laundering operation, where worthless finance paper is swapped for cash, both of which are kept out of circulation. What keeps the markets afloat is a Key Man con game; the proposition that traders who are good gurls and don't panic will ultimately be able to swap their assets for cash as have their predecessors. To keep the mechanism working reserves are swapped back into the custody of asset markets. This is a fraud that generates its own hazards. The amounts of finance paper outstanding are massively larger than any amount that the Fed might absorb onto its balance sheet. It is patently obvious that most 'investors' will never be bailed out. As time passes, this puts the entire operation on a knife edge; any change in perception threatens the dynamic and can precipitate a race to the door, to grasp what available cash as can be had. Since quantitative easing represents both favoritism to certain clients and a change in the dynamic, the Fed risks creating the very circumstance - a money panic - it seeks to avoid. No wonder Thomas Hoenig rants in Fed speak:

Hoenig: QE2 adds to uncertainty with few benefits Thomas Hoenig, the president of the Kansas City Federal Reserve Bank, repeated his opposition to another round of bond buying by the central bank. In a speech to the National Association of Business Economists, Hoenig said more quantitative easing only adds to the uncertain climate in financial markets with only few offsetting benefits. He called quantitative easy a "very risky strategy" for the Fed because there would be "no idea" at what level inflation might settle as a result. Hoenig, a voting member of the FOMC this year who has dissented at all six meetings to date, repeated his call for the Fed to lift interest rates off the zero level and to scrap its pledge to keep rates low for an "extended period."

As all this takes place the next decomposing key man shambles into view: the ongoing mortgage industry fraud that threatens to take down the entire constellation of real estate- invested banks. What's at stake is the small matter of whether the real estate business is trustworthy or not. Here's Yves Smith:

The Wheels Are Coming Off in MBS Land: All 50 State AGs Join Probe; Banks Abandoning MERS Foreclosures (http://www.nakedcapitalism.com/2010/10/the-wheels-are-coming-off-in-mbs-land-all-50-state-ags-join-probe-banks-abandoning-mers.html)

I get on an airplane, and there are more dramatic developments by the time I land.

Even though the headline item is the fact that the attorneys general in all 50 states are joining the mortgage fraud investigation, the real indicator that the banks are stressed is that they have started abandoning MERS, the electronic database that passes itself off as a registry for mortgages. JP Morgan has quit using it as an agent on foreclosures; it clearly can’t withdraw from it fully, given that it has become a central information service.

Despite this being treated as a pretty routine event in the JP Morgan earnings call, trust me, it isn’t. The withdrawal of JP Morgan from the use of MERS as the face in foreclosures is a tacit admission that the past practice of using MERS as the stand -in for the trust is problematic. I’ve heard lawyers discuss the possibility of class action litigation to invalidate all MERS-initiated foreclosures in states with strong anti-MERS rulings; this idea no doubt will get more traction given JP Morgan’s move. (An attorney who is in the thick of this situation told me another major bank has made the same move as JPM, but I see no confirmation in the news as of this writing).

The triggers for the sudden escalation appear to have been the release of a research note by Citigroup which included a grim assessment (which we did not consider to be dire enough) by Professor Levitin to Citi clients on likely path of the mortgage crisis. This was no doubt compounded among the cogoscenti by the research note published by Josh Rosner, that most if not all notes (which are the borrower IOU in a mortgage) were endorsed in blank, which creates near insurmountable problems in foreclosure, worse even for the RMBS ownership of them as de facto mere unsecured paper.

The danger here is debt repudiation going viral as borrowers realize there is no end to them being had. Instead of accountability, the establishment rushes in with more props to keep oppressive business entities in positions of supremacy. Nothing gets fixed, only more debt is added requiring more pressure to be put onto borrowers. Analogies to this aren't hard to come by. Events are accumulating faster than the Establishment can muster resources to deal with them. The largest problem is obliviousness to any solution other than bags of money hurled at issues from a distance propping up crooks and charlatans. Holding responsible people responsible would be cost-free and return immediate dividends. The MERS and related foreclosure controversies are represent a paperwork avalanche. The scope of the bubble and the complexity of the mechanism designed to manage it have proven beyond the process- management resources of the companies involved - hence, 'Robo- signers'. What is needed now is assembly lines of government clerks with no other job but to sort and collate the paper trails fixed to a trust mechanism that insures fairness while liquidating what cannot be supported. This could be something along the lines of the Resolution Trust Corporation. Instead the Establishment stands on the sidelines wringing its hands while nothing is done. Shades of 2008; it's a race between past and present, between the Fed and Fraud and there is no doubt who is going to win. .