Volcker Rule: They Shoot Horses, Don't They?

If the Volcker Rule were posited as a panacea, much of the criticism that has been leveled by the bank lobbyists and their congressmen, and sincere critics who were surprised by its ungainly introduction into the reform deliberations, would be correct. However, I do not think it was, but I could be wrong.

Because a cure for heart disease does not also cure diabetes does not impugn its effectiveness in curing heart disease. And if the patient has both heart disease and diabetes, one might expect a variety of remedies used in careful combination.

What the Volcker Rule would have accomplished is to take the gamblers away from the new “discount window” of Fed and Treasury subsidized programs. It would have also put a serious dent in the ‘Too Big Too Fail’ meme, although it alone was not enough to do that, as it lacked some teeth. But it opened the door to a debate that is not occurring.

What exactly is the role of the financial system, and what needs to be done to regulate it, and help it to perform some utility to society's greater functions? Is the relationship between the financial sector and the productive economy out of balance?

I want to stress this. Any proposal that has not been hammered upon by multiple minds, and tempered with the objections and observations of many perspectives, is likely to be premature, needing much work. By its method of introduction, I fear that the reconsideration of the relationship between the FIRE sector and the productive economy is now off the table.

People seem to be making assumptions about what the Volcker Rule would and would not include. For example, there is reference to the 'shadow banking system' that is something relatively new, the intersection of investment banking and mortgage origination. Does anyone really believe that Volcker would object if mortgage origination and similar long term loans were relegated to the commercial banks and the GSE's? I think not.

For me, the 800 pound gorilla is who obtains access to the discount window and Treasury guarantee programs, and who can be a primary dealer for the Fed. I would say that a company that is not a bank cannot. It is as simple as that. And this is what Wall Street hates so much about anything like Glass-Steagall or the Volcker Rule. They want to be able to tap the Fed's balance sheet, and still maintain their aggressive leverage.

There is a reason that the banks engaged in a decades long effort, costing hundreds of millions in lobbying payments of various sorts, to overturn Glass-Steagall. To ignore that reality is to fall into the trap of the financial engineering distortion that is crippling the Western world. The bankers wanted to broaden their portfolio to intertwine their higher risk efforts with the public trust, as insurance against the occasional setback to even the best laid plans.

Relatively simple systems are more resilient and robust; needlessly complex systems are doomed to increase in complexity to the point of failure without accomplishing anything except more complexity.

The trade offs are always there, and a good system contains a mix of both.

Perhaps the new ‘reform legislation’ will be effective, but I doubt it quite a bit almost to the point of certainty. It will be hailed as an 'evolutionary effort' but will contain loopholes large enough to drive a CEO's bonus through. . If it does nothing to separate self interested, higher risk speculation from the trough of the Fed's balance sheet, it will institutionalize moral hazard, which has probably been the goal of the banks all along.

If the reform legislation relies on firms erecting 'chinese walls' within their firms, and regulators being able to sort out various types of regulated and unregulated activity within a firm, then it is my opinion that it is anathema to sound financial management, and doomed to failure. The problem is fraud, and deception, and regulatory capture. The rules must be as clear, simple, and difficult to cheat as is possible.

And then we will see the return of the financial pundits, suggesting this tweak, and that tweak, this addition to close that loophole, and if only we had made this change. Its a good game really, because it ensure a steady flow of funds from the bank lobby to the Congress, and full employment for financial engineers who can engage in endless argument about the relative merits of the latest tweak.

And the zombie banks will continue to drain the life from the real economy, not in dramatic bailouts, but in a steady stream of slow debilitation. But they will be able to pay enormous salaries and bonuses to their captains and lieutenants, by gaming nearly every financial instrument and market in the world.

This is what will doom the West to a stagflation that will mimic the long Japanese decline, their lost decades. It may not ultimately be resolved without social disorder.

The people are still too easily lulled by jargon and reassurance, and the econorati still believe in financial engineering. If only we put a clever tweak here, and an easy rule change there, things will be fine again. That is why allowing engineers to fix their own 'big system' problems is almost always doomed to failure, because they are too intellectually fascinated with their own creation, and cannot see it in the stark light of objectivity and its function as part of the whole.

How will we fix this? How will we accomplish that? Well, perhaps one can look at how those functions were addressed before the system started to go off kilter, say around 1990, and find an answer there. But that drives the financial engineering crew batty, because it sounds antithetical to Progress. It might stifle innovation.

Well, one might as well say that if they stop getting drunk and engaging in random sex, they will also not wake up next to so many new and interesting people. The point is, you do not have to engage in high risk behaviour to accomplish personal and institutional growth. And there is a role for stifling some things, so that only the good can thrive. It is a basic principle of what used to be called conservatism before it was co-opted by the neo-cons. We have to keep first principles in mind even as we change the specifics.

Was the real economy served better by subprime mortgage collateralization and the growth of an unregulated shadow banking system? Ask the average person, and the answer is clear. But the question is never put that way. To a financial engineer, it is the system itself that matters, and not its primary application, to serve the real economy.

The objective of reform would ideally be more than merely preventing the next collapse of the same sort. It would involve giving the middle class a fighting chance to recover itself and prosper again. And that would involve shrinking the portfolio of the Wall Street banks, and expanding the function and stability or regional and local banking. Already the elite are softening up that hope, of a middle class recovery, by forecasting years of underemployment and decline as an inevitability.

The title of this blog does not refer to the Volcker Rule, which was dead out of the gate by its method of introduction into the process, late and fleshless, and quite possibly by intent to stifle debate. It refers to the public, the poor horses that will be beaten senseless by the FIRE sector over the next ten years for their diversion and entertainment. Am I wrong?

So time to move on, to assess what will be coming out of Washington by way of reform. But I have little hope that there will be anything in it that does not serve about ten corporate institutions well, and a financial elite, to the disadvantage of the rest of the world in the form of distorted markets, institutionalized fraud, and the seignorage of the currency reserves.

Would that I am wrong, I doubt it very, very much.

Non-Farm Payrolls Report Preview for January 2010

The markets breathlessly await the latest Non-Farm Payrolls Report for the US, which will be released tomorrow morning. January is the month in this report that contains the largest seasonal adjustments by far.

Here is a projection of what tomorrow's numbers may look like, and their historical context. The raw number unadjusted for seasonality may be a loss of around 4,000,000 jobs.



It is no accident that the BLS does the major adjustment to its Birth-Death Model in January. Keep in mind that the Birth-Death adjustment is applied BEFORE seasonal adjustment, that is, to the raw, unadjusted number.

Given that the expected raw number will probably be around 3.5 million jobs lost, and then adjusted to a headline number much closer to zero, adding even 380,000 or so job losses to that does not result in such an enormous adjustment in January.

In other words, the adjustment is largely adjusted away by the seasonality. Nonsense, hardly connected to the real world, but quite clever bureaucratic sleight of hand really.



Saying all this, it seems almost needless to stress that any projection of the headline number is a tough call in January, because the seasonality has such enormous latitude. More in the nature of a SWAG than a proper forecast.

Then there is also the matter of the revisions to the prior two months at least, and the possibility of a revision to the whole series going back two years, which sometimes occurs.

So, we'll look for a 'headline number' closer to zero than not, with a shade to the negative, maybe a loss of 20,000 or so. But we are very prepared to be surprised to the upside to a positive number, and downside to a loss of around 80,000. That speaks less to our inability to forecast, we hope, and more so to the arbitrary nature of the government's willingness and ability to fiddle with the numbers.



With pretty colors, it may look more like a sideways chop than a plunge, especially in light of a greater negative from December which will be adjusted but not higher.



And as for the reaction of US equity markets in anticipation today?

As I have stated before, the banks and their prop trading desks are always and everywhere screwing you, and frontrunning their better insights into the markets, even if only by a few milliseconds.

Watch the sovereign debt situation. This may place a heavy weight on the equity markets. But perhaps not just yet.

Is Blackrock Buying the US Equity Market?

One might conjecture from this enormous number of 13G filings noted below that Blackrock has taken what appears to be new 5+% stakes in over 1,800 US equities.

"We counted over 1,800 13Gs that Blackrock dumped on Friday...For those less familiar with the 13G...it’s a requirement when ownership exceeds 5% of the outstanding shares...these filings represented new positions for Blackrock since we only counted 11 amended 13Gs, which in itself seems very surprising, given the long list of stocks."

Holy guacamole!

Perhaps this is an error, or a misreading of the data. Someone 'fat-fingered' the Edgar filing button.

We are incredulous that a private investment firm, no matter how well connected, could have taken 5+% positions in most of the NY listed equity market so quickly. Driven madly bullish, with enormously deep pockets, and an abiding faith in their ability to defy the odds? Facilitating the hostile takeover of the rest of US real economy by a cabal of bonus taking Bonapartes? Starting a new Blackrock 1800 index fund from the bottom up, build it and they will come? LOL

Certainly the SEC will inquire as to their intentions, which is the purpose of such filings, and an explanation to the investment public will be forthcoming.

We suggested the other day that Blackrock and the NY Fed might turn out to be Obama's Halliburton and KBR - private contractors fulfilling administration policy. NY Fed Conspired to Hide Details of AIG There are repeated rumours of an invisible hand in several markets, as an arm of Washington. But this is a bit much.

The Robert Rubin Rule of Financial Crisis Management was stated in the mid 1990's. It held that buying SP futures to prop the stock market was cheaper than trying to clean up the mess after a stock market panic. But this was not about actually buying the market; it was about using price to manage perception, in the manner recommended by Edward Bernays.

The problem with this doctrine, of course, is that it requires larger and more pervasive interventions to maintain the illusion, unless the underlying conditions that set the primary market trend are changed. Rather like creating a short term euphoria by treating a patient with pain killers, to the point of harmful addiction, without addressing the underlying condition.

But buying over 5 percent positions in 1,800 listed equities? That is not your father's market rigging, and certainly a step above buying the SP futures contracts. Clumsy and heavy-handed to say the least.

Skeptically waiting, we are keen to see the clarification, legitimate investment or data error. Regardless of the punter, it's a hell of a bet if that is what it is.

Postscript with tongue still in cheek: As I suspected they are rebranding their ETF's purchased from Barclay's. Impressive amount of stock behind it. Still a hell of a bet, just risk spread more widely. They are just taking the management fees, the public is putting up the capital. LOL


footnoted.org
Blackrock’s massive Friday afternoon dump…
By Michelle Leder
February 1, 2010 at 9:30 am

As we monitored filings on Friday afternoon, we wondered why EDGAR seemed unusually sluggish. But it wasn’t until late Friday that we realized why: Blackrock (BLK) had done a massive document dump on Friday afternoon of 13G filings related to its acquisition of Barclay’s Global Investors.

We counted over 1,800 13Gs that Blackrock dumped on Friday, which explains why EDGAR might have been a tad bit pokey. The stream started at just after 2 p.m. est and didn’t let up until just after 4:30, when the last one, which reported a 6.5% stake in Vodafone came in.

For those less familiar with the 13G, since we don’t often write about these filings, it’s a requirement when ownership exceeds 5% of the outstanding shares. With few rare exceptions, these filings represented new positions for Blackrock since we only counted 11 amended 13Gs, which in itself seems very surprising, given the long list of stocks.

Though it’s hard to tell from the SEC’s EDGAR database the names of those 1,800-plus companies without clicking on each filing (and who has time to click on 1,800 of them?), it’s a bit easier in 10KWizard (now known as Morningstar Document Research). And, indeed, there’s a lot of household names on the list including some big names in tech like Apple (AAPL), AOL (AOL), Google (GOOG), Yahoo (YHOO) — several of which Dow Jones picked up on on Friday afternoon. But there’s a lot more names on the list too, including United Technologies (UTX), Toll Brothers (TOL), and even footnoted frequent flyer Martha Stewart Omnimedia (MSO) where Blackrock disclosed a stake of just over 7%.

Actually, a far more interesting project might be trying to figure out who wasn’t on the list since with 1,800-plus filings, just about any company over even a relatively modest market cap — Martha Stewart’s is currently around $240 million — seems to have made the cut.

The First Year of Obama's Failed Economic Policies: The Worst May Yet Be Avoided

"The banks must be restrained, the financial system reformed, and balance restored to the economy before there can be any sustained recovery."

We have been saying this for some time. The report below from Neil Barofsky says essentially the same thing.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

The US is heading towards a double dip recession, and the next leg down may be more fundamentally damaging than before.

The reason for the decline will be the abject failure of the Obama Administration to address the roots of the problem, instead wasting trillions to prop up a banking system that is a useless distortion.

Worse than useless really, because it actually presents a huge negative influence by stifling the recovery, channeling funds to the crony capitalists and non-producing wealth extraction sector, who tax the people like feudal lords under license of a corrupt government.

So far, Obama has failed the people, but preserved the banks. A source of his failure has been his weakness in listening to Larry Summers and Tim Geithner, the Rubin-Clinton wing of Democrats, who have well established their incompetence and inability to act at a level suitable to their positions. They are captive to special interests, locked into the ways of thinking that brought the world to the point of crisis.

In response to the next leg down, Bernanke will monetize debt at an even more furious and clever pace, perhaps in alliance with the Bank of England and Bank of Japan. The ECB resists, and all who balk will be chastised by the monied powers and their demimonde, the ratings agencies and global banks. This is modern warfare of a sort.

We do not expect the corruption of the world's reserves to be so blatant that the inflation will immediately appear, except in more subtle manner. At some point it may explode, especially if Ben is particularly good at concealing its subtle growth.

Monetary inflation is the growth of the money supply in excess of the demands of the real economy, not nominal growth of the supply. The US has been shifting its growth into the reserves of other central banks for the past twenty years or so, and those eurodollar present an overhang that will egulf the Treasury should they come home to roost too quickly. The great nations see the US problem, most surely. The question is how to handle it, gracefully, since the US is still the world's sole superpower, and given to covert pre-emptive action when it feels threatened.

It is not a pretty picture. We had high hopes for Obama, because he was capable of rising to the challenge. He had the backing of his people. And he is choosing failure, for whatever reason. That is certainly is the template of a modern tragedy.

“Given the same amount of intelligence, timidity will do a thousand times more damage than audacity.” Karl von Clausewitz

ReviewJournal
Watchdog: Bailouts created more risk in system
By DANIEL WAGNER and ALAN ZIBEL
AP Business Writers

WASHINGTON (AP) -- The government's response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

"Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car," Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered "too big to fail" have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky's investigation.

Barofsky renewed a call for Treasury to enact clearer walls so that such apparent conflicts are less likely.

Treasury said it welcomed Barofsky's oversight but resisted the call to erect new barriers against conflicts of interest. The new rules "would be detrimental to the program," Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules "are a rigorous and effective method of protecting taxpayers," she said.

Much of Barofsky's report focused on the government's growing role in the housing market, which he said has increased the risk of another housing bubble.

Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

"The government has stepped in where the private players have gone away," Barofsky said in an interview. "If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of" artificially pushing up home prices in the coming years.

The report warned that these supports mean the government "has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor."

Barofsky's report echoed concerns raised by housing experts in recent months, as home sales and prices rebounded. They warn that the primary reason for the turnaround last year has been billions of dollars in federal spending to lower mortgage rates and prop up demand.

Once that spigot of cash is turned off, they caution, the market will be vulnerable to a dramatic turn for the worse. Daniel Alpert, managing partner of investment bank Westwood Capital, wrote in a report that national home prices are bound to fall 8 to 10 percent below the lows of last spring.

"The lion's share of the remaining decline will occur in markets that saw sizable bubbles but have not yet retrenched," he wrote.

Officials from the Obama administration counter that massive federal intervention has helped the housing market stabilize and prevented more dire consequences.

Barofsky's report also disclosed that, while the Obama administration has pledged to spend $75 billion to prevent foreclosures, only a tiny fraction - just over $15 million - has been spent so far. Under the Making Home Affordable program, only about 66,500 borrowers, or 7 percent of those who signed up, had completed the process as of December.

He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. He stopped short of endorsing specific proposals for overhauling financial regulation, but said many of the proposals would go far to improving the system.

Quantitative Easing: We Are All Central Planners Now

"What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?

Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and ever greater imbalances to keep it from collapsing? I believe that they are.

Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes."

Quantitative easing effectively means providing the financial system with liquidity well in excess of organic commercial demands and conventional open market operations. The Fed does this by expanding its balance sheet extraordinarily, hence the spectacular growth in 'excess reserves' of commercial banks.

The Fed does this for several reasons. The first obviously is to supply reserve capacity to the banks when their own reserve base has deteriorated badly to the point of insolvency. A second reason is to permit the Fed to expand its Balance Sheet in an extraordinary manner, in order to absorb assets that cannot be marked to market by a commercial bank without significantly damaging their own balance sheet. A third reason of course is to take an accommodative stance with regard to real interest rates when nominal rates approach zero.

One of the issues that quantitative easing creates is that it is problematic to continue to effect a fed funds rate. The usual method is to set a target, and then make changes in the levels of liquidity in the system through adds and drains of financial assets like Treasuries to achieve it. This is why Fed Funds is called a 'target rate.'

But how can one do this when the tool of policy making has been thrown in a ditch by the adoption of quantitative easing, by definition driving rates to zero? It is all "adds" and no drains, stuffing the goose beyond its capacity as it were.

Make no mistake: quantitative easing is to central banking what the introduction of nitroglycerin was to conventional warfare. It kicks the power of financial engineering up a notch, to say the least, and brings in an element of risk of more than normal inflationary pressures.

The Fed can set a 'floor' under the overnight interest rate without engaging in open market operations by offering to take reserves and pay a set rate as interest. Presumably banks will take a riskless .25% rather than place funds in the markets at something lower than this. And they will not achieve a higher return for a commensurate risk because the system is awash with liquidity, and prospective borrowers are surrounded by the hidden shoals of marked to model.

This works in the first wave of quantitative easing. But what happens when the Fed seeks to add additional tranches of funds through market purchases of even more dodgy assets, or even begin to exercise more control over the banking system as the economy recovers to avoid a hyperinflation? "Draining" through open market operations is not easy if the banking system is still more fragile than its nominal balance sheets would suggest. In a sort of Gresham's Law, the banks wish to hoard the Treasuries, and disburse their collateralized bundles. Pulling out Treasuries removes the core of their assets.

The Fed is now seeking a 'deposit rate' which in addition to its 'overnight rate' would commit banks to place funds with the Fed for a set period of time, in the manner of a certificate of deposit rather than a demand account.

This article from Bloomberg is an indirect pre-announcement from the Fed that they may abandon the notion of 'target rates' altogether, and set interest rates by fiat, rather than achieving them in the marketplace by adjusting levels of short term liquidity. This marks a transition from 'Phase I' to 'Phase II' of Bernanke's monetary experiment.

I want to emphasize the significance of this change.

This is becoming a pure 'command and control' economic financial engineering by the Fed, in which it sets rates by its decision, without engaging in market operations which could encounter headwinds against those policy decisions. It is similar in magnitude to the Fed monetizing Treasuries directly without subjecting interest rates to the direct discipline of the market. This is of a pedigree more in keeping with a command and control Five Year Plan than a market economy. Extraordinary times call for extraordinary measures the Fed and its apologists might say.

I do not wish to overstate this, but it also suggests that a continuation of the Fed's open market purchases would place an excessive strain on its own balance sheet, which has a much lower percentage of Treasuries than at most times in its history. One would have to wonder if the Fed itself could pass a stress test or a serious audit of the quality of its stated assets.

It is less costly for the Fed to pay interest directly on bank deposits and just set the rate, especially if they are in the form of time defined certificates of deposit, than if it were to continue buying up decaying financial assets to achieve its goals.

In a sense, the Fed is competing with commercial enterprise in 'borrowing' from the banks for its own balance sheet, to affect its policy measures. This is what is meant by setting a floor under the short term rates.

As an aside, I found this quote in the Bloomberg article quite to this point:

"By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers."

The level of reserves they are holding and the rate which they return through their interest program are being used to throttle lending to the commercial companies at market clearing rates. Granted this is all a part of a more aggressive and complex implementation of interest rate policy, but it presents a new level of financial engineering and explicit control of money flows that is quite likely corrosive to a market system, and fraught with unintended consequences.

The US Federal Reserve did not originate the concept of quantitative easing. It began with the Japanese central bank, which one might uncharitably say erred on the side of supporting the banks and the corporate conglomerates, and drove the economy into a protracted slump. There were, we should add, significant mitigating factors including the Japanese demographics and penchant for high savings at low rates in the government postal system.

This is an 'experiment' on the part of the UK and US in their own go at quantitative easing. The risk is obviously inflation, and they are seeking to downplay that at every turn. It is the perception of inflation that the Fed will seek to quell, as it continues to adjust the money supply in ways and with tools that it thinks it understands, but which it has never used before. Perception of inflation is their greatest fear. Once it takes hold it is difficult to stop.

One has to wonder what the anticipated endgame might be. A global currency regime with comprehensive central planning? Since 1999 the financial engineers at the Fed have been unable to achieve sustainable growth in the US national economy as is it is now constituted without generating asset bubbles through abnormally low interest rates. As recovery goes the last was anemic in terms of jobs growth, and this latest effort appears to be even more fruitless.

What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?

Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and ever greater imbalances to keep it from collapsing? I believe that they are.

Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes.


Bloomberg
Fed Weighs Interest on Reserves as New Benchmark Rate
By Scott Lanman

Jan. 26 (Bloomberg) -- Federal Reserve policy makers are considering adopting a new benchmark interest rate to replace the one they’ve used for the last two decades.

The central bank has been unable to control the federal funds rate since the September 2008 bankruptcy of Lehman Brothers Holdings Inc., when it began flooding financial markets with $1 trillion to prevent the economy from collapsing. Officials, who start a two-day meeting today, have said they may replace or supplement the fed funds rate with interest paid on excess bank reserves.

“One option you might want to consider is that our policy rate is the interest rate on excess reserves and we let the fed funds rate trade with some spread to that,” Richmond Fed President Jeffrey Lacker told reporters on Jan. 8 in Linthicum, Maryland.

The central bank needs to have an effective policy rate in place when it starts to raise interest rates from record lows to keep inflation in check, said Marvin Goodfriend, a former Fed economist. Policy makers are concerned that the Fed funds rate, at which banks borrow from each other in the overnight market, may fail to meet the new target, damaging their credibility and their ability to control inflation as the economy recovers.

‘Extended Period’

The choice of a benchmark is the “front line of defense against inflation, and also it’s at the heart of the central bank being able to precisely and flexibly guide interest-rate policy in the recovery,” said Goodfriend, now a professor at Carnegie Mellon University in Pittsburgh.

The Federal Open Market Committee is likely to maintain its pledge to keep interest rates “exceptionally low” for an “extended period” in a statement at about 2:15 p.m. tomorrow, economists said. The Fed probably won’t raise interest rates from record lows until the November meeting, according to the median of 51 forecasts in a Bloomberg survey of economists this month.

Fed Chairman Ben S. Bernanke, in July Congressional testimony, called interest on reserves “perhaps the most important” tool for tightening credit.

Inflation Concerns

Banks’ excess reserves, or deposits held with the Fed above required amounts, totaled $1 trillion in the two weeks ended Jan. 13, compared with $2.2 billion at the start of 2007. The Fed created the reserves through emergency loans and a $1.7 trillion purchase program of mortgage-backed securities, federal agency and Treasury debt.

By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers.

The new policy may be similar to what the Bank of England does now, said Philip Shaw, chief economist at Investec Securities in London. The U.K. central bank’s benchmark interest rate, now at 0.5 percent, is the rate it pays on the reserves it holds for commercial banks. It may drain excess liquidity from the system by selling back the gilts it has purchased through its so-called quantitative easing program, Shaw said.

Communications Strategy

Policy makers will need to adopt a communications strategy to explain the new benchmark because “people might have had a hard time getting their mind around the idea that the official rate had become the interest on reserves rate,” said Kenneth Kuttner, a former Fed economist who has co-written research with Bernanke and now teaches at Williams College in Williamstown, Massachusetts.

Without a federal funds target, banks might have to find a new way to set the prime borrowing rate, the figure most familiar to consumers that that is now pegged at three percentage points above the fed funds target.

In the past, the Fed had controlled the rate by buying or selling Treasury securities, adding or withdrawing cash from the system. That mechanism broke down when the Fed started flooding the system with cash after the bankruptcy of Lehman Brothers to prevent a financial meltdown.

The deposit rate would help set a floor under the fed funds rate because the Fed would lock up funds by offering a fixed rate of interest for a defined period and prohibiting early withdrawals.

‘Risk Free’

“In general, banks will not lend funds in the money market at an interest rate lower than the rate they can earn risk-free at the Federal Reserve,” Bernanke said in an October speech in Washington.

The New York Fed has been testing another tool, reverse repurchase agreements, as a way of pulling cash out of the financial system. In that case, the Fed would sell securities and buy them back at an agreed-upon later date.

There could be complications to using the deposit rate. Banks may be able to generate more revenue by lending at prime rate rather than by earning interest at the Fed, said William Ford, a former Atlanta Fed president at Middle Tennessee State University in Murfreesboro.

Also, the Fed’s direct control over a policy rate --instead of targeting a market rate -- could skew trading and financing toward short-term borrowing once investors know the rate won’t change between Fed meetings, said Vincent Reinhart, a former Fed monetary-affairs director.

The new reliance on reserve interest could also increase the policy clout of Fed governors in Washington at the expense of the 12 regional Fed bank presidents, Reinhart said.

Congress gave only the Fed governors the authority to set the deposit rate. The presidents have historically favored higher rates and voiced more concern about inflation.

“The Federal Reserve Act puts a very high weight on comity,” said Reinhart, now a resident scholar at the American Enterprise Institute in Washington. Using interest on reserves for setting policy “can change the tenor of the discussions, and I don’t know how they get around it.”

HUD Suspends Anti-Flipping Rule for FHA Loans

"As a dog returns to its vomit, so a fool repeats his folly." Prov 26:11

"Mortgagees" in this case would be the banks and their subsidiaries that have foreclosed on the home. So all you entrepreneurial flippers need to check the fine print, and perhaps team up for a percentage from the banks, who are in the driver's seat on this HUD exception to the anti-flipping rule passed in 2003.

This does provide yet another opportunity for the banks and their subsidiaries to skin more money from the foreclosure transaction with the help of public subsidy. So if you are the entrepreneurial sort, you'll have to grease the palms of the banks to gain access to the FHA for those quick flips.

The waiver from the HUD Website is here.

HUD No. 10-011
Lemar Wooley
(202) 708-0685 FOR RELEASE
Friday January 15, 2010

HUD TAKES ACTION TO SPEED RESALE OF FORECLOSED PROPERTIES TO NEW OWNERS

Measure to help bring stability to home values and accelerate sale of vacant properties

WASHINGTON - In an effort to stabilize home values and improve conditions in communities where foreclosure activity is high, HUD Secretary Shaun Donovan today announced a temporary policy that will expand access to FHA mortgage insurance and allow for the quick resale of foreclosed properties. The announcement is part of the Obama administration commitment to addressing foreclosure. Just yesterday, Secretary Donovan announced $2 billion in Neighborhood Stabilization Program grants to local communities and nonprofit housing developers to combat the effects of vacant and abandoned homes.

"As a result of the tightened credit market, FHA-insured mortgage financing is often the only means of financing available to potential homebuyers," said Donovan. "FHA has an unprecedented opportunity to fulfill its mission by helping many homebuyers find affordable housing while contributing to neighborhood stabilization."

With certain exceptions, FHA currently prohibits insuring a mortgage on a home owned by the seller for less than 90 days. This temporary waiver will give FHA borrowers access to a broader array of recently foreclosed properties.

"This change in policy is temporary and will have very strict conditions and guidelines to assure that predatory practices are not allowed," Donovan said.

In today's market, FHA research finds that acquiring, rehabilitating and the reselling these properties to prospective homeowners often takes less than 90 days. Prohibiting the use of FHA mortgage insurance for a subsequent resale within 90 days of acquisition adversely impacts the willingness of sellers to allow contracts from potential FHA buyers because they must consider holding costs and the risk of vandalism associated with allowing a property to sit vacant over a 90-day period of time.

The policy change will permit buyers to use FHA-insured financing to purchase HUD-owned properties, bank-owned properties, or properties resold through private sales. This will allow homes to resell as quickly as possible, helping to stabilize real estate prices and to revitalize neighborhoods and communities.

"FHA borrowers, because of the restrictions we are now lifting, have often been shut out from buying affordable properties," said FHA Commissioner David H. Stevens. "This action will enable our borrowers, especially first-time buyers, to take advantage of this opportunity."

The waiver will take effect on February 1, 2010 and is effective for one year, unless otherwise extended or withdrawn by the FHA Commissioner. To protect FHA borrowers against predatory practices of "flipping" where properties are quickly resold at inflated prices to unsuspecting borrowers, this waiver is limited to those sales meeting the following general conditions:

•All transactions must be arms-length, with no identity of interest between the buyer and seller or other parties participating in the sales transaction.

•In cases in which the sales price of the property is 20 percent or more above the seller's acquisition cost, the waiver will only apply if the lender meets specific conditions.

•The waiver is limited to forward mortgages, and does not apply to the Home Equity Conversion Mortgage (HECM) for purchase program.

Specific conditions and other details of this new temporary policy are in the text of the waiver, available on HUD's website.

Obama Administration Wants to Annuitize 401k's and IRA's - Mandatory "R Bonds"

As a rule of thumb, the worst possible time to convert lump sum savings into a fixed income annuity would be when interest rates are historically low.

Although products may vary, this is roughly equivalent to buying long term bonds at a time when interest rates are likely to increase, substantially reducing your principal in real terms, and eroding your fixed returns through inflation.

For some reason the Obama Administration is promoting the idea now that there should be some encouragement for Americans to start converting their 401K's and IRA's into annuities, to provide themselves with lifetime income.

The effort is being spear-headed by Mark Iwry of the Treasury and Phyllis Borzi of the Department of Labor. Here is a paper written on the subject by Mark Iwry when he was at the Brookings Institution.

The essence of this paper is that distributions from IRA's and 401K's would automatically be rolled into an annuity providing a monthly income by default.

This concept is known on the Street as the handling fees for meager returns pork barrel pigfest. The Fed likes it because they will undoubtedly get a two year rolling chunk of the people's retirement cash to play with.

Perhaps just rolling those 401K's and IRA's into Social Security or the Long Bond would be what they have in mind. Somehow the panacea of TIPS with inflation defined by the government sounds probable. The drawback perhaps is that this would not generate the highest recurring fees for Wall Street and the FIRE sector, which have to be eyeing that 'cash on the sidelines' hungrily.

How about Patriot Bonds that are fully invested in Mortgage Debt formerly owned by the Fed, with some tranches of Commercial Real Estate to add some zest to the recipe? The Treasury can give this option a small tax break, which can be largely consumed by Wall Street fees and mispricing of risk returns.

And I thought that Greenspan's advice for homeowners to step into ARMs into the knee of the housing bubble was foul.

Here's a modest proposal. Raise the amount of losses from investments that can be deducted from income in one year from $3,000 to $20,000 for individuals and $40,000 filing jointly so mom and pop can clean up their balance sheets. And if they really want to jump start the economy, declare a tax and penalty exemption on the first $150,000 that an individual can withdraw from their IRA or 401K in 2010.

And for God's sake fix the Alternative Minimum Tax levels.

Does it seems as though I have barely given this annuitization effort a chance, a fair hearing, the benefit of the doubt, improperly assumed it might not have the best intentions of the American public at heart?

Are you serious? After Healthcare Reform and TARP? These people in Washington and Wall Street have no shame, much less good intentions, common sense, or a conscience. They are strangling the real economy, slowly but surely.

My model for thinking about this annuitization is that the government wishes to appropriate your savings for a 2.0% return, ex fees and mispriced risk and inflation, as a source of funding for the bailouts of an oversized and insolvent FIRE sector (like AIG) and the imploding pretensions of a global financial elite.

"Officials in the Obama administration are moving quickly to develop the investment infrastructure behind the president’s proposal for mandatory automatic enrollment in individual retirement accounts, which could be supported by the creation of Treasury-issued retirement bonds

J. Mark Iwry, deputy assistant secretary for retirement and health policy at the Department of the Treasury, said that administration officials are exploring some “conservative” options for investing the assets of 78 million Americans that he estimates could be automatically en¬rolled in this “universal” workplace retirement system.

He said that officials have discussed the possibility of making a low-risk life-cycle or target date fund the default investment option for these auto-IRAs, which would be mandatory for employers if they don’t offer a retirement plan to their workers.

But there is also a chance that they could rely on a new form of bond — an “R bond” — as the basic building block for the auto-IRA, Mr. Iwry said in addressing reporters at the Treasury Department in Washington last week.

Administration officials are discussing the exact details of these R bonds, such as their interest rates, maturities and minimums, he noted. These bonds ideally would provide individuals with a source of secure, steady returns that would protect their initial investments."

Administration Explores R Bond For Retirement Accounts - Investment News 7 June 2009

Why have a separate "R Bond" instead of those government bonds they have now called 'Treasuries?' And why have a mandatory universal retirement system when you have this thing called 'Social Security?' Think about it. Sounds like the kind of preparations governments make for things like 'new dollars' after a selective default.

Instead of "Yes We Can" the slogan for the Obama Administration should be "Over One Million Fat Cats Served." And the only difference in the Republicans is the breed of the fat cats whose desires they seek to fulfill. The public has lost its advocacy in Washington, and therefore the integrity of the democratic republic is in peril.

The banks must be restrained, and the financial system reformed, and the economy brought back into balance, before there can be a sustained recovery.

"None are so hopelessly enslaved as those who falsely believe they are free." Johann Wolfgang von Goethe

Bloomberg
Retiree Annuities May Be Promoted by Obama Aides
By Theo Francis

The government is looking at ways to promote the conversion of 401(k)s and IRAs into steady payment streams after a significant decline in plan balances

(Bloomberg) — The Obama administration is weighing how the government can encourage workers to turn their savings into guaranteed income streams following a collapse in retiree accounts when the stock market plunged.

The U.S. Treasury and Labor Departments will ask for public comment as soon as next week on ways to promote the conversion of 401(k) savings and Individual Retirement Accounts into annuities or other steady payment streams, according to Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Secretary Mark Iwry, who are spearheading the effort.

Annuities generally guarantee income until the retiree's death, and often that of a surviving spouse as well. They are designed to protect against the risk that retirees outlive their savings, a danger made clear by market losses suffered by older Americans over the last year, David Certner, legislative counsel for AARP, said in an interview.

"There's a real desire on a lot of people's parts to try to encourage something other than just rolling over a lump sum, to make sure this money will actually last a lifetime," said Certner, legislative counsel for Washington-based AARP, the biggest U.S. advocacy group for retirees.

Promoting annuities may benefit companies that provide them through employers, including ING Groep NV (INGA:NA) and Prudential Financial Inc. (PRU), or sell them directly to individuals, such as American International Group Inc. (AIG), the insurer that has received $182.3 billion in government aid...

Why Was There No Canadian Housing Bust? The US Fed Says That They Were Probably Just Lucky Except...

This paper from the Cleveland Fed, which used to shine under the governorship of Jerry Jordan, suggests several reasons why there was no significant housing bust in Canada. Interesting that after each politically correct reason stated, there is an 'oh-by- the-way' in addition that cuts to the heart of the problem.

The Canadians were probably just lucky, according to the Fed, except they actually did things to stem the growth of off-balance-sheet securitization and tightened lending standards earlier on while the US Fed was cheerleading banking speculation and the growing housing bubble even to the point of its collapse.

Chairman Ben struck the party line in a recent speech, blaming the regulators. But in fact the Fed had a significant role to play in both regulation, monetary policy, and in the verbage they put out attacking regulation of banks and enabling their off-balance-sheet vehicles and derivatives speculation at every turn.

Yes, Fannie and Freddie played a significant role in the US. But the Fed set the tone for banking regulation and they not only did not take away the punch bowl, they spiked it with high grain alcohol. The Fed was the 'cop on the beat' and they looked the other way. And they still are.

The Wall Street banks bought the White House, the Congress, and already owned the Fed. It was a failure of stewardship in the US that allowed the bubble then, and the continuing abuses on Wall Street today. And while the US Fed is not the sole perpetrator, it was their duty as the "independent regulator" to take away the punch bowl. And they never did it. And have not done it yet.

From the charts, it is obvious that there is a bubble in Canadian housing, not of the dimensions of the US, but likely a bubble nonetheless. The bubble is partly due to Canada's heavy export involvement with the US, and a certain interdependency implied with the devaluing dollar, and a desire to keep the loon at par with the dollar. The key difference between the nature of their bubble is that it is not founded on the fraudulent securitization of mortgages held by their commercial banks.

Will the Canadian housing bubble 'pop' or will the Canadians be able to grow out of it gracefully? That is not quite the issue being addressed here. Certainly the Canadian monetary authority and regulators are not exemplary, but certainly less inept then the US Fed, at least so far.

Addendum: Canadian readers are quite concerned about the actions of the Harper government and the CMHC, which is similar to a Canadian version of Fannie Mae apparently. CMHC Bubble 100% Made in Canada Several were kind enough to write in and say that Canadian housing is still overpriced relative to rents, and that the debt held by the CMHC is likely to end in tears at some point. I think the chart of home prices indicates that, but it appears that a gradual decline in activity and pricing is possible, which is the conclusion I believe that the Fed was assuming in their paper. Canadian readers of this blog are not so sanguine, and believe that a collapse will happen.

That is always a possibility. It would take considerably more analysis on my part to determine the size of the debt relative to its servicing, and factor in the possible steps that the government might take to manage that debt relative to homeowners.

But the point I think the Cleveland Fed writer makes is not entirely lost here. So far Canada is holding up rather well. It was a characteristic that interested me because Canada also held up remarkably better than the US during the Great Depression, and the people suffered much less, largely because their banking system was more conservative than the US.

It will be interesting to see how the Canadians deal with this issue going forward. Perhaps they really have just been lucky, and are heading towards a similar fate. But one thing remains that at least for now they have many more policy options than the US, which was taken down hard by its banks, and their propensity to leverage up, mismark risk, and pack it into their balance sheets recklessly. Whether they do the right things now is another matter again.

"Why Was the Subprime Market in Canada Smaller?

Given the key role played by the “subprime” market, the question is why the Canadian subprime market was both smaller and levels of securitization were lower than in the U.S. While it is difficult to disentangle the reasons why Canada avoided the subprime boom, some factors can be identified that may have contributed to the differences in the Canadian and U.S. subprime markets.

Perhaps the simplest story is that Canada was “lucky” to be a late adopter of U.S. innovations rather than an innovator in mortgage finance. While the subprime share of the Canadian market was small, it was growing rapidly prior to the onset of the U.S. subprime crisis. In response to the U.S. crisis, some subprime lenders exited the Canadian market due to difficulties in securing funding. In addition, the Canadian government moved in July 2008 to tighten the standards for mortgage insurance required for high LTV loans originated by federally regulated financial institutions. This further limited the ability of Canadian banks to directly offer subprime-type products to borrowers. (That's quite an oh-by-the-way - Jesse)

There are also several institutional details that played a role. The Canadian market lacks a counterpart to Freddie Mac and Fannie Mae, both of which played a significant role in the growth of securitization in the U.S. In addition, bank capital regulation in Canada treats off-balance sheet vehicles more strictly than the U.S., and the stricter treatment reduces the incentive for Canadian banks to move mortgage loans to off-balance sheet vehicles. (Another significant oh-by-the-way - Jesse)

Finally, as noted above, the fact that the government-mandated mortgage insurance for high LTV loans issued by Canadian banks effectively made it impossible for banks to offer certain subprime products. This likely slowed the growth of the subprime market in Canada, as nonbank intermediaries had to organically grow origination networks.

A Challenge for Policymakers

The Canada-U.S. comparison suggests the low interest rate policy of the central banks in both countries contributed to the housing boom over 2001–2006 and that a relaxation of lending standards in the U.S. was the critical factor in setting the stage for the housing bust. A caveat worth emphasizing, however, is that the Canada-U.S. comparison tells us little about what would have happened if U.S. monetary policy had been tighter earlier. Tighter monetary policy in the early part of the decade may have helped to limit the subprime boom by slowing the rate of house price appreciation over 2002–2006. The Canada-U.S. comparison does, however, highlight the practical challenge facing policymakers in assessing whether a rapid run-up in asset prices is a bubble or a “sustainable” movement in market prices."
Why Didn't Canada's Housing Market Go Bust? - Cleveland Fed

Here is a little more detail on the shenanigans of Tim and Ben by John Hussman.

The banks must be restrained, the financial system reformed, and the economy brought back into balance before there can be a sustained recovery.

Monetization: Treasury Adds $400 Billion in Bailouts for Fannie and Freddie

What's another $400 Billion in monetization so that Fannie and Freddie can keep buying up mortgage debt?

Timmy and Ben can resolve to distribute dollars even as they approach a virtual insolvency because they can create them, seemingly out of nothing. The payment obligation for their dollar debt is their own creation -- dollars. But they cannot hand out endless amounts of nature's wealth, things like oil, gold, grains, and silver except as they may possess them by industry, force, or fraud.

And that is what frustrates the statists and monetarists, why the western central bankers hate and fear the precious metals as monetary equivalents and alternative stores of wealth, and deploy their worldly power in proximity to sources of energy. Natural wealth defies their control, is a mirror to their excesses, and a stumbling block for the financial engineering that is the basis of their fractional reserve central banking and a desire for world government and ever-increasing power. Ponzi schemes must inherently continue to expand.

They say fiat, let it be done, according to our will. But natural wealth does not always respond as they wish, and its silence is a profound repudiation.

The full extent of their power to command and control the liquidity flow of the world will be tested in 2010.

".....Back to the math... And here is the kicker. Accounting for securities purchased by the Fed, which effectively made the market in the Treasury, the agency and MBS arenas, but also served to "drain duration" from the broader US$ fixed income market, the stunning result is that net issuance in 2009 was only $200 billion. Take a second to digest that.

And while you are lamenting the death of private debt markets, here is precisely what the Fed, the Treasury, and all bank CEOs are doing all their best to keep hidden until they are safely on their private jets heading toward warmer climes: in 2010, the total estimated net issuance across all US$ denominated fixed income classes is expected to increase by 27%, from $1.75 trillion to $2.22 trillion. The culprit: Treasury issuance to keep funding an impossible budget. And, yes, we use the term impossible in its most technical sense. As everyone who has taken First Grade math knows, there is no way that the ludicrous deficit spending the US has embarked on makes any sense at all... none. But the administration can sure pretend it does, until everything falls apart and blaming everyone else for its fiscal imprudence is no longer an option.

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck."

Demand For US Fixed Income Has To Increase Elevenfold... Or Else - ZeroHedge

And this, meine Damen und Herren. Mesdames et Messieurs, may result in higher interest rates and a taxing drag on the productive economy. Which economies specifically and to what extent depends on how well the Fed and the Treasury can shift the pain of their excesses to the rest of the world. But it is not what one might call deflationary, and an impulse for the US dollar as a stable store of wealth, unless by force or fraud.

AP
Treasury removes cap for Fannie and Freddie aid
By J.W. Elphinstone, AP Real Estate Writer
December 25, 2009

NEW YORK – The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac. ("Its" ATM card? Don't you mean the holders of US dollars? - Jesse)

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

"The companies are nowhere close to using the $400 billion they had before, so why do this now?" said Bert Ely, a banking consultant in Alexandria, Va. "It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Fannie Mae and Freddie Mac provide vital liquidity to the mortgage industry by purchasing home loans from lenders and selling them to investors. Together, they own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages. Without government aid, the firms would have gone broke, leaving millions of people unable to get a mortgage.

The biggest headwind facing the housing recovery has been the rise in foreclosures as unemployment remains high. The two companies, facing mounting losses from mortgage defaults, were taken over by the government in September 2008 under the authority of a law Congress passed in the summer of 2008.

So far the government has provided $60 billion to Fannie Mae and $51 billion to Freddie Mac. The assistance is being provided in exchange for preferred stock paying a 10 percent dividend. The Bush administration first pledged up to $100 billion in support for each company, an amount that was doubled to $200 billion for each by the Obama administration in February.

Treasury officials will provide an updated estimate for Fannie and Freddie losses in February when President Barack Obama sends his 2011 budget to Congress. Though the administration has yet to disclose its long-term plans for the two companies, they are unlikely to return to their former power and influence.

The news followed an announcement Thursday that the CEOs of Fannie and Freddie could get paid as much as $6 million for 2009, despite the companies' dismal performances this year.

Fannie's CEO, Michael Williams, and Freddie CEO Charles "Ed" Haldeman Jr. each will receive $900,000 in salary, $3.1 million in deferred payments next year and another $2 million if they meet certain performance goals, according to filings with the Securities and Exchange Commission.

The pay packages were approved by the Treasury Department and the Federal Housing Finance Agency, which regulates Fannie and Freddie....

The US Bull Market in Smoke, Mirrors and Gullible Investors

We have given quite a bit of coverage to the somewhat 'thin' veneer of recovery being spun by misleading government econmic statistics in the US.

And we have certainly noted the almost blatant manipulation in many US markets, including stocks and commodities where the banks and hedge funds have been pushing prices around, sometimes with the help of the government, in a disgraceful repudiation of any notion of reform.

Thanks to the Tylers at ZeroHedge we have two very nice charts to present the case that the recent continuation of the US stock market rally is attributable to price manipulation largely in the after hours markets when trading is thin.

After Hours Verus Prime Hours Cumulative Trading Gains from September 2009



After Hours Versus Prime Hours Cumulative Trading Gains from March 2009



And a Ballooning Price-to-Earnings Ratio as a Result



Its pretty much a Ponzi scheme, and not all that well hidden. This is probably why insiders continue to sell in large numbers.

If the US market breaks it will go badly for many average people who do not understand how their government has failed to protect them.

But do not underestimate the power of the Bernanke Fed and its enablers in the central banks to continue printing enormous amounts of unfunded dollars and hiding the effects. This may buoy the US markets for longer than we might think, as it did in 2003 to 2007.

But at some point the payments will come due, value will be revealed, price discovery will assert itself, the US dollar and the bond will fail, and then comes the deluge.

Watch what India and China do with their reserves. They know full well what is coming and unlike the US are seeking to protect their people.

Third Quarter US GDP Comes In Significantly Lower Than Original Estimates

Could we have expected anything else from the Madoff nation, a country whose major export is fraud, and predominant industry a large scale variation of Liar's Poker?

GDP in the third quarter is significantly weaker than the results reported in late October. And even the positive value that remains is probably overstated by a chain deflator that underestimates the monetary expansion by the Fed.

Ironically it is ineffective because it is so heavily applied to a broken and outsized banking model rather than to the real economy.

Look for another cycle of exaggerated improvement for the 4th quarter, with later revisions bringing the number well back to earth.

Oh look here, the second quarter was bad indeed, but the third quarter is a miracle of growth. Thanks to the stimulus and automotive programs of the government disaster is averted and all is well....

Oh wait, the third quarter was not so good after all, but the indications are that the fourth quarter is a miracle of growth. Thanks to the housing programs of the government disaster is averted and all is well.

What, you deny this? Do you not wish things to be better? Are you a dollar basher? (repeat as necessary until the fraud collapses completely.)

This is the campaign of perception management by the financial engineers in the Federal Reserve and the US government, and cynical statists of both the left and the right.

"The power of holding two contradictory beliefs in one's mind simultaneously, and accepting both of them....To tell deliberate lies while genuinely believing in them, to forget any fact that has become inconvenient, and then, when it becomes necessary again, to draw it back from oblivion for just so long as it is needed, to deny the existence of objective reality and all the while to take account of the reality which one denies — all this is indispensably necessary. Even in using the word doublethink it is necessary to exercise doublethink. For by using the word one admits that one is tampering with reality; by a fresh act of doublethink one erases this knowledge; and so on indefinitely, with the lie always one leap ahead of the truth." George Orwell

“Through clever and constant application of propaganda, people can be made to see paradise as hell, or to consider the most wretched sort of life as a paradise.” Adolf Hitler

"Print is the sharpest and the strongest weapon of our party. The writer is the engineer of the human mind." Josef Stalin

NY Times
Third-Quarter Growth Weaker Than First Thought
By JAVIER C. HERNANDEZ
December 23, 2009

The nascent economic recovery was weaker than expected in the third quarter, the government said Tuesday, held back by slow business construction and dwindling inventories.

The Commerce Department said the economy expanded at an annual rate of 2.2 percent from July through September, down from the original forecast of 3.5 percent, tempering some of the enthusiasm about the speed of economic renewal. The downward revision was well above average, but analysts still foresee stronger growth in the fourth quarter, as exports rise and an improved jobs market encourages consumer spending.

“We did get off to a slightly slower start than we had thought,” said Nigel Gault, chief United States economist for IHS Global Insight. “That would be very worrying if we didn’t have evidence that we had done well in the fourth quarter.” (The same evidence that will be significantly marked down after the fact, just like the original overstated estimates of 3rd quarter GDP - Jesse)

....Analysts were caught off guard by the magnitude of the decline in the rate of expansion, measured in terms of gross domestic product — the total value of goods and services in the economy. Last month, the government revised the rate to 2.8 percent in the third quarter, down from 3.5 percent in October, and economists surveyed by Bloomberg News expected it to remain steady.

A revival of exports and consumer spending in the last part of 2009 is expected to bring the rate of growth to about 5 percent for the fourth quarter. The momentum will probably continue into 2010, economists say, though high levels of unemployment and a skittish business climate may curb consumer spending, hiring and production.

The Commerce Department’s revisions were based on smaller-than-expected business inventories, which fell by $139.2 billion. Spending by businesses on items like software and equipment was also weaker than expected, rising by 5 percent rather than the 8.4 percent originally predicted.

Paul Dales, chief economist for Toronto-based Capital Economics, said the overall drop was “nothing to worry about,” but he expressed concern about the decrease in investment by businesses.

“It may suggest that a lot of the demand pent up during the recession has already been released,” Mr. Dales wrote in a research note on Tuesday. “High uncertainty and lots of spare capacity are limiting capital spending.”

Construction of business facilities like malls and office buildings fell more than previously thought, by 18.4 percent rather than 15.1 percent. Economists attribute that drop to a frail commercial real estate market, which is confronting high vacancy rates and banks that are reluctant to finance business expansions.

Spending by state and local governments was also weaker than expected, falling 0.6 percent, compared with the 0.1 percent originally forecast. Consumer spending was revised slightly, growing 2.8 percent in the quarter rather than 2.9 percent.

As the New Year approaches, investors are optimistic that the economy will build on its earlier gains rather than fall into another downturn. Retail sales were higher than expected in November, and the trade deficit unexpectedly narrowed in October. In addition, a weak dollar is making American products overseas cheaper, contributing to hope that exports will rise.

Ron Paul On Bernanke and the Fed

Treasury Cancels Plans to Sell Citi Stake After Failed Equity Offering Stings Shareholders

The shareholders of Citigroup should be furious at the greedy and reckless actions of Citi's management in diluting their shares in order to obtain a freer hand in granting themselves fat bonuses.

Tonight's equity offering failed to bring in a sufficient price, serving up a significant 20% discount to existing holders of the stock.

And the de facto largest shareholders of Citigroup, the US taxpaying public and all holders of US Federal Reserve Notes, took quite a paper loss on their holdings because of Tim and Larry's miscalculations regarding the market's willingness to swallow more large chunks of questionable debt riddled equity from the US zombie banks.

Tim decided that because of this failed offering, the Treasury will cancel its plans to unload your 33% of Citi's shares, preferring to consider the quick flip a longer term investment, as failed trades are often wont to become.

And in retrospect, Timmy's decision to convert the government's preferred stock to common stock is looking to be exceptionally.... stupid, or fishy, or all of the above.

Never fear. We are sure that the Obama Administration can reach out to the Working Group on Markets to put a bid under those shares at some future date, perhaps with help from puffed up government estimates of the vitality of the US economy as a wind at its back.

Technically, Citi can pay back the TARP money from the proceeds. Can they have the gall to do that and pay themselves bonuses this year to boot, which is the basis for this exercise in dilution in the first place? This shows the farce that the Obama financial reforms really are. Nothing has changed except that big bank losses were transferred to the public debt, and the excess of the US financial sector continues with government support.

Financial engineering to maintain an imbalanced status quo, even with the mighty Zimbabwe Ben at the helm, is always and everywhere an economic morass, a Vietnam of moral hazard, and a political tarbaby of increasingly distasteful policy decisions. All for the sake of a wealthy few, the rapacious predatory class, an economic elite that traffics in betrayal and the breaking of oaths.

Such is the tangled web we weave, when first we practice to deceive.

Gentlemen, start your presses...

Reuters
U.S. delays its $5 bln Citi sale after weak pricing
By Dan Wilchins and David Lawder

NEW YORK/WASHINGTON, Dec 16 (Reuters) - The U.S. Treasury delayed a plan to sell its $5 billion of Citigroup Inc (C.N) shares after a stock offering by the bank attracted weak demand and priced at a much lower-than-expected $3.15 a share.

The bank sold $20 billion of stock and convertible bonds to repay funds it owes to the government so it can avoid the executive compensation restrictions that came with multiple U.S. bailouts.

But raising that capital came at a steep cost to shareholders, whose shares are worth 20 percent less than their closing level on Friday, before the bank announced its plan for repaying funds to the government.

"It's a terrific deal for Citigroup's managers, who can get paid more, and a terrible deal for shareholders. The company paid a huge price for this capital," said Sean Egan, principal at ratings agency Egan-Jones Ratings.

Citigroup was the third major U.S. bank to launch a multibillion-dollar share sale in December and the multitude of share sales likely dampened demand, analysts said.

"Buyers are in control of the process now," said Blake Howells, director of research at Becker Capital Management in Portland, Oregon.

The share sale price is less than the $3.25 price at which the government bought them earlier this year as part of an emergency rescue of the No. 3 U.S. bank, shrinking the paper value of the government's 7.7 billion shares to $24.2 billion. That stake was originally worth $25 billion and in October was worth nearly $40 billion.

Treasury "is not going to sell at a loss. That's the bottom line," a source familiar with the situation said.

The U.S. decided not to sell any shares at this time, and has agreed not to sell Citi shares for 90 days, the bank and the Treasury said. The government owns about one-third of Citigroup's shares.

The U.S. government still plans to sell its Citigroup shares within the next year, a Treasury spokesman said.

The government's decision not to sell shares was an about-face from Monday, when Citigroup said the government would sell up to $5 billion of shares alongside the bank's offering....

Is the US Financial Crisis Over?

This frankness and honest statement of the situation is the reason that Paul Volcker, one of the most credible advisors in the Obama Administration, is a marginalized voice as compared to Larry Summers and Turbo Tim. Ironic, because only by assuming Volcker's leadership style can the US President hope to get his country out of this cycle of monetary bubbles, systemic fragility, and chronic imbalances driven by an outsized, counterproductive financial sector.

DER SPIEGEL: But even though there are still more people being fired than hired, the Chairman of the Federal Reserve Ben Bernanke is saying that the recession is technically over. Do you agree with him?

Paul Volcker: You know, people get very technical about these things. We had a quarter of increased growth but I don't think we are out of the woods.

SPIEGEL: You expect a backlash?

Volcker: The recovery is quite slow and I expect it to continue to be pretty slow and restrained for a variety of reasons and the possibility of a relapse can't be entirely discounted. I'm not predicting it but I think we have to be careful.

SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?

Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy...

The rest of the interview can be read here

The net Treasury International Capital flows came in light today at 20.7B versus 38.7B expected. GE was a drag on the big caps because of Immelt's lack of enthusiasm for any US recovery.

As a reminder, tomorrow the FOMC will make its December rate decision public at 2:15 EST. Traditationally there will be shenanigans abounding. In the morning the US will be revealing its premiere fantasy economy number, the Consumer Price Index.

As a heads up, Gold often gets hit with a bear raid on FOMC day. Since the miners were hit a bit today with possible front-running that might be a good bet. Who can say in these thin markets?

The US economy is much like this stock market rally: big on show and thin on substance.

Treasuries Fall After Weaker Than Expected Results in the Ten Year Auction

Interest rates rose and stocks and commodities faltered a bit on the result of this ten year treasury auction which was weaker than this Bloomberg piece suggests.

Metals declined as a reflexive reaction to 'higher interest rates.' The hit on the metals preceded the release of the results, in yet another bear raid by the Wall Street banks holding undeliverable short positions.

Foreign central banks were noticeably light buyers, much preferring the shorter durations like the three year.

Primary Dealers took a big chunk of the offering. Current trends suggest that Ben will take it off their hands through monetization.

The Fed will be under signficant pressure to buy the bonds as the bias to the short end of the curve creates imbalances that precipitate a funding crisis, and a possible currency crisis, at the Treasury in 2010 if this trend continues. It is unlikely that they will raise rates when monetization is a viable, if not preferred, option.

Geithner looks likely to be replaced in 2010 by a Treasury Secretary who is more 'seasoned' and who will guide the US multinational banking industry through what could be later known as the currency wars, analagous to the trade wars that occurred in the Great Depression. One might even say that they are already underway.


Bloomberg
Treasuries Fall After $21 Billion Auction of 10-Year Notes
By Cordell Eddings and Susanne Walker

Dec. 9 (Bloomberg) -- Treasuries fell after the U.S sold $21 billion of debt maturing in 10 years, the second of three note and bond auctions this week totaling $74 billion.

The notes drew a yield of 3.448 percent, compared with the average forecast of 3.421 percent in a Bloomberg News survey of seven of the Federal Reserve’s 18 primary dealers. The bid-to- cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.62, compared with an average of 2.63 at the past 10 auctions.

“Investors are not sure they want to be holding this many Treasuries going into a year where duration is going to be extending and rates may go higher,” Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., said before the auction. BNP is one of the primary dealers, which are required to bid at Treasury auctions.

The yield on the current 10-year note rose five basis point to 3.44 percent at 1:02 p.m. in New York, according to BGCantor Market Data.

Indirect bidders, an investor class that includes foreign central banks, bought 34.9 percent of the notes at today’s auction. They purchased 47.3 percent at the November sale. The average for the past 10 auctions is 39.1 percent...

The spread between yields on 2-year and 30-year Treasuries touched 366 basis points as the U.S. prepares to sell $13 billion of bonds tomorrow. The last time the spread was so large was 1992, when the Federal Reserve cut interest rates to bolster growth after a recession...