“And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.” Thomas Jefferson, Letter to John Taylor, May 26, 1816
Confessions of a Quantitative Easer
Confessions of a Quantitative Easer is written by Andrew Hussar who is the former manager of the Federal Reserve’s $1.25 trillion agency backed mortgage backed security purchase program in 2009-2010. This is a commentary based on his Wall Street Journal (WSJ) editorial page confessional on November 2, 2013.
The standard operating procedure and technique used in these situations is to do the “crime” and then “confess” so that you can “be forgiven by the public”. Why the public? The American people are paying for these transgressions. All they have to do is to publicly say, “I am sorry”. It has been used over and over by our political and business leaders for years. In the WSJ article, he clearly states the following facts for which he regrets that he took part.
1. The central bank continues to spin QE as a tool for helping. “But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.”
2. He took over the troubled asset relief program (TA RP). It was passed by Congress with the principal aid of Representative Barney Frank and Senator Chris Dodd. Its stated intent was to keep Wall Street from entering a free fall that would crash the economy and put people out of work. It worked for Wall Street and banks but did not work for Americans. In the last quarter of 2008, 2 million Americans lost their jobs.
The FED knew it would not work for employment but they also knew that it would work for their purposes. Their real purpose was to shore up large banks balance sheets to make the banks appear more “healthy”. The process works like this – The FED creates money out of nowhere; they buy “toxic” mortgages from the FED owners – large banks; the banks get rid of the “toxic” mortgages (worth 30 % – 40% of face value); ½ the cash received is re-deposited in the FED for interest; and the other ½ of the cash is used to buy stocks in the exchange. Who is hired? Nobody. What new infrastructure project is funded? None is. How could this increase employment? It cannot. Who benefits? The Banks benefit and the bankers benefit and got large bonuses for doing such a “good job”. Something is fundamentally wrong with this practice. We give bonuses to the crooks for pulling off the biggest heist in history? This makes me feel like the “One Who Flew Over the Kookoo’s Nest”! Am I the only sane person and everyone else is insane or am I missing something?
There is always a “Stated Reason” and a “Real Reason” for each public political action and position taken such as this. Above, I described the “Real Reason” for TARP and Quantitative Easing. The Federal Reserve’s “Stated Reason” was that they wanted to help the American people. Chairman Ben Bernanke clearly stated that the FED’s central motivation was first “to affect credit conditions for households and businesses” and two to “drive down the cost of credit” so that most Americans could weather the storm. This of course was a lie. He knew that the purpose was to put assets on the large bank’s balance sheets to make them look as if they were solvent when in fact they were insolvent due to their bad decisions of putting toxic mortgages on their books at full face value. Previously, he encouraged them to do so by insisting that they allow mortgages with nothing down – which turned into “toxic” mortgages that people walked from.
Andrew Hussar points out that in its hundred-year history, the FED had never bought a single mortgage bond. Andrew Hussar says, “We were working feverishly to preserve the impression that the FED knew what it was doing.” In fact, research has shown that what was happening was that the banks receiving the $85 billion per month were depositing about half of that back into the Federal Reserve as interest bearing assets and most of the rest was invested into the stock market to buy stocks to shore up the stock market. Meanwhile, the banks were issuing fewer and fewer loans. Why should they take any risk? They have guaranteed profits from the FED and they will get capital gains from the market as they artificially drive the market up with $42.5 billion per month of new money. Although QE drove down the wholesale cost for banks to make loans, Wall Street was pocketing most of the extra profits from interest and capital gains. It appears to me that “The thieves were in the counting house, counting out our money.”
The first round of QE ended March 31, 2010. There had only been trivial increases in the American GDP. However, the US central banks bond purchases was an absolute coup for Wall Street. The banks benefited from lower-cost loans and also benefited from capital gains on the rising values of the security holdings and further. Further, they benefited from the commissions from brokering most of the QE bond transactions. The net result of this is that in 2009 at 2010, Wall Street experienced the most profitable years in their history. Wall Street must have liked these results because QE3 started a few months later after the stock market dropped 14% – probably due to the lack of new money ($42,5 billion) invested by the banks. Germany finance minister, Wolfgang Schauble label the FED actions as “clueless”. Of course, he was thinking of the American people and national sovereignty, not the bank’s survival strategy. It was not “clueless”. It was a directed path for the banks to continue shoring up their balance sheet at the cost of the American public. Banks take the profits and the public takes the losses.
Up to recently, the Fed continued to buy $85 billion worth of bonds a month that now total about $4 trillion. They recently dropped that to $75 billion per month. QE has now become the largest government interaction in financial markets in world history. What has been the result? There has been a couple of percentage points in GDP growth over this period. Unemployment has gone up; the stock market has gone up and the economy has scarcely grown.
Bond experts such as El Erian at PIMCO investments, asserts that the $4 trillion has managed to eke out a $40 billion bump in GDP over this period, which is 0.25% of the GDP. This has been a bad investment for the American people. However, it has been a great one for the banks and its management teams. For instance, during this period, US banks have seen their stock prices triple in value since March 2009. In fact the biggest banks have become a cartel. Only 0.2% of them now control 70% of total US bank assets. In addition, they own the FED. Further, it is becoming obvious that the bond market is now a bubble. When the interest rate goes up as it must someday, the bubble will pop. The interest last year was 1.4% on ten year bonds. It is currently about 3.0% and slowly rising. If it continues, derivatives owners will be forced to pay and they cannot because they are too large. Currently, there are $1.2 quadrillion notional value in derivatives outstanding and most are interest rate swaps.
The conclusion that I draw from this is that Wall Street in collusion with the Federal Reserve and with endorsement of the U.S. Congress has created this bubble in a manner that is consistent with the “Graham-Dodd’s” law of “too big to fail”. When the banks fail, the banks will need more money to cover those bad debts. Where will they get that money? – from the public of course. The only asset yet to be taken is residing in private pensions and 401Ks. They amount to about $29 trillion. The means of getting these assets to save the government, the banks, the managers and the politicians is to use the mechanism of “Bail Ins” and “10-30% Tax on Savings.” This means that when tapering starts and then increases, the system will probably start collapsing and “bail ins” will start. The government rather than increase interest will “tax private savings”. The net result will be the largest financial transfer of wealth from the middle class in history. For those interested, to see how this process that I call “The Sting” has been set to work, see my blog called JP Financial Education here, and look under Articles for those labeled The Sting, Parts I and II. A summary of five relevant articles there is here. The set of laws, government actions, directed lack of reporting by the press, when it occurs would be the largest “White Collar Crime” in history. This could not happen unless there was both active and inactive collusion of bankers, Congress and the Press.
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