Reckless Abandon

SUBHEAD: It’s time we all understand that the interests of the financial world are diametrically opposed to our own interests.  

By Raul Ilargi Meijer on 21 September 2011 for the Automatic Earth - (
Image above: Man holds sign on Wall Street -America 99% Poor 1% Rich. From original article.

I'm not even sure if it's right to claim that it's unique to our societies, but it's certainly something like a token sign. We do a lot of stupid and useless things, but this one is right up there with the cream of the crop of them. For days now, the entire financial world seems to be holding its breath waiting for Ben Bernanke to issue a statement on what his Federal Reserve aims to do next, a statement to be delivered today, Wednesday, around 2.15 PM EDT. What makes this so remarkable is that it should be clear to anyone with a pulse and some control of any of their senses left, that Bernanke's upcoming speech is completely inconsequential for more than a very short and fleeting moment in time.

The Fed can't save our economies or banks from the upcoming recession slash depression anymore than it can send a rocketship to Andromeda. The Federal Reserve is impotent when it comes to saving the economy, even if it tries with all its might not to show it. It flaunts its fictional capacity and ability to come up with new and creative well-calculated measures to influence everything from A to Z like once upon a time the emperor flaunted his new clothes. And no matter how badly any and all of its previous measures have failed, the vast majority among us still praises the subtly elegant materials and their dream-provoking shine. We don't want reality, we want to believe.

Oh, but you say, the Fed did succeed at times: didn't QE1 saved the economy?! No, I say, it did nothing of the kind. One might argue that it saved the day, perhaps, but all it really accomplished was to make the crisis more opaque. And granted, that may well be what it was designed for. So in that light, yes, one can argue that the Fed has been highly successful. But that is not what we are looking for in a central bank. What we are looking for is for it to, indeed, save the economy, in order that, in the case of the Federal Reserve, ordinary Americans can look forward to decent paychecks, and homes they can keep living in, and bright futures for their kids.

Well, neither QE1, nor for that matter any other of the Fed's measures of the past few years, have done anything at all to stop housing prices from plunging, to make sure people get hired again, or to make our children's futures look less bleak. And it has failed to accomplish all of this while spending on and lending to the global financial system some $10-$20 trillion in American "wealth", public funds. It’s simply not true that with different policy decisions, the day could be saved.

The choices lie elsewhere: are we going to use the people's money to "save the financial system", or will we use it to alleviate the misery of the people themselves? To date, the choice Washington, Brussels et al have opted for is abundantly clear: not one choice has been made based on what is best for the people. Instead, the people are told that it’s in their best interest if their money is used to prop up failed and bankrupt institutions. And so far, the people buy this baloney. Everyone wants to believe that it's possible to be saved from hardship.

Even if they are thrown step by step into hardship while being "rescued". It’s time we all understand that the interests of the financial world are diametrically opposed to our own interests. This might not have been true if a rescue were possible, but it's not. It’s not even either/or: the financial system is profoundly broke, and governments and central banks cannot fork over enough leveraged credit to make it sound again. The world of finance will have to fess up to its losses, it must default and be restructured, many of its components must disappear never to be heard from again. And the last thing that should happen is for more public funds to be thrown down the banking drain.

Alas, the last thing that should happen is the only thing that does. Basically, we are told that "our" central bank exists for the greater good of society, if not to benefit mankind as a whole, and that its decisions are based on models so complicated, and based on the most thorough science known to the human brain, that it would be futile for any of us to try and understand its actions. We should leave that to the experts, who, oh lucky us, also happen to be solely concerned with our best interests, not their own. Right now, the only time when one of the leading political and/or regulatory bodies in the world volunteers to give you a glimpse of reality, it's to exhort ever and even more of your money.

The IMF came out with a dire report this week, but only so it can argue for more stimulus (which simply means more money being transferred from the public to the private sector). The IMF represents the financial sector; it does unequivocally not represent you, no matter what claims it may make to the contrary. It's nonsense to claim that what benefits the financial sector would automatically benefit you as well. The opposite is true.

To understand and process that fact, however, you will first need to figure out that the entire financial sector is indeed bankrupt. It doesn't seem to be, perhaps, at first glance, but it's not all that hard to see it for what it is. All you need to do is imagine where Wall Street banks, and the world's other main banks, would be today if not for the money they have already received from the public trough. They wouldn’t be anywhere is where they would be; they would no longer operate as going concerns. And then, even with all that money, they have lost 70-80-90% of their market values. It's not all that difficult.

As soon as you hear Bernanke utter the phrase "economic growth" without linking it directly to the phrase "default", you’ll know he's a fraud. Our economies may in all likelihood never return to growth, ever, but they certainly won't do so until the overhanging debt has been purged, starting with the toxic part of it. You should consider anything less from Ben an affront to your intelligence.

Chances are, however, that you won't. Because all these political-media-industry voices will keep on telling you how important Bernanke and the Fed are. The Fed sets interest rates, right? Wrong. It does nothing of the kind. All Bernanke can do is set a Fed funds rate, close his eyes, fold his hands and pray it’ll stick for more than 5 minutes. That's the extent of his control over interest rates. In reality, the markets set interest rates. A nice example came yesterday from Ian Talley at Dow Jones Newswires, with a headline that ran: IMF Urges ECB To Keep Italian Borrowing Rates Down.

That's all you need to know, really, when it comes to central banks and their grip on interest rates. Obviously, the ECB would love to keep Italy's borrowing rates down, it would save it a huge headache. Problem is, it can't: the markets currently demand a much higher rate for Italian debt than the ECB, or Rome, like. What the IMF wants the ECB to do is buy huge piles of Italian debt, while in the process de facto crippling the free market system.

 But until and unless Italian debt is purged, the ECB would have to buy all of it, including all the upcoming dozens of billions in rollovers, or Italy would need to go elsewhere anyway. The ECB may save the day, but that's all: it can't even save the week that day is in. The Fed has a bunch if options this afternoon, say the media. It can Twist, i.e. sell short term Treasuries to buy long term ones, but that buck stops at about $300 billion and carries no surprises, is priced in. It can cut the interest rate it pays on excess reserves banks hold with it (IOER).

Priced in as well, and by no means a big deal to begin with: banks are not going to start lending again all of a sudden because that rate falls from 0.25% to something even less. The third option is a change of language, to the effect that Bernanke will say they'll keep interest rates at X% until unemployment is below Y%, as long as inflation remains below Z%. Well, that is moot, since, as we saw, the Fed doesn’t set interest rates. What is interesting in this regard is what language Ben will utter when a Greek default starts the EU downfall and the grand flight to safety into the USD and Treasuries. It'll demolish US exports, which will demolish jobs, which will drive down home prices, and so on and so forth. The dollar will be strong, but the majority of Americans won't have any.

 Ben will, in that case too, still be naked and impotent, but don't count on him admitting it. And that's the real problem here, isn't it? Surely there must be some neuron in that bald scalp that realizes it's attached to nothing but a chubby flubby naked body. That neuron, then, will also realize that the body has no balls either.

Wouldn't it be something if Bernanke simply states the truth later today, and tells the nation there's nothing he can do to save it, but that even though he may be impotent, he sure as hell still can grow a pair, and he's decided to come clean? Nah, dream on, that would take a real man.

 PS: No, it's true, Bernanke is of course not entirely without power. He has the power to take as much of your money as he pleases, to do with as he pleases. And he does so with reckless abandon. But that's not what he's going to talk about. .

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