Wednesday, September 19, 2007

Bernanke's Zimbabwe Plan for the US Economy

Fed Raids Your Paycheck and Bank Account To Bailout Banks, Wall Steet, and Mortgage Delinquents

Note: A lower dollar is not necessarily bad per se but the current dollar dive is a symptom of bad policy (such as structural savings, budget, trade, and current-accounts deficits) and the Fed's September 18 rate cut looks misguided for many reasons: 10 Reasons against a Federal Reserve Rate Cut.

The United States Federal Reserve yesterday chose an inflationary plan by lowering the Fed funds benchmark interest rate 50 Basis Points (bps) to 4.75%. The US dollar immediately reacted to the news by falling against major world currencies and commodities:

  • The dollar fell to a record low against the Euro.
  • The dollar fell to less than half the value of the British Pound Sterling.
  • The dollar fell to a record low against a barrel of oil (i.e., oil hit a record high over $82 per barrel).
Debasing your currency and reducing your buying power as an alleged road to prosperity is an old trick to attempt to hide financial problems and to attempt to avoid paying debts (e.g. paying you back in devalued money worth less than what was borrowed--so the government can pay you your Social Security with "Monopoly money").
"Social Security is a cash program and the government can always print more cash" (Alan Greenspan, 9/20 interview).
Sometimes, the policy is "successful" insofar as it fleeces the average consumer without the consumer being aware of the pickpocketing "inflation tax." Other times, the policy runs so far out of control that the scam becomes obvious even to the most inattentive. The German Weimer Republic tried it and the social unrest led to Hitler. Zimbabwe tried it recently and its economy collapsed:
  • The International Money Fund (IMF) warns that Zimbabwe inflation might reach a 100,000% annual rate.
  • The Zimbabwe government "solution" includes printing a Z$200,000 bill to make it easier to carry baskets of cash to buy everyday items.
  • 2006 Zimbabwe prices included Z$50,000 for 2 eggs and Z$110,000 for a loaf of bread.

By the way, the destruction of Zimbabwe's economy began with the Robert Mugabe government's real estate policies for "fair" widespread ownership (initially subsidized by the United States).

Does trying to socially engineer widespread real estate ownership sound familiar?

Thank the Fed for reducing your purchasing power.

Bernanke's double-cut of 50bps has planted both feet firmly on the Zimbabwe side of the fence.

Welcome to Zimbabwe?

Tuesday, September 18, 2007

Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt

Government Doublespeak: 5.25% is too low. No, too high. No, too low. No, too high. . . .

The Fed already, instead of solving a problem, has created an additional problem. The Fed’s August bailouts and promises have led the markets to (1) believe that the current rate is "too high" and (2) expect a September cut to the benchmark Fed funds rate of 25-50 basis points (bp, 0.25-0.50%), according to the Chicago Board of Trade’s Fed-funds futures market.

The Fed created this "reality" and now has to live with it.

Wall Street might throw a tantrum if it does not get its “fix” of easy money through a nominal rate cut. Wall Street might ignore that a rate hold (no cut, no increase) could be a relative cut (in global context). Wall Street might display Delirium Tremens if the Fed raises the rate 25bp.

The potential September market “crisis” (if the Fed does not cut rates today) is an unnecessary crisis that the Fed has manufactured for itself.

Did the Fed deliberately paint itself into a corner to give itself a “systemic” excuse to bailout speculators, or is the Fed incompetent at managing expectations?

If the Fed does ambush the markets with a rate hold (no cut), remember that the turmoil will include anger and confusion over the Fed’s policy deception, not only the interest rate per se.

Do not blame a “crisis” on “high” interest rates which are not high at all.

Government pro-debt doublespeak sings the opposite song to consumers.

Indeed, meanwhile, recent National Association of Realtor (NAR) advertising and government pro-debt propaganda have argued to consumers that 5.25% is already dirt cheap, to get Americans to keep spending money they do not have by ignoring the past rate rises that increased the Fed funds benchmark rate from 1% to 5.25%:

"[T]ake advantage of historically low mortgage rates" (Today's Colorado Federal Savings Bank, based on 5.25% Fed funds benchmark rate, before today's FOMC meeting results. Actually, Fed rate cuts have limited impact on mortgage rates but they are a favorite sales pitch for home sellers).

US interest rates should be higher than the current 5.25% based on fundamentals such as the US savings rate, current accounts balance, and foreign currency exchange rates, so the current 5.25% is already an anti-recessionary, stimulating, low rate.

Thursday, September 13, 2007

Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke

The Swiss National Bank increased its benchmark interest rate 25 basis points (bps) from 2.50% to 2.75%

European Central Banks Differ Amid Crunch (Wall Street Journal)

See Reason #10 for the implications: 10 Reasons Against Federal Reserve Rate Cut

Wednesday, September 12, 2007

10 Reasons against Federal Reserve Rate Cut

Previous: Federal Reserve Pushing on a String

Cutting interest rates to bailout markets will have 1 of 2 possible results: bad or horrible. Either the Federal Reserve will fail to prop up inflated asset prices but throw a wrench into the works while trying, or the Fed will succeed for a time and cause years of more bad decisions based on faulty pricing.

  1. Rate cuts to increase the credit supply are misguided when the current economic condition is a healthy credit-demand crunch.
  2. Rate cuts, and the Fed’s acceptance of mortgage securities as collateral alongside Treasury debt, perpetuate the information crunch about what a good investment is, not solve it.
  3. Rate cuts to increase credit/debt worsen rather than help the savings crunch.
  4. Rate cuts caused the inflated prices and bad debt problems, and more rate cuts prevent the market solution (temporary credit-demand crunch during re-pricing) from working.
  5. Rate cuts are not good for the economy as a whole, they are “good” for imperiously picking winners and losers by changing the rules in the middle of the game, so slick traders caught with the hot potato can unload junk on the next greater fool (maybe you). The Fed also burned smart investors who "shorted" the market (bet on a downturn) when the Fed changed the rules overnight with liquidity bailouts that favored one interest group at the expense of others.
  6. Rate cuts now are a panicky, profligate overreaction when the housing bubble bust has scarcely begun and at least a year (up to 5 years) of foreclosure-causing adjustable-rate mortgage (ARM) resets of interest rates remain on the horizon.
  7. Rate cuts are too late to stop the ongoing foreclosure meltdown and will do little or nothing to help the cherry-picked "poster-children" dragged in front of the TV cameras to justify a bailout--but the cuts will benefit people that you might not want to help. First, a Fed rate cut might subsidize healthy, wealthy prime borrowers who do not need help yet fail to save subprime borrowers during resets with increasing risk premiums (the rate gap between good and bad borrowers). Second, troubled borrowers are more likely to have ARMs, and most ARMs are based not on Fed funds but on the London Inter-Bank Offered Rate (LIBOR), and LIBOR has been diverging up and away from the effective Fed-funds rate, so Fed cuts are quite useless against all the adjustable LIBOR-indexed mortgages. Third, prime fixed mortgage rates are related to 10-year Treasury notes which are set by market trades, not the Fed, and are based on market expectations of long-term inflation rates, not short-term Fed-fund rates, and today's markets might be less likely to believe Greenspan's Goldilocks fairytale of non-inflationary cuts, so an inflationary rate cut might cause the standard 30-year fixed-rate mortgage rate to increase, not decrease. Fourth, Fed-fund rate cuts might have little direct downward effect on mortgage rates in today's conditions (mostly only on prime, non-LIBOR ARMs) but rate cuts will bailout the biggest fans of lower short-term US interest rates, Wall Street and financial-sector stocks.
  8. Rate cuts might be ineffective or dangerously extreme: If a 1% Fed funds rate was "needed" in the blissfully ignorant days of the bubble's birth with no excess housing supply and low unemployment, how low a rate is needed now that the much demanded tighter lending standards have obliterated swaths of buyers, remaining potential buyers (solvent investors, including dollar-rich foreigners) are gun-shy of junk assets, and there is a housing glut?
  9. Rate cuts now might cause a "liquidity trap" by plunging interest rates to near 0% interest to avoid the bubble correction and thereby leaving no room to stimulate the overall economy when the recession arrives.
  10. Rate cuts might cause a further plunge in the dollar’s exchange rate. The Bank of England and (despite continuing liquidity infusions) the European Central Bank (ECB) each announced an upward policy bias with an eye toward raising interest rates, which in itself can act like a relative Fed cut to weaken the dollar (investors expect European returns to be higher relative to US returns, so they need fewer dollars but need more Pounds or Euros to buy European investments). The Fed would have to raise rates to match the European increases simply to maintain the existing rate spread to keep the dollar competitive. A Fed rate-hold while Europe increases is like a relative Fed cut. A Fed rate cut while Europe raises rates could double the run on the dollar.

*Swiss RAISE Interest Rates 25 Basis Points, Mr. Bernanke
*Federal Reserve Bailouts Create Crisis after Crisis, Government "Fixes" Keep Driving Americans into More Debt
*Bernanke's Zimbabwe Plan for the US Economy

Friday, September 7, 2007

Greenspan Needs YOU to Bail HIM Out?

Brother, Can You Spare a Trillion?

Greenspan's Financial Conflict of Interest

Can you find it in your heart to accept more inflation eating away your paycheck before poor Alan is down to a measly $4 million?

Thursday, September 6, 2007

$31billion Federal Reserve Bailout Today

Previous: $57billion European Central Bank Bailout Today

The ECB leads the Fed by the nose again:

UPDATE 2-Fed pumps in sizable funds after ECB (Reuters)

Fed Panics Again

The effective Fed funds rate trended up to 5.31%, above the 5.25% target rate, but the Fed did not have to intervene (the effective rate neared 6% in August) yet the Fed overreacted again to stop any hint of a market correction to interest rates. As Not One Cent predicted, Fed open-market actions (and small reductions to interest rates) appease only temporarily because they do almost nothing to remove the fundamental information, collateral, and insolvency problems:

Federal Reserve Pushing on a String

Should Ben Bernanke Resign? Who Should Be the New Federal Reserve Chair?

$57billion European Central Bank Bailout Today

The European Central Bank (ECB) offers 42.2 billion Euros to bailout speculators and prop up inflated global asset bubble:

ECB Offers $57 Billion One-Day FundsIn Bid to Boost Banks' Liquidity (Wall Street Journal)

Australia joined the bailout bandwagon with a liquidity injection and a loosening of security-repurchase standards.

Next: $31billion Federal Reserve Bailout Today