Bunning Statement On The Re-Nomination Of Ben Bernanke To Be Chairman Of The Federal Reserve

Senate Banking Committee
Thursday, December 3, 2009

As Prepared For Delivery:

Four years ago when you came before the Senate for confirmation to be Chairman of the Federal Reserve, I was the only Senator to vote against you. In fact, I was the only Senator to even raise serious concerns about you. I opposed you because I knew you would continue the legacy of Alan Greenspan, and I was right. But I did not know how right I would be and could not begin to imagine how wrong you would be in the following four years.

The Greenspan legacy on monetary policy was breaking from the Taylor Rule to provide easy money, and thus inflate bubbles. Not only did you continue that policy when you took control of the Fed, but you supported every Greenspan rate decision when you were on the Fed earlier this decade. Sometimes you even wanted to go further and provide even more easy money than Chairman Greenspan. As recently as a letter you sent me two weeks ago, you still refuse to admit Fed actions played any role in inflating the housing bubble despite overwhelming evidence and the consensus of economists to the contrary. And in your efforts to keep filling the punch bowl, you cranked up the printing press to buy mortgage securities, Treasury securities, commercial paper, and other assets from Wall Street. Those purchases, by the way, led to some nice profits for the Wall Street banks and dealers who sold them to you, and the G.S.E. purchases seem to be illegal since the Federal Reserve Act only allows the purchase of securities backed by the government.

On consumer protection, the Greenspan policy was don’t do it. You went along with his policy before you were Chairman, and continued it after you were promoted. The most glaring example is it took you two years to finally regulate subprime mortgages after Chairman Greenspan did nothing for 12 years. Even then, you only acted after pressure from Congress and after it was clear subprime mortgages were at the heart of the economic meltdown. On other consumer protection issues you only acted as the time approached for your re-nomination to be Fed Chairman.

Alan Greenspan refused to look for bubbles or try to do anything other than create them. Likewise, it is clear from your statements over the last four years that you failed to spot the housing bubble despite many warnings.

Chairman Greenspan’s attitude toward regulating banks was much like his attitude toward consumer protection. Instead of close supervision of the biggest and most dangerous banks, he ignored the growing balance sheets and increasing risk. You did no better. In fact, under your watch every one of the major banks failed or would have failed if you did not bail them out.

On derivatives, Chairman Greenspan and other Clinton Administration officials attacked Brooksley Born when she dared to raise concerns about the growing risks. They succeeded in changing the law to prevent her or anyone else from effectively regulating derivatives. After taking over the Fed, you did not see any need for more substantial regulation of derivatives until it was clear that we were headed to a financial meltdown thanks in part to those products.

The Greenspan policy on transparency was talk a lot, use plenty of numbers, but say nothing. Things were so bad one TV network even tried to guess his thoughts by looking at the briefcase he carried to work. You promised Congress more transparency when you came to the job, and you promised us more transparency when you came begging for TARP. To be fair, you have published some more information than before, but those efforts are inadequate and you still refuse to provide details on the Fed’s bailouts last year and on all the toxic waste you have bought.

And Chairman Greenspan sold the Fed’s independence to Wall Street through the so-called “Greenspan Put”. Whenever Wall Street needed a boost, Alan was there. But you went far beyond that when you bowed to the political pressures of the Bush and Obama administrations and turned the Fed into an arm of the Treasury. Under your watch, the Bernanke Put became a bailout for all large financial institutions, including many foreign banks. And you put the printing presses into overdrive to fund the government’s spending and hand out cheap money to your masters on Wall Street, which they use to rake in record profits while ordinary Americans and small businesses can’t even get loans for their everyday needs.

Now, I want to read you a quote: “I believe that the tools available to the banking agencies, including the ability to require adequate capital and an effective bank receivership process are sufficient to allow the agencies to minimize the systemic risks associated with large banks. Moreover, the agencies have made clear that no bank is too-big-too-fail, so that bank management, shareholders, and un-insured debt holders understand that they will not escape the consequences of excessive risk-taking. In short, although vigilance is necessary, I believe the systemic risk inherent in the banking system is well-managed and well-controlled.”

That should sound familiar, since it was part of your response to a question I asked about the systemic risk of large financial institutions at your last confirmation hearing. I’m going to ask that the full question and answer be included in today’s hearing record.

Now, if that statement was true and you had acted according to it, I might be supporting your nomination today. But since then, you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail. Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Instead of taking that money and lending to consumers and cleaning up their balance sheets, the banks started to pocket record profits and pay out billions of dollars in bonuses. Because you bowed to pressure from the banks and refused to resolve them or force them to clean up their balance sheets and clean out the management, you have created zombie banks that are only enriching their traders and executives. You are repeating the mistakes of Japan in the 1990s on a much larger scale, while sowing the seeds for the next bubble. In the same letter where you refused to admit any responsibility for inflating the housing bubble, you also admitted that you do not have an exit strategy for all the money you have printed and securities you have bought. That sounds to me like you intend to keep propping up the banks for as long as they want.

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton. First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio. Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated. Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par. In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined. I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut. Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks. I also cannot understand why you did not seek European government contributions to this bailout of their banking system.

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure. You stated time and again during the housing bubble that there was no bubble. After the bubble burst, you repeatedly claimed the fallout would be small. And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for. Where I come from we punish failure, not reward it. That is certainly the way it was when I played baseball, and the way it is all across America. Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case. I will do everything I can to stop your nomination and drag out the process as long as possible. We must put an end to your and the Fed’s failures, and there is no better time than now.

In the following interview Jim discusses inflation, deflation, hyperinflation, the U.S. Dollar, gold, silver, social unrest, the Federal Reserve, commercial banks incorrectly positioned on the COT, fraudulent bank balance sheets, the equity market, future opportunity, gold and silver shares and much more.

The link to the interview

By Greg Hunter

Back in the late 60’s and early 70’s prime interest rates averaged 6 or 7 percent. Back before 1971 it was possible to save money at a reasonable guaranteed rate of return and easily keep ahead of what little inflation there was in the U.S. economy. That was the beauty of honest money that held its value and paid a real rate of return. In 1971 all that changed when President Richard Nixon took the country off the gold standard and went to a total fiat currency. A few years later the Employee Retirement Income Security Act (ERISA) was sign into law and that made possible the 401K plan. It allowed people to save in a brand new way largely through the stock market. The stock market is an invaluable tool of capitalism. It is how many companies raise capital and create jobs and prosperity. But what most people do not realize is a 401K is not a savings plan but an investing plan. When you save money, you put it away and get a guaranteed return. In an investment plan the money is put away but not guaranteed. Most people I know do not really understand their 401K plan. Folks are repeatedly told “invest for the long term.” They are also told there is really no other way to save for the future because if you simply save your money inflation will eat up your returns. By and large, working people are pushed into 401K’s. In the right business cycle with the right demographics (as in lots of baby boomers investing in stocks at the same time such as the 80’s and 90’s when business and inflation was stable) the 401K is a not a bad deal especially when you consider that companies often match or contribute funds to make the investment plan advantageous to participants. But in the wrong part of the business cycle (aging baby boomer population and big government bail outs of every big bank) the 401K can provide some gut wrenching lessons about “investing.” People are painfully finding out with every statement that these plans have not been such a good “long term” investment deal. The S&P 500 is back at levels not seen since 1998. And that doesn’t really account for companies whose share prices have been wiped out or bankrupted. A few examples spring to mind such as AIG, WaMu, Wachovia, Bear Stearns, GM, Ford, Fannie, Freddie, Lehman, Enron and World Com. Also, factor in a nearly 30 percent drop in the U.S. Dollar Index and how are people in 401K’s making money for retirement? The short answer: They are not!!! If you would have simply invested in money markets (and taken the company match) back in 1998 with your 401K you would have been hit with inflation but at least you would have a positive nominal return. Most people did take that route. Now, to help fund the multi trillion dollar bailout of Wall Street, the Fed has announced a new policy of “Quantitative Easing.” That means “printing money” to us simple folk. So getting any kind of return on cash will be impossible to do because the government will be printing it faster that you or anyone else can save it. Nobel Peace Prize winner Milton Friedman said it best, “inflation is always and everywhere a monetary phenomenon.” Printing lots of fiat currency is going to produce an ugly phenomenon for most people. I see a continuing freak show of bailout and default. If you are an investor then the stock market and all its risks and rewards are for you but if you are a saver then maybe you should have other options. Wouldn’t it be easier for most people to save if we just had honest money? Someday honest money will be necessary for the county and our citizens to survive.

Greg Hunter is the Economics Editor for CNN.

By Antal Fekete

A Message To American Labor Leaders

The “crime of 1873″

My title is a paraphrase of the 1896 battle-cry of William Jennings Bryan during his presidential bid. He was talking about ‘crucifying mankind on a cross of gold’. Bryan was protesting against the unconstitutional closing of the U.S. Mint to silver. Congress inadvertently suspended the unlimited coinage of the standard silver dollar, which it had no authority to do under the Constitution. Bryan called it “the crime of 1873″.

No battle-cry was issued during this year’s presidential campaign by the finalists in protest against our present unconstitutional paper money system, even though it has started a wave of unprecedented unemployment that would sweep through the land in the wake of the current financial crisis and the official response to it: further serial cuttings of the rate of interest.

Politicians have long ago vacated the field of warning people about the danger caused by violations of the monetary provisions of the Constitution. It is now incumbent on the leadership of American labor to call the workers to rise in protest against the job-destroying policies of the government. Please take a few moments and bear with me as I go through a simple monetary explanation of the job-destruction process that has been going on in America for the past thirty years through serial cuttings of the rate of interest, that will reach fever-pitch next year.

Serial rate-cuts destroy the wage fund

Suppose you are a worker taking home $50,000 a year in wages. When your income-flow is capitalized at the current rate of interest of, say, 5 percent, you arrive at the figure of $1,000,000. The sum of one million dollars or its equivalent in physical capital must exist somewhere, in some form, the yield of which will continue paying your wages. Capital has been accumulated and turned into plant and equipment to support you at work. Part of your employer’s capital is the wage fund that backs your employment. Assuming, of course, that no one is allowed to tamper with the rate of interest.

Suppose for the sake of argument that the rate of interest is cut in half to 2½ percent. Nothing could be clearer than the fact that the $1,000,000 wage fund is no longer adequate to support your payroll, as its annual yield has been reduced to $25,000. This can be described by saying that every time the rate of interest is cut by half, capital is being destroyed, wiping out half of the wage fund. Unless compensation is made by adding more capital, your employment is no longer supported by a full slate of capital as before. Since productivity is nothing but the result of combining labor and capital, the productivity of your job has been impaired. You are in danger of being laid off — or forced to take a wage cut of $25,000.

Lemming-like rush into certain disaster

I have news for you. Employers are not in the habit of compensating for the destruction of capital caused by falling interest rates. Rather, they welcome the cut as manna sent from heaven. They are kissing the hand that is strangling them. They are as badly misinformed about the lethal effects of a falling interest rate structure as the rest of society. They confuse a low interest rate structure with a falling one. No less than employees, employers are hurt by the destruction of capital caused by serial rate cuts. After all, it is their capital, too, that is being destroyed. Nevertheless, they accept at face value the official propaganda line that “falling interest rates are good for you”. Employers are like lemmings running to their own certain disaster.

The “crime of 1971″

In the euphoria of celebrating the advent of the irredeemable dollar in 1971, politicians and economists have ‘forgotten’ to look at the untoward consequences of the New Brave World of synthetic credit. Not only was the dollar destabilized by the ‘crime of 1971′; interest rates were cut adrift as well. The U.S. Treasury was soon forced to print 16 percent coupons on its 30 year bonds which would not otherwise sell.

This did not present much of a problem to the Treasury, since interest on bonds was now payable in irredeemable dollars. The same paper, the same amount of ink, and the same printing press would produce the coupon at the same cost, whether it carried the figure 4 or 16, with which the obligation would be discharged.

However, bringing down the rate of interest from 16 percent to its normal level of 4 percent was a different story altogether. It meant that the rate had to be halved twice from 16 to 8 and from 8 to 4 percent, destroying three quarters of the wage fund. Is there any wonder why so many well-paid American industrial jobs were driven offshore in the intervening years, as production was being outsourced?

Academia and media were silent on the real cause of the de-industrialization of America: the destruction of capital through serial rate-cutting. They are still silent as they expect that the Federal Reserve will do more money magic and pump still more money into the economy, causing rates to fall still more. They are oblivious to the fact that this will destroy still more capital in the process, pulling more rug from underneath employment.

Vanishing capital

The problem is vanishing capital. During the past thirty years capital was destroyed across the board as the long-term rate was pushed down from 16 to 4 percent, and the short-term rate from 22 to 1 percent. The process is insidious: only one in a million can identify the causal relation between vanishing interest and vanishing capital. As a result the captains of industry are not aware of what is happening to the capital of their enterprise until it is too late and they are forced to fold tent. Even then, they have no idea what has hit them. It would never cross their mind to blame irredeemable currency and the serial cutting of interest rates for the disaster. Hat in hand, they go to Washington to beg for bailout money with which they can shore up their capital structure. They don’t realize that Washington will claw it all back just as soon as the next round of rate cuts are announced.

Make no mistake about it: vanishing capital does not disappear without a trace. It is being siphoned away clandestinely from the capital account of businesses, to benefit the issuers of irredeemable dollars and their cohorts. These honorable gentlemen cut rates with their right hand and grab the obscene profits thus generated on their bond portfolio with their left hand. It is legalized embezzlement. Keynesians say that the government can turn the stone into bread through driving down the rate of interest to zero. It would be more accurate to say that the government, in a vampire-like fashion, sucks the blood of labor through the bleeding of their wage fund.

The fate of the auto industry

As a result of vanishing capital the American auto industry, not so long ago the envy of the world, is tottering at the brink. The statistical likelihood of the three giant auto-makers running out of capital at the same time is nil. The fact that they do is the evidence of outside interference. The capital of the auto industry has been eroded and ultimately destroyed by the serial rate cuts of the Federal Reserve. It is true that the industry has been adding new capital in the form of state-of-the-art technology. But it could not keep up with the relentless serial rate-cutting. The Fed can cut rates faster than the auto industry can build and equip new factories.

The blame for the suffering should be put squarely on the criminal check-kiting conspiracy between the Treasury and the Federal Reserve. They issue and swap liabilities which they are neither willing nor able to meet. It is a charade, pretending to serve the interest of the national economy when, in fact, they are destroying the nation’s capital.

The destruction is not visible to the naked eye. The details are in the book-keeping. That’s why the sabotage is so hard to detect. As the rate of interest is being pushed down, it makes inroads on the wage fund. Employers are unable to meet their payroll because the falling interest-rate structure calls for ever larger capital to fund it. Unemployment is the result, which is becoming widespread and chronic.

Under a stable interest rate structure none of this would happen. The auto industry and its workers would have a bright future, as they did before the ‘crime of 1971′ hit them. Every worker who is being laid off should be reminded of that fact. They should know that they are being sacrificed on the altar of Mammon. They should understand that they are being crucified on the cross of paper money.

Capital destruction at an ever faster rate

Please also note that the rate of capital destruction is accelerating as we are getting closer to the black hole of zero interest. In principle halving the rate can continue indefinitely. In reality, ever smaller absolute cuts will have ever greater destructive effect on the wage fund. While in the 1980’s it took an 8 percent decline to wipe out half of the wage fund, right now a 2 percent, and thereafter a mere 1 percent cut will do the trick, causing the same amount of damage to employment. This means that the level of economic pain increases ever faster, soon reaching the point where it will become unbearable.

The situation is more than desperate. The political process has failed. The president-elect has committed himself to the status-quo. He will not challenge the unlimited power usurped by the Fed, as his nomination of the president of the Federal Reserve Bank of New York to the post of Treasury Secretary indicates. This nomination evoked the comment, echoed in the New York Times on November 25, that “Geithner deserves retirement, not promotion”. (He is 47.) Obama’s utterances during the election campaign seem to suggest that he believes in Keynesian prestidigitation, turning the stone into bread through serial cuts in the rate of interest, and in Friedmanite money magic of the printing press.

Labor’s finest hour

The only remaining hope the country has is that labor will not tolerate the ongoing destruction of capital. It will not take it lying down any more. It will take to the streets and confront the small reactionary elite running our monetary regime, including Geithner. This is the most destructive system ever devised: the regime of irredeemable currency. Every time it has been tried in history it failed miserably. As the current crisis clearly shows, this time is no different. What is different is that this time the entire world is on irredeemable paper money. That has never happened before. Accordingly, the stakes are immeasurably higher as irredeemable currency is getting ready to self-destruct.

Labor must take the initiative and demand that Congress put an immediate end to the mindless destruction of capital. Congress should stop the Federal Reserve from pursuing a monetary policy of open-ended deliberate interest-rate cuts. The economy is now like a runaway train with brakes disabled, entering a downhill section of tracks. Crash is certain. At the end of the run the country could be completely denuded of capital, with a large part of its labor force idled.

Labor could be the savior of the country in forcing a return to constitutional money at the eleventh hour, by demanding that the Obama administration open the U.S. Mint to gold and silver. That measure would enable the brakes on the money-train. It would stabilize foreign exchange and interest rates and stop the shredding machine, now spinning out of control, from destroying capital. This would be labor’s finest hour: saving the United States from financial ruin and ignominy.

This country has an intelligent, dedicated, and industrious labor force. The best in the world. It should step into the breach. Time for street action has come, if we want to prevent blood from flowing in the streets later.

by Bill Bonner

This week opened with the wail of fire engines. The Europeans announced a bank rescue, variously reported to cost 1.3 trillion euros (Le Monde)…1.7 trillion (Liberation) or 1.873 trillion (Financial Times). They ought to get their story straight. But who cared…investors had a bid!

As the Great Fire burned through their capital, investors bowed their heads and said their prayers: ‘Please God, spare me…and I will be happy with what I’ve got.” And lo! A host of smoke jumpers came down from the heavens. Investors turned their faces to the sky and thought they saw angels. And there was the archangels Gordon Brown and Henry Paulson leading the flock. Suddenly, the wind died down…and the fiery furnace calmed. ‘Hallelujah,’ they said…and bought some more stocks!

In the last 100 years there have only been two fires similar to that of today. The first inferno was in 1929, centered in New York. The second was in 1989, when Tokyo went up in flames. In both instances, rescuers took extraordinary measures. And in both cases, they not only failed to save the economy, they scorched it even more. Obviously, few economists share this analysis with us. The few who do are probably either insolvent or insane, or perhaps both. So, the burden of proof is on us.

We begin by calling an expert witness; Murray Rothbard, once professor at the University of Las Vegas, now among the forgotten dead. A properly-functioning economy is balanced, he explains in his classic, America’s Great Depression. One industry enjoys an expansion, another suffers a contraction. But sometimes there is a “cluster of errors” which causes a major boom. Whence cometh these errors? Who is responsible for them? Rothbard identifies the culprit: “monetary intervention in the market, specifically bank credit expansion to business.” If Rothbard were still among the quick, he’d probably be pointing his finger at Alan Greenspan – the arsonist who lowered the key U.S. lending rate to an “emergency” level of 1% and held it there long after the emergency was over. With the Fed’s false signal before them, business, investors and consumers racked up the biggest pile of tinder in history. Then, he’d probably point at Ben Bernanke, who continues to add kindling…and to Hank Paulson, who led Goldman Sachs while it created trillions of dollars worth of asset-backed explosives and sold it to financial institutions all over the world.

“The boom…is the time when errors are made…” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom… Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal… Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”

But here come the rescuers with yet more dry wood! After stoking the flames with easy credit…they bring more. Professor Rothbard, reviewing the record of the post-’29 rescue team came to this conclusion: The authorities “met the challenge of the Great Depression by acting quickly and decisively…[using] every tool, every device of progressive and ‘enlightened’ economics, every facet of government planning to combat the depression.”

Yet, the fire didn’t go out. It intensified. An expected recovery in 1931 went up in smoke, says Rothbard, thanks to government meddling:

“The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past or future, the story will be the same.”

Six decades and half a world away, the Japanese proved him right. In January, 1990, a spark touched off the Nikkei Dow. Soon, Japan’s miracle economy was in trouble. Bankruptcies rose. Profits fell. Banks teetered. But the Japanese had their economists too. And soon, they were doing what Hoover and Roosevelt had done before them. As to monetary stimulus, the Bank of Japan’s key lending rate was cut from 5% down to “effectively zero.” And there were plenty of fiscal stimuli too. Japan’s government did just what Keynes recommended – it spent money. It went on a spree of what Alan Booth calls “state sponsored vandalism” in the 1990s, taking the budget deficit to a remarkable 5% of GDP in 2002. Roads to nowhere, concrete shorelines, bridges and dams…Japan, per square mile of available territory, covered 30 times as much surface in concrete as in America. In 1996, the Shumizu Corporation even announced plans to build a hotel on the moon using specially developed techniques for making cement on the lunar surface.

Once again, these heroic efforts produced nothing more than farcical consequences. The Japanese economy is still barely on speaking terms with prosperity. And the Nikkei Dow closed at 8,276 last week… a level last seen (except briefly in 2003) a quarter of a century ago.

America’s pyromaniacs still have a ways to go. There are 150 basis points between the Fed’s current key rate and zero…and the US budget deficit is expected to quadruple – reaching $2 trillion in 2009. In the resulting roast, we predict, even the devil will sweat.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

This is a great article explaining the current condition of the Western monetary system. It was written by Thorsten Polleit who is honorary professor at the Frankfurt (Germany) School of Finance and Management.

Why Fannie, Freddie and AIG All Had To Be Bailed Out

By Ellen Brown

“I can calculate the movement of the stars, but not the madness of men.”

– Sir Isaac Newton, after losing a fortune in the South Sea bubble

Something extraordinary is going on with these government bailouts. In March 2008, the Federal Reserve extended a $55 billion loan to JPMorgan to “rescue” investment bank Bear Stearns from bankruptcy, a highly controversial move that tested the limits of the Federal Reserve Act. On September 7, 2008, the U.S. government seized private mortgage giants Fannie Mae and Freddie Mac and imposed a conservatorship, a form of bankruptcy; but rather than let the bankruptcy court sort out the assets among the claimants, the Treasury extended an unlimited credit line to the insolvent corporations and said it would exercise its authority to buy their stock, effectively nationalizing them. Now the Federal Reserve has announced that it is giving an $85 billion loan to American International Group (AIG), the world’s largest insurance company, in exchange for a nearly 80% stake in the insurer . . . .

The Fed is buying an insurance company? Where exactly is that covered in the Federal Reserve Act? The Associated Press calls it a “government takeover,” but this is not your ordinary “nationalization” like the purchase of Fannie/Freddie stock by the U.S. Treasury. The Federal Reserve has the power to print the national money supply, but it is not actually a part of the U.S. government. It is a private banking corporation owned by a consortium of private banks. The banking industry just bought the world’s largest insurance company, and they used federal money to do it. Yahoo Finance reported on September 17:

“The Treasury is setting up a temporary financing program at the Fed’s request. The program will auction Treasury bills to raise cash for the Fed’s use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters.”

Treasury bills are the I.O.U.s of the federal government. We the taxpayers are on the hook for the Fed’s “enhanced liquidity facilities,” meaning the loans it has been making to everyone in sight, bank or non-bank, exercising obscure provisions in the Federal Reserve Act that may or may not say they can do it. What’s going on here? Why not let the free market work? Bankruptcy courts know how to sort out assets and reorganize companies so they can operate again. Why the extraordinary measures for Fannie, Freddie and AIG?

The answer may have less to do with saving the insurance business, the housing market, or the Chinese investors clamoring for a bailout than with the greatest Ponzi scheme in history, one that is holding up the entire private global banking system. What had to be saved at all costs was not housing or the dollar but the financial derivatives industry; and the precipice from which it had to be saved was an “event of default” that could have collapsed a quadrillion dollar derivatives bubble, a collapse that could take the entire global banking system down with it.
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by Bill Holter

To all; we are now entering uncharted territory. The government seizure of FNM and FRE opens up the next and terrifying chapter of the credit crunch. As I have posited many times before, this has NOW ENDED UP IN THE LAP OF THE U.S. TREASURY! The Treasury is now the backstop to all things paper. This will be a real life “Atlas shrugged”. There are huge implications to this step. The Treasury will now have between $5-6 Trillion of mortgage loans added to its balance sheet. The Treasury is in a huge deficit already to the tune of $10 Trillion of funded liabilities and over $70 Trillion of unfunded future liabilities. It is over. The U.S. Treasury is broke. This will take the entire banking system with it. The banking system will need to writedown $36 Billion of Fannie and Freddie preferred stock that is carried as core capital. This means at a 6% reserve ratio, that another $500 Billion of credit must be withdwrawn to keep capital ratios from collapsing. The Treasury stimulus plan was $140 Billion [remember those $600 checks]. Now 3 times that amount will have to be withdrawn from the credit pool unless Treasury doesn’t magically credit these banks with $36 Billion.

There is no telling how much the carried loans are really worth in todays market as even prime loans are only fetching .80 cents on the Dollar. This will cost at least $1 Trillion at a minimum for starters. It will all be printed. The credit rating of the U.S. will be downgraded, the interest rates the Treasury will now have to pay will increase substantially. This is so Dollar negative it goes beyond words to describe it. The borrowing ability of the Treasury is now being hamstrung by the same credit crunch that we were assured last Sept. was “contained”. I’m sorry but the ruse is over. A government running a deficit can only do two things to cover the gap, borrow more or print. They can’t raise taxes because that will implode the economy even worse than it already is. They will find it more and more difficult to borrow the sums needed until the auctions begin to fail. Then the “black helicopters” will be out in full force spreading freshly printed Dollars. The dilutive effect to the Dollar will be astonishing. We are entering the Weimar Republic phase. The Treasury will be crushed under debt and the Dollar [Fed] will be crushed through overissuance of new currency used to buy the Treasury debt.
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